Financial Accounting Liabilities

McGraw-Hill/Irwin

Reporting and Interpreting Property, Plant, and Equipment; Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles

Group 5

Austria, JeffreyAustria, Jeffrey

Calubayan, ElsieCalubayan, Elsie

Dela Cruz, AlvinDela Cruz, Alvin

Granado, Ma. EuniceGranado, Ma. Eunice

Minaballes, LizaMinaballes, Liza

Delete text and place photo here.

Dr. Maria P. IshiiDr. Maria P. Ishii

Financial AccountingFinancial Accounting

McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes

L an d , b u ild in g s ,eq u ip m en t,

fu rn itu re , fixtu res .

L on g -te rmasse ts h avin g

p h ys ica l su b s tan ce .

T angible PlantAssets

P aten ts , cop yrig h ts ,trad em arks ,

fran ch ises , g ood w ill.

N on cu rren t asse tsw ith n o p h ys ica l

su b s tan ce .

IntangibleAssets

O il reserves ,t im b er, o th e r

m in era ls .

S ites acq u ired fo rextrac tin g va lu ab le

resou rces .

NaturalResources

Acquisition.Acquisition.Allocation of the acquisition cost Allocation of the acquisition cost

to expense over the asset’s to expense over the asset’s useful life (depreciation).useful life (depreciation).

Sale or disposal.Sale or disposal.

Acquisition.Acquisition.Allocation of the acquisition cost Allocation of the acquisition cost

to expense over the asset’s to expense over the asset’s useful life (depreciation).useful life (depreciation).

Sale or disposal.Sale or disposal.

Asset priceAsset price

+Reasonable and necessary

costs . . .

Reasonable and necessary costs . . .

. . . for getting the asset to the

desired location.

. . . for getting the asset to the

desired location.

. . . for getting the asset ready for

CostCost =

EXAMPLE:On January 28, Medical Center Western Batangas, a On January 28, Medical Center Western Batangas, a tertiary hospital, purchase a new 4-D Ultrasound machine tertiary hospital, purchase a new 4-D Ultrasound machine from Levins Co. The new machine has a price of $52,000. from Levins Co. The new machine has a price of $52,000. Sales tax is 8%. Medical Center Western Batangas pays Sales tax is 8%. Medical Center Western Batangas pays $500 shipping cost to get the machine to the premise. $500 shipping cost to get the machine to the premise. After the machine arrives, set-up costs of $1,300 are After the machine arrives, set-up costs of $1,300 are incurred, along with $4,000 in testing costs.incurred, along with $4,000 in testing costs.

Buildings• Purchase price• Renovation and repair costs• Legal and realty fees• Title fees

Equipment

• Purchase price

• Installation costs

• Modification to building necessary to install equipment

• Transportation costs

Equipment

• Purchase price

• Installation costs

• Modification to building necessary to install equipment

• Transportation costs

• Purchase price

• Real estate commissions

• Title insurance premiums

• Delinquent taxes

• Surveying fees

• Title search and transfer fees

• Purchase price

• Real estate commissions

• Title insurance premiums

• Delinquent taxes

• Surveying fees

• Title search and transfer fees

Improvements to land such as parking lots, driveways,

fences, sidewalks,

landscaping and outdoor lightings

systems are recorded

separately.

Improvements to land such as parking lots, driveways,

fences, sidewalks,

landscaping and outdoor lightings

systems are recorded

separately.

Allocation of a Lump-Sum PurchaseAllocation of a Lump-Sum Purchase

I think I’ll buy the whole

thing; building, land, and contents.

The total cost must be

allocated to separate

accounts for each asset.

The total cost must be

allocated to separate

accounts for each asset.

The allocation is based on the relative Fair

Market Value of each asset purchased.

The allocation is based on the relative Fair

Market Value of each asset purchased.

Asset cost includes:Asset cost includes:

All materials andlabor traceable tothe construction.

A reasonableamount ofoverhead.

Interest on debtincurred during

the construction.

Capital ExpenditureCapital ExpenditureCapital ExpenditureCapital Expenditure Revenue ExpenditureRevenue ExpenditureRevenue ExpenditureRevenue Expenditure

Expenditure forordinary repairs

and maintenance..

Expenditure forordinary repairs

and maintenance..

To expense an expendituremeans to charge it to an

expense account.

To expense an expendituremeans to charge it to an

expense account.

To capitalize an expendituremeans to charge it to an

asset account.

To capitalize an expendituremeans to charge it to an

asset account.

Any material expenditurethat will benefit several

accounting periods.

Any material expenditurethat will benefit several

accounting periods.

Type of Capital orExpenditure Revenue Identifying Characteristics

Ordinary Revenue 1. Maintains normal operating conditionrepairs and 2. Does not increase productivity

maintenance 3. Does not extend life beyond original estimate

Extraordinary Capital 1. Major overhauls or partialrepairs replacements

2. Extends life beyond original estimate

Additions Capital 1. Increases productivity2. May extend useful life3. Improvements or expansions

The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset.

Cost of plant assets

Balance SheetBalance Sheet

Assets: Plant and equipment

Income StatementIncome Statement

Revenues:Expenses: Depreciation

as the services are received

DepreciationExpense

IncomeStatement

BalanceSheet

AccumulatedDepreciation

Depreciation for

the current year

Total of depreciation

to date on an asset

AcquisitionCost

(Unused)

Balance Sheet Cost

AllocationExpense

Income Statement

(Used)

The calculation of depreciation requiresthree amounts for each asset: Acquisition cost. Estimated useful life. Estimated residual value.

BOOK VALUE= COST - ACCUMULATED DEPRECIATIONBOOK VALUE= COST - ACCUMULATED DEPRECIATIONBOOK VALUE = COST - ACCUMULATED DEPRECIATION

Alternative depreciation methods: Straight-line Units-of-production Accelerated Method: Declining balance

Cost - Residual Value

Years of Useful Life

Depreciation

Expense per Year=

EXAMPLE:On January 1, 2008 Medical Center Western Batangas, On January 1, 2008 Medical Center Western Batangas, purchase a new 4-D Ultrasound machine. The company purchase a new 4-D Ultrasound machine. The company pays a total of $52,000 for the equipment with an estimated pays a total of $52,000 for the equipment with an estimated residual value of $3,000 and estimated useful life of 5 years. residual value of $3,000 and estimated useful life of 5 years. Compute for depreciation for 2005 using the straight-line Compute for depreciation for 2005 using the straight-line method.method.

Medical Center Western Batangas will record $9,800 depreciation each year for five Medical Center Western Batangas will record $9,800 depreciation each year for five years. Total depreciation over the estimated useful life of the equipment is:years. Total depreciation over the estimated useful life of the equipment is:

Salvage ValueSalvage Value

EXAMPLE:

Machinery, at cost P600,000

Residual value none

Estimated Life:

Years 5

Service hours 60,000 hours

Output 150,000 units

EXAMPLE:

Machinery, at cost P600,000

Residual value none

Estimated Life:

Years 5

Service hours 60,000 hours

Output 150,000 units

Actual Operations

Service Hours Output

First Year 14,000 34,000

Second Year 13,000

32,000

Third Year 10,000

25,000

Fourth Year 11,000

29,000

Fifth Year 12,000

30,000

60,000 150,000

Depreciation rate Depreciable Amount

per unit = Estimated life in terms of units of output

Depreciation rate Depreciable Amount

per unit = Estimated life in terms of units of output

Depreciation rate P 600,000per unit = 150,000 units

Depreciation in the early years of an asset’s estimated useful life is higher than in later years.

The double-declining balance depreciation rate is 200% of the straight-line depreciation rate of (1÷Useful Life).

On January 1, 2007, Medical Center Western Batangas buys a new On January 1, 2007, Medical Center Western Batangas buys a new ambulance. The hospital pays $24,000 for the vehicle. The ambulance has an ambulance. The hospital pays $24,000 for the vehicle. The ambulance has an

estimated residual value of $3,000 and an estimated useful life of 5 years.estimated residual value of $3,000 and an estimated useful life of 5 years.

On January 1, 2007, Medical Center Western Batangas buys a new On January 1, 2007, Medical Center Western Batangas buys a new ambulance. The hospital pays $24,000 for the vehicle. The ambulance has an ambulance. The hospital pays $24,000 for the vehicle. The ambulance has an

estimated residual value of $3,000 and an estimated useful life of 5 years.estimated residual value of $3,000 and an estimated useful life of 5 years.

Using Declining-Balance method, we’ll have:

Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or the declining-balance method.

Impairment is the loss of a significant portionof the utility of an asset through . . .• Casualty.• Obsolescence.• Lack of demand for the asset’s services.

Recognize aloss

when an asset

suffers a permane

ntimpairme

Disposal of Property, Plant and EquipmentVoluntary disposals:

• Sale• Trade-in• Retirement

Involuntary disposals:• Fire • Accident

Disposal of Property, Plant and EquipmentVoluntary disposals:

• Sale• Trade-in• Retirement

Involuntary disposals:• Fire • Accident

Update depreciation to the date of disposal.

Recording cashreceived (debit).

Removing accumulateddepreciation (debit).

Removing the asset cost (credit).

Recording a gain (credit)

or loss (debit).

Recording a gain (credit)

or loss (debit).

Journalize disposal by: Journalize disposal by:

If Cash > Book Value, record a gain (credit).

If Cash < Book Value, record a loss (debit).

If Cash = Book Value, no gain or loss.

If Cash > Book Value, record a gain (credit).

If Cash < Book Value, record a loss (debit).

If Cash = Book Value, no gain or loss.

Recording cashreceived (debit).

Removing accumulateddepreciation (debit).

Recording again (credit)

or loss (debit).

Recording again (credit)

or loss (debit).

Removing the asset cost (credit).

Extracted fromthe natural

environmentand reportedat cost less

accumulateddepletion.

Extracted fromthe natural

environmentand reportedat cost less

accumulateddepletion.

Total cost,including

exploration anddevelopment,is charged to

depletion expenseover periods

benefited.

Total cost,including

exploration anddevelopment,is charged to

depletion expenseover periods

benefited.

Unit depletion rate is calculated as follows:

Total Units of Natural Resource

Cost – Residual Value

Unit Depletion

Rate Extracted in Period×Number of Units

Total depletion cost for a period is:

Noncurrent assets without physical

substance.. Useful life is often difficult to determine..

Often provide exclusive rights or privileges.

Usually acquired for Operational use. .

Noncurrent assets without physical

substance.. Useful life is often difficult to determine..

Often provide exclusive rights or privileges.

Usually acquired for Operational use. .

Goodwill Trademarks Copyrights Patents Technology Franchises Licenses and Operating Rights

IntangibleAssets

Recorded at current cash equivalent cost, including purchase price, legal fees, and filing fees.Recorded at current cash equivalent cost, including purchase price, legal fees, and filing fees.

• Amortization is the systematic write-off to expense of the cost of intangible assets over their useful life or legal life, whichever is shorter.

• The straight-line method IS USED to amortize most intangible assets.

• Amortization is the systematic write-off to expense of the cost of intangible assets over their useful life or legal life, whichever is shorter.

• The straight-line method IS USED to amortize most intangible assets.

Date Description Debit CreditAmortization Expense $$$$$ Intangible Asset $$$$$

Goodwill is NOT amortized. It is tested annually to determine if there has been an impairment loss.

Occurs when one company buys another company.

Only purchased goodwill is an intangible asset.

The amount by which the purchase price exceedsthe fair market value of net assets acquired.

A symbol, design, or logo associated with a business.

Internally developed trademarks have no recorded asset cost.

Purchased trademarks are recorded at cost, andamortized over shorter of legal or economic life.

An exclusive legal right to use a name, image or slogan.

McGraw-Hill/Irwin

Exclusive right granted by the federal government to protect artistic or intellectual properties.

Grants the holder the exclusive right to publish and sell musical, literary, or artistic work

Legal life is life of creator plus 70 years.

Most are amortized over a short period of time using the straight-line method.

Exclusive right granted by the federal government to protect artistic or intellectual properties.

Grants the holder the exclusive right to publish and sell musical, literary, or artistic work

Legal life is life of creator plus 70 years.

Most are amortized over a short period of time using the straight-line method.

McGraw-Hill/Irwin

Exclusive right granted by the federal government to sell or manufacture an invention.

Cost is purchase price plus legal cost to defend.

Amortize cost over the shorter of useful life or 20 years.

Research and development costs that might result in a patent are normally expensed as incurred.

Exclusive right granted by the federal government to sell or manufacture an invention.

Cost is purchase price plus legal cost to defend.

Amortize cost over the shorter of useful life or 20 years.

Research and development costs that might result in a patent are normally expensed as incurred.

McGraw-Hill/Irwin

A category of intangible assets that includes a company’s website and any computer programs

written by its employees.

A category of intangible assets that includes a company’s website and any computer programs

written by its employees.

• Legally protected right purchased by a franchisee from franchisor to sell products or provide services for a specified period and purpose.

• Purchase price is intangible asset which is amortized over the shorter of the protected right or useful life.

• Legally protected right purchased by a franchisee from franchisor to sell products or provide services for a specified period and purpose.

• Purchase price is intangible asset which is amortized over the shorter of the protected right or useful life.

• Limited permissions to use a product or service according to specific terms and conditions.

• You may be using computer software that is made available to you through a campus licensing agreement.

• Limited permissions to use a product or service according to specific terms and conditions.

• You may be using computer software that is made available to you through a campus licensing agreement.

Financial Accounting Liabilities

Business

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