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8/2/2019 20110208130220TANGIBLE ASSETS 2003 (1)
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TANGIBLE ASSETSWAYBRIGHT & KEMPLIBBY, LIBBY & SHORT
CHAPTER 8
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Classifying Long-Lived Assets
8-2
Tangible
PhysicalSubstance
Intangible
No PhysicalSubstance
Expected to Benefit Future Periods
Actively Used in Operations
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Classifying Long-Lived Assets
8-3
Tangible
PhysicalSubstance
Intangible
No PhysicalSubstance
Expected to Benefit Future Periods
Actively Used in Operations
Land Assets subject todepreciation
Buildings and equipment
Furniture and fixtures
Natural resource assetssubject to depletion
Mineral deposits and timber
Examples
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COST PRINCIPLE?
GAAP ?
IFRS ?
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Measuring and RecordingAcquisition Cost
Acquisition cost includes the purchase priceand all expenditures needed to prepare the
asset for its intended use.
Acquisition cost does notincludefinancing charges and cash discounts.
8-6
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Acquisition Cost
Equipment
8-8
Purchase price Installation costs
Modification to building
necessary to installequipment
Transportation costs
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Purchase price
Real estate commissions
Title insurance premiums
Unpaid taxes owed on the land
Surveying fees
Title search and transfer fees
Cost of clearing & removing unwantedbuilding
Acquisition CostLand
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8-10
Fencing
Paving
Sprinkler system
Lighting
Sign
Cost of LandDOES NOTINCLUDE
Known as land improvementsseparate account
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8-11
Suppose Ippo Ltd. purchased a land forRM150,000 by paying a quarter of the costof land in cash and the remaining purchase
price by signing a note payable. Othercash expenses to acquire the land includeRM5000 of realtor commission, RM3000
transfer fees, RM2500 survey fee, RM4500sprinkler system, RM10,000 for alarmsystem and RM45,000 for somelandscaping work.
Acquisition Cost Land - Example
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Acquisition by Construction
8-12
Asset cost includes:
All materials andlabor traceable tothe construction.
A reasonableamount ofoverhead.
Interest on debtincurred during
the construction.
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Depreciation
8-13
Depreciation is a cost allocation processthat systematically and rationally matches
acquisition costs of operational assetswith periods benefited by their use.
Cost
Allocation
(Unused)
Balance Sheet
(Used)
Income Statement
ExpenseAcquisition
Cost
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Depreciation
8-14
DepreciationExpense
Income
Statement
BalanceSheet
AccumulatedDepreciation
Depreciation for
the current year
Total of depreciationto date on an asset
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Depreciation on Deltas2000 Balance Sheet
8-15
Book Values
Property and Equipment:
Flight equipment 17,565$
Less: Accumulated depreciation 5,173 12,392$
Ground property and equipment 4,371Less: Accumulated depreciation 2,313$ 2,058
Advance payments for equipment 390
Total property and equipment 14,840$
Book value = Market value/
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Depreciation Concepts
The calculation of depreciation requiresthree amounts for each asset:
Acquisition cost.
Estimated useful life.
Estimated residual value.
8-16
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Alternative DepreciationMethods
Straight-line
Units-of-production
Accelerated Method:Declining balance
8-17
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Straight-Line Method
At the beginning of the year, Delta purchasedequipment for $62,500 cash. The equipment has
an estimated useful life of 3 years and anestimated residual value of $2,500.
8-18
Cost - Residual Value
Life in Years
Depreciation
Expense per Year=
SL
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The formula for computing annual depreciation expense is:
Depreciable Cost / Useful Life (in years) = Depreciation Expense
8-19
ILLUSTRATION FORMULA FORSTRAIGHT-LINE METHOD
Cost
Salvage
Value
Depreciable
Cost
UsefulLife (in Years)
AnnualDepreciation
Expense
DepreciableCost
$62,500 - $2,500 = $60,000
$60,000 3 = $20,000
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Straight-Line Method
8-20
Depreciation Accumulated Accumulated Undepreciated
Expense Depreciation Depreciation Balance
Year (debit) (credit) Balance (book value)
62,500$
1 20,000$ 20,000$ 20,000$ 42,5002 20,000 20,000 40,000 22,500
3 20,000 20,000 60,000 2,500
60,000$ 60,000$
Residual Value
SL
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Units-of-Production Method
8-21
Depreciation
Rate
= Cost - Residual Value
Life in Units of Production
Step 1:
Step 2:
DepreciationExpense
=Depreciation
Rate
Number ofUnits Produced
for the Year
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Units-of-Production Method
At the beginning of the year, Deltapurchased ground equipment for $62,500cash. The equipment has a 100,000 mile
useful life and an estimated residual valueof $2,500.
If the equipment is used 30,000 miles in thefirst year, what is the amount of depreciation
expense?
8-22
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To use the units-of-activity method, 1) the total units of activity for the
entire useful life are estimated, 2) the amount is divided intodepreciable cost to determine the depreciation cost per unit, and 3) thedepreciation cost per unit is then applied to the units of activity duringthe year to determine the annual depreciation.
8-23
ILLUSTRATION 10-11FORMULA FOR UNITS-OF-ACTIVITY METHOD
DepreciableCost
Total Units ofActivity
DepreciableCost per Unit
$60,000 100,000 miles = $0.60
Units ofActivity during
the Year
AnnualDepreciation
Expense
DepreciableCost per Unit
$0.60 x 30,000 miles = $18,000
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Accelerated Depreciation
Accelerated depreciation matches higherdepreciation expense with higher
revenuesin the early years of an assets useful life
when the asset is more efficient.
8-24
Depreciation Repair
Expense Expense
Early Years High Low
Later Years Low High
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Double-Declining-BalanceMethod- Illustration 1
8-26
At the beginning of the year, Deltapurchased equipment for $62,500 cash.The equipment has an estimated usefullife of 3 years and an estimated residual
value of $2,500.
Calculate the depreciation expensefor the first two years.
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Unlike the other depreciation in illustration 1, salvage valueis ignored in determining the amount to which the decliningbalance rate is applied.
A common application of the declining-balance method is
the double-declining-balance method, in which the declining-balance rate is double the straight-line rate.
If DELTA uses the double-declining-balance methode, thedepreciation is 66.6% (2 X the straight-line rate of 33.3%).
8-27
ILLUSTRATION 2
Double-Declining-Balance Method
AnnualDepreciation
Expense
DepreciableCost
$62,500 x 66.6% = $41,625
double thestraight-linerate
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MAINTANING THE ASSET
CAPITAL OF REVENUEEXPENDITURE?
CAPITAL EXPENDITURE
EXTEND THE USEFUL LIFE OF ASSET INCREASE ASSETS CAPACITY OR
PRODUCTIVITY
PROVIDE VALUE THAT EXTEND
BEYOND THE CURRENT PERIOD REVENUE EXPENDITURE
ORDINARY EXPENSES TREAT ASEXPENSES
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Repairs, Maintenance,and Additions
8-29
Type of Capital or
Expenditure Revenue Identifying Characteristics
Ordinary Revenue 1. Maintains normal operating condition
repairs and 2. Does not increase productivity
maintenance 3. Does not extend life beyond original
estimate
Extraordinary Capital 1. Major overhauls or partial
repairs replacements
2. Extends life beyond original estimate
Additions Capital 1. Increases productivity
2. May extend useful life
3. Improvements or expansions
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Capital and RevenueExpenditures
8-30
Many companies have policies expensing allexpenditures below a certain amount according to
the materiality constraint.
Financial Statement Effect
Current Current
Treatment Statement Expense Income Taxes
Capital Balance sheet
Expenditure account debited Deferred Higher Higher
Revenue Income statement Currently
Expenditure account debited recognized Lower Lower
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Asset Impairment
Impairment is the loss of a significant portionof the utility of an asset through . . .
Casualty.
Obsolescence.Lack of demand for the assets services.
8-31
A loss should be recognized when anasset suffers a permanent impairment.
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Disposal of Property, Plant,and Equipment
Voluntary disposals:Sale
Trade-in
Retirement
Involuntary disposals:
Fire
Accident
8-32
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Disposal of Property, Plant,and Equipment
8-33
Update depreciationto the date of disposal.
Journalize disposal by:
Writing off accumulateddepreciation (debit).
Writing off theasset cost (credit).
Recording cashreceived (debit)
or paid (credit).
Recording again (credit)
or loss (debit).
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Disposal of Property, Plant,and Equipment
8-34
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
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Disposal of Property, Plant,and Equipment
8-35
Delta Airlines sold flight equipmentfor $5,000,000 cash at the end of its
17th year of use. The flight equipmentoriginally cost $20,000,000, and wasdepreciated using the straight-line
method with zero salvage value
and a useful life of 20 years.
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8-36
The amount of depreciationrecorded at the end of the 17th year
to bring depreciation up to date is:
a. $0.
b. $1,000,000.c. $2,000,000.
d. $4,000,000.
Disposal of Property, Plant,and Equipment
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8-37
After updating the depreciation,the equipments book value at the
end of the 17th year is:
a. $3,000,000.
b. $16,000,000.c. $17,000,000.
d. $4,000,000.
Disposal of Property, Plant,and Equipment
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8-38
The equipments sale resulted in:
a. a gain of $2,000,000.
b. a gain of $3,000,000.
c. a gain of $4,000,000.
d. a loss of $2,000,000.
Disposal of Property, Plant,and Equipment
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Disposal of Property, Plant,and Equipment
8-39
GENERAL JOURNAL Page 8
Date Description Debit Credit
Prepare the journal entry to record Deltas saleof the equipment at the end of the 17th year.
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Natural Resources
8-40
Examples: oil, coal, gold
Extracted fromthe natural
environment.
A noncurrentasset presented
at cost less
accumulateddepletion.
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Natural Resources
8-41
Depletion is like depreciation.
Total cost ofasset is the costof acquisition,
exploration,and development.
Total cost isallocated over
periods benefited
by means ofdepletion.
D l i f N l
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Depletion of NaturalResources
8-42
Depletion is calculated using the
units-of-production method.
Unit depletion rateis calculated as follows:
Estimated Recoverable Units
Acquisition and Residual
Development Cost Value
D l i f N l
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Depletion of NaturalResources
Total depletion cost for a period is:
8-43
UNIT DEPLETION
RATE
NUMBER OF UNITS
EXTRACTED IN PERIOD
Totaldepletioncost
Inventoryfor sale
UnsoldInventory
Cost ofgoods sold
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Specialized plant assets may be required toextract the natural resource.
These assets are recorded in a separateaccount and depreciated.
Natural Resources
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