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  1. Chapter 8 Long-Term Assets

  2. Conceptual Learning Objectives Chapter 8: SELF-STUDY C1: Describe plant assets and issues in accounting for them. C2: Explain depreciation and the factors affecting its computation. C3: Explain depreciation for partial years and changes in estimates. 8-2

  3. Analytical Learning Objectives SELF-STUDY A1: Compare and analyze alternative depreciation methods. A2: Compute total asset turnover and apply it to analyze a company’s use of assets. 8-3

  4. Procedural Learning Objectives P1:Apply the cost principle to compute the cost of plant assets. P2: Compute and record depreciation using the straight-line, units-of-production, and declining- balance methods. P3: Distinguish between revenue and capital expenditures, and account for them. P4: Account for asset disposal through discarding or selling an asset. Self-Study (Quiz) P5: Account for natural resource assets and their depletion. P6: Account for intangible assets. 8-4

  5. Actively Used in Operations Expected to Benefit Future Periods Called Property, Plant, & Equipment Plant Assets C 1 Tangible in Nature 8-5

  6. Decline in asset value over its useful life Disposal 4. Record disposal. Acquisition 1. Compute cost. Plant Assets C 1 Use 2. Allocate cost to periods benefited. 3. Account for subsequent expenditures. 8-6

  7. Land Land is not a depreciable Asset Cost includes: 1. The total amount paid for the land. 2. Real estate commissions, title insurance fees, legal fees, and any accrued property taxes paid by the purchaser. 3. Payments for surveying,clearing,grading, and draining, and government assessments (incurred at the time or purchase or later) for public roadways, sewers, and sidewalks. 4. Cost of removal of any existing structures(less proceeds from sale of salvaged material). 8-7

  8. Land Improvements Land is not a depreciable Asset, butLand Improvements are. Land Improvements: Costs that increase the usefulness of the land. Examples: -Parking lot surfaces, -Driveways, -Fences, and -Lighting systems.Land Improvements have limited useful lives:Costs are charged to a separate Land Improvement account so that their costs can be allocated to the periods they benefit. 8-8

  9. Buildings The cost of buildings include many costs; the purchase price plus the following: Title fees Cost of purchase or construction Attorney fees Brokeragefees Taxes 8-9

  10. Machinery and Equipment Purchaseprice Taxes Transportation charges Installing,assembling, andtesting Insurance whilein transit 8-10

  11. Exercise 2 Exercise 1 Quick Study 1

  12. Lump-Sum Asset Purchase P1 The total cost of a combined purchase of land and building is separated on the basis of their relative market values. On January 1, Matrix, Inc. purchased land and building for $200,000 cash. The appraised values (FMV) 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? 8-12

  13. Lump-Sum Asset Purchase P1 8-13

  14. Exercise 3

  15. Balance Sheet Income Statement AcquisitionCost Expense Cost Allocation (Unused) (Used) Depreciation C2 Depreciation is the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use. 8-15

  16. Factors in Computing Depreciation The calculation of depreciation requires three amounts for each asset: • Cost $50,000 • Salvage Value $5,000 • Useful Life 5 Years 8-16

  17. Depreciation Methods C 2 • Straight-line • Units-of-production • Declining-balance 8-17

  18. Depreciation Expense for Period Cost - Salvage ValueUseful life = Depreciation Expense per Year $50,000 - $5,0005 years $9,000 = = Straight-Line Method P2 8-18

  19. Salvage Value DepreciationRate = (100% ÷ 5 years) = 20% per year Straight-Line Method P2 8-19

  20. Exercise 6

  21. Depreciation Repair Expense Expense Early Years High Low Later Years Low High Early years’ total expense approximates later years’ total expense. Declining Balance Method P2 8-21

  22. Step 1: Straight-line rate 100 % ÷ Useful life = 100% ÷ 5 = 20% = Step 2: Double-decliningbalance rate = 2 × Straight-line rate = 2 × 20% = 40% Step 3: Depreciationexpense Beginning periodbook value Double-decliningbalance rate = × $20,000 for 2009 = 40%× $50,000 Double-Declining-Balance Method 8-22

  23. Double-Declining-Balance Method P2 2009 Depreciation: 40% × $50,000 = $20,000 2010 Depreciation: 40% × ($50,000 - $20,000) = $12,000 8-23

  24. Below salvage value Double-Declining-Balance Method P2 8-24

  25. We usually must force depreciation expense in the last year so that book value equals salvage value. Double-Declining-Balance Method P2 8-25

  26. Exercise 5 Exercise 8

  27. Step 1: Depreciation Per Unit Cost - Salvage Value Total Units of Production = Step 2: Number of Units Producedin the Period Depreciation Expense Depreciation Per Unit × = Units-of-Production Method P2 8-27

  28. Units-of-Production Method P2 On December 31, 2008, 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 2009, whatis the amount of depreciation expense? 8-28

  29. Depreciation Per Unit $50,000 - $5,000 100,000 units = = $.45 per unit Step 2: Depreciation Expense = $.45 per unit × 22,000 units = $9,900 Units-of-Production Method P2 Step 1: 8-29

  30. Units-of-Production Method P2 No depreciation expense if the equipment is idle. 8-30

  31. Exercise 7

  32. Annual SLDepreciation Annual ProductionDepreciation Annual DDBDepreciation Life in Years Life in Years Life in Years Comparing Depreciation Methods A1 P2 8-32

  33. Depreciation for Tax Reporting A1 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. 8-33

  34. Partial-Year Depreciation: SLD Calculate the straight-line depreciation on December 31, 2009, for equipment purchased on June 30, 2009. The equipment cost $75,000, has a useful life of 10 years, and an estimated salvage value of $5,000. Depreciation = ($75,000 - $5,000) ÷ 10 = $7,000 for all 2009 Depreciation = $7,000 × 6/12 = $3,500 8-34

  35. Partial-Year Depreciation: DDB Calculate the double-declining balance depreciation on December 31, 2009, for equipment purchased on June 30, 2009. The equipment cost $75,000, has a useful life of 10 years, and an estimated salvage value of $5,000. Depreciation = $75,000 x 20%; => (1/10) * 2 = $15,000 for all 2009 Depreciation = $15,000 × 6/12 = $7,500 8-35

  36. Partial-Year Depreciation: DDB Calculate the double-declining balance depreciation on December 31, 2009, for equipment purchased on June 30, 2009. The equipment cost $75,000, has a useful life of 10 years, and an estimated salvage value of $5,000. Compute 2nd year (2010) depreciation?? 1st Year Depreciation = $15,000 × 6/12 = $7,500; 2nd Year Depreciation = $(75,000 – 7,500) x 20%; = $13,500 for all 2010 8-36

  37. Exercise 9 Exercise 10

  38. Book value at date of change Salvage value at date of change – Remaining useful life at date of change Change in Estimates for Depreciation On January 1, 2009, equipment was purchased that cost $30,000, has a useful life of 10 years, and no salvage value. During 2012, the useful life was revised to eight years (five years remaining). Calculate depreciation expense for the year ended December 31, 2012, using the straight-line method. 8-38

  39. Change in Estimates for Depreciation C 3 8-39

  40. Exercise 11:-Calculate BV at the end of 2nd year; -Subtract NEW Salvage Value; -Depreciate using NEW Useful Life.

  41. Reporting Depreciation C 3 8-41

  42. Revenue and Capital Expenditures P3 8-42

  43. If the amounts involved are not material, most companies expense the item. Additional Expenditures P3 8-43

  44. Exercise 14 #1: Age = AD / Annual Depreciation; Depr. =(Cost / UL); #2: JE = Capitalize Major Expenditure (Structural Repairs); #3: New Book Value = Old BV + Major Expenditure;#4: Current Year’s Depreciation =New Book value / New useful Life

  45. Disposals of Plant Assets 1. Update depreciation to the date of disposal. 2. Calculate BV @ date of Disposal 4. Record (Journalize) disposal by: Recording cashreceived (debit)or paid (credit). 3. Recording again (credit) or loss (debit). Removing accumulateddepreciation (debit). Removing the asset cost (credit). 8-45

  46. If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. Recording again (credit) or loss (debit). Discarding Plant Assets Journalize disposal by: Update depreciation to the date of disposal. Recording cashreceived (debit)or paid (credit). Removing accumulateddepreciation (debit). Removing the asset cost (credit). 8-46

  47. Disposal of Assets On September 30, 2009, Evans Company sells a machine that originally cost $100,000 for $60,000 cash. The machine was placed in service on January 1, 2006. It was depreciated using the straight-line method with an estimated salvage value of $20,000 and a useful life of 10 years. 1. UPDATE DEPRECIATION (Partial Year) 2. CALCULATE BV = (Cost – AD) 3. CALCULATE GAIN (LOSS) = (Cash – BV) 4. JOURNALIZE DISPOSAL 8-47

  48. Disposal of Assets 1. Update depreciation to the date of disposal Annual Depreciation ($100,000 - $20,000) ÷ 10 Yrs. = $8,000 Depreciation to September 30, 2009:9/12 × $8,000 = $6,000 8-48

  49. 2. Determine Book Value of Asset 8-49

  50. If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. 3. Determine Gain or Loss on Disposal 8-50