unit 1 plant and non-current assets v2
TRANSCRIPT
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
1/60
Unit 1
Plant Assets and Non-Current
Assets
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
2/60
Called Property, Plant, & Equipment/
Fixed Assets
Called Property, Plant, & Equipment/
Fixed Assets
Plant Assets (FRS 116)
Expected to Benefit Future Periods
Expected to Benefit Future Periods
Actively Used in Operations
Actively Used in Operations
Tangible in Nature
Tangible in Nature
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
3/60
Declineinassetvalue
overitsusefullife
Use
2. Allocate cost to periods
benefited.
3. Account for subsequent
expenditures.
Use
2. Allocate cost to periods
benefited.
3. Account for subsequent
expenditures.
Disposal
4. Record disposal.
Disposal
4. Record disposal.
Plant Assets
Acquisition
. Compute cost.
Acquisition
. Compute cost.
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
4/60
AcquisitionCost
AcquisitionCost
The initial estimate of the costs ofdismantlementand removingthe
item and restoringthe site on
which it is located, the obligation
of which an entity has incurred.
The initial estimate of the costs ofdismantlementand removingthe
item and restoringthe site on
which it is located, the obligation
of which an entity has incurred.
Allexpenditures
needed to
prepare theasset for itsintended use
Allexpenditures
needed to
prepare theasset for itsintended use
Purchase
price
Purchase
price
Cost Determination
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
5/60
Land is not depreciable.
Land is not depreciable.
Purchase
price
Purchase
price
Real estate
commissions
Real estate
commissions
Title insurance premiums
Title insurance premiums
Delinquent
taxes
Delinquent
taxes
Surveying
fees
Surveying
fees
Title search and transfer fees
Title search and transfer fees
Land
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
6/60
Land Improvements
Parking lots, driveways, fences, walks,shrubs, and lighting systems.
Parking lots, driveways, fences, walks,shrubs, and lighting systems.
Depreciate over
useful life ofimprovements.
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
7/60
Cost of purchase or
construction
Cost of purchase or
construction
Brokerage
fees
Brokerage
fees
TaxesTaxes
Title feesTitle fees
Attorney feesAttorney fees
Buildings
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
8/60
Purchase
price
Purchase
price
Installing,
assembling, and
testing
Installing,
assembling, and
testing
Insurance while
in transit
Insurance while
in transit
TaxesTaxes
Transportation
charges
Transportation
charges
Machinery and Equipment
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
9/60
On January 1, Matrix, Inc. purchased land and
building for RM200,000 cash. The appraised
values are building, RM162,500, and land,
RM87,500.How much of the RM200,000 purchase price
will be charged to the building and land
accounts?
On January 1, Matrix, Inc. purchased land and
building for RM200,000 cash. The appraised
values are building, RM162,500, and land,
RM87,500.How much of the RM200,000 purchase price
will be charged to the building and land
accounts?
Lump-Sum Asset Purchase
The total cost of a combined
purchase of land and building
is separated on the basis of
their relative market values.
The total cost of a combined
purchase of land and building
is separated on the basis of
theirrelative market values.
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
10/60
Appraised % of Purchase Apportioned
Asset Value Value Price Cost
a b* c b cLand 87,500$ 35% 200,000$ = 70,000$
Building 162,500 65% 200,000 = 130,000
Total 250,000$ 100% 200,000$
*$87,500 $250,000 = 35%
$162,500 $250,000 = 65%
Appraised % of Purchase Apportioned
Asset Value Value Price Cost
a b* c b cLand 87,500$ 35% 200,000$ = 70,000$
Building 162,500 65% 200,000 = 130,000
Total 250,000$ 100% 200,000$
* $87,500 $250,000 = 35%
$162,500 $250,000 = 65%
Lump-Sum Asset Purchase
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
11/60
Revaluation of Plant Assets
Revaluation is permissible under FRS 116 Revalued amount should be supported by
market-based evidence or appraisal. If revalued amount> carrying
amount=Revaluation Surplus
Credit to Revaluation Reserve If revalued amount< carrying
amount=Revaluation DeficitDebit to Statement of ComprehensiveIncome as revaluation deficit expense
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
12/60
Depreciation is the process of allocatingthe cost of a plant asset to expense in the
accounting periods benefiting from its use.
Depreciation is the process of allocatingthe cost of a plant asset to expense in the
accounting periods benefiting from its use.
Cost
Allocation
Acquisition
Cost
Acquisition
Cost
(Unused)
Statement of Financial Position
(Used)
Statement of Compre
ExpenseExpense
Depreciation
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
13/60
The calculation of depreciation involves thefollowing factors for each asset:
1. Cost
1. Salvage Value
1. Useful Life
2. Depreciation Methods used
Factors in Computing Depreciation
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
14/60
1. Straight-line
1. Units-of-production
1. Double Declining-balance
2. Sum-of-digit
Depreciation Methods
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
15/60
On January 1, 2007, equipment
was purchased for RM50,000
cash. The equipment has an
estimated useful life of five years
and an estimated residual value of
RM5,000.
Cost - Salvage Value
Useful life
Depreciation
Expense for Period=
Straight-Line Method
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
16/60
Straight-Line Method
Cost - Salvage Value
Useful life
Depreciation
Expense for Period=
RM9,0
00
Depreciation
Expense per Year=
RM50,000 -
RM5,000
5 years
=
Dr. Cr.
Depreciation Expense 9,000Accumulated Depreciation - Equipment 9,000
To record annual depreciation
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
17/60
Depreciation Accumulated
Expense Depreciation Accumulated Book
Year (debit) (credit) Depreciation Value
50,000$
2007 9,000$ 9,000$ 9,000$ 41,0002008 9,000 9,000 18,000 32,000
2009 9,000 9,000 27,000 23,000
2010 9,000 9,000 36,000 14,000
2011 9,000 9,000 45,000 5,000
45,000$ 45,000$
Salvage ValueSalvage Value
Straight-Line Method
Depreciation
Rate= (100% 5 years) = 20% per year
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
18/60
De
preciation
Expense
Depreciation Expense
reported on the
Statement ofComprehensive
Income.RM0
RM1,000
RM3,000
RM5,000
RM7,000
RM9,000
2007 2008 2009 2010 2011
For the year ended December 31
Book Value
reported on theStatement of
Financial Position.
$41,000
$32,000
$23,000
$14,000
$5,000
$-
$5,000
$10,000
$15,000
$20,000$25,000
$30,000
$35,000
$40,000
$45,000
2007 2008 2009 2010 2011For the year ended December 31
BookValue
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
19/60
Units-of-Production Method
Step 2:Depreciation
Expense =Depreciation
Per Unit
Number of
Units Producedin the Period
Depreciation
Per Unit= Cost - Salvage Value
Total Units of Production
Step 1:
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
20/60
On December 31, 2007, equipment waspurchased for RM50,000 cash. Theequipment is expected to produce 100,000units during its useful life and has anestimated salvage value of RM5,000.
If 22,000 units were produced in 2008, whatis the amount of depreciation expense?
On December 31, 2007, equipment waspurchased for RM50,000 cash. Theequipment is expected to produce 100,000units during its useful life and has anestimated salvage value of RM5,000.
If 22,000 units were produced in 2008, whatis the amount of depreciation expense?
Units-of-Production Method
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
21/60
Step 2:
Depreciation
Expense = RM.45 per unit 22,000 units =RM9,900
Step 1:
Depreciation
Per Unit=
RM50,000 - RM5,000
100,000 units= RM.45 per
unit
Units-of-Production Method
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
22/60
Depreciation Accumulated Book
Year Units Expense Depreciation Value
50,000$
2008 22,000 9,900$ 9,900$ 40,1002009 28,000 12,600 22,500 27,500
2010 - - 22,500 27,500
2011 32,000 14,400 36,900 13,100
2012 18,000 8,100 45,000 5,000
100,000 45,000$
No depreciation expense if the equipment is idle.
Units-of-Production Method
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
23/60
Double-Declining-Balance Method
Step 2:Double-declining-
balance rate = 2 Straight-line rate = 2 20% =
40%
Step 1:
Straight-line
rate= 100 % Useful life = 100% 5 = 20%
Step 3:
Depreciation
expense=
Double-declining-
balance rate
Beginning period
book value
40% RM50,000 = RM20,000 for
2008
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
24/60
2008 Depreciation:
40% RM50,000 = RM20,000
Double-Declining-Balance Method
2009 Depreciation:
40% (RM50,000 - RM20,000) = RM12,000
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
25/60
Depreciation Accumulated Book
Year Expense Depreciation Value
50,000$
2008 20,000$ 20,000$ 30,000
2009 12,000 32,000 18,000
2010 7,200 39,200 10,800
2011 4,320 43,520 6,480
2012 2,592 46,112 3,888
46,112$ Below salvage value
Double-Declining-Balance Method
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
26/60
Depreciation Accumulated Book
Year Expense Depreciation Value
50,000$
2008 20,000$ 20,000$ 30,000
2009 12,000 32,000 18,000
2010 7,200 39,200 10,800
2011 4,320 43,520 6,480
2012 1,480 45,000 5,00045,000$
We usually must force depreciation expense in the
last year so that book value equals salvage value.
We usually must force depreciation expense in the
last year so that book value equals salvage value.
Double-Declining-Balance Method
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
27/60
Sum-of-Digit Method
Year WeightedFactor (WF)
WF/15 x45,000
Yearlydepreciation
2008 5 45,000 x 5/15 15,000
2009 4 45,000 x 4/15 12,000
2010 3 45,000 x 3/15 9,000
2011 2 45,000 x 2/15 6,000
2012 1 45,000 x 1/15 3,000
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
28/60
Depreciation Accumulated Book
Year Expense Depreciation Value
50,000$2008 15,000$ 15,000$ 35,000
2009 12,000 27,000 23,000
2010 9,000 36,000 14,000
2011 6,000 42,000 8,0002012 3,000 45,000 5,000
45,000$
We usually must force depreciation expense in the
last year so that book value equals salvage value.
We usually must force depreciation expense in the
last year so that book value equals salvage value.
Sum of-digit Method
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
29/60
Comparing Depreciation
Methods
Method Formula Effect on AnnualDepreciation
Straight-line (Cost-Salvage value)/ Usefullife in periods
Consistent amount
Units-of-production
Depreciation per unit x Unitsproduced in period
Varying amount (depends onthe number of unitsproduced)
Double-
decliningbalance
Double-declining balance
rate x Beginning-period bookvalue
Decreasing amount
Sum-of-digit (Cost-Salvage value) xweighted factor/sum-of-thedigits
Decreasing amount
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
30/60
When a plant asset is
acquired during the year,
depreciation is calculated forthe fraction of the year the
asset is owned.
When a plant asset is
acquired during the year,
depreciation is calculated forthe fraction of the year the
asset is owned.
June
30
Partial-Year Depreciation
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
31/60
Calculate the straight-line depreciation on
December 31, 2007, for equipment purchased on
June 30, 2007. The equipment cost RM75,000,
has a useful life of 10 years, and an estimatedsalvage value of RM5,000.
Calculate the straight-line depreciation on
December 31, 2007, for equipment purchased on
June 30, 2007. The equipment cost RM75,000,
has a useful life of 10 years, and an estimatedsalvage value of RM5,000.
Depreciation= (RM75,000 - RM5,000) 10
= RM7,000 for all 2007
Depreciation = RM7,000 6/12 = RM3,500
Depreciation= (RM75,000 - RM5,000) 10
= RM7,000 for all 2007
Depreciation = RM7,000 6/12 = RM3,500
Partial-Year Depreciation
Ch i E ti t f
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
32/60
So depreciation
is an estimate.
Predicted
salvage value
Predicted
useful life
Over the life of an asset, new informationmay come to light that indicates theoriginal estimates were inaccurate.
Over the life of an asset, new informationmay come to light that indicates theoriginal estimates were inaccurate.
Change in Estimates for
Depreciation
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
33/60
On January 1, 2004, equipment was purchased that cost
RM30,000, has a useful life of 10 years, and no salvage
value. During 2007, the useful life was revised to eight
years total (five years remaining).
Calculate depreciation expense for the year
ended December 31, 2007, using the
straight-line method.
On January 1, 2004, equipment was purchased that cost
RM30,000, has a useful life of 10 years, and no salvage
value. During 2007, the useful life was revised to eight
years total (five years remaining).
Calculate depreciation expense for the year
ended December 31, 2007, using the
straight-line method.
Change in Estimates for
Depreciation
Book value at
date of change
Salvage value at
date of change
Remaining useful life at date of change
Change in Estimates for
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
34/60
Change in Estimates for
Depreciation
Asset cost 30,000$
Accumulated depreciation, 12/31/2006
($3,000 per year 3 years) 9,000
Remaining book value 21,000$Divide by remaining life 5
Revised annual depreciation 4,200$
Dr. Cr.
Dec. 31 Depreciation Expense 4,200
Accumulated Depreciation - Equipment 4,200
To record depreciation for 2007
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
35/60
Reporting Depreciation
Property, plant, and equipment:
Land and buildings 150,000$
Machinery and equipment 200,000Office furniture and equipment 175,000
Land improvements 50,000
Total 575,000$
Less Accumulated depreciation (122,000)Net property, plant, and equipment 453,000$
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
36/60
Additional Expenditures
If the amounts involved are not material, mostcompanies expense the item.
If the amounts involved are not material, most
companies expense the item.
Financial Statement Effect
Current Current
Treatment Statement Expense Income Taxes
Capital Balance sheetExpenditure account debited Deferred Higher Higher
Revenue Income statement Currently
Expenditure account debited recognized Lower Lower
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
37/60
Revenue and Capital Expenditures
Type of Capital or
Expenditure Revenue Identifying Characteristics
Ordinary Revenue 1. Maintains normal operating condition.
Repairs 2. Does not increase productivity.
3. Does not extend life beyond originalestimate.
Capital 1. Major overhauls or partial
replacements.
2. Extends life beyond original estimate.
Betterments
and
Extraordinary
Repairs
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
38/60
Recording cash
received (debit)
or paid (credit).
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
Removing accumulated
depreciation (debit).
Update depreciation
to the date of disposal.
Journalize disposal by:Journalize disposal by:
Removing the
asset cost (credit).
Removing the
asset cost (credit).
Recording a
gain (credit)
or loss (debit).
Recording a
gain (credit)
or loss (debit).
Disposals of Plant Assets
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
39/60
Update depreciation
to the date of disposal.
Journalize disposal by:
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Discarding Plant Assets
Recording cash
received (debit)
or paid (credit).
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
Removing accumulated
depreciation (debit).Removing the
asset cost (credit).
Removing the
asset cost (credit).
Recording a
gain (credit)
or loss (debit).
Recording a
gain (credit)
or loss (debit).
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
40/60
On September 30, 2007, Evans Company
sells a machine that originally costRM100,000 for RM60,000 cash. The
machine was placed in service on
January 1, 2004. It was depreciated using
the straight-line method with an estimated
salvage value of RM20,000 and a useful
life of 10 years.
Selling Plant Assets
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
41/60
Update Depreciation to Date of
Disposal
Annual Depreciation:
(RM100,000 - RM20,000) 10 Yrs. =
RM8,000
Depreciation to September 30, 2007:
9/12 RM8,000 = RM6,000
Annual Depreciation:
(RM100,000 - RM20,000) 10 Yrs. =
RM8,000
Depreciation to September 30, 2007:
9/12 RM8,000 = RM6,000
Dr. Cr.Sep. 30 Depreciation expense 6,000
Accumulated Depreciation - Machine 6,000
To update depreciation to date of disposal
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
42/60
Determine Book Value of Asset
Co st 100,00$
A cc u m u l a te d D e p re c ia tio n :( 3 yrs. $8,0 00) + $6 ,000 =30,000
Bo o k V a lu e 70,000$
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
43/60
Determine Gain or Loss on
Disposal
Cost 100,000$
Accumulated depreciation 30,000
Book Value 70,000
Cash Received 60,000
Loss on disposal (10,000)$
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
44/60
Record the Disposal in the Journal
Dr. Cr.
Sep. 3 Cash 60,000
Accumulated Depreciation - Machi 30,000
Loss on Disposal of Asset 10,000
Machine 100,000
To record disposal of equipment
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
45/60
Lets Talk About Natural
Resources!
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
46/60
Total cost,
including
exploration and
development,is charged to
depletion expense
over periods
benefited.
Extracted from
the natural
environmentand reported
at cost less
accumulated
depletion.
Natural Resources
Examples: oil, coal, goldExamples: oil, coal, gold
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
47/60
Cost Determination and Depletion
Step 2:
Depletion
Expense =
Depletion
Per Unit
Units Extracted
and Sold inPeriod
Depletion
Per Unit= Cost - Salvage Value
Total Units of Capacity
Step 1:
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
48/60
Apex Mining acquired a tract of land
containing ore deposits. Total costs of
acquisition and development were
RM1,000,000 and Apex estimates the landcontained 40,000 tons of ore. During the
first year of operations Apex extracted
and sold 13,000 tons of ore.
Apex Mining acquired a tract of land
containing ore deposits. Total costs of
acquisition and development were
RM1,000,000 and Apex estimates the landcontained 40,000 tons of ore. During the
first year of operations Apex extracted
and sold 13,000 tons of ore.
Depletion of Natural Resources
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
49/60
Step 2:
Depletion
Expense= RM25 per ton 13,000 units =
RM325,000
Step 1:
Depletion
Per Unit=
RM1,000,000 - RM0
40,000 tons= RM25 per
ton
Depletion Expense
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
50/60
Plant Assets Used in Extracting
Natural Resources
Specialized plant assets may be required to
extract the natural resource.
These assets are recorded in a separate
account and depreciated.
Specialized plant assets may be required to
extract the natural resource.
These assets are recorded in a separate
account and depreciated.
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
51/60
Lets Look at Intangible Assets!
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
52/60
Noncurrent assets
without physical
substance.
Noncurrent assets
without physical
substance.
Useful life is
often difficult
to determine.
Useful life is
often difficult
to determine.
Usually acquired
for operational
use.
Usually acquired
for operational
use.
Intangible
Assets
Intangible
Assets
Often provide
exclusive rights
or privileges.
Often provide
exclusive rights
or privileges.
Intangible Assets (FRS 138)
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
53/60
o Patents
o Copyrights
o
Leaseholdso Leasehold Improvements
o Franchises & Licenses
o Goodwill
o Trademarks & Trade
Names
Record at current
cash equivalent
cost, including
purchase price,
legal fees, and
filing fees.
Cost Determination and
Amortization
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
54/60
Types of Intangibles
Patents
The exclusive right granted to its owner tomanufacture and sell a patented item or use a
process for 20 years. A patent is generally
amortized, using the straight-line method, over its
useful life not to exceed 20 years.
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
55/60
Types of Intangibles
PatentsMatrix, Inc. purchased a patent for RM10,000. The
patent is expected to have a useful life of 10 years.
Dr. Cr.
Amortization Expense - Patents 1,000
Accumulated Amortization - Patents 1,000
To amortize patent costs
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
56/60
Types of Intangibles
CopyrightsThe exclusive right to publish and sell a musical,
literary, or artistic work during the life of the
creator plus 70 years.
LeaseholdsThe rights the lessor grants to the lessee under
the terms of a lease. Most leases have adeterminable life.
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
57/60
Types of Intangibles
Leasehold ImprovementsA lessee may pay for alterations or improvements
to the leased property such as partitions, painting,
and storefronts. These costs are usually amortizedover the term of the lease.
Franchises and Licenses
The right granted by a company or thegovernment to deliver a product or service under
specified conditions.
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
58/60
Types of Intangibles
Trademarks and Trade Names
A symbol, name, phrase, or jingle identified with a
company, product, or service.
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
59/60
Occurs when onecompany buys
another company.
Occurs when onecompany buys
another company.
Goodwill is not amortized. It is testedeach year to determine if there has been
any impairment in carrying value.
Goodwill is not amortized. It is testedeach year to determine if there has been
any impairment in carrying value.
GoodwillGoodwill
Only purchasedgoodwill is an
intangible asset.
Only purchasedgoodwill is an
intangible asset.
Goodwill
-
8/3/2019 Unit 1 Plant and Non-Current Assets v2
60/60
End of Unit 1