Upload
berniece-rich
View
215
Download
0
Embed Size (px)
DESCRIPTION
6-3 Decline in asset value over its useful life Primary Issues for Noncurrent Assets Acquisition Accounting for acquisition of the asset. Use Accounting for depreciation of the asset. Accounting for maintenance and repair costs. Disposal Accounting for the disposition of the asset.
Citation preview
6-1
CHAPTER 6
Accounting for and Presentation of Property, Plant, and Equipment, and Other
Noncurrent Assets
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-2
Noncurrent Assets
Land
Equipment
Buildings
Intangible Assets
Natural Resources
1) Classified as Assets because they are owned by the organization
2) Have the ability to generate Revenue beyond 1 year
6-3
Decline in asset value over its useful life
Primary Issues for Noncurrent Assets
AcquisitionAccounting for
acquisition of the asset.
UseAccounting for
depreciation of the asset.
Accounting for maintenance and
repair costs.
DisposalAccounting for the disposition of the
asset.
6-4
Land is a non-depreciable asset.
Purchaseprice
Real estatecommissions
Title insurance premiumsDelinquent
taxes
Razing costs of building on the land
Title and legal fees
LandAll costs incurred to get land ready for use are
capitalized.
L O 1
6-5
LandAssume that a company pays $250,000 to purchase land and get it ready for use in its
business on January 01.The following journal entry would be made to
capitalize the $250,000:
L O 1
6-6
Land
If 5 years later, on January 01 that same piece of land is sold for $300,000, the entry to
record the sale would be:
L O 1
6-7
On January 1, UpCo purchased land and building for $200,000 cash. The appraised values are building,
$162,500, and land, $87,500.
How much of the $200,000 purchase price will be charged to the building and land accounts?
Basket PurchaseThe total cost of a combined
purchase of land and a building is allocated to each asset on the
basis of relative market values and each asset is recorded separately.
L O 1
6-8
Appraised % of Purchase ApportionedAsset Value Value Price Cost
a b* c b × cLand 87,500$ 35% × 200,000$ = 70,000$ Building 162,500 65% × 200,000 = 130,000 Total 250,000$ 100% 200,000$
* $87,500 ÷ $250,000 = 35%
$162,500 ÷ $250,000 = 65%
Basket PurchaseL O 1
6-9
Purchaseprice
Architecturalfees
Cost ofpermits
Excavation andconstruction costs
Installationcosts
Transportationcosts
Buildings and EquipmentL O 1
All costs incurred to get an asset ready for use are capitalized.
6-10
Depreciation is the allocation of the cost of an asset to the years in which the
benefits of the asset are expected to be received. It is an application of the
matching concept.
CostAllocation
AcquisitionCost
(Unused)
Balance Sheet
(Used)
Income Statement
Expense
DepreciationL O 2
Does not reflect decline in value
6-11
Depreciation expense is recorded in each fiscal period.
GENERAL JOURNAL
Date Account Titles and ExplanationPRDebit Credit
XXX XX Depreciation Expense $$$$Accumulated Depreciation $$$$
Contra-asset
DepreciationL O 2
Contra-asset accounts Contra-asset accounts are used to segregate are used to segregate
depreciation from depreciation from original costoriginal cost
6-12
Balance Sheet Presentation
Depreciation
Net Book Value (NBV)
L O 2
6-13
IncomeStatement
DepreciationExpense
Depreciation forthe current year
BalanceSheet
AccumulatedDepreciation
Total depreciation recordedas of balance sheet date
DepreciationL O 2
6-14
Depreciation Methods
In the early years of an asset’s life, accelerated depreciation methods result in greater depreciation expense and lower net
income than straight-line depreciation.
Straight-Line Depreciation
Years of Life
Annu
al
Depr
ecia
tion
Expe
nse
($)
Accelerated Depreciation
Years of Life
Annu
al
Depr
ecia
tion
Expe
nse
($)
L O 3
6-15
Depreciation Methods
Straight-Line Depreciation
Years of Life
Annu
al
Depr
ecia
tion
Expe
nse
($)
Straight-Line Methods
Straight-line
Units of production
L O 3
Accelerated Depreciation
Years of Life
Annu
al
Depr
ecia
tion
Expe
nse
($)
Accelerated Methods
Sum-of-the-years’-digits
Declining balance
6-16
EXAMPLE
On December 31, 2007, equipment was purchased for $50,000 cash. The equipment has an
estimated useful life of 5 years and an estimated residual value of $5,000.
SL
Straight-Line Method
Cost - Estimated Salvage ValueEstimated Useful Life
Annual DepreciationExpense =
L O 3
Formula
6-17
Annual DepreciationExpense
=
Annual DepreciationExpense
= $9,000
$50,000 - $5,0005 years
Straight-Line Method
SL
Cost - Estimated Salvage ValueEstimated Useful Life
Annual DepreciationExpense =
L O 3
6-18
Depreciation Accumulated Accumulated UndepreciatedExpense Depreciation Depreciation Balance
Year (debit) (credit) Balance (NBV)2007 50,000$ 2008 9,000$ 9,000$ 9,000$ 41,000 2009 9,000 9,000 18,000 32,000 2010 9,000 9,000 27,000 23,000 2011 9,000 9,000 36,000 14,000 2012 9,000 9,000 45,000 5,000
45,000$ 45,000$ Salvage Value
Straight-Line Method
SL
L O 3
Depreciation stops when
NBV=SALVAGE VALUE
6-19
Dep
reci
atio
n Ex
pens
e
Depreciation Expense is reported on the Income
Statement.
Book Value is reported on the Balance Sheet.
SL
L O 3 Straight-Line Method
6-20
Step 2:
Annual Depreciation Expense =
DepreciationExpense Per Unit
Produced×
Number of Units Produced
during the Year
Units-of-Production Method
DepreciationExpense Per Unit
Produced= Cost - Estimated Salvage Value
Estimated Total Units to be Made
Step 1:
L O 3
6-21
On December 31, 2007, equipment was purchased for $50,000 cash. The equipment is expected to produce 100,000 units during its
useful life and has an estimated salvage value of $5,000.
If 22,000 units were produced in 2008, what is the amount of depreciation expense?
Units-of-Production MethodL O 3
6-22
=
Units-of-Production Method
DepreciationExpense Per Unit
Produced $50,000 - $5,000
100,000
Step 1:
= $.45 per unit
L O 3
Step 2:
Annual Depreciation Expense = $.45 per unit × 22,000 $9,900=
6-23
Accumulated UndepreciatedDepreciation Depreciation Balance
Year Units Expense Balance (book value)2007 50,000$ 2008 22,000 9,900$ 9,900$ 40,100 2009 28,000 12,600 22,500 27,500 2010 * - - 22,500 27,500 2011 32,000 14,400 36,900 13,100 2012 18,000 8,100 45,000 5,000
100,000 45,000$
No depreciation expense is recorded if the equipment is idle.
Salvage Value
Units-of-Production MethodL O 3
6-24
Annual DepreciationExpense =
Double the Straight-line
Depreciation Rate× Book Value at
Beginning of Year
Declining-Balance Method
1
Life in Years× 2
Since we are using 2 times the
straight-line rate, this is called the
Double-Declining-Balance Method.
L O 3
6-25
On December 31, equipment was purchased for $50,000 cash. The
equipment has an estimated useful life of 5 years and an estimated residual
value of $5,000.
Calculate the depreciation expense for 2008 and 2009.
Declining-Balance MethodL O 3
6-26
Double the Straight-line Depreciation Rate2 × 20% = 40%
Depreciation Expense for 200840% × $50,000 = $20,000
Declining-Balance MethodL O 3
Depreciation Expense for 2009 40% × ($50,000 - $20,000) = $12,000
Net Book Value at Beginning of Year
6-27
Depreciation Accumulated UndepreciatedExpense Depreciation Balance
Year (debit) Balance (NBV)2007 50,000$ 2008 20,000$ 20,000$ 30,000 2009 12,000 32,000 18,000 2010 7,200 39,200 10,800 2011 4,320 43,520 6,480 2012 2,592 46,112 3,888
46,112$
($50,000 – $43,520) × 40% = $2,592
Below salvage value
Declining-Balance MethodL O 3
6-28
Depreciation Accumulated UndepreciatedExpense Depreciation Balance
Year (debit) Balance (NBV)2007 50,000$ 2008 20,000$ 20,000$ 30,000 2009 12,000 32,000 18,000 2010 7,200 39,200 10,800 2011 4,320 43,520 6,480 2012 1,480 45,000 5,000
45,000$
In the latter years, depreciation is limited to NBV X 40%, but the asset cannot be depreciated below salvage value.
Declining-Balance MethodL O 3
$1,480 = 6,480 – 5,000 salvage value
6-29
Life in Years
$0
$2,000
$4,000
$6,000
$8,000
$10,000
1 2 3 4 5
Ann
ual
Dep
reci
atio
n
Straight-Line
$0$2,000$4,000$6,000$8,000
$10,000$12,000$14,000$16,000
1 2 3 4 5Life in Years
Ann
ual
Dep
reci
atio
n
Units-of-Production
Life in Years
Ann
ual
Dep
reci
atio
n
$0
$5,000
$10,000
$15,000
$20,000
1 2 3 4 5
Double-Declining-Balance
Comparing Depreciation MethodsL O 3
Total Depreciation at end of useful life will be the same regardless of Depreciation method
6-30
Depreciation Methods Used by 670 Companies
586
32
22
16
8
6
Straight-line
Accelerated method-notspecifiedUnits of production
Declining-balance
Other
Sum-of-the-years'digits
Source: Accounting Trends and Techniques, 2005, AICPA.
L O 3
6-31
Most corporations use the Modified Accelerated Cost Recovery System
(MACRS) for tax purposes.
MACRS depreciation provides for rapid write-off of an asset’s cost in order to
stimulate new investment.
Depreciation for Tax ReportingL O 4
Salvage values are ignoredUseful lives are set by the Internal Revenue Service
6-32
Maintenance and Repair Expense
Preventative maintenance
expenditures and routine repair costs are clearly expenses
of the period in which they are
incurred.
L O 5
6-33
Recording cashreceived (debit).
Removing accumulateddepreciation (debit).
Update depreciation to the date of disposal.
Journalize disposal by:
Removing the asset cost (credit).
Recording again (credit)
or loss (debit).
Disposal of Depreciable AssetsL O 6
6-34
•Cash > BV, record a gain (credit).•Cash < BV, record a loss (debit).•Cash = BV, no gain or loss.
Disposal of Depreciable Assets
Recording again (credit)
or loss (debit).
L O 6
Determining Gain or Loss
6-35
Selling Plant Assets
On 9/30/2008, Evans Company sells a machine
Date purchased 1/1/2003Cost $100,000
Depreciation Method Straight Line
Salvage Value $20,000
Estimated Useful Life 10 years
Selling price $60,000
L O 6
6-36
The amount of depreciation recorded on September 30, 2008,
to bring depreciation up to date is:
a. $8,000.b. $6,000.c. $4,000.d. $2,000.
Selling Plant AssetsL O 6
6-37
The amount of depreciation recorded on September 30, 2008,
to bring depreciation up to date is:
a. $8,000.b. $6,000.c. $4,000.d. $2,000.
Annual Depreciation:($100,000 - $20,000) ÷ 10 Yrs. = $8,000
Depreciation to Sept. 30:9/12 × $8,000 = $6,000
Selling Plant AssetsL O 6
6-38
After updating the depreciation, the machine’s net book value on
September 30, 2008, is:
a. $54,000.b. $46,000.c. $40,000.d. $60,000.
Selling Plant AssetsL O 6
6-39
After updating the depreciation, the machine’s book value on September 30, 2008, is:
a. $54,000.b. $46,000.c. $40,000.d. $60,000.
Cost 100,000$ Accumulated Depreciation: (5 yrs. × $8,000) + $6,000 = 46,000 Book Value 54,000$
Selling Plant AssetsL O 6
6-40
The machine’s sale resulted in:
a. a gain of $6,000.b. a gain of $4,000.c. a loss of $6,000.d. a loss of $4,000.
Selling Plant AssetsL O 6
6-41
The machine’s sale resulted in:
a. a gain of $6,000.b. a gain of $4,000.c. a loss of $6,000.d. a loss of $4,000.
Cost 100,000$ Accum. Depr. 46,000 Book Value 54,000 Cash Received 60,000 Gain 6,000$
Now, you are ready to prepare the journal entry to record the sale of the asset.
Selling Plant AssetsL O 6
6-42
Date Description Debit CreditSept 30 Cash 60,000
Accumulated Depreciation 46,000Gain on Sale 6,000Machine 100,000
Selling Plant AssetsL O 6
6-43
An operating lease is an
ordinary lease for the use of an asset that does not involve any
attributes of ownership.
A capital lease results in the
lessee (renter) assuming
virtually all of the benefits and
risks of ownership for
the leased asset.
Assets Acquired by Capital LeaseL O 7
6-44
*Capital Lease Characteristics:1. Transfers ownership to lessee.2. Includes nominal purchase price.3. Lease term is 75% of life of asset.4. Present value of lease payments is 90% of fair value of
asset.
Assets Acquired by Capital LeaseL O 7
Only 1 criteria needs to be met!
6-45
Computer equipment Cost: $217,765 Issue a 10%, 6 year Note Payable Annual payment: $50,000.
Computer Equipment Annual payment: $50,000. Present Value of Lease Payments: $50,000 @ 10%, 6 years = $217,765
Buy or Lease ?
Buy or Lease an Asset?
LeaseBuy
L O 8
6-46
Buy or Lease an Asset?
Buy
Lease
= Liabilities + Owners' Equity
Net income = Revenues - Expenses
1. Date of Acquisition Computer Equipment
Capital Lease Liability
+217,765 +217,7652. Annual Depreciation
Accumulated Depreciation
Depreciation Expense
3. Annual Lease Payment -Lease Liability Interest Expense
Balance Sheet Income Statement
Assets
= Liabilities + Owners' Equity
Net income = Revenues - Expenses
1. Date of Acquisition Computer Equipment
Note Payable
+217,765 +217,7652. Annual Depreciation
Accumulated Depreciation
Depreciation Expense
3. Annual Lease Payment -Note Principal Interest Expense
Balance Sheet Income Statement
Assets
L O 8
Leasing the computer is essentially the same as buying it. Both methods of acquiring the asset yield the same economic impact and the same effect on the financial statements.
6-47
IntangibleAssets
Intangible AssetsL O 9
Noncurrent assetswithout physical
substance.
Often provideexclusive rights
or privileges.
Useful life isoften difficultto determine.
Usually acquired for operational
use.
6-48
Patents Copyrights Leaseholds Leasehold
Improvements Franchises and
Licenses Trademarks and
Trade Names Goodwill
Record at current cash
equivalent cost, including
purchase price, legal fees, and
filing fees.
Intangible AssetsL O 9
6-49
Amortization for these intangibles: Patent = 20 years Registered Trademark = Unlimited life Copyright = Life of artist + 70 years
Use straight-line method. Amortize over legal life or useful life, whichever is less
Intangible Assets
Amortization is the term used to refer to the allocation of the cost of an intangible asset over
its useful life. The process is similar to straight-line depreciation.
L O 9
6-50
Occurs when onecompany buys
another company.
The amount by which thepurchase price exceeds the fair
market value of net assets acquired.
Goodwill
Only ‘purchased’ goodwill is an
intangible asset.
GoodwillL O 9
6-51
Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised
at a fair value of $900,000.
GoodwillL O 9
6-52
What amount of goodwill should be recorded on Eddy Company’s books?
a. $100,000.b. $200,000.c. $300,000.d. $400,000.
GoodwillL O 9
6-53
What amount of goodwill should be recorded on Eddy Company’s books?
a. $100,000b. $200,000c. $300,000d. $400,000
FMV of Assets 900,000$ Debt Assumed 200,000 FMV of Net Assets 700,000$ Purchase Price 1,000,000 Goodwill 300,000$
GoodwillL O 9
6-54
Goodwill
Recently, the FASB issued a non-
amortization approach to account for purchased
goodwill.
Under the impairment approach, goodwill will only be amortized when the initial recorded value
of the asset has deteriorated.
L O 9
6-55
Total cost,including
exploration anddevelopment,is charged to
depletion expenseover periods
benefited.
Examples: oil, coal, gold
Extracted fromthe natural
environmentand reportedat cost less
accumulateddepletion.
Natural ResourcesL O 9
6-56
Natural Resources
Depletion is the term used to refer to the
allocation of the cost of a natural resource over its useful life.
The process is similar to units-of-production
depreciation.
L O 9
6-57
Other Noncurrent Assets
Long-term Investments
Notes Receivables (with maturities more than a year after the balance
sheet date)
Long-term Deferred Income Tax Assets
When these assets become current, they will be reclassified to current assets.
L O 9
6-58
Time Value of Money
Present Value: the value now of an amountto be received or paid at some future date.
Future Value: the value at some future date of an investment made today.
L O 10
Today 1 year 2 years 3 years 4 years
$ 1,000 Invested at 10% has a future value of
$ 1,464
Today 1 year 2 years 3 years 4 years
$ 1,000 Is the present value at 10% of
$ 1,464
6-59
End of Chapter 6