Transcript Financial Accounting and Accounting Standards

Chapter
9
Plant Assets,
Natural Resources, and
Intangible Assets
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
9-1
Section 1 – Plant Assets
Plant assets include land, land improvements, buildings,
and equipment (machinery, furniture, tools).
Major characteristics include:
“Used in operations” and not for resale.
Long-term in nature and usually depreciated.
Possess physical substance.
Referred to as property, plant, and equipment; plant and
equipment; and fixed assets.
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9-2
Determining the Cost of Plant Assets
Land
Includes all costs to acquire land and ready it for use.
Costs typically include:
(1) purchase price;
(2) closing costs, such as title and attorney’s fees;
(3) real estate brokers’ commissions;
(4) costs of grading, filling, draining, and clearing;
(5) assumption of any liens, mortgages, or encumbrances
on the property.
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9-3
SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Illustration: Assume that Hayes Manufacturing Company
acquires real estate at a cash cost of $100,000. The property
contains an old warehouse that is razed at a net cost of $6,000
($7,500 in costs less $1,500 proceeds from salvaged materials).
Additional expenditures are the attorney’s fee, $1,000, and the
real estate broker’s commission, $8,000. The cost of the land is
$115,000, computed as follows.
Required: Determine amount to be reported as the cost of the
land.
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SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Required: Determine amount to be reported as the cost of the
land.
Land
Cash price of property of $100,000
$100,000
Net removal cost of warehouse of $6,000
6,000
Attorney's fees of $1,000
1,000
Real estate broker’s commission of $8,000
8,000
Cost of Land
$115,000
Journal Entry
Land
Cash
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9-5
115,000
115,000
SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Land Improvements
All expenditures necessary to make the improvements
ready for their intended use.
Driveways, parking lots, fences, landscaping, and
underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of land improvements
over their useful lives.
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9-6
SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Buildings
All costs related directly to purchase or construction.
Purchase costs:
Purchase price, closing costs and real estate broker’s
commission.
Remodeling and replacing or repairing the roof, floors,
electrical wiring, and plumbing.
Construction costs:
Contract price plus payments for architects’ fees, building
permits, and excavation costs.
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9-7
SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Equipment
All costs incurred in acquiring the equipment and
preparing it for use.
Costs typically include:
purchase price,
sales taxes,
freight and handling charges,
insurance on the equipment while in transit,
assembling and installation costs, and
costs of conducting trial runs.
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9-8
SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Illustration: Assume Merten Company purchases factory
machinery at a cash price of $50,000. Related expenditures are
for sales taxes $3,000, insurance during shipping $500, and
installation and testing $1,000. Determine amount to be
reported as the cost of the machinery.
Machinery
$50,000
Cash price
3,000
Sales taxes
Insurance during shipping
Installation and testing
Cost of Machinery
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9-9
500
1,000
$54,500
SO 1 Describe how the cost principle applies to plant assets.
Depreciation
Depreciation is the process of allocating the cost of
tangible assets to expense in a systematic and rational
manner to those periods expected to benefit from the use
of the asset.
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and
equipment, not land.
Depreciable, because the revenue-producing ability of
asset will decline over the asset’s useful life.
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9-10
SO 2 Explain the concept of depreciation.
Depreciation
Factors in Computing Depreciation
Illustration 9-6
Cost
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9-11
Useful Life
Residual Value
SO 2 Explain the concept of depreciation.
Depreciation
Depreciation Methods
Objective is to select the method that best measures an
asset’s contribution to revenue over its useful life.
Examples include:
(1) Straight-line method.
(2) Units-of-Activity method.
(3) Declining-balance method.
Slide
9-12
SO 3 Compute periodic depreciation using different methods.
Depreciation
Illustration: Barb’s Florists purchased a small delivery truck
on January 1, 2011.
Illustration 9-7
Required: Compute depreciation using the following.
(a) Straight-Line
Slide
9-13
(b) Units-of-Activity
(c) Declining Balance.
SO 3 Compute periodic depreciation using different methods.
Depreciation
Straight-Line
Expense is same amount for each year.
Depreciable cost - cost of the asset less its residual
value.
Illustration 9-8
Slide
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SO 3 Compute periodic depreciation using different methods.
Depreciation
Illustration: (Straight-Line Method)
Illustration 9-9
Year
Depreciable
Cost
2011
$ 12,000
2012
12,000
20
2,400
4,800
8,200
2013
12,000
20
2,400
7,200
5,800
2014
12,000
20
2,400
9,600
3,400
2015
12,000
20
2,400
12,000
1,000
2011
Journal
Entry
Slide
9-15
x
Rate
=
20%
Annual
Expense
Accum.
Deprec.
Book
Value
$ 2,400
$ 2,400
$ 10,600
Depreciation expense
Accumulated depreciation
2,400
2,400
SO 3 Compute periodic depreciation using different methods.
Depreciation
Units-of-Activity
Companies estimate total units of activity to calculate
depreciation cost per unit.
Expense varies based on units of activity.
Depreciable cost is
cost less residual
value.
Slide
9-16
Illustration 9-10
SO 3 Compute periodic depreciation using different methods.
Depreciation
Illustration: (Units-of-Activity Method)
Units
of
Cost /
Year
Activity
2011
15,000
2012
x
Unit
Depreciation Accumulated
=
Book
Expense
Depreciation
Value
$ 0.12
$ 1,800
$ 1,800
$ 11,200
30,000
0.12
3,600
5,400
7,600
2013
20,000
0.12
2,400
7,800
5,200
2014
25,000
0.12
3,000
10,800
2,200
2015
10,000
0.12
1,200
12,000
1,000
2011
Journal
Entry
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9-17
Illustration 9-11
Annual
Depreciation expense
Accumulated depreciation
1,800
1,800
SO 3 Compute periodic depreciation using different methods.
Depreciation
Declining-Balance
Decreasing annual depreciation expense over the
asset’s useful life.
Declining-balance rate is double the straight-line rate.
Rate applied to book value.
Illustration 9-12
Slide
9-18
SO 3 Compute periodic depreciation using different methods.
Depreciation
Illustration: (Declining-Balance Method)
Declining
Balance
x Rate =
Annual
Deprec.
Expense
Accum.
Deprec.
Book
Value
$ 5,200
$ 5,200
$ 7,800
Illustration 9-13
Year
Beginning
Book value
2011
13,000
40%
2012
7,800
40
3,120
8,320
4,680
2013
4,680
40
1,872
10,192
2,808
2014
2,808
40
1,123
11,315
1,685
2015
1,685
40
12,000
1,000
2011
Journal
Entry
Slide
9-19
685*
Depreciation expense
5,200
Accumulated depreciation
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
5,200
Depreciation
Comparison of Methods
Illustration 9-14
Illustration 9-15
Slide
9-20
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Illustration: Barb’s Florists purchased a small delivery truck
on October 1, 2011.
Illustration 9-7
Required: Compute depreciation using the following.
(a) Straight-Line
Slide
9-21
(b) Units-of-Activity
(c) Declining Balance.
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Illustration: (Straight-line Method)
Year
2011
2012
2013
2014
2015
2016
Depreciable
Cost
$
12,000
12,000
12,000
12,000
12,000
12,000
x
x
x
x
x
x
Rate
20%
20%
20%
20%
20%
20%
=
=
=
=
=
=
Annual
Expense
$
2,400
2,400
2,400
2,400
2,400
2,400
x
Partial
Year
3/12
x
9/12
Current
Year
Expense
= $
600
2,400
2,400
2,400
2,400
=
1,800
$
12,000
Accum.
Deprec.
$
600
3,000
5,400
7,800
10,200
12,000
Journal entry:
2011
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Depreciation expense
Accumultated depreciation
600
600
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Illustration: (Units-of-Activity Method)
Hours
x
Unit
=
Annual
Accum.
Book
Expense
Deprec.
Value
Year
Used
2011
15,000
$ 0.12
$ 1,800
$ 1,800
$ 11,200
2012
30,000
0.12
3,600
5,400
7,600
2013
20,000
0.12
2,400
7,800
5,200
2014
25,000
0.12
3,000
10,800
2,200
2015
10,000
0.12
1,200
12,000
1,000
2011
Journal
Entry
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Cost /
Illustration 9-12
Depreciation expense
Accumulated depreciation
1,800
1,800
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Illustration: (Declining-Balance Method)
Year
2011
2012
2013
2014
2015
2016
Beginning
Book Value
$
13,000
11,700
7,020
4,212
2,527
1,516
x
x
x
x
x
x
Declining
Balance
Rate
40%
40%
40%
40%
40%
40%
=
=
=
=
=
=
Annual
Expense
$
5,200 x
4,680
2,808
1,685
1,011
607
Partial
Year
3/12
Plug
Current
Year
Expense
= $
1,300
4,680
2,808
1,685
1,011
516
$
12,000
Accum.
Deprec.
$
1,300
5,980
8,788
10,473
11,484
12,000
Journal entry:
2011
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Depreciation expense
Accumultated depreciation
1,300
1,300
SO 3 Compute periodic depreciation using different methods.
Revaluation of Plant Assets
IFRS allows revaluation of plant assets to fair value
If revaluation is used, it must be applied to all assets in
a class of assets.
Assets that are experiencing rapid price changes must
be revalued on an annual basis, otherwise less
frequent revaluation is acceptable.
Slide
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SO 4 Describe the procedure for revising periodic depreciation.
Plant Asset Disposals
Companies dispose of plant assets in three ways —
Retirement, Sale, or Exchange (appendix).
Illustration 9-19
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.
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SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals
Sale of Plant Assets
Compare the book value of the asset with the proceeds
received from the sale.
If proceeds exceed the book value, a gain on disposal
occurs.
If proceeds are less than the book value, a loss on
disposal occurs.
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SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Sale
Gain on Disposal
Illustration: Assume that on July 1, 2011, Wright Company sells
office furniture for $16,000 cash. The office furniture originally
cost $60,000. As of January 1, 2011, it had accumulated
depreciation of $41,000. Depreciation for the first six months of
2011 is $8,000. Prepare the journal entry to record depreciation
expense up to the date of sale.
Depreciation expense
Accumulated depreciation
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8,000
8,000
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Sale
Illustration 9-20
Computation of gain on
disposal
Illustration: Wright records the sale as follows.
July 1
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Cash
16,000
Accumulated depreciation
49,000
Office equipment
60,000
Gain on disposal
5,000
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Sale
Loss on Disposal
Illustration 9-21
Computation of loss on disposal
Illustration: Assume
that instead of selling
the office furniture for
$16,000, Wright sells it
for $9,000.
July 1
Cash
9,000
Accumulated depreciation
49,000
Office equipment
Loss on disposal
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9-30
60,000
5,000
SO 6 Explain how to account for the disposal of a plant asset.
Section 2 – Natural Resources
Natural resources consist of standing timber and
resources extracted from the ground, such as oil, gas,
and minerals.
Standing timber is considered a biological asset under
IFRS.
In the years before they are harvested, the recorded
value of biological assets is adjusted to fair value each
period.
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SO 7 Compute periodic depletion of extractable natural resources.
Section 2 – Natural Resources
IFRS defines extractive industries as those businesses
involved in finding and removing natural resources located in
or near the earth’s crust.
Cost - price needed to acquire the resource and prepare it for
its intended use.
Depletion - allocation of the cost to expense in a rational and
systematic manner over the resource’s useful life.
Depletion is to natural resources as depreciation is to plant
assets.
Companies generally use units-of-activity method.
Depletion generally is a function of the units extracted.
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SO 7 Compute periodic depletion of extractable natural resources.
Section 3 – Intangible Assets
Intangible assets are rights, privileges, and competitive
advantages that do not possess physical substance.
Intangible assets are categorized as having either a
limited life or an indefinite life.
Common types of intangibles:
Patents
Copyrights
Trademarks and trade
names
Franchises or licenses
Goodwill
IFRS permits revaluation of intangible assets to fair value, except for goodwill.
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SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets
Intangible assets are typically amortized on a straight-line
basis.
.
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SO 8 Explain the basic issues related to accounting for intangible assets.
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