This document discusses plant and intangible assets. It defines plant assets as long-lived assets acquired for use in business operations, similar to long-term prepaid expenses where the cost is transferred to expense over the years the assets are used. The major categories of plant assets are tangible assets like land, buildings, equipment and furniture and intangible assets without physical substance like patents and goodwill. The document also discusses the accounting events related to plant assets of acquisition, depreciation, and sale or disposal.
This document discusses plant and intangible assets. It covers the major categories of plant assets including tangible plant assets, intangible assets, and natural resources. It discusses the acquisition, allocation of costs over useful life through depreciation, and sale or disposal of plant assets. It also covers the different methods of depreciation including straight-line and declining balance methods. The document provides examples and questions to illustrate the accounting concepts.
The document discusses inventory valuation methods and the flow of inventory costs. It provides examples of specific identification, average cost, FIFO, and LIFO inventory methods. Under specific identification, the actual cost of the item sold is matched to the sale. Average cost assigns all units the average cost. FIFO assigns the earliest costs to cost of goods sold and most recent to inventory. LIFO assigns most recent costs to cost of goods sold and earliest to inventory. The examples illustrate the journal entries and calculations for each method.
1) Liabilities are debts or obligations arising from past transactions or events that will require payment in the future. They are classified as current if payment is due within one year and noncurrent if payment is due after one year.
2) Common types of liabilities include accounts payable, notes payable, interest payable, payroll liabilities, unearned revenue, long-term debt such as bonds payable and capital leases, and obligations related to pensions, other postretirement benefits, and deferred income taxes.
3) Accounting for liabilities involves recording the initial liability amount, tracking interest accrual over time, and properly allocating payments between interest expense and principal reduction.
This document discusses different methods for depreciating plant and equipment assets over time. It introduces straight-line depreciation, which allocates the cost of an asset evenly over its estimated useful life. It also covers half-year depreciation conventions for assets acquired during the year, and the double-declining balance method, which takes higher depreciation in early years by using twice the straight-line rate. The document provides examples of calculating depreciation expense using these different methods.
The document discusses adjusting entries in accounting. It explains that adjusting entries are needed at the end of an accounting period to update revenue and expense accounts for amounts that relate to multiple periods. There are four main types of adjusting entries: converting assets to expenses, converting liabilities to revenue, accruing unpaid expenses, and accruing uncollected revenue. Examples are provided for each type to illustrate the journal entries needed.
- Plant and intangible assets are long-lived assets acquired for use in business operations, similar to long-term prepaid expenses. The cost is allocated to expense over the asset's useful life through depreciation.
- Major categories of plant assets include tangible assets like land, buildings, equipment, and furniture, as well as intangible assets without physical substance like patents and goodwill.
- Plant asset costs include acquisition costs and costs to prepare the asset for use, such as shipping, installation, and testing. Cost is allocated to the asset through depreciation expense over the asset's useful life.
The document discusses various types of liabilities including current liabilities, noncurrent liabilities, accounts payable, notes payable, bonds payable, and payroll liabilities. It also covers the concepts of present value and how it relates to bond prices. Key liabilities discussed include accounts payable, notes payable which have current and noncurrent portions, interest payable, bonds payable which have principal paid at maturity and periodic interest payments, and payroll liabilities. The document contains examples and questions related to accounting for these various liabilities.
The document discusses the statement of cash flows, which reports a company's cash inflows and outflows during an accounting period. It has three sections - operating, investing, and financing activities. The statement of cash flows helps investors understand a company's ability to generate cash flows, meet obligations, and need for external financing by reporting cash receipts, payments and transactions. It must be prepared using the direct or indirect method, with the direct method showing actual cash amounts for items like cash received from customers and cash paid to suppliers.
This document discusses plant and intangible assets. It covers the major categories of plant assets including tangible plant assets, intangible assets, and natural resources. It discusses the acquisition, allocation of costs over useful life through depreciation, and sale or disposal of plant assets. It also covers the different methods of depreciation including straight-line and declining balance methods. The document provides examples and questions to illustrate the accounting concepts.
The document discusses inventory valuation methods and the flow of inventory costs. It provides examples of specific identification, average cost, FIFO, and LIFO inventory methods. Under specific identification, the actual cost of the item sold is matched to the sale. Average cost assigns all units the average cost. FIFO assigns the earliest costs to cost of goods sold and most recent to inventory. LIFO assigns most recent costs to cost of goods sold and earliest to inventory. The examples illustrate the journal entries and calculations for each method.
1) Liabilities are debts or obligations arising from past transactions or events that will require payment in the future. They are classified as current if payment is due within one year and noncurrent if payment is due after one year.
2) Common types of liabilities include accounts payable, notes payable, interest payable, payroll liabilities, unearned revenue, long-term debt such as bonds payable and capital leases, and obligations related to pensions, other postretirement benefits, and deferred income taxes.
3) Accounting for liabilities involves recording the initial liability amount, tracking interest accrual over time, and properly allocating payments between interest expense and principal reduction.
This document discusses different methods for depreciating plant and equipment assets over time. It introduces straight-line depreciation, which allocates the cost of an asset evenly over its estimated useful life. It also covers half-year depreciation conventions for assets acquired during the year, and the double-declining balance method, which takes higher depreciation in early years by using twice the straight-line rate. The document provides examples of calculating depreciation expense using these different methods.
The document discusses adjusting entries in accounting. It explains that adjusting entries are needed at the end of an accounting period to update revenue and expense accounts for amounts that relate to multiple periods. There are four main types of adjusting entries: converting assets to expenses, converting liabilities to revenue, accruing unpaid expenses, and accruing uncollected revenue. Examples are provided for each type to illustrate the journal entries needed.
- Plant and intangible assets are long-lived assets acquired for use in business operations, similar to long-term prepaid expenses. The cost is allocated to expense over the asset's useful life through depreciation.
- Major categories of plant assets include tangible assets like land, buildings, equipment, and furniture, as well as intangible assets without physical substance like patents and goodwill.
- Plant asset costs include acquisition costs and costs to prepare the asset for use, such as shipping, installation, and testing. Cost is allocated to the asset through depreciation expense over the asset's useful life.
The document discusses various types of liabilities including current liabilities, noncurrent liabilities, accounts payable, notes payable, bonds payable, and payroll liabilities. It also covers the concepts of present value and how it relates to bond prices. Key liabilities discussed include accounts payable, notes payable which have current and noncurrent portions, interest payable, bonds payable which have principal paid at maturity and periodic interest payments, and payroll liabilities. The document contains examples and questions related to accounting for these various liabilities.
The document discusses the statement of cash flows, which reports a company's cash inflows and outflows during an accounting period. It has three sections - operating, investing, and financing activities. The statement of cash flows helps investors understand a company's ability to generate cash flows, meet obligations, and need for external financing by reporting cash receipts, payments and transactions. It must be prepared using the direct or indirect method, with the direct method showing actual cash amounts for items like cash received from customers and cash paid to suppliers.
This document summarizes the inventory management process for Metro's centralized warehouse. It outlines the receiving, booking, data management, stock management, and EDI flow operations. Key aspects include receiving goods, checking delivery notices, inputting data into the inventory system, adjusting inventory levels, transferring stock between stores, and filling documentation. Charts are provided to control late and wrong bookings, short receipts, adjustments, and more. The goal is to optimize the centralized inventory process.
How much is that doggy in the window the cost of holding dead inventoryTom Shay
This session by Tom Shay illustrates the cost of a small business holding onto inventory that is not selling. By selling this inventory, even at cost or below, and putting that money into inventory that is selling will increase the gross sales, profitability, and return on investment.
The document discusses logistics management in the dairy industry. It describes the key aspects of logistics operations including production, packaging, warehousing, transportation, overcoming challenges, and customer service. It provides details on the job responsibilities of logistics management and the processes involved in ensuring efficient transportation and delivery of dairy products from manufacturers to consumers while maintaining quality. Reverse logistics related to product returns is also mentioned.
This document discusses accounting for merchandising companies. It describes the operating cycle of merchandising companies, which involves purchasing inventory, selling inventory on credit, and collecting accounts receivable. The document also discusses the income statement and accounting systems used by merchandising companies, including perpetual and periodic inventory systems. It provides examples of journal entries under each system.
This document provides an overview of accounting and its branches. It defines accounting as a specialized information system that records transactions and provides economic information. The main branches are financial accounting, cost accounting, and management accounting. Financial accounting records money transactions between an entity and third parties. Cost accounting determines costs of products, processes, and projects. Management accounting assists management in formulating policies and planning operations. The document also discusses the history and evolution of cost accounting and its contributions to functions like planning, controlling, decision making, inventory management, and financial analysis.
Cost Accounting (cost of production report & cost of goods sold) on Honda com...Muhammad Farhan Javed
The document provides information about Honda's motorcycle production process in Pakistan. It discusses Honda's history and establishment in Pakistan through a joint venture with Atlas Group. It describes Honda's two motorcycle manufacturing plants in Karachi and Sheikhupura. The manufacturing process begins with requisitioning raw materials from suppliers. The materials are inspected upon arrival at the plants and defective items are returned. The plants then assemble motorcycles through various production stages until final quality checks are passed and motorcycles are ready for distribution.
The document provides an income statement and schedule of cost of goods manufactured for Chan Corporation for the year ended December 31, 2004. It shows revenues of $350 million and cost of goods sold of $232 million, resulting in a gross margin of $118 million. Cost of goods manufactured was $204 million. The schedule breaks down the costs into direct material costs of $105 million, direct manufacturing labor costs of $40 million, and indirect manufacturing costs of $51 million, for total manufacturing costs of $196 million.
The document outlines the calculation of cost of goods sold (COGS) by detailing opening and closing inventory amounts for materials and finished goods, purchases and returns, direct materials consumed, cost of goods manufactured, prime costs including direct materials and labor, conversion costs including labor and factory overhead, total manufacturing costs, and the final calculation of COGS by adding opening finished goods inventory and subtracting closing finished goods inventory from the cost of goods manufactured.
Linen control involves four phases: routine checking of linen appearance and hygiene, quantity control of daily linen flow, periodic stocktaking, and documentation. Key aspects include inspecting fresh and soiled linen for quality; maintaining records of linen distribution, collection, and inventory; and analyzing discrepancies to minimize linen loss. Proper linen control ensures high standards and efficient linen management.
This document discusses inventory controls for various items managed by the executive housekeeper, including linens, uniforms, guest loan items, machines/equipment, cleaning supplies, guest room supplies, and printed materials. It emphasizes the importance of determining par levels for each item based on factors like usage rates and occupancy. Effective inventory control involves regular physical inventories, strict issuing procedures, and maintaining accurate records to monitor inventory levels and avoid shortages. The laundry cycle is also a key consideration for determining linen par levels.
Solution Chapter 3 l Cost Accounting Planning and Control by Matz.Hammer an...Bushra Sultana Malik
This document contains 9 journal entries related to the manufacturing cost accounting cycle for 3 jobs. It records materials, labor, and overhead being charged to Work in Process accounts for each job. It also records payroll expenses and taxes, and the application of overhead to production using a predetermined overhead rate of 80%.
Tools, equipment and paraphernalia used in cleaning,washingAngie Filler
This document lists and defines various tools, equipment, and paraphernalia used for cleaning, washing, ironing, and taking vital signs. It includes definitions for common household items like brooms, clothes hangers, dishwashers, and ironing boards. It also defines medical equipment used to take vital signs, such as different types of sphygmomanometers (mercury, aneroid, and digital) for measuring blood pressure and stethoscopes and thermometers.
This document provides information on material management. It defines material management as planning, organizing, and controlling the flow of materials from initial purchase through operations to distribution. The objectives of material management include obtaining the right quality and quantity of supplies at the right time and place for the right cost. Material management aims to gain economy in purchasing and satisfy demand during replenishment periods while maintaining adequate reserve stocks.
Controlling involves evaluating and regulating ongoing activities to ensure goals are achieved. It provides indications of performance relative to goals and a mechanism to adjust performance. Control is important for managing people and resources, coping with uncertainty, and planning. There are different levels of control including strategic, tactical, and operational control. The control process involves establishing standards, measuring performance, comparing to standards, correcting deviations, and changing standards if needed. Effective control is integrated with planning, flexible, accurate, timely, and objective. Common control techniques include financial control using statements, ratios, and budgets, as well as quality, inventory, and structural controls.
- Inventory constitutes a significant part of current assets for many companies, often around 60% of current assets. Effective inventory management is important to avoid unnecessary costs and ensure profitability.
- There are different types of inventory including raw materials, work in progress, and finished goods. The objectives of inventory management are to maintain optimal inventory levels for smooth operations while minimizing costs.
- An optimum inventory level balances ordering costs, carrying costs, and stock-out costs. Both over-investment and under-investment in inventory can be dangerous for a company. Effective inventory management tracks inventory levels and determines when and how much to order.
This document discusses inventory management. It defines inventory as materials obtained in advance of need that are held until used or sold. There are different types of inventories like raw materials, work in progress, spare parts, and finished goods. Inventory valuation involves determining inventory quantities and assigning values. Holding inventory incurs costs like storage, ordering, shortages. The objectives of inventory control are to ensure smooth operations while minimizing costs and risks through techniques like determining economic order quantities and stock levels.
The document discusses inventory control, which involves maintaining desired inventory levels to balance economic and production needs. It describes different types of inventory like raw materials, work in progress, and finished goods. Effective inventory control requires planning inventory levels, ordering, receiving, storing, and recording inventory. Key aspects of inventory control include determining maximum and minimum inventory levels, reorder points, and economic order quantities.
- Plant and intangible assets are long-lived assets acquired for use in business operations, similar to long-term prepaid expenses. The cost is allocated to expense over the asset's useful life through depreciation.
- Major categories of plant assets include tangible assets like land, buildings, equipment, and furniture, as well as intangible assets without physical substance like patents and goodwill.
- Plant asset costs include acquisition costs and costs to prepare the asset for use, such as shipping, installation, and testing. Cost is allocated to the asset through depreciation expense over the asset's useful life.
This document summarizes the inventory management process for Metro's centralized warehouse. It outlines the receiving, booking, data management, stock management, and EDI flow operations. Key aspects include receiving goods, checking delivery notices, inputting data into the inventory system, adjusting inventory levels, transferring stock between stores, and filling documentation. Charts are provided to control late and wrong bookings, short receipts, adjustments, and more. The goal is to optimize the centralized inventory process.
How much is that doggy in the window the cost of holding dead inventoryTom Shay
This session by Tom Shay illustrates the cost of a small business holding onto inventory that is not selling. By selling this inventory, even at cost or below, and putting that money into inventory that is selling will increase the gross sales, profitability, and return on investment.
The document discusses logistics management in the dairy industry. It describes the key aspects of logistics operations including production, packaging, warehousing, transportation, overcoming challenges, and customer service. It provides details on the job responsibilities of logistics management and the processes involved in ensuring efficient transportation and delivery of dairy products from manufacturers to consumers while maintaining quality. Reverse logistics related to product returns is also mentioned.
This document discusses accounting for merchandising companies. It describes the operating cycle of merchandising companies, which involves purchasing inventory, selling inventory on credit, and collecting accounts receivable. The document also discusses the income statement and accounting systems used by merchandising companies, including perpetual and periodic inventory systems. It provides examples of journal entries under each system.
This document provides an overview of accounting and its branches. It defines accounting as a specialized information system that records transactions and provides economic information. The main branches are financial accounting, cost accounting, and management accounting. Financial accounting records money transactions between an entity and third parties. Cost accounting determines costs of products, processes, and projects. Management accounting assists management in formulating policies and planning operations. The document also discusses the history and evolution of cost accounting and its contributions to functions like planning, controlling, decision making, inventory management, and financial analysis.
Cost Accounting (cost of production report & cost of goods sold) on Honda com...Muhammad Farhan Javed
The document provides information about Honda's motorcycle production process in Pakistan. It discusses Honda's history and establishment in Pakistan through a joint venture with Atlas Group. It describes Honda's two motorcycle manufacturing plants in Karachi and Sheikhupura. The manufacturing process begins with requisitioning raw materials from suppliers. The materials are inspected upon arrival at the plants and defective items are returned. The plants then assemble motorcycles through various production stages until final quality checks are passed and motorcycles are ready for distribution.
The document provides an income statement and schedule of cost of goods manufactured for Chan Corporation for the year ended December 31, 2004. It shows revenues of $350 million and cost of goods sold of $232 million, resulting in a gross margin of $118 million. Cost of goods manufactured was $204 million. The schedule breaks down the costs into direct material costs of $105 million, direct manufacturing labor costs of $40 million, and indirect manufacturing costs of $51 million, for total manufacturing costs of $196 million.
The document outlines the calculation of cost of goods sold (COGS) by detailing opening and closing inventory amounts for materials and finished goods, purchases and returns, direct materials consumed, cost of goods manufactured, prime costs including direct materials and labor, conversion costs including labor and factory overhead, total manufacturing costs, and the final calculation of COGS by adding opening finished goods inventory and subtracting closing finished goods inventory from the cost of goods manufactured.
Linen control involves four phases: routine checking of linen appearance and hygiene, quantity control of daily linen flow, periodic stocktaking, and documentation. Key aspects include inspecting fresh and soiled linen for quality; maintaining records of linen distribution, collection, and inventory; and analyzing discrepancies to minimize linen loss. Proper linen control ensures high standards and efficient linen management.
This document discusses inventory controls for various items managed by the executive housekeeper, including linens, uniforms, guest loan items, machines/equipment, cleaning supplies, guest room supplies, and printed materials. It emphasizes the importance of determining par levels for each item based on factors like usage rates and occupancy. Effective inventory control involves regular physical inventories, strict issuing procedures, and maintaining accurate records to monitor inventory levels and avoid shortages. The laundry cycle is also a key consideration for determining linen par levels.
Solution Chapter 3 l Cost Accounting Planning and Control by Matz.Hammer an...Bushra Sultana Malik
This document contains 9 journal entries related to the manufacturing cost accounting cycle for 3 jobs. It records materials, labor, and overhead being charged to Work in Process accounts for each job. It also records payroll expenses and taxes, and the application of overhead to production using a predetermined overhead rate of 80%.
Tools, equipment and paraphernalia used in cleaning,washingAngie Filler
This document lists and defines various tools, equipment, and paraphernalia used for cleaning, washing, ironing, and taking vital signs. It includes definitions for common household items like brooms, clothes hangers, dishwashers, and ironing boards. It also defines medical equipment used to take vital signs, such as different types of sphygmomanometers (mercury, aneroid, and digital) for measuring blood pressure and stethoscopes and thermometers.
This document provides information on material management. It defines material management as planning, organizing, and controlling the flow of materials from initial purchase through operations to distribution. The objectives of material management include obtaining the right quality and quantity of supplies at the right time and place for the right cost. Material management aims to gain economy in purchasing and satisfy demand during replenishment periods while maintaining adequate reserve stocks.
Controlling involves evaluating and regulating ongoing activities to ensure goals are achieved. It provides indications of performance relative to goals and a mechanism to adjust performance. Control is important for managing people and resources, coping with uncertainty, and planning. There are different levels of control including strategic, tactical, and operational control. The control process involves establishing standards, measuring performance, comparing to standards, correcting deviations, and changing standards if needed. Effective control is integrated with planning, flexible, accurate, timely, and objective. Common control techniques include financial control using statements, ratios, and budgets, as well as quality, inventory, and structural controls.
- Inventory constitutes a significant part of current assets for many companies, often around 60% of current assets. Effective inventory management is important to avoid unnecessary costs and ensure profitability.
- There are different types of inventory including raw materials, work in progress, and finished goods. The objectives of inventory management are to maintain optimal inventory levels for smooth operations while minimizing costs.
- An optimum inventory level balances ordering costs, carrying costs, and stock-out costs. Both over-investment and under-investment in inventory can be dangerous for a company. Effective inventory management tracks inventory levels and determines when and how much to order.
This document discusses inventory management. It defines inventory as materials obtained in advance of need that are held until used or sold. There are different types of inventories like raw materials, work in progress, spare parts, and finished goods. Inventory valuation involves determining inventory quantities and assigning values. Holding inventory incurs costs like storage, ordering, shortages. The objectives of inventory control are to ensure smooth operations while minimizing costs and risks through techniques like determining economic order quantities and stock levels.
The document discusses inventory control, which involves maintaining desired inventory levels to balance economic and production needs. It describes different types of inventory like raw materials, work in progress, and finished goods. Effective inventory control requires planning inventory levels, ordering, receiving, storing, and recording inventory. Key aspects of inventory control include determining maximum and minimum inventory levels, reorder points, and economic order quantities.
- Plant and intangible assets are long-lived assets acquired for use in business operations, similar to long-term prepaid expenses. The cost is allocated to expense over the asset's useful life through depreciation.
- Major categories of plant assets include tangible assets like land, buildings, equipment, and furniture, as well as intangible assets without physical substance like patents and goodwill.
- Plant asset costs include acquisition costs and costs to prepare the asset for use, such as shipping, installation, and testing. Cost is allocated to the asset through depreciation expense over the asset's useful life.
This document discusses accounting for plant and intangible assets. It covers major categories of plant assets including tangible assets like land, buildings and equipment and intangible assets like patents and goodwill. It describes the major events in the life of a plant asset - acquisition, depreciation over its useful life, and sale/disposal. Methods of determining the cost of an acquired asset are presented. The document also discusses accounting for depreciation using methods like straight-line and declining balance and events that would trigger revising depreciation rates or recognizing impairment. Guidelines for recording the disposal of plant assets and trading in used assets for new ones are also summarized.
What is 'Property, Plant And Equipment - PP&E'
Property, plant and equipment (PP&E) is a company asset that is vital to business operations but cannot be easily liquidated, and depending on the nature of a company's business, the total value of PP&E can range from very low to extremely high compared to total assets. International accounting standard 16 deals with the accounting treatment of PP&E. It is listed separately in most financial statements because it is treated differently in accounting statements, and improvements, replacements and betterments can pose accounting issues depending on how the costs are recorded.
BREAKING DOWN 'Property, Plant And Equipment - PP&E'
PP&E is also called tangible fixed assets. These assets are physical, tangible assets and they are expected to generate economic benefits for a company for a period of longer than one year. Examples of PP&E include land, buildings and vehicles. Industries or businesses that require a large amount of fixed assets are described as capital intensive.
Financial Statement Record
PP&E is recorded in a company's financial statements in the balance sheet. The cost of PP&E considers the actual cost of purchasing and bringing the asset to its intended use. This cost is called the historical cost. For example, when purchasing a building for a company to run its retail operations, the historical cost could include the purchase price, transaction fees and any improvements made to the building to bring it to its destined use. The value of PP&E is adjusted routinely as fixed assets generally see a decline in value due to use and depreciation. Amortization is used to devalue these assets as they are used, but land is not amortized because it can increase in value. Instead, it is represented at current market value. The balance of the PP&E account is remeasured every reporting period, and, after accounting for historical cost and amortization, is called the book value. This figure is reported on the balance sheet. #ucp
This document discusses plant and intangible assets. It defines major categories of plant assets such as land, buildings, equipment, and natural resources. It also defines intangible assets such as patents, copyrights, trademarks, franchises and goodwill. The document outlines the accounting treatment for acquisition, depreciation/depletion, impairment, disposal and revaluation of plant and intangible assets over their useful lives.
396
Chapter
Plant Assets, Natural
Resources, and
Intangible Assets
After studying this chapter, you should be
able to:
1 Describe how the cost principle applies
to plant assets.
2 Explain the concept of depreciation.
3 Compute periodic depreciation using
different methods.
4 Describe the procedure for revising
periodic depreciation.
5 Distinguish between revenue and
capital expenditures, and explain the
entries for each.
6 Explain how to account for the disposal
of a plant asset.
7 Compute periodic depletion of natural
resources.
8 Explain the basic issues related to
accounting for intangible assets.
9 Indicate how plant assets, natural
resources, and intangible assets are
reported.
S T U D Y O B J E C T I V E S
Feature Story
The Navigator✓
9
HOW MUCH FOR A RIDE TO THE BEACH?
It’s spring break. Your plane has landed, you’ve finally found your bags, and
you’re dying to hit the beach—but first you need a “vehicular unit” to get
Scan Study Objectives ■
Read Feature Story ■
Read Preview ■
Read text and answer
p. 402 ■ p. 409 ■ p. 412 ■ p. 417 ■
Work Comprehensive p. 421 ■
p. 422 ■
Review Summary of Study Objectives ■
Answer Self-Study Questions ■
Complete Assignments ■
The Navigator✓
Do it!
Do it!
JWCL165_c09_396-443.qxd 8/4/09 9:39 PM Page 396
397
you there. As you turn
away from baggage claim
you see a long row of
rental agency booths.
Many are names you are
familiar with—Hertz, Avis,
and Budget. But a booth
at the far end catches your
eye—Rent-A-Wreck
(www.rent-a-wreck.com).
Now there’s a company
making a clear statement!
Any company that relies
on equipment to generate
revenues must make decisions about what kind of equipment to buy, how
long to keep it, and how vigorously to maintain it. Rent-A-Wreck has decided
to rent used rather than new cars and trucks. It rents these vehicles across
the United States, Europe, and Asia. While the big-name agencies push
vehicles with that “new car smell,” Rent-A-Wreck competes on price. The
message is simple: Rent a used car and save some cash. It’s not a message
that appeals to everyone. If you’re a marketing executive wanting to impress
a big client, you probably don’t want to pull up in a Rent-A-Wreck car. But if
you want to get from point A to point B for the minimum cash per mile, then
they are playing your tune. The company’s message seems to be getting
across to the right clientele. Revenues have increased significantly.
When you rent a car from Rent-A-Wreck, you are renting from an independ-
ent business person who has paid a “franchise fee” for the right to use the
Rent-A-Wreck name. In order to gain a franchise, he or she must meet finan-
cial and other criteria, and must agree to run the rental agency according to
rules prescribed by Rent-A-Wreck. Some of these rules require that each fran-
chise maintain its cars in a reasonable fashion. This ensures that, though you
won’t be cruising down Daytona Beach’s Atlantic Avenue in a Mercedes con-
ver.
This document discusses cost behavior analysis and the use of fixed and variable costs. It defines fixed and variable costs, explaining that total variable cost is proportional to activity level while total fixed cost remains constant. Variable cost per unit remains the same over a relevant range, while fixed cost per unit decreases as activity increases. Examples of variable costs include materials, labor, commissions. Fixed costs include depreciation, taxes, salaries. The proportion of fixed to variable costs differs between industries and there is a trend toward higher fixed costs as knowledge workers replace manual labor.
The document discusses the weighted average cost of capital (WACC) and how it is used to value companies. It provides examples of calculating WACC based on a company's capital structure and required rates of return on debt and equity. WACC is the weighted average of the cost of the company's various sources of financing and provides the minimum return needed to attract investors. The document outlines the steps for determining a company's WACC, including calculating market values for debt and equity and determining required rates of return for each.
The document provides an overview of accounting concepts including definitions, users, and types of costs. It defines accounting as the process of identifying, measuring and communicating economic information. Managerial accounting provides internal information to managers, while financial accounting provides external information. Cost concepts are defined, including direct materials, direct labor, manufacturing overhead, and period versus product costs. The classifications of inventory for manufacturers are also discussed.
This document provides an overview of accounting for plant assets, natural resources, and intangible assets according to IFRS. It discusses how to determine the cost of various asset types like land, buildings, equipment, and vehicles. It also explains the concept of depreciation as a method to allocate the cost of plant assets over their useful lives. The document provides examples of accounting entries for purchasing and recording different asset types.
This document discusses capital budgeting and methods for evaluating capital investment projects. It begins by defining capital budgeting as analyzing long-term investment alternatives and deciding which assets to acquire or sell. It then discusses typical cash inflows and outflows for capital projects. Several evaluation methods are covered, including payback period, return on investment, and net present value. Net present value is presented as the preferred method because it considers the time value of money by discounting future cash flows. The document concludes by providing an example net present value calculation for a capital replacement decision.
Managerial Accounting Garrison Noreen Brewer Chapter 05Asif Hasan
This document discusses cost behavior analysis. It defines variable costs as costs that vary proportionally with changes in activity levels. Variable costs remain the same on a per-unit basis but change in total as activity changes. Fixed costs remain constant in total even as activity levels change, but fixed costs per unit decrease as activity increases. Examples of variable costs include materials and labor, while fixed costs include rent, insurance, and depreciation. The trend is for industries to have increasing fixed costs relative to variable costs as more tasks are automated.
The document summarizes key concepts from Chapter 7 of a corporate finance textbook, including net present value (NPV), internal rate of return (IRR), mutually exclusive projects, and investment timing. It provides examples and formulas for calculating NPV and IRR. The key investment decision rules are to accept projects with a positive NPV and projects with an IRR higher than the opportunity cost of capital. When choosing between mutually exclusive projects, select the project with the highest positive NPV. For investment timing, defer investments if doing so lowers costs in present value terms.
This document contains excerpts from a chapter on cost behavior analysis from a business textbook. It discusses different types of costs including variable costs, fixed costs, and mixed costs. Variable costs fluctuate with changes in activity levels, while fixed costs remain constant despite changes in activity. The chapter defines relevant ranges for analyzing cost behavior, and provides examples of variable, fixed, and mixed costs from different business contexts to illustrate cost behavior concepts.
This document discusses accounting for fixed assets. It defines fixed assets as long-term tangible assets used in operations, such as equipment, buildings, and land improvements. It explains how to classify costs of acquiring fixed assets as capital expenditures or revenue expenditures. It also describes various depreciation methods including straight-line, units-of-production, and double-declining balance and compares their application. The document provides examples to illustrate computing depreciation expense under each method.
This chapter discusses key concepts for making capital investment decisions, including determining relevant cash flows, computing depreciation expense, and calculating operating cash flow. It provides examples of computing cash flows for projects using pro forma financial statements and outlines the process for analyzing projects using techniques like NPV, IRR, and equivalent annual cost analysis. The chapter also includes examples demonstrating how to analyze replacement decisions, compute depreciation, and determine bid prices.
The document discusses adjusting entries in accounting. Adjusting entries are needed at the end of an accounting period to ensure revenues and expenses are recorded in the appropriate periods. There are four types of adjusting entries: converting assets to expenses, converting liabilities to revenue, accruing unpaid expenses, and accruing uncollected revenues. Examples are provided for each type along with sample journal entries to record the adjustments.
The document discusses adjusting entries, which are journal entries made at the end of an accounting period to allocate revenues and expenses to the appropriate periods. There are four types of adjusting entries: 1) converting assets to expenses, 2) accruing unpaid expenses, 3) converting liabilities to revenue, and 4) accruing uncollected revenues. Examples are provided for each type, including depreciation of long-term assets, recognition of prepaid expenses, and allocation of unearned revenue.
The document discusses adjusting entries, which are journal entries made at the end of an accounting period to properly record revenue and expenses that have been earned or incurred but not yet recorded. There are four main types of adjusting entries: 1) converting assets to expenses, 2) converting liabilities to revenue, 3) accruing unpaid expenses, and 4) accruing uncollected revenues. Examples are provided for each type, including entries to record depreciation expense, rental revenue recognition, accrued wages, and prepaid insurance. The purpose of adjusting entries is to ensure the financial statements accurately reflect the company's financial position and results of operations for the period.
The document discusses adjusting entries, which are journal entries made at the end of an accounting period to adjust accounts and properly state revenues and expenses across periods. There are four types of adjusting entries: 1) converting assets to expenses, 2) accruing unpaid expenses, 3) converting liabilities to revenue, and 4) accruing uncollected revenues. Examples are provided for each type, including depreciation of long-term assets, recognition of prepaid expenses, and allocation of deferred revenues over time.
Vicinity Jobs’ data includes more than three million 2023 OJPs and thousands of skills. Most skills appear in less than 0.02% of job postings, so most postings rely on a small subset of commonly used terms, like teamwork.
Laura Adkins-Hackett, Economist, LMIC, and Sukriti Trehan, Data Scientist, LMIC, presented their research exploring trends in the skills listed in OJPs to develop a deeper understanding of in-demand skills. This research project uses pointwise mutual information and other methods to extract more information about common skills from the relationships between skills, occupations and regions.
"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
The Impact of Generative AI and 4th Industrial RevolutionPaolo Maresca
This infographic explores the transformative power of Generative AI, a key driver of the 4th Industrial Revolution. Discover how Generative AI is revolutionizing industries, accelerating innovation, and shaping the future of work.
Enhancing Asset Quality: Strategies for Financial Institutionsshruti1menon2
Ensuring robust asset quality is not just a mere aspect but a critical cornerstone for the stability and success of financial institutions worldwide. It serves as the bedrock upon which profitability is built and investor confidence is sustained. Therefore, in this presentation, we delve into a comprehensive exploration of strategies that can aid financial institutions in achieving and maintaining superior asset quality.
TEST BANK Principles of cost accounting 17th edition edward j vanderbeck mari...Donc Test
TEST BANK Principles of cost accounting 17th edition edward j vanderbeck maria r mitchell.docx
TEST BANK Principles of cost accounting 17th edition edward j vanderbeck maria r mitchell.docx
TEST BANK Principles of cost accounting 17th edition edward j vanderbeck maria r mitchell.docx
An accounting information system (AIS) refers to tools and systems designed for the collection and display of accounting information so accountants and executives can make informed decisions.
[4:55 p.m.] Bryan Oates
OJPs are becoming a critical resource for policy-makers and researchers who study the labour market. LMIC continues to work with Vicinity Jobs’ data on OJPs, which can be explored in our Canadian Job Trends Dashboard. Valuable insights have been gained through our analysis of OJP data, including LMIC research lead
Suzanne Spiteri’s recent report on improving the quality and accessibility of job postings to reduce employment barriers for neurodivergent people.
Decoding job postings: Improving accessibility for neurodivergent job seekers
Improving the quality and accessibility of job postings is one way to reduce employment barriers for neurodivergent people.
Optimizing Net Interest Margin (NIM) in the Financial Sector (With Examples).pdfshruti1menon2
NIM is calculated as the difference between interest income earned and interest expenses paid, divided by interest-earning assets.
Importance: NIM serves as a critical measure of a financial institution's profitability and operational efficiency. It reflects how effectively the institution is utilizing its interest-earning assets to generate income while managing interest costs.
In this chapter we will study the acquisition and depreciation of productive assets used in a business. In addition, we will take a quick look at accounting for natural resources and intangibles. This chapter contains some challenging accounting procedures, so let’s get started.
Plant assets are tangible assets that are used actively in the operations of the entity. We fully expect these assets, sometimes referred to as property, plant, and equipment, to benefit future periods.
When we acquire a plant asset, it is recorded at its historical cost. Once the asset is placed in service, we will allocate a portion of the asset’s cost to depreciation expense as the asset becomes older.
There are three major categories of plant assets. Tangible plant assets 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 that will be used in the business. Examples include oil reserves, timber, and other minerals.
We will review the accounting issues related to all three of these categories.
There are three accountable events we need to discuss.
When we acquire a plant asset, it is recorded at its historical cost. We will see how cost is determined on the next slide.
Once the asset is placed in service, we will allocate a portion of the asset’s cost to depreciation expense as the asset becomes older.
Finally, at the end of the asset’s useful life, we will dispose of it and remove it from our 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. We record the purchase price net of any cash discounts available.
Finance charges are not included in the cost of an asset. If we elect to finance the purchase over a period of time, the interest cost is charged as an expense when incurred.
Let’s see how to determine the cost of a plant asset on the next slide.
On May 4th, Heat Company buys a new machine for fifty two thousand dollars. Sales tax is eight percent. Heat Company also pays five hundred dollars in shipping costs, one thousand three hundred dollars in set-up costs, and four thousand dollars in testing costs.
What is the cost of the machine?
Part I
Remember that the cost of an asset includes the purchase price plus any cost that is necessary to get the asset to you and ready for use. The cost of the new machine is sixty one thousand nine hundred sixty dollars.
Part II
The entry to record the purchase includes a debit to the asset account and a credit to Cash.
When purchasing land, the cost includes the purchase price and other costs generally incurred in connection with land acquisitions. Many of these costs are related to obtaining legal title to the land. Also remember that land is not a depreciable plant asset.
Land improvements include parking lots, driveways, fences, sidewalks, landscaping, and any outdoor lighting systems. Land improvements are depreciated over their useful life.
Whether we purchase or construct a building, the cost should include the purchase price plus any attorney fees, title fees, and repairs made prior to using the building. If we construct the building, the cost will include all the necessary construction costs as well as the costs we have just mentioned.
Machinery and equipment is recorded at its purchase price less any available cash discount. If the company pays delivery charges on the truck, these costs are included in the cost of the truck. If we need to install any special parts to make the machinery or equipment ready for its intended use, we will include these costs in the price of the assets. Other costs included are insurance and property taxes of the current period.
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 the building is. We must assign a portion of the purchase price 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.
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 a Capital Expenditure and charge the amount to a balance sheet account like the asset or accumulated depreciation. In some cases, the expenditures may be treated as Revenue Expenditures and charged to current period income as an expense.
For each expenditure subsequent to acquisition of a plant asset we must 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 an expense. Subsequent expenditures that are for betterments are classified as extraordinary repairs. These should be treated as capital expenditures and charged to the asset account.
Depreciation is a process of cost allocation. We allocate the cost of the asset to expense over its useful life in some rational and systematic manner. We do not want to confuse asset valuation, an economic concept, with allocation.
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.
When dealing with depreciation, there are several terms and concepts we need to understand.
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.
We depreciate assets as we use them to help earn revenue. As assets are used, they incur physical deterioration and obsolescence.
Now, let’s look at some common methods of calculating depreciation expense.
Regardless of the method used to calculate depreciation expense, we must know three variables: (1) the asset’s cost; (2) the estimated residual value we expect to receive 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.
Let’s see how this works.
Part I
On January 1, 2005, Bass Company purchased a boat for twenty four thousand dollars. The estimated useful life is five years and the estimated residual value is three thousand dollars.
Can you calculate the amount of annual depreciation?
Part II
This calculation was relatively easy. Did you get the annual depreciation of four thousand two hundred dollars? Now let’s look at a schedule of the annual depreciation for over the life of the asset.
Notice that depreciation expense is the same amount in each of the five years. If we plot this amount on a graph, it would be a straight-line. That is how we got the name of the method.
Accumulated depreciation increases by four thousand two 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 four thousand two hundred dollars each year.
At the end of the asset’s useful life, the book value is equal to the estimated residual value. We want this to be true regardless of the method we use.
To this point we have discussed depreciation of an asset that was purchased on January first of the year. We realize that relative few assets will actually be purchase on January 1st. One way to determine depreciation for assets purchased throughout the year is to use the half-year convention. Using this convention, in the year of acquisition, a company would record half a year, or six months, of depreciation. Let’s see how how this works.
Part I
In our example, a company purchased equipment for seventy five thousand dollars on some date in two thousand five. The equipment has a useful life of ten years and estimated residual value of five thousand dollars. This company uses straight-line depreciation for all its plant assets.
Let’s calculate depreciation expense for 2005 using the half-year convention.
Part II
Using straight-line depreciation, the depreciation expense for an entire year would be seven thousand dollars. We determine this amount by taking cost less residual value and dividing it by the useful life. Since the company uses the half-year convention, we divide the annual depreciation in half for the first year. The depreciation expense for 2005 would be three thousand five hundred dollars.
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 and 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. We do this by dividing one hundred percent by the asset’s useful life.
The second step is to calculate the double declining balance rate. We do this by multiplying the straight-line rate times two.
The third, and final step is to determine depreciation expense. We multiply the double declining rate times the book value of the asset at the beginning of the period. Under the double declining balance method we ignore estimated residual value.
Let’s look at an example.
Part I
On January 1, 2005, Bass Company purchased a boat for twenty four thousand dollars. The estimated useful life is five years and the estimated residual value is three thousand dollars.
Can you calculate the amount of annual depreciation using the double-declining balance method?
Part II
The first step is to calculate the straight line depreciation rate. Recall that we do this by dividing one hundred percent by the asset’s useful life. In our specific case we divide one hundred percent by the five-year useful life to get a straight-line rate of twenty percent.
The second step is to calculate the double declining balance rate. We do this by multiplying the straight-line rate times two. In our case that would be twenty percent times two, or forty percent.
The third, and final step is to determine depreciation expense. We multiply the double declining rate times the book value of the asset at the beginning of the period. In our case we would multiply the beginning book value (cost less accumulated depreciation) of twenty four thousand dollars by forty percent. Depreciation expense for 2005 is nine thousand six hundred dollars.
Remember, under the double declining balance method we ignore estimated salvage value.
Part I
While we always want the book value to be equal to estimated salvage value at the end of the asset’s useful life, it just will not work properly using the double declining balance method.
In this case, we need for the book value at the end of 2009 to be equal to three thousand dollars, the estimated residual value. The only way we can make this work is to force depreciation expense in the last year to be the amount needed to bring book value down to residual value.
In 2009, we will record depreciation expense of one hundred ten dollars. We determine this amount by subtracting the salvage value of three thousand dollars from the book value at the end of 2008, three thousand one hundred ten dollars.
Part II
Notice that no matter which depreciation method we use, total depreciation taken at the end of the 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 twenty one thousand dollars.
Auditors review management’s estimates for useful lives and residual values for reasonableness.
The principle of consistency ensures that companies avoid switching depreciation methods from period to period, unless there is a compelling reason for the change.
You know that the salvage value and useful life of a plant asset are both estimates. Like all estimates, new information may come to light that will cause us to revise our previous estimate.Let’s see how accountants handle the revision of previous estimates.
In our example, a company purchased equipment on January 1, 2002 for thirty thousand dollars. The equipment is estimated to have a ten year useful life and no salvage value at the end of its useful life. The company uses the straight-line method for all plant assets and begins recording depreciation on this equipment in 2002.
We continue our original computations for 2002 through 2004. During 2005, we learn new information about the equipment. This new information causes us to revise our estimate of the equipment’s useful life. We now believe the equipment will have a total useful life of eight years. We already recorded depreciation expense for three years (2002, 2003, and 2004), so there are five years remaining in the equipment’s useful life.In this case, accountants would take the book value at the date of revision of our estimate, that is, 2005, and subtract any estimated salvage value at the time of revision. This total is to be divided by the remaining useful life of the asset at the date of revision.Let’s calculate the proper depreciation expense for 2005.
Part I
The asset had a cost of thirty thousand dollars and a ten year useful life with no salvage value. Under straight line depreciation we record three thousand dollars of expense in each of the years 2002, 2003, and 2004. Let’s calculate the depreciation expense at December 31, 2005.
Part II
The original cost of the asset was thirty thousand dollars. Accumulated depreciation has a balance of nine thousand dollars at the beginning of 2005. The remaining book value is twenty one thousand dollars and the remaining useful life of the asset is five years, so depreciation for each of those five years will be four thousand two hundred dollars.
If an asset’s value decreases and cannot be recovered through future use or sale, the asset is considered to be impaired and it should be written down to its net realizable value.
Whenever we dispose of a plant asset, the first thing we do is update depreciation to the date of disposal. After completing the update we can begin on the journal entry.We start the journal entry by recording a debit to the cash account, if cash was received, or credit the cash account, if cash was paid by the company. In addition, we must determine 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.We complete the entry by removing the plant asset’s cost from our books with a credit, and remove the related accumulated depreciation with a debit.Let’s see how we calculate the gain or loss associated with the disposal.
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.
Now let’s look at a specific example of disposal of a plant asset.
On September 30, 2005, Evans Map Company sells a machine for sixty thousand dollars. The machine was purchased on January 1, 2000, for one hundred thousand dollars, had an estimated salvage value of twenty thousand dollars and a useful life of ten years. Evans’ uses straight-line deprecation.
Let’s answer the following questions.
Part I
What is the amount of depreciation to be recorded on September 30, 2005, to bring the depreciation up to date?
Part II
Annual depreciation is eight thousand dollars. For the nine months ending September 30, 2005, Evans will record six thousand dollars in depreciation.
Part I
After updating the depreciation, what is the machine’s book value?
Part II
Book value is calculated as cost of one hundred thousand dollars minus the accumulated depreciation of forty six thousand dollars. So, for Evans’ machine, the book value is fifty four thousand dollars.
Part I
Did the sale of the machine result in a gain or a loss?
Part II
To determine a gain or loss, compare the cash received of sixty thousand with the book value of fifty four thousand. Since Evans received more cash than the book value, Evans has a gain of six thousand dollars.
Part I
Now, you have all the pieces of information necessary to record the sale.
Part II
We record the disposal with a debit to Cash for sixty thousand dollars, a debit to Accumulated Depreciation for forty six thousand dollars, a credit to Gain on Sale for six thousand dollars, and a credit to Machinery for one hundred thousand dollars.
Instead of selling assets, some transactions involve exchanging one plant asset for another asset. Sometimes these transactions are an exchange of similar assets and sometimes the exchange involves dissimilar assets.
Let’s look at some basic information about exchanging assets.
If the exchange involves dissimilar assets, then any gain or loss on the transaction is immediately recorded.
However, we have special accounting rules that apply when we trade one plant asset for a similar plant asset. The particular accounting rule we will follow depends on whether there is a gain or loss involved in the transaction. If the exchange if for similar assets and there is a loss on the exchange, then the loss is recorded immediately. However, if the exchange involves similar assets, some cash is paid, and there is a gain on the exchange, then none of the gain can be recorded immediately. Instead, we record the asset received at the book value of the asset given up. We do not recognize the gain because most accountants believe that the earnings process is not complete.
Let’s look at an example of a similar exchange.
On May 30, 2005, Essex Company exchanges a used airplane and thirty five thousand dollars cash for a new similar airplane. The old airplane given up has a historical cost of forty thousand dollars, accumulated deprecation to the date of exchange of thirty thousand dollars, and a fair value of four thousand dollars.The first thing we need to determine is whether a gain or loss will result. Remember that our accounting depends upon whether a gain or a loss is indicated on the transaction.
Part I
Does this exchange of similar airplanes result in a gain or a loss?
Part II
The book value of the airplane given up is ten thousand dollars and the fair value of the airplane given up is four thousand dollars. By comparing the ten thousand dollar book value with the four thousand dollar fair value, Essex has a six thousand dollar loss on the exchange.
The general rule is that when we exchange similar productive assets and a loss in indicated, the loss is recognized in full.
Part I
Let’s prepare the journal entry to record the exchange.
Part II
We begin by recording the parts of the journal entry that we know. We know we are giving up the old airplane, so we debit Accumulated Depreciation and credit the old Airplane account for their respective amounts. We also know we are giving up cash of thirty five thousand dollars and have a loss on the transaction of six thousand. Now all we need is to debit the new Airplane account for thirty-nine thousand dollars. This amount represents the fair value of the assets given up in the exchange: Cash of thirty five thousand dollars and the old Airplane of four thousand dollars.
Let’s change the subject away from disposals of plant assets and discuss intangible assets.
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. We will review the major types of intangible assets and related accounting on the remaining screens.
We have provided you with a list of intangible assets that will be discussed. Intangible assets are normally recorded at the purchase price plus any legal or related fees.
Amortization is the systematic write-off of the cost of an intangible over its useful or legal life, whichever is shorter. Amortization is the same concept as depreciation only we call it 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, we have goodwill associated with the transaction.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 and recognize the loss in value.
A patent gives the holder the exclusive right to manufacture and sell an item or process for twenty years. Patents are amortized (a process just like depreciation) using the straight-line method of its useful life, but never more than twenty years. Most companies amortized patents over a very short period of time.
A trademark or trade name is any symbol, name, phrase, or jingle the 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, or the name “Harley-Davidson.” How about the phrase, “Coke is it.”We normally amortize the cost of trademarks over a short period of time using the straight-line method.
The holder of a franchise has the right to deliver a product or service under conditions granted by the franchisor. You really can’t drive down any major street without finding a number of franchise operations. The accounting for franchises can become quite complex. At this point it is sufficient to be able to define the nature of a franchise.
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.
According the generally accepted accounting principles, research and development costs should be expensed as incurred.
Now let’s turn to the last major subject we will cover in the presentations . . . . natural resources.
Natural resources abound. We have accounting issues 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. As accountants, we 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 we will study 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 will be charged to income each period through the depletion expense account.
Let’s see how the accounting rules for natural resources work.
We 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 our estimated total capacity of the natural resource we expected to extract. For oil we express the denominator in terms of barrels, for coal we use tons, for timber we use 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, determine on the previous slide, by the number of extracted units sold during the period. Depletion expense, which becomes part of 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.
The development and extraction of many types of natural resources require highly specialized plant assets. Just think of the use of off-shore drilling platforms for oil and gas production. These specialized assets are recorded in a separate account from the natural resource and depreciation over their useful life.
As this slide indicates, the straight-line method is used by the majority of companies. This is because of the simplicity of the calculation and ease of use.
This chapter covered a great deal of new material related to plant asset acquisition, depreciation and disposal. We also covered accounting issues for intangible assets and natural resources.
In the next chapter, you will learn about liabilities.