Long-Term Assets: Plant Assets and Intangibles

1. Long-Term Assets: Plant Assets and Intangibles Chapter 9 Part 1

2. Objective 1 Define and describe the life cycle of long-term assets

3. Long-lived Assets Plant Assets Natural Resources Intangible Assets Depreciation Depletion Amortization

4. Internal Controls • All plant assets should be labeled • Maintain a subsidiary ledger • Reconcile the total balance of subsidiary accounts with the controlling account • Physically inspect each asset at least once a year

5. Objective 2 Calculate and record the cost to acquire plant assets

6. Cost Principle • Assets should be recorded at their historical cost • Cost of an asset – all costs necessary to acquire the asset and get it ready for its intended use

7. Land Purchase price Legal fees Costs of grading and clearing Additional permanent improvements Not depreciated Land Improvements - Improvements with limited life Driveways and parking lots Sidewalks Fences Depreciated Land and Land Improvements

8. Buildings • Purchase price • Legal fees • Repairs and renovations • If self-constructed • Architectural fees • Building permits • Material • Labor • Overhead • Some interest costs

9. Machinery and Equipment • Purchase price (less any discounts) • Transportation charges • Insurance while in transit • Sales tax • Installation costs • Cost of testing before asset is used

10. Furniture and Fixtures • Purchase price (less any discounts) • Shipping charges • Costs to assemble

11. Land Purchase price $200,000 Property tax 2,100 Title insurance 2,500 Remove and level 10,400 $215,000 Building Cost $800,000 Land improvements Fence $51,000 Signage 15,000 Lighting 6,000 $72,000 E9-14

12. Lump Sum Purchases • Assign cost to individual assets based on relative sales values

13. E9-16 $3,000/$12,000 $2,500 25.0% $5,000/$12,000 4,170 41.7% $4,000/$12,000 3,330 33.3% $10,000 100%

14. E9-16 Bed 1 2,500 Bed 2 4,170 Bed 3 3,330 Cash 5,000 Note Payable 5,000

15. Capital Expenditures Does the expenditure increase capacity or efficiency or extend useful life? YES NO Capital Expenditure Debit asset account Expense Debit repairs and maintenance expense

16. E9-16 Expenditure benefits more than one period. Debit an asset Capital Expenditures • Purchase price • Lubrication before machine is placed in service • Major overhaul • Sales tax • Transportation and insurance • Installation • Training of personnel Expenses: • Ordinary recurring repairs • Periodic lubrication • Income tax Expenditure that maintains the asset in its current working condition. Debit an expense

17. Objective 3 Calculate and record depreciation of plant assets

18. Depreciation • Process of allocating the cost of a plant asset to expense over its useful life in a rational and systematic way Matching Principle

19. Depreciation – Adjusting Entry Partial balance sheet: Building $120,000 Less Accumulated Depreciation (80,000) $40,000 Depreciation Expense Accumulated Depreciation

20. Factors in Computing Depreciation • Cost • Estimated Residual Value • Depreciable cost = Cost – Residual Value • Estimated Useful Life • Physical wear and tear • Obsolescence

21. Depreciation Methods • Straight-line • Units-of-production • Declining balance

22. Depreciation Expense per Year Cost - Residual ValueUseful life in years = Straight-Line Method

23. E9-19 Straight-line $30,000 – $6,000 / 4 years = $6,000 per yr $24,000 $6,000 $6,000 18,000 6,000 12,000 6,000 18,000 12,000 6,000 24,000 6,000

24. Units-of-Production Method 1: Compute depreciation per unit: Cost - Residual Value Total Units of Production 2: Compute depreciation expense: Depreciation per unit Number of units producedin the period ×

25. E9-19 Units of Production ($30,000 - $6,000) / 1,000 operations = $24.00 per operation $24 x 100 $27,600 $2,400 $2,400 20,400 9,600 $24 x 300 7,200 19,200 10,800 9,600 24,000 6,000 4,800

26. Double-Declining Balance Method • Accelerated method – writes off a greater amount of the cost of an asset in earlier years of asset’s useful life • Amount of depreciation expense recognized declines each year

27. 1 Useful life in years X 2 Depreciationexpense Double-declining-balance rate Beginning periodbook value = × Ignores residual value Double-Declining-Balance Method 1: Compute straight-line rate and multiply it by 2 2: Multiply beginning book value by rate

28. Switchover to Straight Line • A method employed by some companies • Change from double-declining balance to straight-line during the next-to-last year of asset’s life • Eliminates the need to use a plug figure for depreciation expense in last year

29. E9-19 Double declining Balance: Rate = 2/4 or 50% $15,000 $15,000 $15,000 $30,000 x 50% $15,00 x 50% 7,500 22,500 7,500 ($7,500 – 6,000)/2 23,250 6,750 750 24,000 6,000 750

30. Use of Depreciation Methods

31. Partial Year Depreciation • When plant asset is acquired during the year, compute full year’s depreciation and multiply that by the fraction of the year the asset is owned

32. – Book value New residual value Revising Depreciation • Depreciation is an estimate • Estimated residual value • Estimated useful life Remaining life in years

33. E9-20 Cost $700,000 Residual value 100,000 Depreciable base $600,000 /40 years Depreciation expense per year $15,000

34. E9-20 Depreciation expense per year $15,000 X 15 years Accumulated depreciation after 15 years $225,000

35. E9-20 Book value after 15 years Cost $700,000 Accumulated depreciation (225,000) Cost left to depreciate $475,000 Residual value (175,000) New depreciable base $300,000 Life (30 years – 15 years taken) /15 year New depreciation per year $20,000

36. E9-20 Yr 15 Depreciation Expense 15,000 Accumulated Depreciation 15,000 Yr 16 Depreciation Expense 20,000 Accumulated Depreciation 20,000

37. Fully Depreciated Assets • If still useful, a company will continue to use it • Report book value on balance sheet • Record no more depreciation

38. Depreciation for Tax Reporting • Modified Accelerated Cost Recovery System (MACRS) • Assets are classified into categories by asset life • Depreciation method is specified according to category