Investments in Property, Plant, and Equipment and in Intangible Assets

1. 10 • C H A P T E R Investments in Property, Plant, and Equipment and in Intangible Assets

2. Learning Objective 1 • Identify the two major categories of long-term operating assets: property, plant, and equipment and intangible assets.

3. Define and Provide Examples of Operating Assets

4. Name and Define the Two Types of Operating Assets

5. Diagram the Time Line ofBusiness Issues

6. Learning Objective 2 • Understand the factors important in deciding whether to acquire a long-term operating asset.

7. Define Capital Budgeting

8. What is the Time Value of Money?

9. Learning Objective 3 • Record the acquisition of property, plant, and equipment through a simple purchase as well as through a lease, self-construction, and as part of the purchase of several assets at once.

10. Assets Acquired by Purchase Frank’s Fruit Farm purchased a fork lift for use in its wholesale business. Frank’s paid $12,000 cash for the fork lift.Make the necessary journal entry for this purchase.

11. Assets Acquired by Purchase Frank’s Fruit Farm purchased a fork lift for use in its wholesale business. Frank’s paid $12,000 for the fork lift. What entry is necessary if Frank paid $3,000 cash and borrowed the remaining $9,000?Make the appropriate entry.

12. What is a Lease?

13. Match Lease Terms Capital Lease • The party that is granted the right to use the property under the terms of a lease. The owner of property that is leased (rented) to another party. Lessor A simple rental agreement. Operating Lease A leasing transaction that is recorded as a purchase by the lessee. Lessee

14. Operating Lease Frank’s Fruit Farm leases a building with monthly rental payments of $1,000.Make the appropriate entry if rent is paid in cash the first month.

15. Capital Lease Frank’s Fruit Farm enters into a non-cancelable lease agreement that requires lease payments of $100,000 a year for 20 years. At the end of 20 years, Frank’s will own the property.Make the appropriate entries.

16. Transfer of Ownership? Bargain Purchase Option? Term ³ 75% of Useful Life? Capital Lease Operating Lease PV Payment ³ 90% of FMV? Classifying Leases Respond YES or NO. If the item below occurs, is the lease a capital lease?

17. Assets Acquired bySelf Construction • Self-constructed assets recorded at cost include all expenditures incurred to build the asset and make it ready for its intended use • Costs include materials used to build the asset the construction labor capitalized interest some reasonable share of the general company overhead

18. Acquisition of SeveralAssets at Once— Define the Terms Below • Basket Purchase Relative Fair Market Value Method

19. Example: Basket Purchase When two or more assets are acquired at a single price, the prices are allocated on the “relative fair market value” method. In this example, Frank’s Fruit Farm purchased land and a new sorting facility at a total cost of $3,600,000.Prepare the entry to record the purchase. % of Total Asset FMV Cost Value

20. Learning Objective 4 • Compute straight-line and units-of-production depreciation expense for plant and equipment.

21. Define these Depreciation Terms • Depreciation • Book Value • Salvage Value

22. Methods of Depreciation • Straight-Line • The cost of the asset is allocated equally over the periods of an asset’s estimated useful life. • Units-of-Production • The cost of an asset is allocated to each period on the basis of the productive output or use of the asset during the period.

23. Example: Depreciation Methods • Frank’s Fruit Farm purchased a fork lift on January 1 for transporting fresh produce to and from the warehouse. The following facts apply: • Acquisition cost. . . . . . . . . . . . $24,000 • Estimated salvage value. . . . . $ 2,000 • Estimated life: • In years. . . . . . . . . . . . . . . . 4 years • In miles driven. . . . . . . . . . . 60,000 miles • Compute Frank’s annual depreciation expense using both the straight-line and units-of-production methods and determine the appropriate journal entries.

24. Annual Depreciation Expense = Make the Journal Entry Do the calculation. = = What is the Formula for theStraight-Line Method?

25. Per Unit Depreciation = Make the Journal Entry Depreciation Expense = Do the calculation. Depreciation Expense = = What is the Formula for theUnits-of-Production Method?

26. Year Straight-Line Units-of-Production 2000 2001 2002 2003 Total $ 5,500 5,500 5,500 5,500 $22,000 $ 4,400 6,600 7,700 3,300 $22,000 Comparison of Methods

27. What are the two steps to compute depreciation expense for less than a full year? Partial-Year Depreciation

28. More Depreciation TermsDefined. • Natural Resources • Depletion

29. Example: Depletion Hard Hat’s mine contains an estimated 200,000 tons of coal. The depletion expense for each ton of coal is $6.Determine the journal entry if 12,000 tons are mined.

30. Learning Objective 5 • Account for repairs and improvements of property, plant, and equipment.

31. Expenditures on Existing Assets • Ordinary expenditures • Capitalized expenditures

32. Learning Objective 6 • Identify whether a long-term operating asset has suffered a decline in value and record the decline.

33. Book value (of asset) Sum of future cash flows (from asset) IMPAIRMENT Record asset at its fair value Sum of future cash flows less than book value NO IMPAIRMENT Asset continues to be reported at book value What is the Impairment Test?

34. Learning Objective 7 • Record the discarding and selling of property, plant, and equipment.

35. Discarding Property, Plant, and Equipment Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis.If Frank’s scraps the conveyor after 5 full years, what is the appropriate entry?

36. Discarding Property, Plant, and Equipment Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If Frank pays $300 to have the conveyor dismantled and removed, what is the appropriate entry?

37. Selling Property, Plant, and Equipment Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If Frank scraps the conveyor after only 4 years of service, there will be a loss of $3,300. What is the appropriate journal entry?

38. Selling Property, Plant, and Equipment Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If the conveyor is sold for $600 after 5 full years of service, what is the appropriate journal entry?

39. Selling Property, Plant, and Equipment Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If the conveyor is sold for $600 after only four years of service, Frank’s will experience a loss of $2,400. Make the appropriate entry.

40. Learning Objective 8 • Account for the acquisition and amortization of intangible assets and understand the special difficulties associated with accounting for intangibles.

41. What are Intangible Assets? • Rights and privileges that are • Amortization

42. Define Each of These Intangible Assets. • Patent • Franchise • License

43. Calculate the amortization for each of the eight years. Benefit Amortizing a Patent $200,000 Patent with useful life of 8 years: PATENT

44. Goodwill An intangible asset that exists when a business is valued at more than the fair market value of its net assets, usually due to: strategic location reputation good customer relations similar factors Equal to the excess of the purchase price over the fair market value of the net assets purchased.

45. Inventory $750,000 Long-term operating assets 220,000 Other assets 25,000 Liabilities (18,000) Total Net Assets $977,000 Example: Goodwill Frank’s Fruit Farm purchased Farmers’ Market for $1,200,000. At the time of the purchase, Farmers’ recorded the following market values of its assets and liabilities:

46. Inventory. . . . . . . . . . . . . . . . . . . . . . 750,000 Long-Term Operating Assets . . . . 220,000 Other Assets. . . . . . . . . . . . . . . . . . 25,000 Goodwill . . . . . . . . . . . . . . . . . . . . . 223,000 Liabilities. . . . . . . . . . . . . . . . . . 18,000 Cash . . . . . . . . . . . . . . . . . . . . . . 1,200,000 Purchased Farmers’ Market for $1,200,000. Example: Goodwill Frank’s Fruit Farm purchased Farmers’ Market for $1,200,000. Make the journal entry in Frank’s books to appropriately recognize goodwill.

47. Learning Objective 9 • Use the fixed asset turnover ratio as a measure of how efficiently a company is using its property, plant, and equipment.

48. Define Fixed Asset Turnover

49. Expanded MaterialLearning Objective 10 • Compute declining-balance and sum-of-the-years’-digits depreciation expense for plant and equipment.

50. Accelerated DepreciationDefine each term. • Declining-Balance Method • Sum-of-the-Years’-Digits Method (SYD)