05. ACCOUNTING.ppt

05. ACCOUNTING
LONG-LIVED NON-MONETARY ASSET
Prof. Dr.Wiwiek M.Daryanto, SE-Ak, MM,CMA

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Educational Background
Accountant (1981), cum-laude, UGM
Registered Indonesian Accountant:D.2794
Master of Management (1988), College of
Economics and Management, University of the
Philippines
Doctor of Philosophy (2004), IPB
Certified Management Accountant (2000),
Australia
HP: 0811-89-42-73 Phone: 021-8616982
Email:wiwiek.daryanto@ipmi.ac.id

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Ch7.Long-Lived Non-monetary
Assets and Their Amortization
Dr. Wiwiek M.Daryanto, SE-Ak, MM, CMA
HP 0811-89-4273

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Long-Lived Non-monetary
Long-Lived Assets, assets that provide service
for several future years.
If the benefits are obtained in the current
period, the costs of the goods or services are
expenses.
If the benefits are expected in future periods,
the costs are assets in the current period and the
expenditures are said to be capitalized.

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The cost of the goods or services
should be matched with the
revenues that are obtained from the
periods.
The general name for the
matching process is amortization.

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Cash or
payable
X X
Benefits
beyond this
Period?
Capitalize
Expense
X X
X X
Assets Accounts
Retained Earnings
Y Y
Z Z
Y Y
Z Z
Amortization
Entries
Made
in
future
periods
As
benefits
are
received
Expenditure
(cost incurred)

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Type of Asset Method of Converting
to Expense
Tangible Assets
•Land
•Plant and equipment
•Natural resources
•Not amortized
•Depreciation
•Depletion

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Types of Long-Lived Assets
and Amortization Methods
Type of Asset Method of Converting
to Expense
Intangible Assets
•Goodwill
•Intangible Assets (other than
goodwill)-limited life
•Intangible Assets (other than
goodwill)-indefinite life
•Leasehold improvements
•Deferred charges
•Research and development costs
•Not amortized
•Amortization
•Not amortized
•Amortization
•Amortization
•Not capitalized

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CAPEX or OPEX ?
1. Low cost Items : CAPEX or OPEX
2. Repair and Maintenance : OPEX
3. Betterment/Improvement: CAPEX
4. Replacement : CAPEX or OPEX

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Capital Expenditure Criteria
1. Benefit >or< 1 Year
2. Materiality
3. Judgment

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• A tangible asset is an asset that has physical
substance, such as a building or a machine.
• An intangible asset, such as patent rights or
copyrights, has no physical substance. Many
such assets are referred to as intellectual
property.
• Long-tangible assets are listed on the B/S
under the heading “property, plant, and
equipment” or “fixed assets”.

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• The accounting process of converting
the original cost of fixed assets to
expense is called depreciation.
• Natural resources, such as petroleum
and natural gas in the ground are
usually reported as a separate category
(but not after they have been taken out
of the ground and become inventory).
• The accounting process of converting
the cost of the natural resource assets
to expense is called depletion.

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Plant and Equipment:
Acquisition
• Low-Cost Items, items that have a low
unit cost, such as calculators and hand
tools, are charged immediately as
expenses, even though they may have
a long life. Each company sets its own
criteria for items that are to be
capitalized.

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Acquisition
• Repair and maintenance is work done to keep
an asset in good operating condition or to
bring it back to good operating condition if it
has broken down.
• Repair and maintenance costs are ordinarily
period costs; they are not added to the
capitalized cost of the asset.
• A betterment is added to the cost of the
asset.

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Acquisition
• The distinction between maintenance
expenses and betterments is this:
Maintenance keeps the asset in good
condition but in no better condition than
when it was purchased; a betterment
makes the asset better than it was
purchased or extend its useful life beyond
the original estimate of useful life.
• In practice the line between the two is
difficult to draw.

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Acquisition
• Replacement: may be either assets or
expenses, depending on how the asset
unit is defined.
• The replacement of an entire asset
results in the writing off of the old asset
and the recording of the new asset.
• The replacement of a component part
of an asset is maintenance expense.

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Items Included in Cost
• The governing principle is that the cost of
an item of property, plant, or equipment
includes all expenditures that are
necessary to make the asset ready for its
intended use.
• Despite the principle, many organizations
do not capitalize all the costs incurred to
make the asset ready to provide service.
• Some capitalize only the purchase price,
because it is simpler and to minimize
property taxes.

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Items Included in Cost
• Self-Constructed Assets
• The amount of capitalized cost includes
all the costs incurred in construction.

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PLANT AND EQUIPMENT:
DEPRECIATION
Why is depreciation an expense? The answer
is that the costs of all goods and services
consumed by an entity during an accounting
period are expenses.
The costs of insurance protection provided in
a year is an expense of that year even
though the insurance premium was paid two
or three years previously.

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DEPRECIATION
Depreciation expenses is conceptually
just like insurance expenses.
The principle difference is that the
fraction of total cost of an item of plant
and equipment that is expense in a
given year is difficult to estimate,
whereas the fraction of the total cost of
an insurance policy that is an expense
in a given year can be easily calculated.

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DEPRECIATION
The useful life of a tangible long-
lived asset is limited by either
deterioration or obsolescence.
Deterioration is physical process of
wearing out.
Dep/yr=(Acq.Cost-Est of Res V)/
Est. of Economic Life

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DEPRECIATION
Obsolescence refers to loss of usefulness
because of the development of improved
equipment of processes, changes in style, or
other causes not related to the physical
condition of the asset.
We will refer to the time until an asset wears
out of its physical life, and the time until it
becomes obsolete or is expected to be
disposed of as its service life.

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DEPRECIATION
Although the word depreciation is some
times used as referring only to physical
deterioration (“wear and tear”), this usage is
incorrect.
In many cases a piece of equipment’s
service life is shorter than its physical life;
computers are a good example.

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Judgments Required
1. The service life of the asset-the number of
accounting periods over which the asset
will be useful to the specific entity that
owns it.
2. The asset’s residual value at the end of its
service life-any amount eventually
recovered through sale, trade in, or
salvage.

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Judgments Required
It is this net cost that should be charged as
an expense over the asset’s life, not is
original cost.
In a great many situations, however, the
estimated residual value is so small or
uncertain that it is disregarded.

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Judgments Required
3. The method of depreciation- the method
that will be used to allocate a fraction of
the asset’s net cost to each of the
accounting periods in which it is expected
to be used.
Straight line depreciation
Exp> EBT<  Tax <

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Judgments Required
Accountants, not being clairvoyant, can not
know in advance how long the asset will be
used or what its residual value will be.
Often they have no scientific or strictly
logical way of deciding the best
depreciation method.

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Judgments Required
The amount of depreciation expense
that results from these judgments is
therefore an estimate-yet another
estimate that effects the amount of
each period’s reported income.
Because of the arithmetic precision of
the calculations that take place after
these judgments are made, the inexact
nature of depreciation expense is
sometimes overlooked.

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Service Life
The service life of an asset is the period
of time over which is expect to provide
service (i.e. benefits) to the entity that
controls it.
The service life may be shorter than the
physical life because of obsolescence or
because the entity may plan to dispose
of an asset before its physical life ends.

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Depreciation Methods
Consider a piece of equipment
purchased for $1,000 with an estimated
service life of 10 years and estimated
residual value of zero.
The objective of depreciation accounting
is to charge this net cost of $1,000 as an
expense over the 10 years period.

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Depreciation Method
How much should be charged as an
expense each year?.

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Straight-line Method. One concept views a
fixed asset as providing its services in a
level stream.
That is, the service provided (benefit
received) is equal in each year of the
asset’s life, just a three-years insurance
policy provides equal insurance protection
in each of its three years.

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This concept leads to the straight-line
method, which charges as an expense
an equal fraction of the net cost of the
asset each year.

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Depreciation Method
For a piece of equipment whose
net cost is $1,000 with an
estimated service life of 10 years,
1/10 of $ 1,000 (=$100) is the
depreciation expense of the first
year, another 1/10 is the
depreciation expense of the second
year, and so on.

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Expressed another way, the
equipment is said to have a
depreciation rate of 10 percent per
year, the rate being the reciprocal of
the estimated service life.

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Accelerated Methods. A second
concept recognizes that the stream of
benefits provided by a fixed asset may
not be level.
Rather, the benefits provided may be
greatest in the first year of the asset’s
service life and least in the last year.

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This pattern may occur because the asset’s
mechanical efficiency tends to decline with
age, because maintenance costs tend to
increase with age, or because of the
increasing likelihood that better equipment
will become available and make it obsolete.
Often, when a facility is mot working at
capacity, it is the older equipment that is
not used.

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It is argued, therefore, that when an asset
was purchased, the probability that the
earlier periods would benefit more than the
later periods was taken into account and
that the depreciation method should reflect
this.

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Such a line a of reasoning leads to
an accelerated method that charges
a larger fraction of the costs an
expense of the early years than of
the later years.

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Two methods, the double-declining-balance
method and sum-of-the years’ digits (or
simply years’ digit) method are described
below.
The effect of either of these methods is to
write off approximately two-thirds or the
asset’s cost in the first half of its estimated
life, as contrasted with the straight-line
methods under which, of course, half the cost
is written off in each half of the asset’s
estimated life.

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Depreciation Method
Thus, if an accelerated method is
used, depreciation expense is
greater in the early years and less
in the later years as compared with
the straight-line method.

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In a declining-balance method each year’s
depreciation is found by applying a rate to
the net book value of the asset as of the
beginning of that year.
(In straight-line method the depreciation
rate is applied to original cost net of
residual value, not to each year’s net book
value).

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The net book value of an asset at a
point in time is the original acquisition
cost less total depreciation
accumulated up to that time.
With a declining-balance method, the
asset’s estimated residual value, if
any, has no effect on the annual
depreciation charges because residual
value is not included in the calculation
of an asset’s net book value.

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The declining-balance rate is
stated percentage of the
straight-line rate.
Thus, for an asset with a useful
life of 10 years (straight-line
rate =10 percent), 200 percent
declining balance would use a
rate of 20 percent (200 percent
* 10 percent).

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Similarly, 150 percent declining balance
would use rate of 15 percent.
The 200 percent declining balance method
is also called the double-declining-
balance method because the
depreciation rate is double the straight-line
rate.

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After several years the annual depreciation
charge with a declining-balance method
will be lower than the annual charge with
the straight-line method.
The usual practice is to change at that time
from declining-balance to straight-line
depreciation for the remainder of the
asset’s life.

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In the year’s-Digits methods, the numbers
1,2,3,…., n are added, where n is the
estimated years of useful life.
This sum can be found by the equation
(using 10 years for the example:
SYD = n (n+1 / 2) = 10 (10+1 / 2) = 55

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The depreciation rate each year is a
fraction in which the denominator is the
sum of these digits and the numerator is,
for the first year, n; for the second year, n
– 1; for the third year, n – 2; and so on.
Thus, for a 10 years asset, the rate 10/55
the first year, 9/10 the second year, 8/10
the third year, and so on.

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As with the straight-line method, the
rate is applied to the net cost-cost less
residual value-of the asset.

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Units-of-Production Method
A third concept of depreciation also treats
the assets as consisting of a bundle of
service units; but it does not assume that
these service units will be provided in a
mathematical time-phased pattern, as is
assumed by the straight line an
accelerated methods.
Rather, with this concept a period’s
depreciation is related to the number of
service units provided by the asset during
the period.

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Depreciation Method
For a piece of equipment whose
net cost is $1,000 with an
estimated service life of 10 years,
1/10 of $ 1,000 (=$100) is the
depreciation expense of the first
year, another 1/10 is the
depreciation expense of the second
year, and so on.

RATE= n(n+1)/2=55
10 (10+1)/2=55 n=economic life
Dep 1= 10/55 x ($1,000-$0)=$181
Dep 2= 9/55 x ($1,000-$0)= $
Dep 3=8/55 x ($1,000-$0) = $
Etc.
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BLUE BIRD VS. PRESIDENT T
BB=4YRS. PT = 10 YRS
RP 11O M=ACQ. COSTS
ERV = RP 50 M. ERV = RP 10 M
DEP/YR=15M. DEP/YR=RP 10M.
DEPRECIATIONTAX DEDUCTIBLE EXP
NI >
CUSTOMER IMAGE>
OTHER INCOME 70M – 50M=20M
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Comparison of Depreciation Methods
Straight-line
(10 percent rate)
Double-Declining-Balance
(20 percent rate ) Years’- Digits
Year
Annual
Depreciation
Net book
Value, 12/31
Annual
Depreciation
Net Book
Value, 12/31 Rate
Annual
Depreciation
Net Book
Value, 12/31
0 $ 1,000 $ 1,000.00 $ 1,000.00
1 $ 100 900 $ 200,00 800.00 10/ 55 $ 181.82 818.00
2 $ 100 800 160,00 640.00 9/ 55 163.64 654.54
3 $ 100 700 128,00 512.00 8/ 55 145.45 509.09
4 $ 100 600 102,40 409.60 7/ 55 127.27 381.82
5 $ 100 500 81,92 327.68 6/ 55 109.09 272.73
6 $ 100 400 65,54 262.14 5/ 55 90.91 181.82
7 $ 100 300 65,54 196.60 4/ 55 72.73 109.09
8 $ 100 200 65,54 131.06 3/ 55 54.55 54.54
9 $ 100 100 65,54 65.52 2/ 55 36.36 18.18
10 $ 100 0 65,54 0 1/ 55 18.18 0
$ 1,000 65,52 $ 1000.00
$ 1,000,00

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55
0
200
180
160
140
120
100
80
60
40
20
1 2 3 4 5 6 7 8 9 10
Years’-Digits
Straight-line
Double-Declining-Balance
Annual
Depreciation
(
Dollars)
ANNUAL DEPRECIATION CHARGES
For equipment with Net Cost of $ 1,000 and 10 – Year Service life

After the controller of Stern Corporation had
ascertained the changes in accounts receivable
and the allowance for doubtful accounts in 2010,
a similar analysis was made of property, plant,
and equipment and accumulated depreciation
accounts. Again the controller examined the
December 31, 2009, balance sheet [see Exhibit 1
of Stern Corporation (A), Case 5–1]. Also
reviewed were the following company
transactions that were found to be applicable to
these accounts:
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Case 7-1 Stern Corp (B)

EXHIBIT 1.
Assets
Current assets:
Cash and temporary investments $ 98.1
Accounts receivable (less allowances) 536.8
Inventories 403.1
Prepaid expenses 207.1
Total current assets 1,245.1
All other assets 2,992.0
Total Assets $4,237.1
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Balance Sheet
As of December 31, 2010 (millions)

EXHIBIT 1.
Liabilities and Shareholders’ Equity
Current liabilities $1,214.6
All other liabilities and
stockholders’ equity 3,022.5
Total liabilities and
stockholders’ equity $4,237.1
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Balance Sheet
As of December 31, 2010 (millions)

• On January 2, 2010, one of the factory machines
was sold for its book value, $3,866. This machine
was recorded on the books at $31,233 with
accumulated depreciation of $27,367.
• Tools were carried on the books at cost, and at the
end of each year a physical inventory was taken to
determine what tools still remained. The account
was written down to the extent of the decrease in
tools as ascertained by the year-end inventory. At
the end of 2010, it was determined that there had
been a decrease in the tool inventory amounting to
$7,850.
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• On March 1, 2010, the company sold for $2,336
cash an automobile that was recorded on the
books at a cost of $8,354 and had an accumulated
depreciation of $5,180, giving a net book value of
$3,174 as of January 1, 2010. In this and other
cases of the sale of long-lived assets during the
year, the accumulated depreciation and
depreciation expense items were both increased by
an amount that reflected the depreciation
chargeable for the months in 2010 in which the
asset was held prior to the sale at rates listed in
item 7 below.
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• The patent listed on the balance sheet had been
purchased by the Stern Corporation. The cost of
the patent was written off as an expense over the
remainder of its legal life as of December 31,
2009, the patent’s remaining legal life was five
years.
• On July 1, 2010, a typewriter that had cost $1,027
and had been fully depreciated on December 31,
2009, was sold for $75.
61

• On October 1, 2010, the company sold a desk for
$80. This piece of furniture was recorded on the
books at a cost of $490 with an accumulated
depreciation of $395 as of January 1, 2010.
• Depreciation was calculated at the following rates:
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Buildings 2%
Factory machinery 10*
Furniture and fixtures 10
Automotive equipment 20
Office machines 10
1.* Included in the factory machinery cost of $3,425,585 was a
machine costing $85,000 that had been fully depreciated on
December 31, 2009, and that was still in use.

1. In a manner similar to that used in Stern
Corporation (A), analyze the effect of each of
these transactions on the property, plant, and
equipment accounts, accumulated depreciation,
and any other accounts that may be involved.
Prepare journal entries for these transactions.
2. Give the correct totals for property, plant, and
equipment, and the amount of accumulated
depreciation as of December 31, 2010, after the
transactions affecting them had been recorded.
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Questions

BOOK VALUE = ACQUISITION COSTS –
ACCUMULATED DEPRECIATION AT THE
DATE
64

L--------------------------------------l
1/1/2010. 1/3 31/12/10
Exhibit 1. ???
DEP EXP>-EBTAX<  TAX <
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BUY FIXED ASSET/PPE
DEBIT: ACQUISITION COSTS @ COSTS
CREDIT : CASH / PAYABLE
DONATED CAPITAL
EVERY PERIOD 31/12/…..:
DEBIT: DEPRECIATION EXPENSES
CREDIT : ACCUMULATED DEPRECIATION
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SELL / TERMINATE
D : CASH @ MARKET PRICE
ACCUMULATED DEPRECIATION
LOSS (IF)
CREDIT:
FIXED ASSET@ACQUISITION
COSTS
GAIN (IF)
67

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CHAPTER 7-CASE 7-1 page 196 STERN CO(B)
1. JANUARY 2010
---------------------------l----------------------
CASH $ 3,866 mkt price
ACC DEP OF F Mach$ 27,367
FACTORY MACHINE $31,233
(TO RECORD THE SALE OF FM). MP=BV
2. 31-12-2010
TOOLS USED $7,850
TOOLS $ 7,850
(............................)

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3. AUTOMOTIVE EQUIPMENT
MARCH 1, 2010
DEPRECIATION OF A E $278.50
ACC, DEP OF A E $278.50
(............) NOTE:2/12 X(8,354X20%)=$278.50
MARKET PRICE $ 2,336
BV=8354-(278.50+5180)=8354-5458.50=2895.5
LOSS ON SALE $559.50

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3. A E
MARCH 1, 2010
MARKET PRICE $ 2336
BV=8354-(278.50+5180)=8354-5458.50=2895.5
LOSS ON SALE $559.50
CASH $ 2,336
ACC DEP OF A E $ 5,458.50
LOSSES ON SALE $559.50
A E $8,354
(TO RECORD THE SALE OF A E)

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4. 31-12-2010
AMORTIZATION OF PATENT $ 11,250
PATENT $11,250
(TO RECORD AMORTIZATION OF PATENT)
5. JULY 1, 2010
CASH $ 75
ACC DEP OF O M $ 1,027
OFFICE MACHINE $ 1,027
GAIN ON SALE $ 75
(TO RECORD THE SALE OF OM)

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6. F F
OCT 1, 2010
DEP OF F F $36.75
ACC DEP OF FF $36.75
(TO RECORD DEP OF FF FOR 9 MONTHS)
NOTES:
9/12 X ($490 X 10%)= $36.75

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MARKET PRICE $ 80
BV=490-(395+36.75)=490-431.75=58.25
GAIN ON SALE $21.75
1/10/2010:
CASH $ 80
ACC DEP OF F F $ 431.75
F F $490
GAIN ON SALE $21.75
(TO RECORD THE SALE OF F F)

05. ACCOUNTING.ppt

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