Day 2 may 7 08 assets


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  • 3
  • 1 – land does not have a useful life to allocate. Eg. LI fencing, paving, lighting, sprinkler system.
  • 2 & 3
  • 80K. 88K/110K = .80. .80 X 100 80K
  • 3
  • (9K – 1K = 8K) / 8000 =1,000
  • (9K – 1K)/10,000 = .80; .80 X 1,200 = $960
  • 9K (cost – A/D or book value) X 2/8 = $2,250
  • 2
  • Cost (6K) – A/D (2K) = Book value (4K). (4K – 1K) / 6 = $500
  • (35,000 – 20,000) – 10,000 = 5,000 loss. First ask them to record the amount and then give time to do JE.
  • 10-36B 7 th .
  • Trade-in = cost of new asset = book value of old asset plus any cash payment
  • Natural resources depleted using units-of-production method, usually no residual value. B/S:Cost-Acc/depletıon
  • Depletion expense. Accumulated depletion.
  • $1,920,000/3,000,000=$.64. .64 X 300,000 = $192,000.
  • IA – ([patents, copyrights, trademarks, franchises] use straight-lıne no A/A), goodwill
  • No A/A patents – just reduce patents all IA but goodwill account for like patents.
  • Trademark amortized over its useful life.
  • Franchises amortized over its useful life.
  • Goodwill not amortized. Only decreased and record a loss when value decreases. Assess value annually.
  • E10-27- 7 th . 8 – (15-10) = 3.
  • Day 2 may 7 08 assets

    1. 1.
    2. 2. Plant Assets Review Questions Chapter 10
    3. 3. All of the following are characteristics of a plant asset except: <ul><li>Long-lived </li></ul><ul><li>Used in production of income </li></ul><ul><li>Held for resale to customers </li></ul><ul><li>Has physical form </li></ul>
    4. 4. Answer: 3
    5. 5. All of the following assets are subject to depreciation except: <ul><li>Land </li></ul><ul><li>Land improvements </li></ul><ul><li>Building </li></ul><ul><li>Equipment </li></ul>
    6. 6. Answer: 1 Depreciation is the allocation of the plant assets cost over its useful life. Because land does not have a defined useful life, it does not lose usefulness; therefore, it is not depreciated.
    7. 7. Which of the following costs would be included in the Land account? <ul><li>Grading the land </li></ul><ul><li>Paving parking lot </li></ul><ul><li>Removal of useless, old barn on land </li></ul><ul><li>Mowing the grass </li></ul>
    8. 8. Answer: 2 and 3 Grading the land and removing the old building are added to the Land account. Mowing the grass is a maintenance expense.
    9. 9. Tyne Company made a lump-sum purchase of land and building for $100,000. The appraised values for the land was $22,000 and the for the building was $88,000. How much should be debited to Building?
    10. 10. Answer: $80,000 Total appraised value = $22,000 + $88,000 = $110,000 80% (88,000 ÷ 110,000) of the $100,000 cost should be allocated to the Building. $100,000 x 80% = $80,000
    11. 11. Which of the following costs is a capital expenditure? <ul><li>Replace broken window in office building </li></ul><ul><li>Paint foyer of office building </li></ul><ul><li>Addition on building for three new offices </li></ul><ul><li>Paid maintenance plan on heating system </li></ul>
    12. 12. Answer: 3 An addition is a permanent improvement that makes the building more useful for a long period of time. Capital expenditure ıncreases the asset’s capacity or efficiency or extends the asset’s useful life.
    13. 13. <ul><li>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. </li></ul><ul><li>How much depreciation is recognized at the end of the first year of use assuming the company uses the straight-line method of depreciation. </li></ul>
    14. 14. Answer: $1,000 (Cost – Residual value) ÷ Years of useful life ($9,000 - $1,000) ÷ 8 years = $1,000
    15. 15. <ul><li>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. </li></ul><ul><li>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? </li></ul>
    16. 16. Answer: $960 (Cost – Residual value) ÷ Total units of output ($9,000 - $1,000) ÷ 10,000 hours = $0.80 per hour $0.80 x 1,200 hours = $960
    17. 17. <ul><li>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. </li></ul><ul><li>How much depreciation is recognized at the end of the first year assuming the company uses the double-declining balance method of depreciation? </li></ul>
    18. 18. Answer: $2,250 (Cost–Accumulated depreciation) x (2/yrs of life) = ($9,000 – 0) x (2/8) = $2,250
    19. 19. If the amount of use of a machine varies from year to year, the depreciation method that best matches expense with revenue is <ul><li>Straight-line </li></ul><ul><li>Units of production </li></ul><ul><li>Double-declining balance </li></ul><ul><li>None of the above </li></ul>
    20. 20. Answer: 2 Depreciation expense is recognized only to extent that an asset has been used in a period.
    21. 21. Change in Accounting Estımate In 2005, Conway Company purchased an asset for $6,000. It was estimated to have a useful life of 5 years and a residual value of $1,000. The straight-line method of depreciation is used. At the beginning of 2007, Conway revises the estimated useful to a total of 8 years. How much depreciation expense will Conway recognize on the asset at the end of 2007?
    22. 22. Answer: $500 Cost $6,000 Depreciation for 2005 $1,000 Depreciation for 2006 1,000 (2,000) Book value $4,000 Less residual value (1,000) $3,000 $3,000 ÷ (8 – 2 years) = $500
    23. 23. Roge Company owns a truck that cost $35,000 and has total accumulated depreciation of $20,000 to-date. Roge sells the truck for $10,000. What amount of gain/(loss) is recognized on the date of sale? What is the journal entry to record this sale?
    24. 24. Cost $35,000 Accumulated Depreciation (20,000) Book value $15,000 Cash received from sale (10,000) Loss on sale $5,000
    25. 25. <ul><li>Cash 10,000 </li></ul><ul><li>Loss on sale of truck 5,000 </li></ul><ul><li>Accumulated dep. – Truck 20,000 </li></ul><ul><li>Truck 35,000 </li></ul>
    26. 26. Trade-in <ul><li>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. </li></ul>
    27. 27. Jan. 1 <ul><li>Equipment (new) 120,000 </li></ul><ul><li>Accumulated Depreciation- </li></ul><ul><li>Equipment 90,000 </li></ul><ul><li>Equipment (old) 130,000 </li></ul><ul><li>Cash 80.000 </li></ul>
    28. 28. Long-lived Assets Plant Assets Natural Resources Intangible Assets Depreciation Depletion Amortization
    29. 29. <ul><li>Natural resources consist of standing timber and underground deposits of oil, gas, and minerals. </li></ul><ul><li>Natural resources, frequently called wasting assets , have two distinguishing characteristics: </li></ul><ul><li>1 They are physically extracted in operations. </li></ul><ul><li>2 They are replaceable only by an act of nature. </li></ul>NATURAL RESOURCES
    30. 30. Natural Resources <ul><li>Plant assets extracted from the natural environment </li></ul><ul><li>Expensed through depletion using the units of production method </li></ul><ul><li>Reported on balance sheet at cost less accumulated depletion </li></ul>
    31. 31. Depletion <ul><li>Compute depletion rate per unit: </li></ul><ul><li>Compute depletion expense: </li></ul>Estimated total units of natural resource Cost – Residual Value Depletion rate per unit Number of units extracted this period ×
    32. 32. <ul><li>Natural resources usually have no residual value. </li></ul>
    33. 33. Depletion <ul><li>Mine: $398,500 </li></ul><ul><li>Filing fee 500 </li></ul><ul><li>License 1,000 </li></ul><ul><li>Survey 60,000 </li></ul><ul><li>Total cost $460,000 </li></ul><ul><li>Divided by 200,000 tons = $2.30 per ton </li></ul><ul><li>Depletion: </li></ul><ul><li>40,000 tons @ $2.30/ton = $92,000 </li></ul>
    34. 34. a) Mineral Asset 398,500 Cash 398,500 b) Mineral Asset 1,500 Cash 1,500 To record filing and license fees GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT
    35. 35. b) Mineral Asset 60,000 Cash 60,000 Paid for geological survey c) Depletion Expense, Mineral Asset 92,000 Accumulated Depletion, Mineral Asset 92,000 GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT
    36. 36. <ul><li>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: </li></ul>
    37. 37. <ul><li>$1,920,000 / 3,000,000 = $.64 per ton </li></ul><ul><li>$.64 X 300,000 = $192.000 </li></ul>
    38. 38. Objective 6 Account for intangible assets
    39. 39. Intangible Assets <ul><li>Noncurrent assets with no physical form </li></ul><ul><li>Provide exclusive rights or privileges </li></ul><ul><li>Acquired to help generate revenues </li></ul><ul><li>Expensed through amortization using the straight-line method over the asset’s useful life </li></ul><ul><li>Written off the asset directly </li></ul>
    40. 40. <ul><li>Intangible assets are rights, privileges, and competitive advantages that result from the ownership of long lived assets that do not possess physical substance. </li></ul><ul><li>Intangibles may arise from government grants, acquisition of another business, and private monopolistic arrangements. </li></ul>INTANGIBLE ASSETS
    41. 41. INTANGIBLE ASSETS <ul><li>Patents </li></ul><ul><li>Copyrights </li></ul><ul><li>Trademarks </li></ul><ul><li>Franchises </li></ul><ul><li>Goodwill </li></ul><ul><li>1 – 4 accounted for in a similar fashion </li></ul>
    42. 42. Intangible Assets: Patents <ul><li>Patents are federal government grants. </li></ul><ul><li>They give the holder the right to produce and sell an invention (e.g. prescription drugs). </li></ul><ul><li>Suppose a company pays $170,000 to acquire a patent on January 1. </li></ul><ul><li>The company believes that its expected useful life is 5 years. </li></ul><ul><li>What are the entries? </li></ul>
    43. 43. Intangible Assets: Patents Jan. 1 Patents 170,000 Cash 170,000 To acquire a patent Dec. 31 Amortization Expense 34,000 Patents ($170,000/5) 34,000 To amortize the cost of a patent
    44. 44. <ul><li>Copyrights are granted by the federal government, giving the owner the exclusive right to reproduce and sell an artistic or published . </li></ul><ul><li>Copyrights extend for the life of the creator plus 7 0 years. </li></ul><ul><li>The cost of a copyright consists of the cost of acquiring and defending it. </li></ul>Copyrights
    45. 45. Intangible Assets: Copyrights Literary compositions (novels) Musical compositions Films (movies) Software Other works of art
    46. 46. <ul><li>Free Books </li></ul><ul><li>There are over 25,000 free books in the Project Gutenberg Online Book Catalog . </li></ul><ul><li>A grand total of over 100,000 titles are available at Project Gutenberg Partners, Affiliates and Resources . </li></ul><ul><li>If you don't live in the United States, please check the copyright laws of your country before downloading or redistributing a book. </li></ul><ul><li>Why are these books free? </li></ul><ul><ul><li>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 </li></ul></ul>
    47. 47. Intangible Assets: Trademarks Trademarks, Trade Names, or Brand Names are assets that represent distinctive identifications of a product or service.
    48. 48. Intangible Assets: Franchises <ul><li>Franchises are privileges granted by private business or government to sell a product or service. </li></ul>
    49. 49. Goodwill <ul><li>Excess of purchase price of a company over market value of net assets acquired </li></ul><ul><li>Only recorded in the purchase of another company </li></ul><ul><li>Not amortized </li></ul><ul><li>Measure value of each year </li></ul><ul><ul><li>If value has increased – record nothing </li></ul></ul><ul><ul><li>If value has decreased – recognize loss and decrease carrying value </li></ul></ul>
    50. 50. Intangible Assets: Goodwill <ul><li>Goodwill is defined as the excess of purchase price over the fair value of the net assets acquired. </li></ul><ul><li>Goodwill can only be recorded in the purchase of another company. </li></ul><ul><li>Goodwill is no longer amortized </li></ul><ul><li>Goodwill is now subject to an “impairment” test. </li></ul>
    51. 51. Intangible Assets: Goodwill Purchase price paid for Mexana Company $10 million Assets at market value 9 million Less Mexana’s liabilities 1 million Market value of Mexana’s net assets 8 million Goodwill $ 2 million Goodwill Example – p. 417
    52. 52. Goodwill <ul><li>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. </li></ul><ul><li>Calculate goodwill. Record the purchase of Kettle Chips by PepsiCo. </li></ul>
    53. 53. Calculation 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
    54. 54. <ul><li>Assets (Cash, Receivables 15,000,000 </li></ul><ul><li>Inventories, Plant Assets) </li></ul><ul><li>Goodwill 3,000,000 </li></ul><ul><li>Liabilities 10,000,000 </li></ul><ul><li>Cash 8,000,000 </li></ul>
    55. 55. <ul><li>Research and development costs pertain to expenditures incurred to develop new products and processes. </li></ul><ul><li>These costs are not intangible costs, but are usually recorded as an expense when incurred. </li></ul>RESEARCH AND DEVELOPMENT COSTS
    56. 56. Objective Report long-term assets on the balance sheet
    57. 57. Balance Sheet Presentation Total Current Assets $880,000 Property, Plant, and Equipment Land 120,000 Buildings $800,000 Equipment    160,000 960,000 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
    58. 58.
    59. 59.
    60. 60. End of Chapter 10