Chapter 6Property, Plant & Equipment; Intangible Assets

Chapter 6 2

Chapter 6: Objectives• Determine the acquisition cost of property, plant

and equipment assets. • Compute depreciation expense using three

depreciation methods. • Account for disposals of property, plant and

equipment. • Identify major types of intangible assets and the

key accounting issues related to these assets. • Identify the key information needs of decision

makers regarding property, plant and equipment.

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Acquisition CostsThe acquisition cost of a PP&E asset includes all reasonable and necessary expenditures incurred to obtain the asset and to prepare it for use.

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Relative Market Valuation

Market Proportion of Total Allocated Value Total Market Value Cost Cost

Land $160,000 160/800 = 20% $600,000 $120,000Building 400,000400/800 = 50% $600,000 150,000Equipment 240,000240/800 = 30% $600,000 180,000

$800,000 $600,000

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DepreciationSalvage value is the estimated value of an asset at the end of its useful life.

When computing depreciation, the term depreciable cost is often used, which refers to the asset's acquisition cost less its salvage value. Thus, depreciable cost is the amount of asset cost that is expected to be consumed or "used up" over its useful life.

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Depreciation Methods

•Straight-line

•Units-of-production

•Double-declining-balance

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Depreciation ExampleAssume that Riverside Construction Company acquired a drill press on January 1, 2002. The following data are used to illustrate the three depreciation methods.  Equipment: Drill Press (Asset #14-27B)Acquisition Date: January 1, 2002Acquisition Cost: $68,000Useful Life: 4 years or 30,000 unitsSalvage Value: $8,000 Depreciable Cost: $68,000 - $8,000 = $60,000

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Straight-line MethodUnder the straight-line method, a business allocates an equal amount of depreciation expense to each year of an asset's estimated useful life.

Depreciation Expense = Depreciable Cost/ Useful Life in Years

Depreciation Expense 15,000Accumulated Depreciation - #1427B 15,000 Record annual depreciation on drill press.

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Units of Production MethodUnder the units of production method, a business allocates an equal amount of depreciation expense to each unit produced by the asset.

Depreciation Expense = Depreciable amount / # of expected units*units produced during the period

Dec. 31 Depreciation Expense 22,000

Accumulated Depreciation - #1427B 22,000 Record annual depreciation on drill press.

Assume 11,000 units were produced during year 1.

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Double Declining BalanceUnder the double-declining-balance method (DDB) of depreciation, annual depreciation expense is computed by multiplying an asset's book value at the beginning of a year by twice the straight-line rate of depreciation.

Dec. 31 Depreciation Expense 34,000Accumulated Depreciation - #1427B 34,000

Record annual depreciation on drill press.

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Disposal of AssetsDepreciate to the date of the disposal or sale.Record any cash or other assets at FMVReduce the asset and its related accumulated depreciation to zeroRecord the gain or loss

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Natural ResourcesNatural resources include long-term

assets that are extracted or harvested from or beneath the earth's surface.

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Intangible AssetsLong-term assets that do not have a physical form or substance are called intangible assets.

•Patents

•Copyrights

•Trademarks

•Goodwill

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The general rule is that most intangible assets should be amortized over the shorter of their legal life, their useful life, or forty years (which is an arbitrary period established for financial accounting purposes).

Goodwill

Goodwill, however, should be analyzed annually to determine any decreases in it value.