Copyright © 2007 Prentice-Hall. All rights reserved 1 Long-Term Assets: Plant Assets and...

Copyright © 2007 Prentice-Hall. All rights reserved 1

Long-Term Assets: Long-Term Assets: Plant Assets and Plant Assets and

IntangiblesIntangibles

Long-Term Assets: Long-Term Assets: Plant Assets and Plant Assets and

IntangiblesIntangiblesChapter 9 Part 1


Objective 1Objective 1Objective 1Objective 1

Define and describe the life cycle of long-term assets


Long-lived AssetsLong-lived AssetsLong-lived AssetsLong-lived Assets

Plant Plant AssetsAssetsPlant Plant AssetsAssets

Natural Natural ResourcesResourcesNatural Natural

ResourcesResourcesIntangible Intangible

AssetsAssetsIntangible Intangible

AssetsAssets

DepreciationDepreciationDepreciationDepreciation DepletionDepletionDepletionDepletion AmortizationAmortizationAmortizationAmortization


Internal ControlsInternal ControlsInternal ControlsInternal 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



Calculate and record the cost to acquire plant assets


• 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

Cost PrincipleCost PrincipleCost PrincipleCost Principle


Land and Land Land and Land ImprovementsImprovementsLand and Land Land and Land ImprovementsImprovements

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


BuildingsBuildingsBuildingsBuildings

• Purchase price• Legal fees• Repairs and renovations• If self-constructed

– Architectural fees– Building permits– Material– Labor– Overhead– Some interest costs


Machinery and Machinery and EquipmentEquipment

Machinery and Machinery and EquipmentEquipment

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


Furniture and FixturesFurniture and FixturesFurniture and FixturesFurniture and Fixtures

• Purchase price (less any discounts)• Shipping charges• Costs to assemble


E9-14E9-14E9-14E9-14LandPurchase price $200,000Property tax 2,100

Title insurance 2,500Remove and level 10,400

$215,000

BuildingCost $800,000

Land improvementsFence $51,000Signage 15,000Lighting 6,000

$72,000


Lump Sum PurchasesLump Sum PurchasesLump Sum PurchasesLump Sum Purchases

• Assign cost to individual assets based on relative sales values


E9-16E9-16E9-16E9-16

Bed Appraised Cost

Percent of Value

Cost Allocated Cost

1 $3,000 X $10,000

2 5,000 X 10,000

3 4,000 X 10,000

$12,000

$2,500

4,170

3,330

$10,000

$3,000/$12,00025.0%

$5,000/$12,00041.7%

$4,000/$12,00033.3%

100%


E9-16E9-16E9-16E9-16GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Bed 1 2,500Bed 2 4,170Bed 3 3,330

Cash 5,000Note Payable 5,000


Does the expenditure increase capacityor efficiency or extend useful life?

Does the expenditure increase capacityor efficiency or extend useful life?

YESYES NONO

Capital ExpenditureDebit asset

account

Capital ExpenditureDebit asset

account

ExpenseDebit repairs and

maintenance expense

ExpenseDebit repairs and

maintenance expense

Capital ExpendituresCapital ExpendituresCapital ExpendituresCapital Expenditures


E9-16E9-16E9-16E9-16Capital 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 benefits more than one period.

Debit an asset

Expenditure that maintains the asset in

its current working condition.

Debit an expense



Calculate and record depreciation of plant assets


DepreciationDepreciationDepreciationDepreciation

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

Matching PrincipleMatching Principle


Depreciation – Adjusting Depreciation – Adjusting EntryEntry

Depreciation – Adjusting Depreciation – Adjusting EntryEntry

GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Depreciation Expense

Accumulated Depreciation

Partial balance sheet:Building $120,000Less Accumulated Depreciation (80,000) $40,000


Factors in Computing Factors in Computing DepreciationDepreciation

Factors in Computing Factors in Computing DepreciationDepreciation

1. Cost2. Estimated Residual Value

• Depreciable cost = Cost – Residual Value

3. Estimated Useful Life• Physical wear and tear• Obsolescence


Depreciation MethodsDepreciation MethodsDepreciation MethodsDepreciation Methods

• Straight-line• Units-of-production• Declining balance


Straight-Line MethodStraight-Line MethodStraight-Line MethodStraight-Line Method

Cost - Residual Value

Useful life in years

Depreciation

Expense per Year=


E9-19E9-19E9-19E9-19

Straight-line$30,000 – $6,000 / 4 years = $6,000 per yr

YearDepr Exp for

YearTotal

Accum DeprYear-End

Book Value

2006

2007

2008

2009

$6,000 $6,000

6,000 12,000

6,000 18,000

6,000 24,000

$24,000

18,000

12,000

6,000


Cost - Residual Value Total Units of Production

1: Compute depreciation per unit:

2: Compute depreciation expense:

Depreciationper unit

× Number of units producedin the period

Units-of-Production Units-of-Production MethodMethod

Units-of-Production Units-of-Production MethodMethod


E9-19E9-19E9-19E9-19Units of Production($30,000 - $6,000) / 1,000 operations =

$24.00 per operation

YearDepr Exp for

YearTotal

Accum DeprYear-End

Book Value

2006

2007

2008

2009

$24 x 100 $2,400

$24 x 300 9,600

19,200

24,000

$27,600

20,400

10,800

6,000

9,600

4,800

$2,400

7,200


Double-Declining Balance Double-Declining Balance MethodMethod

Double-Declining Balance Double-Declining Balance MethodMethod

• 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


2: Multiply beginning book value by rate

Depreciationexpense

=Double-declining-

balance rate×

Beginning periodbook value

Double-Declining-Balance Double-Declining-Balance MethodMethod

Double-Declining-Balance Double-Declining-Balance MethodMethod

1: Compute straight-line rate and multiply it by 2

Ignores residual value

1 Useful life in years

X 2


Switchover to Straight Switchover to Straight LineLine

Switchover to Straight Switchover to Straight LineLine

• 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


E9-19E9-19E9-19E9-19Double declining Balance: Rate = 2/4 or 50%

YearDepr Exp for

YearTotal

Accum DeprYear-End

Book Value

20x6

20x7

20x8

20x9

$30,000 x 50% $15,000

$15,00 x 50% 22,500

23,250

24,000

$15,000

7,500

6,750

6,000

750

750

$15,000

7,500

($7,500 – 6,000)/2


Use of Depreciation Use of Depreciation MethodsMethods

Use of Depreciation Use of Depreciation MethodsMethods

84%

10%

5%

1%

Straight-line Accelerated UOP Other


Partial Year DepreciationPartial Year DepreciationPartial Year DepreciationPartial 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


Revising DepreciationRevising DepreciationRevising DepreciationRevising Depreciation

• Depreciation is an estimate– Estimated residual value– Estimated useful life

Remaining life in years

Book value New residual value–


E9-20E9-20E9-20E9-20

Cost $700,000 Residual value 100,000Depreciable base $600,000

/40 years

Depreciation expense per year $15,000


E9-20E9-20E9-20E9-20

Depreciation expense per year

$15,000

X 15 yearsAccumulated depreciation

after 15 years

$225,000


E9-20E9-20E9-20E9-20

Book value after 15 yearsCost $700,000Accumulated depreciation (225,000)

Cost left to depreciate $475,000Residual value (175,000)New depreciable base $300,000Life (30 years – 15 years taken) /15 year

New depreciation per year $20,000


E9-20E9-20E9-20E9-20

GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Yr 15 Depreciation Expense 15,000

Accumulated Depreciation 15,000

Yr 16 Depreciation Expense 20,000

Accumulated Depreciation 20,000


Fully Depreciated AssetsFully Depreciated AssetsFully Depreciated AssetsFully Depreciated Assets

• If still useful, a company will continue to use it

• Report book value on balance sheet• Record no more depreciation


Depreciation for Tax Depreciation for Tax ReportingReporting

Depreciation for Tax Depreciation for Tax ReportingReporting

• Modified Accelerated Cost Recovery System (MACRS)

• Assets are classified into categories by asset life

• Depreciation method is specified according to category

Copyright © 2007 Prentice-Hall. All rights reserved 1 Long-Term Assets: Plant Assets and...

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