Day 2 may 7 08 ders.ch.10.plant assets


Plant AssetsPlant AssetsReview QuestionsReview Questions

Plant AssetsPlant AssetsReview QuestionsReview Questions

Chapter 10


All of the following are All of the following are characteristics of a plant characteristics of a plant

asset except:asset except:

All of the following are All of the following are characteristics of a plant characteristics of a plant

asset except:asset except:

1. Long-lived2. Used in production of income3. Held for resale to customers4. Has physical form


Answer: 3 Answer: 3 Answer: 3 Answer: 3


All of the following assets All of the following assets are subject to depreciation are subject to depreciation

except:except:

All of the following assets All of the following assets are subject to depreciation are subject to depreciation

except:except:1. Land2. Land improvements3. Building4. Equipment


Answer: 1 Answer: 1

Depreciation is the allocation Depreciation is the allocation of the plant assets cost over of the plant assets cost over its useful life. Because land its useful life. Because land does not have a defined useful does not have a defined useful life, it does not lose life, it does not lose usefulness; therefore, it is not usefulness; therefore, it is not depreciated. depreciated.

Answer: 1 Answer: 1

Depreciation is the allocation Depreciation is the allocation of the plant assets cost over of the plant assets cost over its useful life. Because land its useful life. Because land does not have a defined useful does not have a defined useful life, it does not lose life, it does not lose usefulness; therefore, it is not usefulness; therefore, it is not depreciated. depreciated.


Which of the following Which of the following costs would be included costs would be included

in the Land account?in the Land account?

Which of the following Which of the following costs would be included costs would be included

in the Land account?in the Land account?

1. Grading the land2. Paving parking lot3. Removal of useless, old barn on

land4. Mowing the grass


Answer: 2 and 3Answer: 2 and 3Grading the land and Grading the land and

removing the old building removing the old building are added to the Land are added to the Land account. Mowing the account. Mowing the

grass is a maintenance grass is a maintenance expense.expense.

Answer: 2 and 3Answer: 2 and 3Grading the land and Grading the land and

removing the old building removing the old building are added to the Land are added to the Land account. Mowing the account. Mowing the

grass is a maintenance grass is a maintenance expense.expense.


Tyne Company made a Tyne Company made a lump-sum purchase of lump-sum purchase of land and building for land and building for

$100,000. The appraised $100,000. The appraised values for the land was values for the land was $22,000 and the for the $22,000 and the for the building was $88,000. building was $88,000. How much should be How much should be debited to Building?debited to Building?

Tyne Company made a Tyne Company made a lump-sum purchase of lump-sum purchase of land and building for land and building for

$100,000. The appraised $100,000. The appraised values for the land was values for the land was $22,000 and the for the $22,000 and the for the building was $88,000. building was $88,000. How much should be How much should be debited to Building?debited to Building?


Answer: $80,000Answer: $80,000

Total appraised value = Total appraised value = $22,000 + $88,000 = $22,000 + $88,000 =

$110,000$110,000

80% (88,000 80% (88,000 ÷ 110,000) of ÷ 110,000) of the $100,000 cost should the $100,000 cost should

be allocated to the be allocated to the Building.Building.

$100,000 x 80% = $80,000$100,000 x 80% = $80,000


Total appraised value = Total appraised value = $22,000 + $88,000 = $22,000 + $88,000 =

$110,000$110,000

80% (88,000 80% (88,000 ÷ 110,000) of ÷ 110,000) of the $100,000 cost should the $100,000 cost should

be allocated to the be allocated to the Building.Building.

$100,000 x 80% = $80,000$100,000 x 80% = $80,000


Which of the following Which of the following costs is a capital costs is a capital

expenditure?expenditure?

Which of the following Which of the following costs is a capital costs is a capital

expenditure?expenditure?1. Replace broken window in office building

2. Paint foyer of office building3. Addition on building for three new

offices4. Paid maintenance plan on heating

system


Answer: 3 An addition is a Answer: 3 An addition is a permanent improvement permanent improvement that makes the building that makes the building more useful for a long more useful for a long period of time.period of time.

Capital expenditure Capital expenditure ıncreases the asset’s ıncreases the asset’s capacity or efficiency or capacity or efficiency or extends the asset’s useful extends the asset’s useful life.life.

Answer: 3 An addition is a Answer: 3 An addition is a permanent improvement permanent improvement that makes the building that makes the building more useful for a long more useful for a long period of time.period of time.

Capital expenditure Capital expenditure ıncreases the asset’s ıncreases the asset’s capacity or efficiency or capacity or efficiency or extends the asset’s useful extends the asset’s useful life.life.


On January 1, Finley Company purchased a machine for $9,000. It has a residual value of $1,000 and a useful life of 8 years or 10,000 hours of operation.How much depreciation is recognized at the end of the first year of use assuming the company uses the straight-line method of depreciation.



(Cost – Residual value) (Cost – Residual value) ÷ ÷ Years of useful lifeYears of useful life

($9,000 - $1,000) ÷ 8 ($9,000 - $1,000) ÷ 8 years = $1,000years = $1,000


(Cost – Residual value) (Cost – Residual value) ÷ ÷ Years of useful lifeYears of useful life

($9,000 - $1,000) ÷ 8 ($9,000 - $1,000) ÷ 8 years = $1,000years = $1,000


On January 1, Finley Company purchased a machine for $9,000. It has a residual value of $1,000 and a useful life of 8 years or 10,000 hours of operation.If the machine operated for 1,200 hours during the year, how much depreciation is recognized at the end of the year assuming the company uses the units of production method of depreciation?


Answer: $960Answer: $960

(Cost – Residual value) (Cost – Residual value) ÷ Total units of output÷ Total units of output

($9,000 - $1,000) ÷ ($9,000 - $1,000) ÷ 10,000 hours = $0.80 10,000 hours = $0.80

per hourper hour

$0.80 x 1,200 hours = $0.80 x 1,200 hours = $960$960


(Cost – Residual value) (Cost – Residual value) ÷ Total units of output÷ Total units of output

($9,000 - $1,000) ÷ ($9,000 - $1,000) ÷ 10,000 hours = $0.80 10,000 hours = $0.80

per hourper hour

$0.80 x 1,200 hours = $0.80 x 1,200 hours = $960$960


On January 1, Finley Company purchased a machine for $9,000. It has a residual value of $1,000 and a useful life of 8 years or 10,000 hours of operation.How much depreciation is recognized at the end of the first year assuming the company uses the double-declining balance method of depreciation?



(Cost–Accumulated (Cost–Accumulated depreciation) x (2/yrs of depreciation) x (2/yrs of

life) =life) =($9,000 – 0) x (2/8) = ($9,000 – 0) x (2/8) =

$2,250$2,250


(Cost–Accumulated (Cost–Accumulated depreciation) x (2/yrs of depreciation) x (2/yrs of

life) =life) =($9,000 – 0) x (2/8) = ($9,000 – 0) x (2/8) =

$2,250$2,250


If the amount of use of a If the amount of use of a machine varies from year machine varies from year to year, the depreciation to year, the depreciation

method that best matches method that best matches expense with revenue isexpense with revenue is

If the amount of use of a If the amount of use of a machine varies from year machine varies from year to year, the depreciation to year, the depreciation

method that best matches method that best matches expense with revenue isexpense with revenue is

1. Straight-line2. Units of production3. Double-declining balance4. None of the above


Answer: 2Answer: 2Depreciation expense is Depreciation expense is

recognized only to recognized only to extent that an asset has extent that an asset has been used in a period.been used in a period.

Answer: 2Answer: 2Depreciation expense is Depreciation expense is

recognized only to recognized only to extent that an asset has extent that an asset has been used in a period.been used in a period.


Change in Accounting EstımateChange in Accounting EstımateIn 2005, Conway Company In 2005, Conway Company purchased an asset for $6,000. It purchased an asset for $6,000. It was estimated to have a useful was estimated to have a useful life of 5 years and a residual value life of 5 years and a residual value of $1,000. The straight-line of $1,000. The straight-line method of depreciation is used. method of depreciation is used. At the beginning of 2007, Conway At the beginning of 2007, Conway revises the estimated useful to a revises the estimated useful to a total of 8 years. How much total of 8 years. How much depreciation expense will Conway depreciation expense will Conway recognize on the asset at the end recognize on the asset at the end of 2007?of 2007?

Change in Accounting EstımateChange in Accounting EstımateIn 2005, Conway Company In 2005, Conway Company purchased an asset for $6,000. It purchased an asset for $6,000. It was estimated to have a useful was estimated to have a useful life of 5 years and a residual value life of 5 years and a residual value of $1,000. The straight-line of $1,000. The straight-line method of depreciation is used. method of depreciation is used. At the beginning of 2007, Conway At the beginning of 2007, Conway revises the estimated useful to a revises the estimated useful to a total of 8 years. How much total of 8 years. How much depreciation expense will Conway depreciation expense will Conway recognize on the asset at the end recognize on the asset at the end of 2007?of 2007?



CostCost $6,000$6,000Depreciation for 2005Depreciation for 2005 $1,000 $1,000

Depreciation for 2006Depreciation for 20061,0001,000 (2,000) (2,000)

Book value Book value $4,000 $4,000 Less residual value Less residual value

(1,000)(1,000)$3,000$3,000

$3,000 $3,000 ÷ (8 – 2 years) = $500÷ (8 – 2 years) = $500


CostCost $6,000$6,000Depreciation for 2005Depreciation for 2005 $1,000 $1,000

Depreciation for 2006Depreciation for 20061,0001,000 (2,000) (2,000)

Book value Book value $4,000 $4,000 Less residual value Less residual value

(1,000)(1,000)$3,000$3,000

$3,000 $3,000 ÷ (8 – 2 years) = $500÷ (8 – 2 years) = $500


Roge Company owns a Roge Company owns a truck that cost $35,000 and truck that cost $35,000 and

has total accumulated has total accumulated depreciation of $20,000 to-depreciation of $20,000 to-date. Roge sells the truck date. Roge sells the truck for $10,000. What amount for $10,000. What amount of gain/(loss) is recognized of gain/(loss) is recognized on the date of sale? What on the date of sale? What

is the journal entry to is the journal entry to record this sale?record this sale?

Roge Company owns a Roge Company owns a truck that cost $35,000 and truck that cost $35,000 and

has total accumulated has total accumulated depreciation of $20,000 to-depreciation of $20,000 to-date. Roge sells the truck date. Roge sells the truck for $10,000. What amount for $10,000. What amount of gain/(loss) is recognized of gain/(loss) is recognized on the date of sale? What on the date of sale? What

is the journal entry to is the journal entry to record this sale?record this sale?


CostCost $35,000$35,000Accumulated DepreciationAccumulated Depreciation(20,000)(20,000)

Book valueBook value $15,000$15,000Cash received from saleCash received from sale(10,000)(10,000)

Loss on saleLoss on sale $5,000$5,000

CostCost $35,000$35,000Accumulated DepreciationAccumulated Depreciation(20,000)(20,000)

Book valueBook value $15,000$15,000Cash received from saleCash received from sale(10,000)(10,000)

Loss on saleLoss on sale $5,000$5,000


Cash 10,000Loss on sale of truck 5,000Accumulated dep. – Truck 20,000 Truck 35,000


Trade-inTrade-inTrade-inTrade-in

The accounts of Haley-Davis Printing Company include Land, Buildings and Equipment. Haley-Davis has a separate accumulated depreciation account for each asset. On January 1 Haley-Davis traded in equipment with accumulated depreciation of $90,000 (cost of $130,000) for similar new equipment. Haley-Davis also paid $80,000 cash. Record this transaction.

Copyright © 2007 Prentice-Hall. All rights reserved

Jan. 1Jan. 1Jan. 1Jan. 1

Equipment (new) 120,000Accumulated Depreciation-Equipment 90,000 Equipment (old) 130,000 Cash 80.000

27


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


• Natural resources consist of standing timber and underground deposits of oil, gas, and minerals.

• Natural resources, frequently called wasting assets, have two distinguishing characteristics:1 They are physically extracted in operations.2 They are replaceable only by an act of nature.

NATURAL RESOURCESNATURAL RESOURCES


Natural ResourcesNatural ResourcesNatural ResourcesNatural Resources

• Plant assets extracted from the natural environment

• Expensed through depletion using the units of production method

• Reported on balance sheet at cost less accumulated depletion


DepletionDepletionDepletionDepletion

• Compute depletion rate per unit:

• Compute depletion expense:

Estimated total units of natural resource

Cost – Residual Value

Depletion rate per unit

Number of units extracted this

period×


Natural resources usually have no residual value.


DepletionDepletionDepletionDepletion

Mine: $398,500Filing fee 500License 1,000Survey 60,000Total cost $460,000

Divided by200,000 tons = $2.30 per ton

Depletion: 40,000 tons @ $2.30/ton = $92,000


GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

a) Mineral Asset 398,500

Cash 398,500

b) Mineral Asset 1,500

Cash 1,500

To record filing and licensefees


GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

b) Mineral Asset 60,000Cash 60,000

Paid for geological survey

c) Depletion Expense, MineralAsset 92,000

Accumulated Depletion,Mineral Asset 92,000


84. Golden Miners purchased a mine in 20X5 for $1,920,000. It was estimated that the mine contained 3,000,000 tons of ore, and would be totally worthless once all ore was extracted. Golden Miners extracted 250,000 tons in 20X5 and 300,000 tons in 20X6. Depletion expense for 20X6 would equal:


$1,920,000 / 3,000,000 = $.64 per ton

$.64 X 300,000 = $192.000


Objective 6Objective 6Objective 6Objective 6

Account for intangible assets


Intangible AssetsIntangible AssetsIntangible AssetsIntangible Assets

• Noncurrent assets with no physical form

• Provide exclusive rights or privileges• Acquired to help generate revenues• Expensed through amortization using

the straight-line method over the asset’s useful life

• Written off the asset directly


• Intangible assets are rights, privileges, and competitive advantages that result from the ownership of long lived assets that do not possess physical substance.

• Intangibles may arise from government grants, acquisition of another business, and private monopolistic arrangements.

INTANGIBLE ASSETSINTANGIBLE ASSETS


INTANGIBLE ASSETSINTANGIBLE ASSETS

1. Patents2. Copyrights3. Trademarks4. Franchises5. Goodwill

1 – 4 accounted for in a similar fashion


Intangible Assets: Intangible Assets: PatentsPatents


• Patents are federal government grants.• They give the holder the right to produce

and sell an invention (e.g. prescription drugs).

• Suppose a company pays $170,000 to acquire a patent on January 1.

• The company believes that its expected useful life is 5 years.

• What are the entries?


Jan. 1Patents 170,000

Cash 170,000To acquire a patent

Dec. 31Amortization Expense 34,000

Patents ($170,000/5) 34,000To amortize the cost of a patent




• Copyrights are granted by the federal government, giving the owner the exclusive right to reproduce and sell an artistic or published.

• Copyrights extend for the life of the creator plus 70 years.

• The cost of a copyright consists of the cost of acquiring and defending it.

CopyrightsCopyrightsCopyrightsCopyrights


Literary compositions (novels)Musical compositionsFilms (movies)SoftwareOther works of art

Intangible Assets: Intangible Assets: CopyrightsCopyrights

Intangible Assets: Intangible Assets: CopyrightsCopyrights

46

http://www.gutenberg.org/wiki/http://www.gutenberg.org/wiki/Main_PageMain_Page

Free Books

There are over 25,000 free books in the Project Gutenberg Online Book Catalog.

A grand total of over 100,000 titles are available at Project Gutenberg Partners, Affiliates and Resources.

If you don't live in the United States, please check the copyright laws of your country before downloading or redistributing a book.

• Why are these books free? – Copyright for most of these books has expired in the United States.

(They may still be copyrighted in other countries). So anybody may make verbatim or non-verbatim copies of those works

http://www.gutenberg.org/wiki/Gutenberg:No_Cost_or_Freedom%3F

http://www.gutenberg.org/catalog/

http://www.gutenberg.org/wiki/Gutenberg:Partners%2C_Affiliates_and_Resources

http://en.wikipedia.org/wiki/Copyright


Trademarks, Trade Names,or Brand Names are assets that representdistinctive identifications of a product or

service.

Intangible Assets: Intangible Assets: TrademarksTrademarks

Intangible Assets: Intangible Assets: TrademarksTrademarks


Intangible Assets: Intangible Assets: FranchisesFranchises

Intangible Assets: Intangible Assets: FranchisesFranchises

• Franchises are privileges granted by private business or government to sell a product or service.


GoodwillGoodwillGoodwillGoodwill

• Excess of purchase price of a company over market value of net assets acquired

• Only recorded in the purchase of another company

• Not amortized• Measure value of each year

– If value has increased – record nothing– If value has decreased – recognize loss

and decrease carrying value


Intangible Assets: Intangible Assets: GoodwillGoodwill

Intangible Assets: Intangible Assets: GoodwillGoodwill

• Goodwill is defined as the excess of purchase price over the fair value of the net assets acquired.

• Goodwill can only be recorded in the purchase of another company.

• Goodwill is no longer amortized• Goodwill is now subject to an

“impairment” test.


Purchase price paid forMexana Company $10 millionAssets at market value 9 millionLess Mexana’s liabilities 1 millionMarket value ofMexana’s net assets 8 millionGoodwill $ 2 million

Goodwill Example – p. 417

Intangible Assets: Intangible Assets: Goodwill Goodwill

Intangible Assets: Intangible Assets: Goodwill Goodwill

52

GoodwillGoodwill

PepsiCo, Inc. has acquired several other companies. Assume that PepsiCo purchased Kettle Chips Co. for $8 million cash. The book value of Kettle Chips’ assets is $12 million (market value, $15 million), and it has liabilities of $10 million.

Calculate goodwill. Record the purchase of Kettle Chips by PepsiCo.

53

Calculation of GoodwillCalculation of Goodwill

Purchase price paid for Kettle Chips...........………… $8,000,000

Market value of Kettle Chips’ net assets:

Market value of Kettle Chips’ assets $15,000,000

Less: Kettle Chips’ liabilities.....……. (10,000,000)

Market value of Kettle Chips’ net assets..………... 5,000,000

Cost of goodwill purchased..............…………………. $3,000,000

Assets (Cash, Receivables 15,000,000

Inventories, Plant Assets)

Goodwill 3,000,000

Liabilities 10,000,000

Cash 8,000,000

54


• Research and development costs pertain to expenditures incurred to develop new products and processes.

• These costs are not intangible costs, but are usually recorded as an expense when incurred.

RESEARCH AND DEVELOPMENT COSTS

RESEARCH AND DEVELOPMENT COSTS


ObjectiveObjectiveObjectiveObjective

Report long-term assets on the balance sheet


Balance Sheet Balance Sheet PresentationPresentation

Balance Sheet Balance Sheet PresentationPresentation

Total Current Assets $880,000

Property, Plant, and Equipment

Land 120,000

Buildings $800,000

Equipment 160,000960,000

Less: Accumulated Depreciation, Buildings and Equipment

(410,000) 550,000

Oil $380,000

Less: Accumulated Depletion, Oil (80,000) 300,000

Property, Plant, and Equipment, net 970,000

Goodwill 350,000

60

End of Chapter End of Chapter 1010End of Chapter End of Chapter 1010

Day 2 may 7 08 ders.ch.10.plant assets

Technology

Transcript of Day 2 may 7 08 ders.ch.10.plant assets