Transcript MGT430 LECTURE 17.ppt

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The Principle of Consistency
Just-In-Time (JIT) Inventory Systems
Taking a Physical Inventory
LCM and Other Write-Downs of Inventory
Goods In Transit
Periodic Inventory Systems
valuation methods in a periodic inventory
system.
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Previous Lecture
1. Specific Identification
2. Average-Cost Method
3. First-In, First-Out Method (FIFO)
4. Last-In, First-Out Method (LIFO)
• The Gross Profit Method
• Inventory Turnover Rate
• Accounting Methods Can Affect Analytical
Ratios
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Chapter
9
PLANT AND INTANGIBLE
ASSETS
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Pakistan Cargo Services
What kind of plant and intangible assets would
you expect Pakistan Cargo Services (PCS) to
have? Probably the first thing you would think of
is vehicles, truck, because you may used to
seeing PCS trucks on the street and highways
virtually every day.
Pakistan Cargo Services has a very large
investment in aircraft along with significant
investment on property, plant, and equipment
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Pakistan Cargo Services
Plant assets are very important for a company
such as Pakistan Cargo Services to be successful
in its daily operations. But it is depend upon the
nature of company and volume of operation.
In addition, some companies required certain
intangible assets to do business. It is rights &
privileges that have been developed or
acquired, such as trade names & patents; these
may be as important to a business as its
equipment, building & land.
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Plant Assets
Long-lived assets acquired for use in
business operations.
Similar to long-term prepaid expenses
Date
The cost of plant assets
is the advance purchase
of services.
Description
Debit
Credit
As years pass, and the
services are used, the
cost is transferred to
depreciation expense.
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Major Categories of Plant Assets
Tangible Plant
Assets
Intangible
Assets
Natural
Resources
Long-term
assets having
physical substance.
Noncurrent assets
with no physical
substance.
Sites acquired for
extracting valuable
resources.
Land, buildings,
equipment,
furniture, fixtures.
Patents, copyrights,
trademarks,
franchises, goodwill.
Oil reserves,
timber, other
minerals.
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Accountable Events
Ê Acquisition.
Ë Allocation of the
acquisition cost to
expense over the
asset’s useful life
(depreciation).
Ì Sale or disposal.
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Acquisition of Plant Assets
Asset
price
Cost
+
Reasonable and
necessary costs . . .
. . . for getting
the asset to the
desired location.
. . . for getting
the asset ready
for use.
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Determining Cost
On May 4, Heat Co., an Ohio maker of stoves,
buys a new machine from a Texas company.
The new machine has a price of $52,000.
Sales tax was computed at 8%.
Heat Co. pays $500 shipping cost to get the
machine to Ohio. After the machine arrives,
set-up costs of $1,300 are incurred, along with
$4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.
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Determining Cost
List price
Sales tax @ 8%
Transportation cost
Set-up
Testing
Total cost to Heat Co.
Date
Description
May 4 New Machine
Cash
$ 52,000
4,160
500
1,300
4,000
$ 61,960
Debit
Credit
61,960
61,960
Prepare the journal entry.
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Special Considerations
Land
Cost includes real estate
commissions, escrow
fees, legal fees, clearing
and grading the property.
Land
Improvements
Improvements to land
such as driveways,
fences, and landscaping
are recorded separately.
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Special Considerations
Buildings
Repairs made prior to the
building being put in use
are considered part of the
building’s cost.
Equipment
Related interest,
insurance, and property
taxes are treated as
expenses of the current
period.
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Special Considerations
Allocation of a Lump-Sum Purchase
I think I’ll buy the
whole thing; barn,
land, and animals.
The total cost
must be
allocated to
separate
accounts for
each asset.
The allocation
is based on
the relative
Fair Market
Value of each
asset
purchased.
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Capital Expenditures and Revenue
Expenditures
Capital
Expenditure
Revenue
Expenditure
Any material expenditure
that will benefit several
accounting periods.
Expenditure for
ordinary repairs
and maintenance.
To capitalize an expenditure
means to charge it to an
asset account.
To expense an expenditure
means to charge it to an
expense account.
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Depreciation
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.
Cost of
plant
assets
Balance Sheet
Assets:
Plant and
equipment
Income Statement
Revenues:
Expenses:
Depreciation
as the services
are received
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Depreciation
Book Value
– Cost – Accumulated Depreciation
Accumulated Depreciation
– Contra-asset
– Represents the portion of an asset’s
cost that has already been allocated to
expense.
Causes of Depreciation
– Physical deterioration
– Obsolescence
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Straight-Line Depreciation
Depreciation
Expense per Year
=
Cost - Residual Value
Years of Useful Life
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Straight-Line Depreciation
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
straight-line method.
Cost – Residual Value
$ 24,000 – $ 3,000
=
Years of Useful Life
5
= $ 4,200 per year
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Straight-Line Depreciation
Bass Co. will record $4,200 depreciation each year for
five years. Total depreciation over the estimated useful
life of the boat is:
Year
2003
2004
2005
2006
2007
Depreciation
Expense
(debit)
$
$
4,200
4,200
4,200
4,200
4,200
21,000
Accumulated
Depreciation
(credit)
$
$
4,200
4,200
4,200
4,200
4,200
21,000
Accumulated
Depreciation
Balance
$
4,200
8,400
12,600
16,800
21,000
Undepreciated
Balance
(book value)
$
24,000
19,800
15,600
11,400
7,200
3,000
Salvage Value
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Depreciation for Fractional Periods
When an asset is acquired during the year,
depreciation in the year of acquisition must be
prorated.
Half-Year Convention
In the year of
acquisition, record six
months of depreciation.
½
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Half-Year Convention
Using the half-year convention, calculate the
straight-line depreciation on December 31,
2001, for equipment purchased in 2003. The
equipment cost $75,000, has a useful life of 10
years and an estimated salvage value of
$5,000.
Depreciation
Depreciation
=
=
=
($75,000 - $5,000) ÷ 10
$7,000 for a full year
1
$7,000 × /2
= $3,500
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Declining-Balance Method
Depreciation in the early years of an asset’s estimated
useful life is higher than in later years.
Accelerated
Depreciation
Remaining
=
× Depreciation
Expense
Book Value
Rate
The double-declining balance depreciation
rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
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Declining-Balance Method
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
double-declining balance method.
2003 Depr.
Expense
=
=
=
=
Remaining
×
Book Value
$
24,000 ×
$
24,000 ×
$
9,600
Accelerated
Depreciation Rate
2 × 1/ 5
40%
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Declining-Balance Method
Total depreciation
over the estimated
an
Compute
depreciation
for theuseful
restlife
ofofthe
asset is the same using either the straight-line method or
boat’s
estimated useful life.
the declining-balance method.
Computation
Year
2003 $ 24,000 × 40%
2004 $ 14,400 × 40%
2005 $ 8,640 × 40%
2006 $ 5,184 × 40%
Plug year # 5
2007
Total Depreciation
Depr.
Expense
$ 9,600
$ 5,760
$ 3,456
$ 2,074
110
$
$ 21,000
Accumulated
Depreciation
9,600
$
15,360
$
18,816
$
20,890
$
21,000
$
Book
Value
$ 14,400
$ 8,640
$ 5,184
$ 3,110
$ 3,000
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Financial Statement Disclosures
• Estimates of Useful Life and
Residual Value
– May differ from company to
company.
– The reasonableness of
management’s estimates is
evaluated by external auditors.
• Principle of Consistency
– Companies should avoid switching
depreciation methods from period to
period.
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Revising Depreciation Rates
Predicted
salvage value
Predicted
useful life
So depreciation
is an estimate.
Over the life of an asset, new information
may come to light that indicates the
original estimates need to be revised.
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Revising Depreciation Rates
On January 1, 2003, equipment was
purchased that cost $30,000, has a useful
life of 10 years and no salvage value.
During 2006, the useful life was revised to 8
years total (5 years remaining).
Calculate depreciation expense for the year
ended December 31, 2006, using the
straight-line method.
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Revising Depreciation Rates
When our estimates change,
depreciation is:
Book value at
date of change
–
Salvage value at
date of change
Remaining useful life at date of change
Asset cost
Accumulated depreciation, 12/31/2005
($3,000 per year × 3 years)
Remaining book value
Divide by remaining life
Revised annual depreciation
$ 30,000
9,000
$ 21,000
÷5
$ 4,200
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Impairment of Assets
If the cost of an asset
cannot be recovered
through future use or
sale, the asset should
be written down to its
net realizable value.
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Disposal of Plant and Equipment
Update depreciation
to the date of disposal.
Journalize disposal by:
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
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Disposal of Plant and Equipment
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
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Disposal of Plant and Equipment
On September 30, 2003, Evans Map Company
sells a machine that originally cost $100,000 for
$60,000 cash. The machine was placed in
service on January 1, 1998. It has been
depreciated using the straight-line method with
an estimated salvage value of $20,000 and an
estimated useful life of 10 years.
Let’s answer the following questions.
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Disposal of Plant and Equipment
The amount of depreciation
recorded on September 30, 2003,
to bring depreciation up to date is:
a.
b.
c.
d.
$8,000.
$6,000.
$4,000.
$2,000.
Annual Depreciation:
($100,000 - $20,000) ÷ 10 Yrs. = $8,000
Depreciation to Sept. 30:
9/12 × $8,000 = $6,000
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Disposal of Plant and Equipment
After updating the depreciation, the
machine’s book value on
September 30, 2003, is:
a.
b.
c.
d.
$54,000.
$46,000.
$40,000.
$60,000.
Cost
Accumulated Depreciation:
(5 yrs. × $8,000) + $6,000 =
Book Value
$ 100,000
46,000
$ 54,000
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Disposal of Plant and Equipment
The machine’s sale resulted in:
a.
b.
c.
d.
a gain of $6,000.
a gain of $4,000.
a loss of $6,000.
a loss of $4,000.
Cost
Accum. Depr.
Book value
Cash received
Gain
$
$
$
100,000
46,000
54,000
60,000
6,000
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End of Todays Session
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