Financial Accounting and Accounting Standards

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Transcript Financial Accounting and Accounting Standards

Slide 9-1

Chapter

9 Slide 9-2

Plant Assets, Natural Resources, and Intangible Assets (

LONG TERM ASSETS)

Financial Accounting, Seventh Edition

Slide

9-3

In Chapter 8

You learned: o

How to account for cash and accounts receivable

o o o

Why it’s important to control cash How a company accounts for bad debts Types of short term receivables

Study Objectives

Slide 9-4

Describe how the cost principle applies to plant assets.

Explain the concept of depreciation.

Compute periodic depreciation using different methods.

Describe the procedure for revising periodic depreciation.

Distinguish between revenue and capital expenditures, and explain the entries for each.

Explain how to account for the disposal of a plant asset.

Compute periodic depletion of natural resources.

Explain the basic issues related to accounting for intangible assets.

Indicate how plant assets, natural resources, and intangible assets are reported.

Slide

9-5

In Chapter 9

You will learn: o To account for the o • • • • • • Buildings purchase and use of: Manufacturing plants Equipment Furniture & Fixtures Natural resources Intangible assets How transactions related to long-term assets are presented on the financial statements.

Stop and Obtain the Handouts for Chapter 9

To be successful in this class (and on the proctored exams), it is important that you practice along with the PowerPoint slides.

Print out the Chapter Handouts and use to take notes along with the slides.

Stop and try to solve the practice problems, THEN check the solution.

Most students will READ and say they understand.

Successful students tell us that reading is NOT enough, but that WRITING and PRACTICING make the difference.

Slide 9-6

Plant Assets, Natural Resources, and Intangible Assets

Slide 9-7 Plant Assets

Determining the cost of plant assets Depreciation Expenditures during useful life Plant asset disposals

Natural Resources

Accounting for natural resources Financial statement presentation

Intangible Assets

Accounting for intangibles Types of intangibles Research and development costs

Statement Presentation and Analysis

Presentation Analysis

Slide 9-8

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.

Slide 9-9

Section 1 – Plant Assets

Illustration 9-1 Percentages of plant assets in relation to total assets

Slide 9-10

Determining the Cost of Plant Assets

Land

Includes all costs to acquire land and ready it for use. Costs typically include: (1) (2) (3) (4) (5) the purchase price; closing costs, such as title and attorney’s fees; real estate brokers’ commissions; costs of grading, filling, draining, and clearing; assumption of any liens, mortgages, or encumbrances on the property.

SO 1 Describe how the cost principle applies to plant assets.

Slide

9-11

Acquiring Plant Assets

Assets are required to be recorded at their Historical Cost (e.g., not appraisal value) • Cost includes all necessary costs to get the assets ready for their intended purpose • Their intended purpose is to help generate future revenues.

• The expected future must exceed the cost revenues of the asset.

Acquisition Cost - Land

Slide

9-12

Land

+ + + + =

Costs of preparing the land for use, such as clearing or draining Net Cost of tearing down existing Structures

Cost of Land The Historical Cost Remains on the Balance Sheet. Land is not depreciated

Determining the Cost of Plant Assets

Do YOU HAVE YOUR COURSEPACK? Calculator? If not, get them out NOW.

Slide 9-13

SO 1 Describe how the cost principle applies to plant assets.

Slide 9-14

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 $_________

Required:

the land.

Determine amount to be reported as the cost of

SO 1 Describe how the cost principle applies to plant assets.

Slide 9-15

Determining the Cost of Plant Assets

Required:

the land.

Determine amount to be reported as the cost of Cash price of property of $100,000

Land

$100,000 Net removal cost of warehouse of $6,000 Attorney's fees of $1,000 6,000 1,000 Real estate broker’s commission of $8,000 Cost of Land 8,000 $115,000

SO 1 Describe how the cost principle applies to plant assets.

Slide 9-16

Determining the Cost of Plant Assets

Land Improvements

Includes all expenditures necessary to make the improvements ready for their intended use.

Examples are driveways, parking lots, fences, landscaping, and underground sprinklers.

Limited useful lives.

Expense (depreciate) the cost of land improvements over their useful lives.

SO 1 Describe how the cost principle applies to plant assets.

Acquisition Cost

Slide

9-17

+ + =

Buildings - Plant

Costs to Update or facilities Any other costs to get the plant operational

Depreciation allocates the cost against future revenues.

Cost of Building

Determining the Cost of Plant Assets

Slide 9-18

Buildings

Includes all costs related directly to purchase or construction.

Purchase costs: Purchase price, closing costs (attorney’s fees, title insurance, etc.) 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.

SO 1 Describe how the cost principle applies to plant assets.

Acquisition Cost

Slide

9-19

Building

+ +

Cost of renovating or repairing building

=

Cost of Building Buildings are depreciated, even if the firm expects the market value of the building to increase

Slide

9-20

Acquisition Cost

+ + + =

Equipment (

also Furn. & Fixt.

)

Insurance in Transit Installation Costs, including test runs

Will be depreciated over the estimated useful life of the equipment Cost of Equipment

Determining the Cost of Plant Assets

Slide 9-21

Equipment

Include 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.

SO 1 Describe how the cost principle applies to plant assets.

Slide 9-22

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.

Machinery

Determine amount to be reported as the cost of the machinery.

Cost of Machinery

SO 1 Describe how the cost principle applies to plant assets.

Slide 9-23

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

Cash price Sales taxes Insurance during shipping Installation and testing $50,000 3,000 500 1,000 Cost of Machinery $54,500

SO 1 Describe how the cost principle applies to plant assets.

Slide 9-24

Let’s practice…



See Self Study Question # 1



See Brief Exercise #9-1 and 9-2



See Problem 1B

Slide

9-25

Long-Term Assets

Are recorded on the Balance Sheet at Cost Recording a Cost as an Asset is called Capitalizing the Cost

Slide

9-26

As the Assets are used….

A portion of the cost is transferred to the Income Statement And Matched Against the Revenue the assets helped generate

Slide 9-27

Depreciation

Depreciation

is the process of allocating the cost of tangible assets to use of the asset.

expense in a systematic and rational manner to those periods expected to benefit from the 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.

SO 2 Explain the concept of depreciation.

Slide 9-28

Depreciation

Factors in Computing Depreciation

Cost Useful Life

Illustration 9-6

Salvage Value

SO 2 Explain the concept of depreciation.

Slide 9-29

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) (2) (3) Straight-line method.

Units-of-Activity method.

Declining-balance method.

Illustration 9-8 Use of depreciation methods in 600 large U.S. companies

SO 3 Compute periodic depreciation using different methods.

Depreciation

Go to your Chapter 9 – Course Pack, Depreciation – Demo - take notes & practice!

Illustration:

Barb’s Florists purchased a small delivery truck on January 1, 2011.

Illustration 9-7 Slide 9-30 Required:

Compute depreciation using the following. (a) Straight-Line.

(b) Units-of-Activity.

SO 3 Compute periodic depreciation using different methods.

Slide 9-31

First….let’s record the Journal Entry



Assume the Delivery Truck was purchased with Cash. Note the journal entry on the journal entry form in your handout: General Journal – (Note: Include Explanations, put spaces between journals) # DATE Account Titles AND Description Debit Credit

Slide 9-32

First….let’s record the Journal Entry



1 1/1/2011 Equipment Cash

To record purchase of Delivery Truck with a 5 year life and $1,000 salvage value.

13,000

Credit

13,000

Depreciation

Straight-Line

Expense is same amount for each year.

Depreciable cost is cost of the asset less its salvage value.

Illustration 9-9 Slide 9-33

SO 3 Compute periodic depreciation using different methods.

Depreciation

Slide 9-34 Straight-Line Depreciation Schedule (use your handout) Facts:

Item: ____________________

Hint: WATCH THE DATES!

Straight - line

original cost: salvage: depreciable cost: life (in years): $ 13,000 $ 1,000 $ 12,000 5

Column headers: Date of purchase

end of year 1 end of year 2 end of year 3 end of year 4 end of year 5 Depreciation Expense 2,400 Accum. Depreciation 2,400 Book Value $ 13,000 10,600 Can you do the other 4 years without checking the answer?

SO 3 Compute periodic depreciation using different methods.

Depreciation

Can YOU do the other 4 years without checking the answer?

Slide 9-35

SO 1 Describe how the cost principle applies to plant assets.

Depreciation

(Straight-Line Method) SOLUTION

Illustration: Year

2011 2012 2013 2014 2015

Depreciable Cost

$ 12,000 12,000 12,000 12,000 12,000

x Rate =

20% 20 20 20 20

Annual Expense

$ 2,400 2,400 2,400 2,400 2,400

Accum.

Deprec.

$ 2,400 4,800 7,200 9,600 12,000

Illustration 9-10 Book Value

$ 10,600 8,200 5,800 3,400 1,000

Slide 9-36 2011 Journal Entry

Depreciation expense Accumulated depreciation 2,400 2,400

SO 3 Compute periodic depreciation using different methods.

Slide 9-37

First….let’s record the Journal Entry using Straight Line Method



Book depreciation for the first year, as of 12/31/2011. Add this to the journal entry form in your handout: General Journal – (Note: Include Explanations, put spaces between journals) # DATE Account Titles AND Description Debit

1 1/1/2011 Equipment Cash

To record purchase of Delivery Truck with a 5 year life and $1,000 salvage value.

13,000

Credit

13,000 XXX 12/31/2011

Slide 9-38

Depreciation Journal Entry – Straight Line Method



1 1/1/2011 Equipment Cash

To record purchase of Delivery Truck with a 5 year life and $1,000 salvage value.

13,000

Credit

13,000 XXX 12/31/2011 Depreciation Expense Accumulated Depreciation

To book one year depreciation expense, using straight line method.

2,400 2,400

Slide 9-39

Depreciation

Units-of-Activity

Companies estimate total units of activity to calculate depreciation cost per unit.

Expense varies based on units of activity.

In this case, the truck’s life)

units

are its driving range (over its of 100,000 miles Depreciable cost is cost less salvage value.

SO 3 Compute periodic depreciation using different methods.

Slide 9-40

Depreciation

Units-of-Activity (use your handout)

Create a Depreciation Schedule, given the following mileage: • Year 1: 15,000 miles • Year 2: 30,000 miles • Year 3: 20,000 miles • Year 4: 25,000 miles • Year 5: 10,000 miles

SO 3 Compute periodic depreciation using different methods.

Depreciation

Units-of-Activity (use your handout) Slide 9-41 Units of Activity Column headers: Date of purchase

end of year 1 end of year 2 end of year 3 end of year 4 end of year 5 Milage Depreciation Expense Accum. Depreciation Book Value 15,000 30,000 20,000 25,000 10,000 $ 1,800 $ 1,800 $ 13,000 $ 11,200 $ 12,000 $ 0.12

per mile

Can you do the other 4 years without checking the answer?

SO 3 Compute periodic depreciation using different methods.

Depreciation

Can YOU do the other 4 years without checking the answer?

Slide 9-42

SO 1 Describe how the cost principle applies to plant assets.

Depreciation (Units-of-Activity Method) SOLUTION

Year

2011 2012 2013 2014 2015 Units

of Activity x

15,000 30,000 20,000 25,000 10,000

Cost / Unit

$ 0.12

0.12

= Annual Depreciation Accumulated Expense Depreciation

$ 1,800 3,600 2,400 3,000 1,200 $ 1,800 5,400 7,800 10,800 12,000

Book Value

$ 11,200 7,600 5,200 2,200 1,000

Slide 9-43 2011 Journal Entry

Depreciation expense Accumulated depreciation 1,800 1,800

SO 3 Compute periodic depreciation using different methods.

Slide 9-44

First….let’s record the Journal Entry, using Units of Activity Method



1 1/1/2011 Equipment Cash

To record purchase of Delivery Truck with a 5 year life and $1,000 salvage value.

13,000

Credit

13,000 XXX 12/31/2011

Slide 9-45

Depreciation Journal Entry - Units of Activity Method



1 1/1/2011 Equipment Cash

To record purchase of Delivery Truck with a 5 year life and $1,000 salvage value.

13,000

Credit

13,000 XXX 12/31/2011 Depreciation Expense Accumulated Depreciation

To book one year depreciation expense, using units of activity method.

1,800 1,800

Slide 9-46

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 9-13

SO 3 Compute periodic depreciation using different methods.

Depreciation

Can YOU do the other 4 years without checking the answer?

Slide 9-47

SO 1 Describe how the cost principle applies to plant assets.

Depreciation

(Declining-Balance Method) SOLUTION

Illustration: Beginning Year Book value x Declining Balance

Rate = 2011 2012 2013 2014 2015 13,000 7,800 4,680 2,808 1,685 40% 40 40 40 40

Annual Deprec.

Expense

$ 5,200 3,120 1,872 1,123 685*

Accum.

Deprec.

$ 5,200 8,320 10,192 11,315 12,000

Illustration 9-14 Book Value

$ 7,800 4,680 2,808 1,685 1,000

Slide 9-48 2011 Journal Entry

Depreciation expense Accumulated depreciation 5,200

Computation of $674 ($1,685 x 40%) is adjusted to $685.

5,200

Slide 9-49

First….let’s record the Journal Entry, using Declining Balance Method



1 1/1/2011 Equipment Cash

To record purchase of Delivery Truck with a 5 year life and $1,000 salvage value.

13,000

Credit

13,000 XXX 12/31/2011

Slide 9-50

Depreciation Journal Entry - Declining Balance Method



1 1/1/2011 Equipment Cash

To record purchase of Delivery Truck with a 5 year life and $1,000 salvage value.

13,000

Credit

13,000 XXX 12/31/2011 Depreciation Expense Accumulated Depreciation

To book one year depreciation expense, using double declining value method.

5,200 5,200

Depreciation

Comparison of Methods Illustration 9-15 Illustration 9-16 Slide 9-51

SO 3 Compute periodic depreciation using different methods.

Depreciation for Partial Year

The following four slides are included to illustrate the calculation of partial-year depreciation expense.

The amounts are consistent with the previous slides illustrating the calculation of depreciation expense.

Slide 9-52

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 Slide 9-53 Required:

Compute depreciation using the following. (a) Straight-Line.

(b) Units-of-Activity.

SO 3 Compute periodic depreciation using different methods.

Slide 9-54

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 Rate x 20% = x 20% = x 20% = x 20% = x 20% = x 20% = Annual Expense x 2,400 2,400 2,400 2,400 2,400 x Partial Year 3/12 9/12 = = Current Year Expense $ 600 2,400 2,400 2,400 2,400 1,800 Accum.

Deprec.

3,000 5,400 7,800 Journal entry: 2011 Depreciation expense Accumultated depreciation 600 600

SO 3 Compute periodic depreciation using different methods.

Depreciation for Partial Year

Illustration:

(Units-of-Activity Method)

Year

2011 2012 2013 2014 2015

Hours Used

15,000 30,000 20,000 25,000 10,000

x Cost / Unit

$ 0.12

0.12

= Annual Expense

$ 1,800 3,600 2,400 3,000 1,200

Accum.

Deprec.

$ 1,800 5,400 7,800 10,800 12,000

Illustration 9-12 Book Value

$ 11,200 7,600 5,200 2,200 1,000

Slide 9-55 2011 Journal Entry

Depreciation expense Accumulated depreciation 1,800 1,800

SO 3 Compute periodic depreciation using different methods.

Depreciation for Partial Year

Illustration:

(Declining-Balance Method)

Beginning Year Book Value 2011 2012 $ 13,000 2013 2014 2015 2016 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 607 x Partial Year 3/12 Plug = Current Year Expense 516 $ 12,000 Journal entry: 2011 Depreciation expense Accumultated depreciation 1,300 1,300 Accum.

Deprec.

$ 1,300 5,980 8,788 Slide 9-56

SO 3 Compute periodic depreciation using different methods.

Slide 9-57

Depreciation

Depreciation and Income Taxes

IRS does not require taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.

IRS requires the straight-line method or a special accelerated-depreciation method called the Modified Accelerated Cost Recovery System (MACRS). MACRS is NOT acceptable under GAAP.

SO 3 Compute periodic depreciation using different methods.

Depreciation

Revising Periodic Depreciation

Accounted for in the period of change and future periods (Change in Estimate) .

Not handled retrospectively.

Not considered error.

Slide 9-58

SO 4 Describe the procedure for revising periodic depreciation.

Slide 9-59

Depreciation

Illustration:

Assume that Barb’s Florists decides on January 1, 2014, to extend the useful life of the truck one year because of its excellent condition. The company has used the straight-line method to depreciate the asset to date, and book value is $5,800 ($13,000 - $7,200).

Questions:

What is the journal entry to correct the prior years’ depreciation?

Required

Calculate the depreciation expense for 2014.

SO 4 Describe the procedure for revising periodic depreciation.

Slide 9-60

Depreciation

Book value, 1/1/14 Salvage value Depreciable cost Useful life (revised) / Annual depreciation $5,800 - 1,000 4,800 3 years $ 1,600 First, establish Book Value at the date of change in estimate.

Illustration 9-17

Journal entry for 2014 Depreciation expense Accumulated depreciation 1,600 1,600

SO 4 Describe the procedure for revising periodic depreciation.

Slide 9-61

Expenditures During Useful Life

Ordinary Repairs

- expenditures to maintain the operating efficiency and productive life of the unit.

Debit - Repair (or Maintenance) Expense. Referred to as

revenue expenditures

Additions and Improvements

increase the operating efficiency, productive capacity, or useful life of a plant asset.

- costs incurred to Debit - the plant asset affected.

Referred to as

capital expenditures

SO 5 Distinguish between revenue and capital expenditures, and explain the entries for each.

Slide 9-62

Fraud Alert



A Revenue Expenditure reduces profit thru an expense account (e.g., repair expense) in the current year.



A Capital Expenditure reduces profit at a (thru depreciation expense over time) much

slower rate

Plant Asset Disposals

Companies dispose of plant assets in three ways — Retirement, Sale, or Exchange (appendix).

Illustration 9-18 Slide 9-63

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.

SO 6 Explain how to account for the disposal of a plant asset.

Slide 9-64

Plant Asset Disposals - Retirement

Retirement of Plant Assets

Illustration:

Assume that Hobart Enterprises retires its computer printers, which cost $32,000. The accumulated depreciation on these printers is $32,000. The journal entry to record this retirement is?

Accumulated depreciation Printing equipment 32,000 32,000 Question: What happens if a fully depreciated plant asset is still useful to the company?

SO 6 Explain how to account for the disposal of a plant asset.

Plant Asset Disposals - Retirement

Illustration:

Assume that Sunset Company discards delivery equipment that cost $18,000 and has accumulated depreciation of $14,000. The journal entry is?

Accumulated depreciation Loss on disposal Delivery equipment 14,000 4,000 18,000

Slide 9-65

Companies report a loss on disposal in the “Other expenses and losses” section of the income statement.

SO 6 Explain how to account for the disposal of a plant asset.

Slide 9-66

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

occurs. on disposal If proceeds are less than the book value, a

loss

disposal occurs.

SO 6 Explain how to account for the disposal of a plant asset.

Slide 9-67

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 8,000 8,000

SO 6 Explain how to account for the disposal of a plant asset.

Plant Asset Disposals - Sale

Illustration 9-19 Computation of gain on disposal Illustration:

Wright records the sale as follows.

July 1

Slide 9-68

Cash Accumulated depreciation Office equipment Gain on disposal 16,000 49,000 60,000 5,000

SO 6 Explain how to account for the disposal of a plant asset.

Slide 9-69

Plant Asset Disposals - Sale

Loss on Disposal Illustration:

Assume that instead of selling the office furniture for $16,000, Wright sells it for $9,000. July 1 Cash Accumulated depreciation Loss on disposal Office equipment

Illustration 9-20 Computation of loss on disposal

9,000 49,000 2,000 60,000

SO 6 Explain how to account for the disposal of a plant asset.

Slide 9-70

Section 2 – Natural Resources

Natural resources

consist of standing timber and underground deposits of oil, gas, and minerals.

Distinguishing characteristics: Physically extracted in operations. Replaceable only by an act of nature.

SO 7 Compute periodic depletion of natural resources.

Long-Term Assets

The general term to describe the process is called “Amortization”

Expense over time

“Depreciation”

is the specific term to describe the amortization of

Property Plant and Equipment “Depletion”

is the specific term to describe the amortization of

Natural Resources “Amortization”

is also used to describe the write-off of

Intangible Assets

Slide

9-71

Slide 9-72

Section 2 – Natural Resources

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.

SO 7 Compute periodic depletion of natural resources.

Section 2 – Natural Resources

Slide 9-73 Illustration:

as follows: Assume that Lane Coal Company invests $5 million in a mine estimated to have 10 million tons of coal and no salvage value. In the first year, Lane extracts and sells 800,000 tons of coal. Lane computes the depletion expense $5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton $.50 x 800,000 = $400,000 depletion expense

Journal entry:

Depletion expense Accumulated depreciation 400,000 400,000

SO 7 Compute periodic depletion of natural resources.

Financial Statement Presentation

Illustration 9-22 Statement presentation of accumulated depletion Slide 9-74

Extracted resources that have not been sold are reported as inventory in the current assets section.

SO 7 Compute periodic depletion of natural resources.

Slide 9-75

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 Franchises or licenses Trademarks and trade names Goodwill

SO 8 Explain the basic issues related to accounting for intangible assets.

Slide 9-76

Accounting for Intangible Assets

Valuation Purchased

Intangibles: Recorded at cost.

Includes all costs necessary to make the intangible asset ready for its intended use.

Internally Created

Intangibles: Generally expensed.

Only capitalize direct costs incurred in perfecting title to the intangible, such as legal costs.

SO 8 Explain the basic issues related to accounting for intangible assets.

Accounting for Intangible Assets

Amortization of Intangibles Limited-Life

Intangibles: Amortize to expense.

Credit asset account or accumulated amortization.

Indefinite-Life

Intangibles: No foreseeable limit on time the asset is expected to provide cash flows. No amortization.

Slide 9-77

SO 8 Explain the basic issues related to accounting for intangible assets.

Slide 9-78

Types of Intangible Assets

Patents

Exclusive right to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant.

Capitalize costs of purchasing a patent and amortize over its 20-year life or its useful life, whichever is shorter.

Expense any R&D costs in developing a patent. Legal fees incurred successfully defending a patent are capitalized to Patent account.

SO 8 Explain the basic issues related to accounting for intangible assets.

Accounting for Intangible Assets

Illustration:

Assume that National Labs purchases a patent at a cost of $60,000. National estimates the useful life of the patent to be eight years. National records the annual amortization as follows.

Amortization expense Patent 7,500 7,500

Slide 9-79

SO 8 Explain the basic issues related to accounting for intangible assets.

Slide 9-80

Accounting for Intangible Assets

Copyrights

Give the owner the exclusive right to reproduce and sell an artistic or published work.

 plays, literary works, musical works, pictures, photographs, and video and audiovisual material.

is granted for the life of the creator plus Capitalize acquisition costs. Amortized to expense over useful life.

SO 8 Explain the basic issues related to accounting for intangible assets.

Slide 9-81

Accounting for Intangible Assets

Trademarks and Trade Names

Word, phrase, jingle, or symbol that identifies a particular enterprise or product.

 Wheaties, Game Boy, Frappuccino, Kleenex, Windows, Coca-Cola, and Jeep.

Trademark or trade name has legal protection for indefinite number of 20 year renewal periods. Capitalize acquisition costs. No amortization.

SO 8 Explain the basic issues related to accounting for intangible assets.

Accounting for Intangible Assets

Franchises and Licenses

Contractual arrangement between a franchisor and a franchisee.

 Shell, Taco Bell, or Rent-A-Wreck are franchises.

Franchise (or license ) with a limited life should be amortized to expense over the life of the franchise.

Franchise with an indefinite life should be carried at cost and not amortized.

Slide 9-82

SO 8 Explain the basic issues related to accounting for intangible assets.

Franchise Facts

….

Slide 9-83

    

71% of Franchise owners only own one franchise * 75% have owned their Franchise for 5 years or less (43% less than 2 years) 77% work more than 40 hours per week (49% work more than 50 hours) 65% owners are between 35-54 years old #1 reason for buying franchise:



Seeking MORE control What are some of the TOP franchises for 2005?

* = based on a survey of North American franchise owners representing over 200 franchises by

the Franchise Business Review, over one half million responses.

Slide 9-84

They are:

Slide 9-85

Fastest Growing Franchises…ranked

(not on exam, just an illustration)

2006

Subway Subway Pizza Hut Stratus Building Solutions * Jan-Pro Franchisi ng* Jan-Pro Franchisi ng* Hamton Hotels Hamton Hotels Jan-Pro Franchisi ng* Jan-Pro Franchisi ng* Subway Subway Subway Subway Quiznos

2007

Dunkin' Donuts

2008

Subway

2009 2010 2011

Instant Tax Stratus Building Solutions Solutions * Jiffy 7-Eleven Lube

2012

Source: http://www.entrepreneur.com/franzone/fastestgro wing/index.html

Provides cleaning service for commercial buildings Note: Source contains average start up costs

Accounting for Intangible Assets

Goodwill

Includes exceptional management, desirable location, good customer relations, skilled employees, high-quality products, etc. Only recorded when an entire business is purchased.

Goodwill is recorded as the excess of ...

purchase price over the FMV of the identifiable net assets acquired

Internally created goodwill should not be capitalized.

Slide 9-86

SO 8 Explain the basic issues related to accounting for intangible assets.

Slide 9-87

Research and Development Costs

Frequently results in something that a company patents or copyrights such as: new product, process, idea, formula, composition, or literary work.

All R & D costs are

expensed when incurred

Slide 9-88

SO 8 Explain the basic issues related to accounting for intangible assets.

Statement Presentation and Analysis

Presentation

Illustration 9-23 Slide 9-89

SO 9 Indicate how plant assets, natural resources, and intangible assets are reported.

Statement Presentation and Analysis

Analysis

Illustration 9-25 Slide 9-90

Each dollar invested in assets produced $0.59 in sales. If a company is using its assets efficiently, each dollar of assets will create a high amount of sales.

SO 9 Indicate how plant assets, natural resources, and intangible assets are reported.

Buying a Wreck of Your Own Slide 9-91

   There are approximately 250 million vehicles in operation in the U.S. Around the world, there were 806 million cars and light trucks on the road in 2007. Currently, these vehicles burn over 260 billion gallons of fuel yearly.

In the U.S., the 2008 car and light-truck market dropped dramatically, to approximately 13.2 million units, down by about 2.9 million from 2007.

The cost of an average new car is about $22,000. The price of the average used car is now about $13,900.

Slide 9-92

    Financial institutions typically require a down payment of at least 10% of the value of a vehicle on a vehicle loan. Thus, the average new car will require a much higher down payment. However, interest rates on used-car loans are higher than on new-car loans.

To stimulate car sales, individuals can generally deduct fees and taxes on the purchase price of a qualified new car, light truck, motor home, or motorcycle.

A new car typically loses at least 30% of its value during the first two years, and about 40 to 50% after three years. Some brands maintain their value better than others. To keep monthly car payments down, car companies will now provide financing for up to six years. (It used to be two or three years.) With such a long loan, you might end up “ upside down on the loan loan.

”— that is, you might actually owe more money than the car is worth if you decide to sell the car before the end of the

There are many costs to consider in deciding whether to buy a new or used car. These costs include the down payment, monthly loan payments, insurance, maintenance and repair costs, and state (department of motor vehicle) fees. The graph below compares the total costs over five years for the typical new versus used car.

Slide 9-93

Slide 9-94

Should you buy a new car?

YES:

I have enough stress in my life. I don’t want to worry about my car breaking down—and if it does break down, I want it to be covered by a warranty. Besides, I have an image to maintain—I don’t want to be seen in anything less than the latest styling and the latest technology.

NO:

I’m a college student, and I need to keep my costs down. Also, used cars are a lot more dependable than they used to be. In addition, my self image is strong enough that I don’t need a fancy new car to feel good about myself (despite what the car advertisements say).

Slide 9-95

End of Chapter 9



Good Bye and Good Luck!



Course Pack exercise solutions follow

Slide 9-96

Copyright

“Copyright © 2010 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”

DEPRECIATION

Note: If you do not have enough information to solve a problem, put an X in the box.

Name: ___________________

On January 1, 20x1,

Maynard's

computer repair purchased for $50,000 a delivery truck that will be driven an estimated 120,000 miles. The truck has an estimated useful life of five years and an estimated residual value of $6,000. To the best of your ability, prepare a depreciation schedule.

Hint: WATCH THE DATES!

Straight - line Misc. calc: Column headers: Date of purchase Cost

1 2 3 4 5 50,000 50,000 50,000 50,000 50,000

deprec exp acc depre

8,800 8,800 8,800 8,800 8,800 8,800 17,600 26,400 35,200 44,000

carry. Value

50,000 41,200 32,400 23,600 14,800 6,000 Solution to extra problem in course pack

Double-Declining Column headers: Date of purchase

1 2 3 4 5

Rate Carry Value before depre deprec exp

0.4

50,000 30,000 18,000 10,800 0.4

6,480 20,000 12,000 7,200 4,320 480

acc depre

20,000 32,000 39,200 43,520 44,000

carry. Value

0.2

0.4

50,000 30,000 18,000 10,800 6,480 6,000 note: 480 is NOT 40% of

Slide 9-97 Production Column headers: Date of purchase Year 4 only Cost

50,000

deprec exp acc depre carry. Value

6,233 x x

Note: do for year 4 only. Assume

17,000 miles were 50000 driven that year.

44,000 $ 0.37 6,233

Slide 9-98