Post on 24-Dec-2015
Investments in Property,Plant, and Equipmentand in Intangible Assets
Investments in Property,Plant, and Equipmentand in Intangible Assets
C H A P T E R 10
Learning Objective 1
Identify the two major categories of long-term operating assets: property, plant, and equipment and intangible assets.
Learning Objective 2
Understand the factors important in deciding whether to acquire a long-term operating asset.
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.
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.
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.
Match Lease Terms
The party that is granted the right to use the property under the terms of a lease.
Lessee
Lessor
Operating Lease
Capital Lease
The owner of property that is leased (rented) to another party.
A simple rental agreement.
A leasing transaction that is recorded as a purchase by the lessee.
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.
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.
Classifying Leases
Transfer of Ownership?
Bargain PurchaseOption?
Term 75% ofUseful Life?
PV Payment 90%of FMV?
CapitalLease
OperatingLease
Respond YES or NO. If the item below occurs, is the lease a capital lease?
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
Acquisition of SeveralAssets at Once—
Define the Terms Below
Basket Purchase
Relative Fair Market Value Method
Example: Basket Purchase
Asset FMV% of Total
Value Cost
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.
Learning Objective 4
Compute straight-line and units-of-production depreciation expense for plant and equipment.
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.
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. . . . . . . . . . . . $24,000Estimated salvage value. . . . . $ 2,000Estimated life:In years. . . . . . . . . . . . . . . . 4 yearsIn 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.
Example: Depreciation Methods
What is the Formula for theStraight-Line Method?
Annual Depreciation
Expense=
=
=
Do the calculation.
Make the
Journal Entry
What is the Formula for theUnits-of-Production Method?
Per UnitDepreciation
=
DepreciationExpense =
DepreciationExpense =
=
Do the calculation.
Make the
Journal Entry
Comparison of Methods
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$0
$2,000
$4,000
$6,000
$8,000
2000 2001 2002 2003
Units-of-ProductionStraight-Line
Partial-Year Depreciation
*M
M- =
+M
-M
1 2 3
4 5 6
7 89
000
¥
%
Ö
+
=x
ON
CE
C
.991.75
3.16
28.03
7.15
2.90
What are the two steps to compute depreciation expense for less than a full
year?
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.
Learning Objective 6
Identify whether a long-term operating asset has suffered a decline in value and record the decline.
What is the Impairment Test?
Sum of future cash flows(from asset)
Book value(of asset)
IMPAIRMENTRecord asset at its
fair value
NO IMPAIRMENTAsset continues to bereported at book value
Sum of future cash flows less than book value
Discarding Property, Plant, and EquipmentFrank’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?
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?
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?
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?
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.
Learning Objective 8
Account for the acquisition and amortization of intangible assets and understand the special difficulties associated with accounting for intangibles.
Amortizing a Patent
PATENT
Benefit
$200,000 Patent with useful life of 8 years:
Calculate the
amortization for each of the eight
years.
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 priceover the fair market value of the net assets
purchased.
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:
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.
Inventory. . . . . . . . . . . . . . . . . . . . . . 750,000
Long-Term Operating Assets . . . . 220,000
Other Assets. . . . . . . . . . . . . . . . . . 25,000Goodwill . . . . . . . . . . . . . . . . . . . . . 223,000
Liabilities. . . . . . . . . . . . . . . . . . 18,000Cash . . . . . . . . . . . . . . . . . . . . . . 1,200,000
Purchased Farmers’ Market for $1,200,000.
Learning Objective 9
Use the fixed asset turnover ratio as a measure of how efficiently a company is using its property, plant, and equipment.
Expanded MaterialLearning Objective 10
Compute declining-balance and sum-of-the-years’-digits depreciation expense for plant and equipment.
Accelerated DepreciationDefine each term.
Declining-Balance Method
Sum-of-the-Years’-Digits Method (SYD)
Accelerated Depreciation MethodsFrank’s Fruit Farm purchased a fork lift for $12,000. The fork lift has a salvage value of $2,000 and a useful life of 4 years. Compute depreciation using both the DDB and SYD depreciation methods.
X 2 =Double-Declining Balance
Depreciation Expense
Book ValueAsset’s Life in Years
Book Value = Cost – Accumulated Depreciation
Sum of theyears of theasset’s life
Sum-of-the-Year’s-Digits
(Cost – Salvage Value)
Current Year / (4+3+2+1)
Change in EstimatesFrank’s purchased a fork lift for $12,000 with a $2,000 salvage value Fruit Farm a 4-year useful life. After 3 years, better information reveals the fork lift has a 6-year useful life and a $3,000 salvage value. Calculate a new depreciation expense for the next three years.
Formula CalculationTotal
Depreciation
Annual depreciationfor first 3 years
Book value after 3 years
Annual depreciation for last3 years (based on newtotal life of 6 years and newsalvage value of $3,000)