Cost Accounting Chapter 9

2,893 views

Published on

Published in: Education, Business, Technology
0 Comments
2 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
2,893
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
178
Comments
0
Likes
2
Embeds 0
No embeds

No notes for slide
  • 2
  • 4
  • Cost Accounting Chapter 9

    1. 1. Slide9-1 Chapter PLANT AND INTANGIBLE 9 ASSETS McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    2. 2. Slide9-2 Plant Assets Long-lived assets acquired for use in business operations. Similar to long-term prepaid expenses As years pass, and the The cost of plant assets services are used, the is the advance purchase cost is transferred to of services. depreciation expense. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    3. 3. Slide9-3 Major Categories of Plant Assets T a n g ib le P la n t In ta n g ib le N a tu ra l A s s e ts A s s e ts R e s o u rc e s L o n g -te rm N o n c u rre n t a s s e ts S it e s a c q u ir e d fo r a s s e t s h a v in g w it h n o p h y s ic a l e x t r a c t in g v a lu a b le p h y s ic a l s u b s t a n c e . s u b s ta n c e . re s o u rc e s . L a n d , b u ild in g s , P a t e n t s , c o p y r ig h t s , O il r e s e r v e s , e q u ip m e n t , tra d e m a rk s , t im b e r , o t h e r fu r n it u r e , fix t u r e s . fr a n c h is e s , g o o d w ill. m in e r a ls . McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    4. 4. Slide9-4 Accountable Events –Acquisition. —Allocation of the acquisition cost to expense over the asset’s useful life (depreciation). ˜Sale or disposal. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    5. 5. Slide9-5 Acquisition of Plant Assets Asset price Cost + Reasonable and necessary costs . . . . . . for getting . . . for getting the asset to the the asset ready desired location. for use. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    6. 6. Slide9-6 Determining Cost On May 4, Heat Co., an Ohio maker of stoves, buys a new machine from a Texas company. The new machine has a price of $52,000. Sales tax was computed at 8%. Heat Co. pays $500 shipping cost to get the machine to Ohio. After the machine arrives, set-up costs of $1,300 are incurred, along with $4,000 in testing costs. Compute the cost of Heat Co.’s new machine. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    7. 7. Slide9-7 Determining Cost Prepare the journal entry. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    8. 8. Slide9-8 Special Considerations Cost includes real estate commissions, escrow Land fees, legal fees, clearing and grading the property. Improvements to land Land such as driveways, Improvements fences, and landscaping are recorded separately. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    9. 9. Slide9-9 Special Considerations Repairs made prior to the building being put in use Buildings are considered part of the building’s cost. Related interest, insurance, and property Equipment taxes are treated as expenses of the current period. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    10. 10. Slide9-10 Special Considerations Allocation of a Lump-Sum Purchase The total cost The allocation must be is based on allocated to the relative I think I’ll buy the separate Fair Market whole thing; barn, accounts for Value of each land, and animals. each asset. asset purchased. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    11. 11. Slide9-11 Capital Expenditures and Revenue Expenditures Capital Revenue Expenditure Expenditure Any material expenditure Expenditure for that will benefit several ordinary repairs accounting periods. and maintenance. To capitalize an expenditure To expense an expenditure means to charge it to an means to charge it to an asset account. expense account. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    12. 12. Slide9-12 Depreciation The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset. Balance Sheet Cost of Assets: plant Plant and assets equipment as the services Income Statement are received Revenues: Expenses: Depreciation McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    13. 13. Slide9-13 Depreciation Book Value  Cost – Accumulated Depreciation Accumulated Depreciation  Contra-asset  Represents the portion of an asset’s cost that has already been allocated to expense. Causes of Depreciation  Physical deterioration  Obsolescence McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    14. 14. Slide9-14 Straight-Line Depreciation Depreciation Cost - Residual Value = Expense per Year Years of Useful Life McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    15. 15. Slide9-15 Straight-Line Depreciation On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the straight-line method. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    16. 16. Slide9-16 Straight-Line Depreciation Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful life of the boat is: Salvage Value McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    17. 17. Slide9-17 Depreciation for Fractional Periods When an asset is acquired during the year, depreciation in the year of acquisition must be prorated. Half-Year Convention ½ In the year of acquisition, record six months of depreciation. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    18. 18. Slide9-18 Half-Year Convention Using the half-year convention, calculate the straight-line depreciation on December 31, 2001, for equipment purchased in 2003. The equipment cost $75,000, has a useful life of 10 years and an estimated salvage value of $5,000. Depreciation = ($75,000 - $5,000) ÷ 10 = $7,000 for a full year 1 Depreciation = $7,000 × /2 = $3,500 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    19. 19. Slide9-19 Declining-Balance Method 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. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    20. 20. Slide9-20 Declining-Balance Method On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the double-declining balance method. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    21. 21. Slide9-21 Declining-Balance Method Compute depreciation for the restlife of an Total depreciation over the estimated useful of the asset is the same using either the straight-line method or boat’s estimated useful life. the declining-balance method. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    22. 22. Slide9-22 Financial Statement Disclosures Estimates of Useful Life and Residual Value  May differ from company to company.  The reasonableness of management’s estimates is evaluated by external auditors. Principle of Consistency  Companies should avoid switching depreciation methods from period to period. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    23. 23. Slide9-23 Revising Depreciation Rates Predicted Predicted salvage value useful life So depreciation is an estimate. Over the life of an asset, new information may come to light that indicates the original estimates need to be revised. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    24. 24. Slide9-24 Revising Depreciation Rates On January 1, 2003, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2006, the useful life was revised to 8 years total (5 years remaining). Calculate depreciation expense for the year ended December 31, 2006, using the straight-line method. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    25. 25. Slide9-25 Revising Depreciation Rates When our estimates change, depreciation is: Book value at Salvage value at date of change – date of change Remaining useful life at date of change Asset cost $ 30,000 Accumulated depreciation, 12/31/2005 ($3,000 per year × 3 years) 9,000 Remaining book value $ 21,000 Divide by remaining life ÷5 Revised annual depreciation $ 4,200 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    26. 26. Slide9-26 Impairment of Assets If the cost of an asset cannot be recovered through future use or sale, the asset should be written down to its net realizable value. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    27. 27. Slide9-27 Disposal of Plant and Equipment Update depreciation to the date of disposal. Journalize disposal by: Recording cash Recording a received (debit) gain (credit) or paid (credit). or loss (debit). Removing accumulated Removing the depreciation (debit). asset cost (credit). McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    28. 28. Slide9-28 Disposal of Plant and Equipment If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. Recording cash Recording a received (debit) gain (credit) or paid (credit). or loss (debit). Removing accumulated Removing the depreciation (debit). asset cost (credit). McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    29. 29. Slide9-29 Disposal of Plant and Equipment On September 30, 2003, Evans Map Company sells a machine that originally cost $100,000 for $60,000 cash. The machine was placed in service on January 1, 1998. It has been depreciated using the straight-line method with an estimated salvage value of $20,000 and an estimated useful life of 10 years. Let’s answer the following questions. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    30. 30. Slide9-30 Disposal of Plant and Equipment The amount of depreciation recorded on September 30, 2003, to bring depreciation up to date is: a. $8,000. Annual Depreciation: ($100,000 - $20,000) ÷ 10 Yrs. = $8,000 b. $6,000. c. $4,000. Depreciation to Sept. 30: d. $2,000. 9/12 × $8,000 = $6,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    31. 31. Slide9-31 Disposal of Plant and Equipment After updating the depreciation, the machine’s book value on September 30, 2003, is: a. $54,000. Cost $ 100,000 Accumulated Depreciation: b. $46,000. (5 yrs. × $8,000) + $6,000 = 46,000 c. $40,000. Book Value $ 54,000 d. $60,000. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    32. 32. Slide9-32 Disposal of Plant and Equipment The machine’s sale resulted in: a. a gain of $6,000. b. a gain of $4,000. c. a loss of $6,000. d. a loss of $4,000. Cost $ 100,000 Accum. Depr. 46,000 Book value $ 54,000 Cash received 60,000 Gain $ 6,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    33. 33. Slide9-33 Trading in Used Assets for New Ones Accounting depends on whether assets are similar or dissimilar. Airplane Truck for for Airplane Airplane Only situations where cash is paid will be demonstrated. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    34. 34. Slide9-34 Trading in Used Assets for New Ones Dissimilar Similar Assets Assets and Cash Paid Recognize Yes No Gains? Recognize Yes Yes Losses? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    35. 35. Slide9-35 Trading in Used Assets for New Ones – Similar Assets On May 30, 2003, Essex Company exchanged a used airplane and $35,000 cash for a new airplane. The old airplane originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and a fair value of $4,000. SIMILAR McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    36. 36. Slide9-36 Trading in Used Assets for New Ones – Similar Assets The exchange resulted in a: Cost $ 40,000 a. gain of $6,000. Accum. Depr. 30,000 Book Value $ 10,000 b. loss of $6,000. Fair Value 4,000 c. loss of $4,000. Loss $ 6,000 d. gain of $4,000. Prepare a journal entry to record the exchange. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    37. 37. Slide9-37 Trading in Used Assets for New Ones – Similar Assets Prepare the journal entry to record the trade. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    38. 38. Slide9-38 Intangible Assets Noncurrent assets Often provide without physical exclusive rights substance. or privileges. Characteristics Useful life is Usually acquired often difficult for operational to determine. use. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    39. 39. Slide9-39 Intangible Assets Record at current cash  Patents equivalent cost, including  Copyrights purchase price,  Leaseholds legal fees, and  Leasehold filing fees. Improvements  Goodwill  Trademarks and Trade Names McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    40. 40. Slide9-40 Intangible Assets Amortize over shorter of economic life or legal life, subject to a maximum of 40 years. Use straight-line method. Research and development costs are normally expensed as incurred. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    41. 41. Slide9-41 Intangible Assets – Goodwill Goodwill Occurs when one Only purchased company buys goodwill is an another company. intangible asset. The amount by which the purchase price exceeds the fair market value of net assets acquired. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    42. 42. Slide9-42 Intangible Assets – Goodwill Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised at a fair value of $900,000. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    43. 43. Slide9-43 Intangible Assets – Goodwill Intangible Assets – Goodwill What amount of goodwill should be recorded on Eddy Company books? a. $100,000. b. $200,000. c. $300,000. d. $400,000. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    44. 44. Slide9-44 Intangible Assets – Patents Exclusive right granted by federal government to sell or manufacture an invention. Cost is purchase Amortize cost price plus legal over the shorter of cost to defend. useful life or 17 years. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    45. 45. Slide Intangible Assets –9-45 Trademarks and Trade Names A symbol, design, or logo associated with a business. Purchased Internally trademarks developed are recorded trademarks at cost, and have no amortized over recorded shorter of legal asset cost. or economic life, or 40 years. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    46. 46. Slide9-46 Intangible Assets – Franchises Legally protected right to sell products or provide services purchased by franchisee from franchisor. Purchase price is intangible asset which is amortized over the shorter of the protected right or 40 years. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    47. 47. Slide9-47 Intangible Assets – Copyrights Exclusive right granted by the federal government to protect artistic or intellectual properties. Legal life is Amortize cost life of creator over a period not plus 50 years. to exceed 40 years. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    48. 48. Slide9-48 Natural Resources Total cost, Extracted from including the natural exploration and environment development, and reported is charged to at cost less depletion expense accumulated over periods depletion. benefited. Examples: oil, coal, gold McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    49. 49. Slide9-49 Depletion of Natural Resources Depletion is calculated using the units-of-production method. Unit depletion rate is calculated as follows: Cost – Salvage Value Total Units of Capacity McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    50. 50. Slide9-50 Depletion of Natural Resources Total depletion cost for a period is: Unit Depletion Number of Units Rate × Extracted in Period Cost of Total goods sold Inventory depletion for sale cost Unsold Inventory McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    51. 51. Slide9-51 Depletion of Natural Resources Specialized plant assets may be required to extract the natural resource. These assets are recorded in a separate account and depreciated. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    52. 52. Slide9-52 The Units-of-Output Method Cost per Unit Cost - Residual Value = of Output Estimated Units of Output Depreciation Cost per Unit Number of Expense = × of Output Units Produced McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    53. 53. Slide9-53 MACRS: The “Tax Method” MACRS = Modified Accelerated Cost Recovery System The only accelerated method Based on allowed by the IRS when Declining-Balance computing depreciation for tax Methods return purposes. Asset Cost × MACRS rate Rates are available from tables provided by the IRS. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    54. 54. Slide9-54 Which Depreciation Methods Do Most Businesses Use? A survey of 600 Publicly Owned Corporations Straight-line 563 Declining-balance 44 Sum-of-the-years-digits 11 Accelerated methods (not specified) 70 Units-of-output 53 Other 9 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    55. 55. Slide9-55 End of Chapter 9 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

    ×