• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
Financial Accounting Liabilities
 

Financial Accounting Liabilities

on

  • 316 views

report on financial accounting

report on financial accounting

Statistics

Views

Total Views
316
Views on SlideShare
316
Embed Views
0

Actions

Likes
0
Downloads
10
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment
  • There are three major categories of plant assets: Tangible plant assets or what we usually refer as the Property, Plant, and Equipment are long-term assets that have physical substance. Examples include land, buildings, equipment, furniture, and fixtures. Intangible assets are noncurrent assets with no physical substance. Examples include patents, copyrights, trademarks, franchises, and goodwill. Natural resources are acquired for extracting valuable resources to be used in the business. Examples include oil reserves, timber, and other minerals.
  • Here is the overview of the three accountable events to discuss. When a plant asset is acquired, it is recorded at its historical cost. Once the asset is placed in service, a portion of the asset’s cost is allocated to depreciation expense as the asset becomes older. Finally, at the end of an asset’s useful life, it’s disposed of and removed from the books and records. The accounting for plant assets usually covers several accounting periods.
  • The cost of a plant asset includes the purchase price as well as all costs necessary to get the asset in place and ready for its intended use. The purchase price, net of any cash discounts available, is recorded. Finance charges are not included in the cost of an asset. If a purchase is financed over a period of time, the interest cost is charged as an expense when incurred. Recording acquisition costs as assets is referred to as capitalizing the costs.
  • Part I Remember that the cost of an asset includes the purchase price plus any cost that is necessary to get the asset in place and ready for use. The cost of the new machine is $61,960. Part II The entry to record the purchase includes a debit to the asset account and a credit to Cash.
  • In addition to the purchase price of a building, the acquisition cost includes legal fees, realty fees, title fees, and renovation and repair costs necessary to get the building ready for its intended use.
  • Machinery and equipment are recorded at their purchase price less any available cash discount. If the company pays delivery charges on a truck, these costs are included in the cost of the truck. If any special parts need to be installed to make the machinery or equipment ready for its intended use, these costs will be included in the price of these assets. Therefore, aside from the purchase price, the cost of equipment includes sales taxes, delivery charges, installation costs, and any building modification costs necessary to accommodate the equipment. Insurance and property taxes are expenses in the current period; they are not part of the acquisition cost of an asset.
  • When purchasing land, the cost includes the purchase price, legal fees, surveying fees, broker’s commissions, and other costs generally incurred in connection with the purchase such as taxes and recording fees. As noted earlier, land is not a depreciable asset.
  • It is not uncommon to have a lump-sum purchase of assets. The most common example may be when purchasing a building and land. Remember, the land is not depreciable but a building is. A portion of the purchase price must be assigned separately to the building and to the land. When faced with this type of problem, accountants normally divide the cost between the assets on the basis of relative fair market values.
  • If we construct a tangible asset, such as a building, the cost will include all the necessary construction costs, material and labor, plus a reasonable amount of overhead, and any interest costs on money borrowed to finance the construction.
  • After a plant asset is purchased, the company may incur additional expenditures on that asset. These expenditures may be for repairs and maintenance, overhauls, upgrading the asset, and similar expenditures. One way to handle these types of expenditures is to treat them as Capital Expenditures and charge the amounts to an asset account on the balance sheet. In some cases, the expenditures may be treated as Revenue Expenditures and charged to current period income as expenses. For each expenditure subsequent to acquisition of a plant asset, decide if the expenditure is to be treated as a Capital or Revenue expenditure. Generally, subsequent expenditures for ordinary repairs are treated as revenue expenditures and charged to current period income as expenses. Subsequent expenditures that are for betterments are classified as extraordinary repairs. These should be treated as capital expenditures and charged to the asset account.
  • After a tangible long-lived asset is purchased, a company may incur additional expenditures on that asset. These expenditures may be for repairs and maintenance, overhauls, and upgrades or additions. Generally, subsequent expenditures for ordinary repairs and maintenance are expensed in the period incurred. These amounts are called revenue expenditures. Subsequent expenditures that are for betterments like overhauls that extend the life of the asset, and additions are capitalized instead of expensed. These amounts are called capital expenditures.
  • Depreciation is a process of cost allocation. The cost of an asset is allocated to expense over its useful life in some rational and systematic manner. Do not confuse asset valuation, an economic concept, with allocation. The unused portion of the asset’s cost appears on the balance sheet. A portion of the cost is allocated to expense on the income statement each accounting period.
  • The unused portion of the asset’s cost appears on the balance sheet. We allocate a portion of the cost to expense on the income statement each accounting period. The current year’s depreciation is an expense on the income statement. Accumulated depreciation represents the depreciation taken on the asset since its purchase, and is deducted from the asset’s cost on the balance sheet.
  • Regardless of the method used to calculate depreciation expense, we must know three amounts for the asset: (1) the asset’s acquisition cost; (2) the estimated useful life of the asset, and (3) the estimated residual (salvage) value we expect to receive at the end of its useful life. Once these three amounts are known, we select the depreciation method that we will use to calculate depreciation expense.
  • Book value is calculated as the historical cost of the asset minus the accumulated depreciation. Book value is the undepreciated cost of the asset. Accumulated depreciation represents the depreciation taken on the asset since its purchase. Accumulated depreciation is a contra-asset account and is subtracted from the asset account to determine book value. Assets are depreciated as we use them to help earn revenue. As assets are used, they incur physical deterioration and obsolescence.
  • There are three popular methods of calculating depreciation expense. The easiest and most widely used method is called straight-line depreciation . In special circumstances, we may wish to use the units-of-productions method . We would elect this method if the life of the asset is generally measured in terms of units of production. For example, airplanes keep highly detailed records of engine operating hours. The unit of production may be operating hours run for an aircraft engine. The third method is called the declining-balance method . Under this method, we take more depreciation expense in the early years of the asset’s life and lower amounts of depreciation in later years. Several income tax depreciation calculations are based on the declining balance method.
  • Regardless of the method used to calculate depreciation expense, three variables must be known: (1) the asset’s cost; (2) the estimated residual value expected to be received at the end of its useful life, and (3) the estimated useful life of the asset. When using the straight-line method, depreciation expense is calculated by taking cost minus residual value and dividing by the years of useful life.
  • Notice that depreciation expense is the same amount in each of the 5 years. If this amount was plotted on a graph, it would be a straight-line. That is how the name for this method was determined. Accumulated depreciation increases by nine thousand eight hundred dollars each year. The cost of the asset less accumulated depreciation at the end of any year is called book value . Book value decreases by nine thousand eight hundred dollars each year. At the end of the asset’s useful life, the book value is equal to the estimated residual value. This should be true regardless of the method used.
  • This method assumes that depreciation is more a function of use rather than passage of time. The life of the asset is considered in terms of the output it produces or the number of hours it works. Thus depreciation is related to the estimated production capability of the asset and is expressed in a rate per unit of output or hour of use.
  • In the example, the rate per unit is P4.00 computed by dividing P 600,000 by 150,000 units
  • The Depreciation rate per unit is then multiplied by the yearly output to get the annual depreciation
  • There are several appealing reasons to use a declining-balance method for depreciation. One reason to consider the declining-balance method is to better match depreciation expense with revenue generated. The idea is that a newer asset will generate more revenue in early years rather than later years, so depreciation expense should be higher in the early years of ownership and less in later years. Another reason that the declining-balance method is appealing to use for financial statement reporting is that it is similar to the depreciation method used for tax purposes. Calculating depreciation expense under the double-declining-balance method is a three step process. The first step is to calculate the straight-line depreciation rate. Do this by dividing one hundred percent by the asset’s useful life. The second step is to calculate the double-declining-balance rate, which is done by multiplying the straight-line rate times two. The third and final step is to determine depreciation expense. Multiply the double-declining rate times the book value of the asset at the beginning of the period. Under the double-declining-balance method estimated residual value is ignored.
  • The first step is to calculate the straight-line depreciation rate. Recall that this is done by dividing 100% by the asset’s useful life. In this case divide 100% by the 5-year useful life to get a straight-line rate of 20%. The second step is to calculate the double-declining-balance rate. Do this by multiplying the straight-line rate times 2. In this case that would be 20% times two, or 40%. The third and final step is to determine depreciation expense. Multiply the double-declining rate times the book value of the asset at the beginning of the period. In this case, multiply the beginning book value (cost less accumulated depreciation) of $24,000 by 40%. Depreciation expense for 2007 is $9,600. Remember, under the double-declining-balance method ignore estimated salvage value.
  • While book value should always be equal to the estimated salvage value at the end of an asset’s useful life, it just will not work properly using the double-declining-balance method. In this case, the book value at the end of 2011 needs to be equal to $3,000, the estimated residual value. The only way that can work is to force depreciation expense in the last year to be the amount needed to bring book value down to residual value. In 2011, depreciation expense will be recorded at $110. This amount is determined by subtracting the salvage value of $3,000 from the book value at the end of 2010, $3,110. Notice that no matter which depreciation method is used, the total depreciation taken at the end of an asset’s life will be the same. In this case, for both the straight-line method and the double-declining-balance method, total depreciation taken is $21,000.
  • Assets are depreciated as we use them to help earn revenue. As assets are used, they incur physical deterioration and obsolescence. But if an asset’s value decreases and cannot be recovered through future use or sale, the asset is considered to be impaired. An impairment can be the result of a casualty, obsolescence, or the lack of demand for the asset’s services. If an asset’s value decreases and cannot be recovered through future use or sale, the asset is considered to be impaired and should be written down to its net realizable value resulting in a loss being recognized.
  • A business may voluntarily dispose of an asset by selling it, trading it, or retiring it. A business may also dispose of an asset involuntarily as the result of a casualty such as a fire or accident.
  • When a plant asset is disposed of, the first thing to do is update depreciation to the date of disposal. After completing the update, the journal entry can be created. The journal entry begins by the recording of a debit to the cash account, if cash was received, or credit to the cash account, if cash was paid by the company. In addition, it must be determined whether a gain or loss is associated with the disposal. A gain is recorded with a credit, just like revenue, and a loss is recorded with a debit, just like an expense account. The entry is completed by removing the plant asset’s cost from the books with a credit, and removing the related accumulated depreciation with a debit.
  • If the amount of cash received is greater than the book value of the asset (cost less accumulated depreciation), a gain is associated with the disposal. If the cash received is less than the book value of the asset, a loss will be recorded. When the amount of cash is exactly equal to the book value of the asset, there will be no gain or loss in connection with the disposal.
  • Natural resources abound. There are accounting issues associated with oil, coal, timber, gold, gravel, and a wide variety of other natural resources. In general, natural resources can be thought of as anything extracted from our natural environment. Accountants report natural resources at their cost less accumulated depletion . Depletion is the allocation of the cost of a natural resource over its useful life. The depletion studied in this text is very similar to straight-line depreciation. The cost of any natural resource must include all exploration and development costs as well as extraction costs. A portion of these total costs are charged to income each period through the depletion expense account.
  • Begin the process of calculating depletion expense by determining the depletion expense per unit of natural resource. The numerator of the equation contains the resource cost less any estimated residual value. The denominator of the equation is the estimated total capacity of the natural resource expected to be extracted. For oil, the denominator is expressed in terms of barrels, for coal in tons, for timber in board feet, and the like for other resources. The second step to determine the current period’s depletion expense is calculated by multiplying the depletion expense per unit, determined on the previous slide, by the number of extracted units sold during the period. Depletion expense, which becomes part of the cost of goods sold, is based on the number of units sold, not the number of units extracted. To determine the unsold inventory balance at the end of the current period, multiply the depletion expense per unit by the number of units on hand at the end of the period.
  • Intangible assets lack physical substance and that makes it difficult to determine the asset’s useful life or any residual value. Many intangible assets involve exclusive rights or privileges.
  • Most Intangible assets are amortized. Amortization is the systematic write-off of the cost of an intangible asset over its useful or legal life, whichever is shorter. Amortization is the same concept as depreciation only it’s called a different name because it refers to intangible assets. The entry to record amortization includes a debit to Amortization Expense and a credit to the specific intangible asset account involved.
  • An intangible asset called goodwill can be created when one company buys another company. If the purchase price of the company is greater than the fair value of the net assets and liabilities acquired, goodwill is associated with the transaction. Unlike other intangible assets, goodwill can not be associated with any specific right. It does not exist separate from the company itself. It represents the value of a company as a whole over and above its identifiable net assets. Goodwill may be attributed to many factors, including good reputation, superior employees and management, good clientele, and good business location. Goodwill is not amortized. Each year we must test to see if there has been any impairment in the carrying value of the goodwill. If an impairment is determined to exist, we will reduce the goodwill account to its fair value and recognize a loss. Let’s look at an example to see how we determine the amount of goodwill.
  • A trademark or trade name is any symbol, name, phrase, or jingle that is identified with a company, product or service. No other party may use the trademark or trade name without the permission of the holder. Many trade marks are extremely valuable. The name “Mercedes-Benz” is quite valuable, as is the name “Harley-Davidson.” Trademarks have unlimited (or indefinite) lives and are not amortized. We normally amortize the cost of trademarks over a short period of time using the straight-line method.
  • A copyright grants to the holder the exclusive right to publish and sell musical, literary, or artistic work for the life of the creator plus seventy years. Most copyrights are amortized over a short period of time using the straight-line method.
  • A patent gives the holder the exclusive right to manufacture and sell an item or process for twenty years. A patent is amortized using the straight-line method over its useful life, but never more than twenty years. Most companies amortize patents over a very short period of time. Research and development costs that might lead to a patent are normally expensed as incurred
  • Technology is a category of intangible assets that includes a company’s website and any computer programs written by its employees. This category of intangible assets is rapidly growing on corporate balance sheets.
  • You probably can’t drive down any major street without finding a number of fast-food franchise operations. The holder of a franchise has the right to deliver a product or service under conditions granted by the franchisor. Any cost to acquire a franchise is amortized over the contract life of the franchise.
  • Licenses and operating rights grant limited permission to use a product or service according to specific terms and conditions. For example, you may be using computer software that is made available to you through a campus licensing agreement.

Financial Accounting Liabilities Financial Accounting Liabilities Presentation Transcript

  • Slide 1McGraw-Hill/Irwin Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Group 5 Austria, JeffreyAustria, Jeffrey Calubayan, ElsieCalubayan, Elsie Dela Cruz, AlvinDela Cruz, Alvin Granado, Ma. EuniceGranado, Ma. Eunice Minaballes, LizaMinaballes, Liza Delete text and place photo here. Dr. Maria P. IshiiDr. Maria P. Ishii Financial AccountingFinancial Accounting
  • Slide 2McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles L a n d , b u i l d i n g s , e q u i p m e n t , f u r n i t u r e , f i x t u r e s . L o n g - t e r m a s s e t s h a v i n g p h y s i c a l s u b s t a n c e . T a n g i b l e P l a n t A s s e t s P a t e n t s , c o p y r i g h t s , t r a d e m a r k s , f r a n c h i s e s , g o o d w i l l . N o n c u r r e n t a s s e t s w i t h n o p h y s i c a l s u b s t a n c e . I n t a n g i b l e A s s e t s O i l r e s e r v e s , t i m b e r , o t h e r m i n e r a l s . S i t e s a c q u i r e d f o r e x t r a c t i n g v a l u a b l e r e s o u r c e s . N a t u r a l R e s o u r c e s
  • Slide 3McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Acquisition.Acquisition. Allocation of the acquisition cost toAllocation of the acquisition cost to expense over the asset’s useful lifeexpense over the asset’s useful life (depreciation).(depreciation). Sale or disposal.Sale or disposal. Acquisition.Acquisition. Allocation of the acquisition cost toAllocation of the acquisition cost to expense over the asset’s useful lifeexpense over the asset’s useful life (depreciation).(depreciation). Sale or disposal.Sale or disposal.
  • Slide 4McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Asset priceAsset price + Reasonable and necessary costs . . . Reasonable and necessary costs . . . . . . for getting the asset to the desired location. . . . for getting the asset to the desired location. . . . for getting the asset ready for use. . . . for getting the asset ready for use. CostCost =
  • Slide 5McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles EXAMPLE: On January 28, Medical Center Western Batangas, aOn January 28, Medical Center Western Batangas, a tertiary hospital, purchase a new 4-D Ultrasound machinetertiary hospital, purchase a new 4-D Ultrasound machine from Levins Co. The new machine has a price of $52,000.from Levins Co. The new machine has a price of $52,000. Sales tax is 8%. Medical Center Western Batangas paysSales tax is 8%. Medical Center Western Batangas pays $500 shipping cost to get the machine to the premise.$500 shipping cost to get the machine to the premise. After the machine arrives, set-up costs of $1,300 areAfter the machine arrives, set-up costs of $1,300 are incurred, along with $4,000 in testing costs.incurred, along with $4,000 in testing costs. EXAMPLE: On January 28, Medical Center Western Batangas, aOn January 28, Medical Center Western Batangas, a tertiary hospital, purchase a new 4-D Ultrasound machinetertiary hospital, purchase a new 4-D Ultrasound machine from Levins Co. The new machine has a price of $52,000.from Levins Co. The new machine has a price of $52,000. Sales tax is 8%. Medical Center Western Batangas paysSales tax is 8%. Medical Center Western Batangas pays $500 shipping cost to get the machine to the premise.$500 shipping cost to get the machine to the premise. After the machine arrives, set-up costs of $1,300 areAfter the machine arrives, set-up costs of $1,300 are incurred, along with $4,000 in testing costs.incurred, along with $4,000 in testing costs.
  • Slide 6McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles
  • Slide 7McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Buildings • Purchase price • Renovation and repair costs • Legal and realty fees • Title fees Buildings • Purchase price • Renovation and repair costs • Legal and realty fees • Title fees
  • Slide 8McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Equipment • Purchase price • Installation costs • Modification to building necessary to install equipment • Transportation costs Equipment • Purchase price • Installation costs • Modification to building necessary to install equipment • Transportation costs
  • Slide 9McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Land • Purchase price • Real estate commissions • Title insurance premiums • Delinquent taxes • Surveying fees • Title search and transfer fees Land • Purchase price • Real estate commissions • Title insurance premiums • Delinquent taxes • Surveying fees • Title search and transfer fees Improvements to land such as parking lots, driveways, fences, sidewalks, landscaping and outdoor lightings systems are recorded separately. Improvements to land such as parking lots, driveways, fences, sidewalks, landscaping and outdoor lightings systems are recorded separately.
  • Slide 10McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Allocation of a Lump-Sum PurchaseAllocation of a Lump-Sum Purchase I think I’ll buy the whole thing; building, land, and contents. The total cost must be allocated to separate accounts for each asset. The total cost must be allocated to separate accounts for each asset. The allocation is based on the relative Fair Market Value of each asset purchased. The allocation is based on the relative Fair Market Value of each asset purchased.
  • Slide 11McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Asset cost includes:Asset cost includes: All materials and labor traceable to the construction. A reasonable amount of overhead. Interest on debt incurred during the construction.
  • Slide 12McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Capital ExpenditureCapital ExpenditureCapital ExpenditureCapital Expenditure Revenue ExpenditureRevenue ExpenditureRevenue ExpenditureRevenue Expenditure Expenditure for ordinary repairs and maintenance.. Expenditure for ordinary repairs and maintenance.. To expense an expenditure means to charge it to an expense account. To expense an expenditure means to charge it to an expense account. To capitalize an expenditure means to charge it to an asset account. To capitalize an expenditure means to charge it to an asset account. Any material expenditure that will benefit several accounting periods. Any material expenditure that will benefit several accounting periods.
  • Slide 13McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Type of Capital or Expenditure Revenue Identifying Characteristics Ordinary Revenue 1. Maintains normal operating condition repairs and 2. Does not increase productivity maintenance 3. Does not extend life beyond original estimate Extraordinary Capital 1. Major overhauls or partial repairs replacements 2. Extends life beyond original estimate Additions Capital 1. Increases productivity 2. May extend useful life 3. Improvements or expansions
  • Slide 14McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset. The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset. Cost of plant assets Balance SheetBalance Sheet Assets: Plant and equipment Assets: Plant and equipment Income StatementIncome Statement Revenues: Expenses: Depreciation Revenues: Expenses: Depreciation as the services are received
  • Slide 15McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Depreciation Expense Income Statement Balance Sheet Accumulated Depreciation Depreciation for the current year Total of depreciation to date on an asset Acquisition Cost (Unused) Balance Sheet Cost Allocation Expense Income Statement (Used)
  • Slide 16McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles The calculation of depreciation requires three amounts for each asset:  Acquisition cost.  Estimated useful life.  Estimated residual value. The calculation of depreciation requires three amounts for each asset:  Acquisition cost.  Estimated useful life.  Estimated residual value.
  • Slide 17McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles BOOK VALUE = COST - ACCUMULATED DEPRECIATIONBOOK VALUE = COST - ACCUMULATED DEPRECIATION BOOK VALUE = COST - ACCUMULATED DEPRECIATION
  • Slide 18McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Alternative depreciation methods: Straight-line  Units-of-production  Accelerated Method: Declining balance Alternative depreciation methods: Straight-line  Units-of-production  Accelerated Method: Declining balance
  • Slide 19McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Cost - Residual Value Years of Useful Life Depreciation Expense per Year =
  • Slide 20McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles EXAMPLE: On January 1, 2008 Medical Center Western Batangas,On January 1, 2008 Medical Center Western Batangas, purchase a new 4-D Ultrasound machine. The companypurchase a new 4-D Ultrasound machine. The company pays a total of $52,000 for the equipment with an estimatedpays a total of $52,000 for the equipment with an estimated residual value of $3,000 and estimated useful life of 5 years.residual value of $3,000 and estimated useful life of 5 years. Compute for depreciation for 2005 using the straight-lineCompute for depreciation for 2005 using the straight-line method.method. EXAMPLE: On January 1, 2008 Medical Center Western Batangas,On January 1, 2008 Medical Center Western Batangas, purchase a new 4-D Ultrasound machine. The companypurchase a new 4-D Ultrasound machine. The company pays a total of $52,000 for the equipment with an estimatedpays a total of $52,000 for the equipment with an estimated residual value of $3,000 and estimated useful life of 5 years.residual value of $3,000 and estimated useful life of 5 years. Compute for depreciation for 2005 using the straight-lineCompute for depreciation for 2005 using the straight-line method.method. ..
  • Slide 21McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles
  • Slide 22McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Medical Center Western Batangas will record $9,800 depreciation each year for fiveMedical Center Western Batangas will record $9,800 depreciation each year for five years. Total depreciation over the estimated useful life of the equipment is:years. Total depreciation over the estimated useful life of the equipment is: Medical Center Western Batangas will record $9,800 depreciation each year for fiveMedical Center Western Batangas will record $9,800 depreciation each year for five years. Total depreciation over the estimated useful life of the equipment is:years. Total depreciation over the estimated useful life of the equipment is: Salvage ValueSalvage Value
  • Slide 23McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles EXAMPLE: Machinery, at cost P600,000 Residual value none Estimated Life: Years 5 Service hours 60,000 hours Output 150,000 units EXAMPLE: Machinery, at cost P600,000 Residual value none Estimated Life: Years 5 Service hours 60,000 hours Output 150,000 units Actual Operations Service Hours Output First Year 14,000 34,000 Second Year 13,000 32,000 Third Year 10,000 25,000 Fourth Year 11,000 29,000 Fifth Year 12,000 30,000 60,000 150,000
  • Slide 24McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Depreciation rate Depreciable Amount per unit = Estimated life in terms of units of output Depreciation rate Depreciable Amount per unit = Estimated life in terms of units of output Depreciation rate P 600,000 per unit = 150,000 units = P 4 Depreciation rate P 600,000 per unit = 150,000 units = P 4
  • Slide 25McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles
  • Slide 26McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Depreciation in the early years of an asset’s estimated useful life is higher than in later years. Depreciation in the early years of an asset’s estimated useful life is higher than in later years. The double-declining balance depreciation rate is 200% of the straight-line depreciation rate of (1÷Useful Life). The double-declining balance depreciation rate is 200% of the straight-line depreciation rate of (1÷Useful Life).
  • Slide 27McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles On January 1, 2007, Medical Center Western Batangas buys a newOn January 1, 2007, Medical Center Western Batangas buys a new ambulance. The hospital pays $24,000 for the vehicle. The ambulance has anambulance. The hospital pays $24,000 for the vehicle. The ambulance has an estimated residual value of $3,000 and an estimated useful life of 5 years.estimated residual value of $3,000 and an estimated useful life of 5 years. On January 1, 2007, Medical Center Western Batangas buys a newOn January 1, 2007, Medical Center Western Batangas buys a new ambulance. The hospital pays $24,000 for the vehicle. The ambulance has anambulance. The hospital pays $24,000 for the vehicle. The ambulance has an estimated residual value of $3,000 and an estimated useful life of 5 years.estimated residual value of $3,000 and an estimated useful life of 5 years. Using Declining-Balance method, we’ll have:
  • Slide 28McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or the declining-balance method. Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or the declining-balance method.
  • Slide 29McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Impairment is the loss of a significant portion of the utility of an asset through . . . • Casualty. • Obsolescence. • Lack of demand for the asset’s services. Recognize a loss when an asset suffers a permanent impairment
  • Slide 30McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Disposal of Property, Plant and Equipment Voluntary disposals: • Sale • Trade-in • Retirement Involuntary disposals: • Fire • Accident Disposal of Property, Plant and Equipment Voluntary disposals: • Sale • Trade-in • Retirement Involuntary disposals: • Fire • Accident
  • Slide 31McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Update depreciation to the date of disposal. Update depreciation to the date of disposal. Recording cash received (debit). Recording cash received (debit). 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). Journalize disposal by:Journalize disposal by:
  • Slide 32McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles If Cash > Book Value, record a gain (credit). If Cash < Book Value, record a loss (debit). If Cash = Book Value, no gain or loss. If Cash > Book Value, record a gain (credit). If Cash < Book Value, record a loss (debit). If Cash = Book Value, no gain or loss. Recording cash received (debit). Recording cash received (debit). Removing accumulated depreciation (debit). Removing accumulated depreciation (debit). Recording a gain (credit) or loss (debit). Recording a gain (credit) or loss (debit). Removing the asset cost (credit). Removing the asset cost (credit).
  • Slide 33McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Extracted from the natural environment and reported at cost less accumulated depletion. Extracted from the natural environment and reported at cost less accumulated depletion. Total cost, including exploration and development, is charged to depletion expense over periods benefited. Total cost, including exploration and development, is charged to depletion expense over periods benefited.
  • Slide 34McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Unit depletion rate is calculated as follows: Total Units of Natural Resource Cost – Residual Value Unit Depletion Rate Extracted in Period× Number of Units Total depletion cost for a period is:
  • Slide 35McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Noncurrent assets without physical substance..  Useful life is often difficult to determine.. Often provide exclusive rights or privileges. Usually acquired for Operational use.. Noncurrent assets without physical substance..  Useful life is often difficult to determine.. Often provide exclusive rights or privileges. Usually acquired for Operational use..  Goodwill  Trademarks  Copyrights  Patents  Technology  Franchises  Licenses and Operating Rights  Goodwill  Trademarks  Copyrights  Patents  Technology  Franchises  Licenses and Operating Rights Intangible Assets Recorded at current cash equivalent cost, including purchase price, legal fees, and filing fees. Recorded at current cash equivalent cost, including purchase price, legal fees, and filing fees.
  • Slide 36McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles • AmortizAtion is the systemAtic write-off to expense of the cost of intAngible Assets over their useful life or legAl life, whichever is shorter. • the strAight-line method is used to Amortize most intAngible Assets. • AmortizAtion is the systemAtic write-off to expense of the cost of intAngible Assets over their useful life or legAl life, whichever is shorter. • the strAight-line method is used to Amortize most intAngible Assets. Date Description Debit Credit Amortization Expense $$$$$ Intangible Asset $$$$$
  • Slide 37McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Goodwill is NOT amortized. It is tested annually to determine if there has been an impairment loss. Goodwill is NOT amortized. It is tested annually to determine if there has been an impairment loss. Occurs when one company buys another company. Only purchased goodwill is an intangible asset. The amount by which the purchase price exceeds the fair market value of net assets acquired.
  • Slide 38McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles A symbol, design, or logo associated with a business.A symbol, design, or logo associated with a business. Internally developed trademarks have no recorded asset cost. Internally developed trademarks have no recorded asset cost. Purchased trademarks are recorded at cost, and amortized over shorter of legal or economic life. Purchased trademarks are recorded at cost, and amortized over shorter of legal or economic life. An exclusive legal right to use a name, image or slogan.An exclusive legal right to use a name, image or slogan.
  • Slide 39McGraw-Hill/Irwin
  • Slide 40McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles  Exclusive right granted by the federal government to protect artistic or intellectual properties.  Grants the holder the exclusive right to publish and sell musical, literary, or artistic work  Legal life is life of creator plus 70 years.  Most are amortized over a short period of time using the straight-line method.  Exclusive right granted by the federal government to protect artistic or intellectual properties.  Grants the holder the exclusive right to publish and sell musical, literary, or artistic work  Legal life is life of creator plus 70 years.  Most are amortized over a short period of time using the straight-line method.
  • Slide 41McGraw-Hill/Irwin copyright © 2002 John Doe
  • Slide 42McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles  Exclusive right granted by the federal government to sell or manufacture an invention.  Cost is purchase price plus legal cost to defend.  Amortize cost over the shorter of useful life or 20 years.  Research and development costs that might result in a patent are normally expensed as incurred.  Exclusive right granted by the federal government to sell or manufacture an invention.  Cost is purchase price plus legal cost to defend.  Amortize cost over the shorter of useful life or 20 years.  Research and development costs that might result in a patent are normally expensed as incurred.
  • Slide 43McGraw-Hill/Irwin
  • Slide 44McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles A category of intangible assets that includes a company’s website and any computer programs written by its employees. A category of intangible assets that includes a company’s website and any computer programs written by its employees.
  • Slide 45McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles • Legally protected right purchased by a franchisee from franchisor to sell products or provide services for a specified period and purpose. • Purchase price is intangible asset which is amortized over the shorter of the protected right or useful life. • Legally protected right purchased by a franchisee from franchisor to sell products or provide services for a specified period and purpose. • Purchase price is intangible asset which is amortized over the shorter of the protected right or useful life.
  • Slide 46McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles • Limited permissions to use a product or service according to specific terms and conditions. • You may be using computer software that is made available to you through a campus licensing agreement. • Limited permissions to use a product or service according to specific terms and conditions. • You may be using computer software that is made available to you through a campus licensing agreement.
  • Slide 47McGraw-Hill/Irwin Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting Property, Plant, and Equipment;Reporting and Interpreting Property, Plant, and Equipment; Natural Resources and IntangiblesNatural Resources and Intangibles Operating Activity (Indirect method) Effect on Cash Flows Depreciation and amortization + Gain on sale -Loss on sale + Loss due to impairment + Investing Activities Purchases of long-lived assets -Sales of long-lived assets +