Accounting for Plant Assets, Intangible Assets, and Related Expenses

1. Accounting for Plant Assets,Intangible Assets, andRelated Expenses Chapter 10

2. Plant Assets

3. Measure the cost of a plant asset. Objective 1

4. Cost Principle

5. Land and Land Improvements Purchase price of land $500,000 Add related costs: Back property taxes $40,000 Transfer taxes 8,000 Removal of buildings 5,000 Survey fees 1,000 54,000 Total cost of land $554,000

6. Land Improvements All improvements located on the land but subject to decay:

7. Buildings – Construction

8. Buildings – Purchasing

9. Machinery and Equipment

10. Capital Leases What are capital leases? They are lease arrangements similar to installment purchases. Capital leases are reported as assets, even though the company does not own the asset. Leasehold improvements are similar to land improvements.

11. Capitalizing the Cost of Interest Suppose on January 2, 2002, The Home Depot borrows $1,000,000 on a one-year, 10% note payable, to build a warehouse. Total interest for the year is $100,000. Assume average accumulated expenditures on the project during 2002 are $700,000. How much interest is capitalized? $70,000

12. Dec. 31, 2002 Building (700,000 × 10%) 70,000 Interest Expense 30,000 Interest Payable 100,000 Accrued interest of construction loan Capitalizing the Cost of Interest

13. Lump-Sum Purchases Example Andrea Ortiz paid $110,000 for a combined purchase of land and a building. The land is appraised at $90,000 and the building at $60,000. How much of the purchase price is allocated to land and how much to the building?

14. Lump-Sum Purchases Example

15. Distinction Between Capital and Revenue Expenditures

16. Measuring the Depreciationof Plant Assets

17. Objective 2 Account for depreciation.

18. Depreciation Methods

19. Depreciation Methods Example Donishia and Richard Catering, Inc., purchased a delivery van on January 1, 200x, for $22,000. The company expects the van to have a trade-in value of $2,000 at the end of its useful life. The van has an estimated service life of 100,000 miles or 4 years.

20. Straight-Line Method Example

21. Units-of-ProductionMethod Example

22. Double-Declining-Balance Method Example Straight-line rate is 100% ÷ 4 = 25% Double-declining-balance = 2 times the straight-line rate = 50% What is the book value of the van at the end of the first year? $22,000 × 50% = $11,000 $22,000 – $11,000 = $11,000

23. Double-Declining-Balance Method Example Dec. 31, 200x Depreciation Expense $11,000 Accumulated Depreciation $11,000 To record depreciation expense for a one-year period

24. Depreciation Methods Comparison

25. Use of Depreciation Methods

26. Objective 3 Select the best depreciation method for income tax purposes.

27. Relationship Between Depreciation and Taxes MACRS was created by the Tax Reform Act of 1986. It is an accelerated method used for depreciating equipment.

28. Depreciation for Partial Years Assume that Donishia and Richard Catering, Inc., owned the van for 3 months. How much is the van’s depreciation?

29. Revising Depreciation Rates

30. Objective 4 Account for the disposal of a plant asset.

31. Disposing of Plant Assets selling exchanging discarding (scrapping it) Gain/loss is reported on the income statement... and closed to Income Summary.

32. Disposing by Discarding Example On September 1, Joe, manager of Joe’s Landscaping, is contemplating the disposal of an old piece of equipment: Equipment cost: $36,000 Residual value: $ 6,000 Accumulated depreciation: $20,000 Estimated useful life at acquisition: 10 years

33. Disposing by Discarding Example Assume the equipment is discarded on November 30. What is the accumulated depreciation on November 30?

34. Disposing by Discarding Example November 30, 20xx Accumulated Depreciation 20,750 Loss on disposal 15,250 Equipment 36,000 To record discarding of equipment

35. Selling a Plant Asset Example Assume the equipment is sold for $10,000. What is the gain or loss? Nov. 30, 20xx Cash 10,000 Accumulated Depreciation 20,750 Loss on Sale of Equipment 5,250 Equipment 36,000 To record sale of equipment for $10,000

36. Selling a Plant Asset Example Equipment is sold for $20,000. What is the gain or loss? Nov. 30, 20xx Cash 20,000 Accumulated Depreciation 20,750 Gain on Sale of Equipment 4,750 Equipment 36,000 To record sale of equipment for $20,000

37. Exchanging Plant Assets Assume equipment with a cost of $36,000 and a book value of $15,250 is exchanged for new, similar equipment having a cost of $42,000 with a trade-in of $18,000 allowed. Cash payment is $24,000. What is the cost of the new asset? $24,000 + $15,250 = $39,250

38. Exchanging Plant Assets Equipment (new) $39,250 Accumulated Depreciation (old) $20,750 Equipment (old) $36,000 Cash $24,000

39. Objective 5 Account for natural resource assets and depletion.

40. Accounting for Natural Resources

41. Objective 6 Account for intangible assets and amortization.

42. Intangible Assets

43. Intangible Assets: Patents Patents are federal government grants. They give the holder the right to produce and sell an invention. Suppose a company pays $170,000 to acquire a patent on January 1. The company believes that its expected useful life is 5 years. What are the entries?

44. Intangible Assets: Patents

45. Intangible Assets: Copyrights

46. Intangible Assets: Trademarks

47. Intangible Assets: Franchises Franchises are privileges granted by private business or government to sell a product or service.

48. Intangible Assets: Goodwill

49. Special Issues

50. End of Chapter 10