Ch1 - Non-Current Assets
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Chapter 1
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Plant
Assets
Natural
Resources
Intangible
Assets
Depreciation Depletion Amortization
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Held for use in business
Full cost includes several expenditures
Last several years
Can be sold or traded in
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LO1 - Measure the cost of a plant asset -
The Cost Principle
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LandLand
improvementsBuildings
Machinery & equipment
Furniture & fixtures
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NOT depreciated
Costs included in Land◦ Purchase price
◦ Brokerage fees
◦ Survey and legal fees
◦ Property taxes in arrears
◦ Title transfer
◦ Costs of clearing and removing unwanted buildings
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Subject to depreciation
Examples:◦ Fencing
◦ Paving
◦ Sprinkler systems
◦ Lighting
◦ Signs
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Cost includes:◦ Purchase price
◦ Architectural fees
◦ Contractor charges
◦ Materials, labor, and overhead
If self-constructed, interest on loans may be
included
If existing structure is purchased, repairs and
renovations are included
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Cost includes:◦ Purchase price (less any discounts)
◦ Transportation charges
◦ Insurance while in transit
◦ Sales tax
◦ Installation costs
◦ Cost of testing before asset is used
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Purchase price (less any discounts)
Shipping charges
Costs to assemble
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Company purchases a group of plant assets for a
single price◦ Also called basket purchase
Assign cost to individual assets based on relative
sales values
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Fair value Percent Allocated
cost
Land $75,000 50% $70,000
Building $60,000 40% $56,000
Equipment $15,000 10% $14,000
Total $150,000 100% $140,000
Divide fair value of
each asset by the total
fair value of $150,000
Multiply
percent by
total cost
of
$140,000
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Capital expenditures Expenses
Debited to an asset
account
Increase asset’s capacity
of efficiency OR
Extend useful life
Debited to an expense
account
Maintain asset in working
order
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If a capital expenditure is incorrectly recorded as
an expense:
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Overstates expenses
Understates net income
Understates Capital
Understates assets (equipment)
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Allocation of a plant asset’s cost to expense over
its useful life
Matches expense against revenue generated
using the asset
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$40,000 cost
10-year life
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Wear and tear from use
Physical factors
Obsolescence◦ Computers and other technology
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Cost
Estimated useful life◦ Expressed in years, units, miles, or output
Estimated residual value◦ Also called salvage value
◦ Expected cash value at end of useful life
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Cost Useful LifeResidual
Value
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Straight-line
Units-of production
Declining-balance
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(Cost – residual value)1
Life
Depreciation expense
#
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CostAccumulated
depreciation
Book value
Increases over
time
Decreases over
time
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Depreciation expense =
Depreciation per unit x activity during the period
Depreciation per unit =
(Cost – Residual value) x1
Life in units
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Accelerated method◦ Writes off more depreciation near the start of an asset’s
life
Residual value is not in formula◦ Ignored until last year
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(Cost – Accumulated
depreciation)
#
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Depreciation expense
Book
value
Twice the straight-
line rate
Decreases over the
asset’s life
2
Life
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The cost of an equipment is $41,000. ABC Company
expects the equipment to remain useful for 5 years
(10,000 units) and to have a residual value of $1,000.
The company expects the equipment to be used 3,000
units the first year; 2,500 units the second year; 2,000
units the third year; 1,500 units the fourth year and
1,000 units the fifth year.
To compute depreciation for all 5 years using the
straight-line method, Units-of- production method and
Double-declining-balance method.
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Year
Value at the
beginning
of the year
Depreciation for the year
Book
valueDepreciation expenseAccumulated
depreciation
1 $41,000 $8,000 $8,000 $33,000
2 $33,000 $8,000 $16,000 $25,000
3 $25,000 $8,000 $24,000 $17,000
4 $17,000 $8,000 $32,000 $9,000
5 $9,000 $8,000 $40,000 $1,000
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Year
Value at the
beginning
of the year
Depreciation for the year
Book
valueDepreciation expenseAccumulated
depreciation
1 $41,000 $12,000 $12,000 $29,000
2 $29,000 $10,000 $22,000 $19,000
3 $19,000 $8,000 $30,000 $11,000
4 $11,000 $6,000 $36,000 $5,000
5 $5,000 $4,000 $40,000 $1,000
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Year
Value at the
beginning
of the year
Depreciation for the year
Book
valueDepreciation expenseAccumulated
depreciation
1 $41,000 $16,400 $8,000 $33,000
2 $33,000 $9,840 $16,000 $25,000
3 $25,000 $5,904 $24,000 $17,000
4 $17,000 $3,542 $32,000 $9,000
5 $9,000 $4,314* $40,000 $1,000
*Last-year depreciation is the “plug figure”
needed to reduce book value to the residual
value amount ($5,314 - $1,000 = $4,314).
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Cost = $50,000 Life = 5 years or
100,000 units
Residual value
= $5,000
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Straight-line
• For assets that generate revenue over time
Units-of-production
• For assets that depreciate due to wear and tear
Double-declining-balance
• For assets that produce more revenue in their early years
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(65,000,000 – 5,000,000)
Straight-line – 1st year
1
4
$15,000,000 depreciation, 1st year
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(65,000,000 – 5,000,000) x1
Units-of-Production
6,000,000 miles= $10
per mile
x $10 per mile
1.3 million miles
= $13,000,000
depreciation expense, 1st year
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($65,000,000 - 0)12
12
$32,500,000 depreciation
expense, 1st year
Double-declining-balance – 1st year
2
4
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Cost $65,000,000
Less: Accumulated depreciation 15,000,000
Book value, using straight-line $50,000,000
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Considered a change in estimate
Businesses must report on the reason and effect
of the change
Remaining asset book value is depreciated over
the remaining life
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Asset has reached the end of its estimated life
If still useful, a company will continue to use it
Report book value on balance sheet
Record no more depreciation
Asset never reported below residual value
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Asset wears out or becomes obsolete.
Company can:◦ Sell the asset for cash
◦ Scrap the asset for no cash
◦ Trade the asset for another asset
Non-like property exchange
Like-kind exchange
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Result in a
gain or loss
No gain or
loss
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Bring depreciation up to date
Remove old asset from books◦ Zero out asset by crediting for original cost
◦ Zero out accumulated depreciation of asset by debiting
for all depreciation taken
Record the value of any cash paid or received◦ If money is borrowed, credit Notes payable
Determine difference between total debits and
total credits
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If asset was traded for a like-kind asset◦ Difference will be recorded as a debit to the new asset
account
If the asset was sold or exchanged for a dissimilar
asset◦ Gain or loss will be recorded
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If debits > credits If debits < credits If debits = credits
GAIN LOSS NO GAIN
OR LOSS
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On January 2, 2011, Ditto Clothing Consignments purchased
showroom fixtures for $16,000 cash, expecting the fixtures to
remain in service 5 years.
Ditto has depreciated the fixtures on a double-declining-balance
basis, with zero residual value.
On August 31, 2012, Ditto sold the fixtures for $7,600 cash.
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When a plant asset is sold during the year, depreciation must be
updated.
First-year double-declining-balance depreciation was computed
by multiplying the book value (same as cost in year one) by 2 over
the life of the asset.
$16,000 x 2/5 = $6,400.
End of year book value equaled $9,600 ($16,000 - $6,400).
For 2012, the book value is multiplied by 2/5, resulting is $3,840
for a full year of depreciation. Since the sale took place on August
31, this amount is multiplied by 8/12.
Depreciation expense is $2,560.
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GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
8 31 Depreciation expense 2,560
Accumulated depreciation 2,560
Year Depreciation
expense
Accumulated
depreciation
Book value
$16,000
2011 $6,400 6,400 9,600
2012 2,560 8,960 7,040
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GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
8 31 Cash 7,600
Accumulated depreciation 8,960
Fixtures 16,000
Gain on sale of plant assets 560
Year Depreciation
expense
Accumulated
depreciation
Book value
$16,000
2011 $6,400 6,400 9,600
2012 2,560 8,960 7,040
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Plant assets extracted from the natural
environment◦ Iron, oil, coal
Expensed through depletion using the units-of-
production method
Accumulated depletion is a contra-asset account
to the natural resource
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Depletion expense =
Depletion per unit x number of units removed
Depletion per unit =
(Cost – Residual value) x
1Estimated total units of natural
resource
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Non-current assets with no physical form
Provide exclusive rights or privileges
Expensed through amortization using the straight-
line method◦ Credit to the asset directly
◦ If intangible has indefinite life, it is not amortized
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Patent
• Exclusive 20-year right to produce & sell an invention
Copyright
• Exclusive right to sell a book, musical work, film, art, software, or intellectual property
Trademarks and brand names
• Represent distinctive products or services
Issued by the federal government
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Franchises & licenses
• Allows purchaser to sell goods or services under specific conditions
Goodwill
• Excess of the cost to purchase another company over the market value of its net assets
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Only recorded when a company purchases another business
Not amortized◦ Current value measured each year
If value increases, no entry
If value decreases, a loss is recorded
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Important to several industries, such as
pharmaceutical companies
Not an intangible◦ Expensed as incurred
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Capitalize
Results in higher
asset value and
larger net income◦ Looks better to
investors
If cost provides a
future benefit, then
capitalize
Expense
Results in lower net
income◦ Less taxes
If cost does not
provide a future
benefit, then expense
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