Blue-background PowerPoint slides, Chapter 7: Plant assets, natural resources, and intangibles

Chapter 7 Plant Assets, Natural Resources, and Intangibles

Learning Objectives

Determine the cost of a plant asset

Account for depreciation

Select the best depreciation method

Analyze the effect of a plant asset disposal

Account for natural resources and depletion

Account for intangible assets and amortization

Report plant asset transactions on the statement of cash flows

Types of Assets

Land

Buildings, machinery, equipment

Land improvements and leasehold improvements

Lump-sum (or basket) purchases of assets

Lump-sum Purchases

Total cost divided among assets based on their relative sales value.

Land 280,000 Purchased land and building Cash 2,800,000 Building 2,520,000

Capital Expenditures

Record an Asset for Capital Expenditures

Extraordinary repairs:

major engine overhaul

modification of body for new use of truck

addition to storage capacity of truck

Record Repair and Maintenance Expense for an expense:

Repair of transmission or other mechanism

Oil change, lubrication, etc.

Replacement of tires and windshield or a paint job

Capital Expenditures

General rule:

Capitalize the cost if it increases an asset’s capacity or efficiency or extends its useful life

Depreciation

Depreciation results from

Physical wear and tear

Obsolescence

Depreciation is an allocation of the cost of an asset over its useful life.

Depreciation is not a process of valuation.

Depreciation does not mean setting aside cash to replace assets as they wear out.

Depreciation

To estimate depreciation expense you need to know:

Cost

Estimated useful life

Estimated residual value

Depreciation Methods

Straight-line

Units-of-production

Double-declining-balance

Straight-Line Depreciation Straight-line depreciation per year = Cost – Residual Value Useful Life in years

Units-of-Production Units-of-production depreciation per unit of output = Cost – Residual Value Useful life in units of production

Double-Declining Balance DDB Depreciation rate per year = 1 Useful life years X 2 Rate X Book Value = Annual Depreciation Expense

Plant Assets - Other Issues

Depreciation for Tax Purposes

Companies may use different depreciation methods for tax and book.

MACRS (Modified Accelerated Cost Recovery System) is used for tax.

Depreciation for partial years

Changing the useful life of a depreciable asset (change in accounting estimate)

Fully depreciated assets

Disposal of Plant Assets

First, record depreciation to the date of disposal.

Remove the asset and related accumulated depreciation from the books.

Record the asset received in exchange (may be cash or other assets).

Record the gain or loss on the disposal.

Disposing of an Asset To dispose of a fully depreciated asset with cost and accumulated depreciation of $60,000: Accumulated Depreciation - Machinery 60,000 To dispose of fully depreciated machine Machinery 60,000 To dispose of an asset with cost of $60,000 and accumulated depreciation of $50,000: Accumulated Depreciation - Equipment 50,000 To dispose of equipment Equipment 60,000 Loss on Disposal of Equipment 10,000

Selling an Asset UPS sells equipment on Sep 30, 20X4 for $7,000 cash. The equipment cost $10,000 when purchased on Jan 1, 20X1 and has been depreciated on a straight-line basis (10 year useful life, no residual value). First update depreciation then record the sale. Depreciation expense (10,000 / 10 x 9/12) 750 To update depreciation Accumulated Depreciation – Equipment 750 Accumulated Depreciation - Equipment $3,750 Gain on sale of equipment 750 Equipment 10,000 Cash 7,000 To dispose of equipment

Exchanging an Asset Delivery Auto (new) 11,000 Cash 10,000 Delivery Auto (old) 9,000 Accumulated Depreciation (old) 8,000 Traded in old delivery car for new auto. Mazzio Pizzeria traded its delivery car with cost of $9,000 and accumulated depreciation of $8,000 and $10,000 cash for a new car.

Natural Resources