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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.

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© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-1 PLANT AND INTANGIBLE ASSETS Chapter 9
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-2 Long-lived assets acquired for use in business operations. Long-lived assets acquired for use in business operations. Similar to long-term prepaid expenses The cost of plant assets is the advance purchase of services. As years pass, and the services are used, the cost is transferred to depreciation expense. Plant AssetsPlant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-3 L a n d , b u ild in g s , e q u ip m e n t, f u r n it u r e , f ix t u r e s . L o n g - t e rm a s s e t s h a v in g p h y s ic a l s u b s t a n c e . T a n g i b l e P l a n t A s s e ts P a t e n t s , c o p y r ig h t s , t r a d e m a r k s , f r a n c h is e s , g o o d w ill. N o n c u r r e n t a s s e ts w it h n o p h y s ic a l s u b s t a n c e . I n t a n g i b le A s s e ts O il r e s e r v e s , t im b e r , o t h e r m in e r a ls . S it e s a c q u ir e d f o r e x t ra c t in g v a lu a b le r e s o u r c e s . N a t u r a l R e s o u r c e s Major Categories of Plant AssetsMajor Categories of Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-4 Acquisition. Allocation of the acquisition cost to expense over the asset’s useful life (depreciation). Sale or disposal. Acquisition. Allocation of the acquisition cost to expense over the asset’s useful life (depreciation). Sale or disposal. Accountable EventsAccountable Events
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-5 Asset price Asset price Reasonable and necessary costs . . . Reasonable and necessary costs . . . . . . for getting the asset to the desired location. . . . for getting the asset to the desired location. . . . for getting the asset ready for use. . . . for getting the asset ready for use. CostCost Acquisition of Plant AssetsAcquisition of Plant Assets +
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-6 On May 4, Heat Co., an Ohio maker of stoves, buys a new machine from a Texas company. The new machine has a price of $52,000. Sales tax was computed at 8%. Heat Co. pays $500 shipping cost to get the machine to Ohio. After the machine arrives, set-up costs of $1,300 are incurred, along with $4,000 in testing costs. Compute the cost of Heat Co.’s new machine. On May 4, Heat Co., an Ohio maker of stoves, buys a new machine from a Texas company. The new machine has a price of $52,000. Sales tax was computed at 8%. Heat Co. pays $500 shipping cost to get the machine to Ohio. After the machine arrives, set-up costs of $1,300 are incurred, along with $4,000 in testing costs. Compute the cost of Heat Co.’s new machine. Determining CostDetermining Cost
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-7 Prepare the journal entry. Determining CostDetermining Cost
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-8 Improvements to land such as driveways, fences, and landscaping are recorded separately. Improvements to land such as driveways, fences, and landscaping are recorded separately. Cost includes real estate commissions, escrow fees, legal fees, clearing and grading the property. Cost includes real estate commissions, escrow fees, legal fees, clearing and grading the property. Land Improvements Land Improvements LandLand Special ConsiderationsSpecial Considerations
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-9 Repairs made prior to the building being put in use are considered part of the building’s cost. Repairs made prior to the building being put in use are considered part of the building’s cost. BuildingsBuildings Special ConsiderationsSpecial Considerations EquipmentEquipment Related interest, insurance, and property taxes are treated as expenses of the current period. Related interest, insurance, and property taxes are treated as expenses of the current period.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-10 I think I’ll buy the whole thing; barn, land, and animals. Special ConsiderationsSpecial Considerations The allocation is based on the relative Fair Market Value of each asset purchased. The allocation is based on the relative Fair Market Value of each asset purchased. The total cost must be allocated to separate accounts for each asset. The total cost must be allocated to separate accounts for each asset. Allocation of a Lump-Sum PurchaseAllocation of a Lump-Sum Purchase
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-11 Capital Expenditure Capital Expenditure Revenue Expenditure Revenue Expenditure Any material expenditure that will benefit several accounting periods. Any material expenditure that will benefit several accounting periods. To capitalize an expenditure means to charge it to an asset account. To capitalize an expenditure means to charge it to an asset account. Expenditure for ordinary repairs and maintenance. Expenditure for ordinary repairs and maintenance. To expense an expenditure means to charge it to an expense account. To expense an expenditure means to charge it to an expense account. Capital Expenditures and Revenue Expenditures Capital Expenditures and Revenue Expenditures
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-12 The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset. The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset. Cost of plant assets Balance SheetBalance Sheet Assets: Plant and equipment Assets: Plant and equipment Income StatementIncome Statement Revenues: Expenses: Depreciation Revenues: Expenses: Depreciation as the services are received DepreciationDepreciation
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-13 Book Value  Cost – Accumulated Depreciation Accumulated Depreciation  Contra-asset  Represents the portion of an asset’s cost that has already been allocated to expense. Causes of Depreciation  Physical deterioration  Obsolescence Book Value  Cost – Accumulated Depreciation Accumulated Depreciation  Contra-asset  Represents the portion of an asset’s cost that has already been allocated to expense. Causes of Depreciation  Physical deterioration  Obsolescence DepreciationDepreciation
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-14 Cost - Residual Value Years of Useful Life Depreciation Expense per Year = Straight-Line DepreciationStraight-Line Depreciation
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-15 On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the straight-line method. On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the straight-line method. Straight-Line DepreciationStraight-Line Depreciation
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-16 Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful life of the boat is: Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful life of the boat is: Salvage ValueSalvage Value Straight-Line DepreciationStraight-Line Depreciation
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-17 When an asset is acquired during the year, depreciation in the year of acquisition must be prorated. When an asset is acquired during the year, depreciation in the year of acquisition must be prorated. Half-Year Convention In the year of acquisition, record six months of depreciation. Half-Year Convention In the year of acquisition, record six months of depreciation. ½ Depreciation for Fractional PeriodsDepreciation for Fractional Periods
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-18 Half-Year ConventionHalf-Year Convention Using the half-year convention, calculate the straight-line depreciation on December 31, 2003, for equipment purchased in 2003. The equipment cost $75,000, has a useful life of 10 years and an estimated salvage value of $5,000. Depreciation = ($75,000 - $5,000) ÷ 10 = $7,000 for a full year Depreciation = $7,000 × 1 /2 = $3,500 Depreciation = ($75,000 - $5,000) ÷ 10 = $7,000 for a full year Depreciation = $7,000 × 1 /2 = $3,500
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-19 Depreciation in the early years of an asset’s estimated useful life is higher than in later years. Depreciation in the early years of an asset’s estimated useful life is higher than in later years. The double-declining balance depreciation rate is 200% of the straight-line depreciation rate of 1/Useful Life. The double-declining balance depreciation rate is 200% of the straight-line depreciation rate of 1/Useful Life. Declining-Balance MethodDeclining-Balance Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-20 On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the double-declining balance method. On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the double-declining balance method. Declining-Balance MethodDeclining-Balance Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-21 Compute depreciation for the rest of the boat’s estimated useful life. Compute depreciation for the rest of the boat’s estimated useful life. Declining-Balance MethodDeclining-Balance Method Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or the declining-balance method. Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or the declining-balance method.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-22 Estimates of Useful Life and Residual Value  May differ from company to company.  The reasonableness of management’s estimates is evaluated by external auditors. Principle of Consistency  Companies should avoid switching depreciation methods from period to period. Estimates of Useful Life and Residual Value  May differ from company to company.  The reasonableness of management’s estimates is evaluated by external auditors. Principle of Consistency  Companies should avoid switching depreciation methods from period to period. Financial Statement DisclosuresFinancial Statement Disclosures
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-23 So depreciation is an estimate. So depreciation is an estimate. Predicted salvage value Predicted salvage value Predicted useful life Predicted useful life Over the life of an asset, new information may come to light that indicates the original estimates need to be revised. Over the life of an asset, new information may come to light that indicates the original estimates need to be revised. Revising Depreciation RatesRevising Depreciation Rates
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-24 Revising Depreciation RatesRevising Depreciation Rates On January 1, 2003, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2006, the useful life was revised to 8 years total (5 years remaining). Calculate depreciation expense for the year ended December 31, 2006, using the straight-line method. On January 1, 2003, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2006, the useful life was revised to 8 years total (5 years remaining). Calculate depreciation expense for the year ended December 31, 2006, using the straight-line method.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-25 When our estimates change, depreciation is: When our estimates change, depreciation is: Book value at date of change Salvage value at date of change Remaining useful life at date of change – Revising Depreciation RatesRevising Depreciation Rates Asset cost 30,000$ Accumulated depreciation, 12/31/2005 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5 Revised annual depreciation 4,200$
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-26 If the cost of an asset cannot be recovered through future use or sale, the asset should be written down to its net realizable value. If the cost of an asset cannot be recovered through future use or sale, the asset should be written down to its net realizable value. Impairment of AssetsImpairment of Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-27 Update depreciation to the date of disposal. Update depreciation to the date of disposal. Recording cash received (debit) or paid (credit). Recording cash received (debit) or paid (credit). Removing accumulated depreciation (debit). Removing accumulated depreciation (debit). Removing the asset cost (credit). Removing the asset cost (credit). Recording a gain (credit) or loss (debit). Recording a gain (credit) or loss (debit). Disposal of Plant and EquipmentDisposal of Plant and Equipment Journalize disposal by:Journalize disposal by:
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-28 If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. Recording cash received (debit) or paid (credit). Recording cash received (debit) or paid (credit). Removing accumulated depreciation (debit). Removing accumulated depreciation (debit). Removing the asset cost (credit). Removing the asset cost (credit). Recording a gain (credit) or loss (debit). Recording a gain (credit) or loss (debit). Disposal of Plant and EquipmentDisposal of Plant and Equipment
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-29 On September 30, 2003, Evans Map Company sells a machine that originally cost $100,000 for $60,000 cash. The machine was placed in service on January 1, 1998. It has been depreciated using the straight-line method with an estimated salvage value of $20,000 and an estimated useful life of 10 years. Let’s answer the following questions. On September 30, 2003, Evans Map Company sells a machine that originally cost $100,000 for $60,000 cash. The machine was placed in service on January 1, 1998. It has been depreciated using the straight-line method with an estimated salvage value of $20,000 and an estimated useful life of 10 years. Let’s answer the following questions. Disposal of Plant and EquipmentDisposal of Plant and Equipment
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-30 The amount of depreciation recorded on September 30, 2003, to bring depreciation up to date is: a. $8,000. b. $6,000. c. $4,000. d. $2,000. The amount of depreciation recorded on September 30, 2003, to bring depreciation up to date is: a. $8,000. b. $6,000. c. $4,000. d. $2,000. Annual Depreciation: ($100,000 - $20,000) ÷ 10 Yrs. = $8,000 Depreciation to Sept. 30: 9/12 × $8,000 = $6,000 Disposal of Plant and EquipmentDisposal of Plant and Equipment
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-31 After updating the depreciation, the machine’s book value on September 30, 2003, is: a. $54,000. b. $46,000. c. $40,000. d. $60,000. After updating the depreciation, the machine’s book value on September 30, 2003, is: a. $54,000. b. $46,000. c. $40,000. d. $60,000. Cost 100,000$ Accumulated Depreciation: (5 yrs. × $8,000) + $6,000 = 46,000 Book Value 54,000$ Disposal of Plant and EquipmentDisposal of Plant and Equipment
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-32 The machine’s sale resulted in: a. a gain of $6,000. b. a gain of $4,000. c. a loss of $6,000. d. a loss of $4,000. The machine’s sale resulted in: a. a gain of $6,000. b. a gain of $4,000. c. a loss of $6,000. d. a loss of $4,000. Cost 100,000$ Accum. Depr. 46,000 Book value 54,000$ Cash received 60,000 Gain 6,000$ Disposal of Plant and EquipmentDisposal of Plant and Equipment
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-33 Accounting depends on whether assets are similar or dissimilar. Accounting depends on whether assets are similar or dissimilar. Airplane for Airplane Airplane for Airplane Truck for Airplane Truck for Airplane Only situations where cash is paid will be demonstrated. Only situations where cash is paid will be demonstrated. Trading in Used Assets for New Ones Trading in Used Assets for New Ones
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-34 Recognize Gains? Recognize Losses? Similar Assets and Cash Paid Yes No Yes Yes Dissimilar Assets Trading in Used Assets for New Ones Trading in Used Assets for New Ones
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-35 On May 30, 2003, Essex Company exchanged a used airplane and $35,000 cash for a new airplane. The old airplane originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and a fair value of $4,000. On May 30, 2003, Essex Company exchanged a used airplane and $35,000 cash for a new airplane. The old airplane originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and a fair value of $4,000. SIMILAR Trading in Used Assets for New Ones – Similar Assets Trading in Used Assets for New Ones – Similar Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-36 The exchange resulted in a: a. gain of $6,000. b. loss of $6,000. c. loss of $4,000. d. gain of $4,000. The exchange resulted in a: a. gain of $6,000. b. loss of $6,000. c. loss of $4,000. d. gain of $4,000. Cost 40,000$ Accum. Depr. 30,000 Book Value 10,000$ Fair Value 4,000 Loss 6,000$ Prepare a journal entry to record the exchange. Trading in Used Assets for New Ones – Similar Assets Trading in Used Assets for New Ones – Similar Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-37 Trading in Used Assets for New Ones – Similar Assets Trading in Used Assets for New Ones – Similar Assets Prepare the journal entry to record the trade. Prepare the journal entry to record the trade.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-38 Noncurrent assets without physical substance. Noncurrent assets without physical substance. Useful life is often difficult to determine. Useful life is often difficult to determine. Usually acquired for operational use. Usually acquired for operational use. Often provide exclusive rights or privileges. Often provide exclusive rights or privileges. Intangible AssetsIntangible Assets CharacteristicsCharacteristics
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-39  Patents  Copyrights  Leaseholds  Leasehold Improvements  Goodwill  Trademarks and Trade Names Record at current cash equivalent cost, including purchase price, legal fees, and filing fees. Intangible AssetsIntangible Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-40 Amortize over shorter of economic life or legal life, subject to a maximum of 40 years. Use straight-line method. Research and development costs are normally expensed as incurred. Amortize over shorter of economic life or legal life, subject to a maximum of 40 years. Use straight-line method. Research and development costs are normally expensed as incurred. Intangible AssetsIntangible Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-41 The amount by which the purchase price exceeds the fair market value of net assets acquired. The amount by which the purchase price exceeds the fair market value of net assets acquired. Occurs when one company buys another company. Occurs when one company buys another company. Only purchased goodwill is an intangible asset. Only purchased goodwill is an intangible asset. Intangible Assets – GoodwillIntangible Assets – Goodwill GoodwillGoodwill
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-42 Not amortized.Not amortized. Subject to assessment for impairment value and may be written down. Subject to assessment for impairment value and may be written down. Intangible Assets – GoodwillIntangible Assets – Goodwill GoodwillGoodwill
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-43 Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised at a fair value of $900,000. Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised at a fair value of $900,000. Intangible Assets – GoodwillIntangible Assets – Goodwill
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-44 What amount of goodwill should be recorded on Eddy Company books? a. $100,000. b. $200,000. c. $300,000. d. $400,000. What amount of goodwill should be recorded on Eddy Company books? a. $100,000. b. $200,000. c. $300,000. d. $400,000. Intangible Assets – GoodwillIntangible Assets – GoodwillIntangible Assets – Goodwill
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-45 Exclusive right granted by federal government to sell or manufacture an invention. Exclusive right granted by federal government to sell or manufacture an invention. Cost is purchase price plus legal cost to defend. Cost is purchase price plus legal cost to defend. Amortize cost over the shorter of useful life or 17 years. Amortize cost over the shorter of useful life or 17 years. Intangible Assets – PatentsIntangible Assets – Patents
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-46 A symbol, design, or logo associated with a business. A symbol, design, or logo associated with a business. Purchased trademarks are recorded at cost, and amortized over shorter of legal or economic life, or 40 years. Internally developed trademarks have no recorded asset cost. Intangible Assets – Trademarks and Trade Names Intangible Assets – Trademarks and Trade Names
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-47 Legally protected right to sell products or provide services purchased by franchisee from franchisor. Legally protected right to sell products or provide services purchased by franchisee from franchisor. Purchase price is intangible asset which is amortized over the shorter of the protected right or 40 years. Purchase price is intangible asset which is amortized over the shorter of the protected right or 40 years. Intangible Assets – FranchisesIntangible Assets – Franchises
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-48 Exclusive right granted by the federal government to protect artistic or intellectual properties. Exclusive right granted by the federal government to protect artistic or intellectual properties. Amortize cost over a period not to exceed 40 years. Amortize cost over a period not to exceed 40 years. Legal life is life of creator plus 50 years. Legal life is life of creator plus 50 years. Intangible Assets – CopyrightsIntangible Assets – Copyrights
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-49 Total cost, including exploration and development, is charged to depletion expense over periods benefited. Total cost, including exploration and development, is charged to depletion expense over periods benefited. Examples: oil, coal, goldExamples: oil, coal, gold Extracted from the natural environment and reported at cost less accumulated depletion. Extracted from the natural environment and reported at cost less accumulated depletion. Natural ResourcesNatural Resources
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-50 Depletion is calculated using the units-of-production method. Unit depletion rate is calculated as follows: Total Units of Capacity Cost – Salvage Value Depletion of Natural ResourcesDepletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-51 Total depletion cost for a period is: Unit Depletion Rate Number of Units Extracted in Period× Total depletion cost Total depletion cost Inventory for sale Inventory for sale Unsold Inventory Unsold Inventory Cost of goods sold Cost of goods sold Depletion of Natural ResourcesDepletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-52 Specialized plant assets may be required to extract the natural resource. These assets are recorded in a separate account and depreciated. Depletion of Natural ResourcesDepletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-53 Cost per Unit of Output = Cost - Residual Value Estimated Units of Output Depreciation Expense = Cost per Unit of Output × Number of Units Produced The Units-of-Output MethodThe Units-of-Output Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-54 MACRS = Modified Accelerated Cost Recovery SystemMACRS = Modified Accelerated Cost Recovery System Based on Declining-Balance Methods Based on Declining-Balance Methods Asset Cost × MACRS rate Rates are available from tables provided by the IRS. Asset Cost × MACRS rate Rates are available from tables provided by the IRS. The only accelerated method allowed by the IRS when computing depreciation for tax return purposes. The only accelerated method allowed by the IRS when computing depreciation for tax return purposes. MACRS: The “Tax Method”MACRS: The “Tax Method”
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-55 A survey of 600 Publicly Owned Corporations 563 44 11 70 53 9 Straight-line Declining-balance Sum-of-the-years'-digits Accelerated methods (not specified) Units-of-output Other Which Depreciation Methods Do Most Businesses Use? Which Depreciation Methods Do Most Businesses Use?
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin Slide 9-56 End of Chapter 9End of Chapter 9

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Williams09

  • 1.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-1 PLANT AND INTANGIBLE ASSETS Chapter 9
  • 2.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-2 Long-lived assets acquired for use in business operations. Long-lived assets acquired for use in business operations. Similar to long-term prepaid expenses The cost of plant assets is the advance purchase of services. As years pass, and the services are used, the cost is transferred to depreciation expense. Plant AssetsPlant Assets
  • 3.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-3 L a n d , b u ild in g s , e q u ip m e n t, f u r n it u r e , f ix t u r e s . L o n g - t e rm a s s e t s h a v in g p h y s ic a l s u b s t a n c e . T a n g i b l e P l a n t A s s e ts P a t e n t s , c o p y r ig h t s , t r a d e m a r k s , f r a n c h is e s , g o o d w ill. N o n c u r r e n t a s s e ts w it h n o p h y s ic a l s u b s t a n c e . I n t a n g i b le A s s e ts O il r e s e r v e s , t im b e r , o t h e r m in e r a ls . S it e s a c q u ir e d f o r e x t ra c t in g v a lu a b le r e s o u r c e s . N a t u r a l R e s o u r c e s Major Categories of Plant AssetsMajor Categories of Plant Assets
  • 4.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-4 Acquisition. Allocation of the acquisition cost to expense over the asset’s useful life (depreciation). Sale or disposal. Acquisition. Allocation of the acquisition cost to expense over the asset’s useful life (depreciation). Sale or disposal. Accountable EventsAccountable Events
  • 5.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-5 Asset price Asset price Reasonable and necessary costs . . . Reasonable and necessary costs . . . . . . for getting the asset to the desired location. . . . for getting the asset to the desired location. . . . for getting the asset ready for use. . . . for getting the asset ready for use. CostCost Acquisition of Plant AssetsAcquisition of Plant Assets +
  • 6.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-6 On May 4, Heat Co., an Ohio maker of stoves, buys a new machine from a Texas company. The new machine has a price of $52,000. Sales tax was computed at 8%. Heat Co. pays $500 shipping cost to get the machine to Ohio. After the machine arrives, set-up costs of $1,300 are incurred, along with $4,000 in testing costs. Compute the cost of Heat Co.’s new machine. On May 4, Heat Co., an Ohio maker of stoves, buys a new machine from a Texas company. The new machine has a price of $52,000. Sales tax was computed at 8%. Heat Co. pays $500 shipping cost to get the machine to Ohio. After the machine arrives, set-up costs of $1,300 are incurred, along with $4,000 in testing costs. Compute the cost of Heat Co.’s new machine. Determining CostDetermining Cost
  • 7.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-7 Prepare the journal entry. Determining CostDetermining Cost
  • 8.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-8 Improvements to land such as driveways, fences, and landscaping are recorded separately. Improvements to land such as driveways, fences, and landscaping are recorded separately. Cost includes real estate commissions, escrow fees, legal fees, clearing and grading the property. Cost includes real estate commissions, escrow fees, legal fees, clearing and grading the property. Land Improvements Land Improvements LandLand Special ConsiderationsSpecial Considerations
  • 9.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-9 Repairs made prior to the building being put in use are considered part of the building’s cost. Repairs made prior to the building being put in use are considered part of the building’s cost. BuildingsBuildings Special ConsiderationsSpecial Considerations EquipmentEquipment Related interest, insurance, and property taxes are treated as expenses of the current period. Related interest, insurance, and property taxes are treated as expenses of the current period.
  • 10.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-10 I think I’ll buy the whole thing; barn, land, and animals. Special ConsiderationsSpecial Considerations The allocation is based on the relative Fair Market Value of each asset purchased. The allocation is based on the relative Fair Market Value of each asset purchased. The total cost must be allocated to separate accounts for each asset. The total cost must be allocated to separate accounts for each asset. Allocation of a Lump-Sum PurchaseAllocation of a Lump-Sum Purchase
  • 11.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-11 Capital Expenditure Capital Expenditure Revenue Expenditure Revenue Expenditure Any material expenditure that will benefit several accounting periods. Any material expenditure that will benefit several accounting periods. To capitalize an expenditure means to charge it to an asset account. To capitalize an expenditure means to charge it to an asset account. Expenditure for ordinary repairs and maintenance. Expenditure for ordinary repairs and maintenance. To expense an expenditure means to charge it to an expense account. To expense an expenditure means to charge it to an expense account. Capital Expenditures and Revenue Expenditures Capital Expenditures and Revenue Expenditures
  • 12.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-12 The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset. The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset. Cost of plant assets Balance SheetBalance Sheet Assets: Plant and equipment Assets: Plant and equipment Income StatementIncome Statement Revenues: Expenses: Depreciation Revenues: Expenses: Depreciation as the services are received DepreciationDepreciation
  • 13.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-13 Book Value  Cost – Accumulated Depreciation Accumulated Depreciation  Contra-asset  Represents the portion of an asset’s cost that has already been allocated to expense. Causes of Depreciation  Physical deterioration  Obsolescence Book Value  Cost – Accumulated Depreciation Accumulated Depreciation  Contra-asset  Represents the portion of an asset’s cost that has already been allocated to expense. Causes of Depreciation  Physical deterioration  Obsolescence DepreciationDepreciation
  • 14.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-14 Cost - Residual Value Years of Useful Life Depreciation Expense per Year = Straight-Line DepreciationStraight-Line Depreciation
  • 15.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-15 On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the straight-line method. On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the straight-line method. Straight-Line DepreciationStraight-Line Depreciation
  • 16.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-16 Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful life of the boat is: Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful life of the boat is: Salvage ValueSalvage Value Straight-Line DepreciationStraight-Line Depreciation
  • 17.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-17 When an asset is acquired during the year, depreciation in the year of acquisition must be prorated. When an asset is acquired during the year, depreciation in the year of acquisition must be prorated. Half-Year Convention In the year of acquisition, record six months of depreciation. Half-Year Convention In the year of acquisition, record six months of depreciation. ½ Depreciation for Fractional PeriodsDepreciation for Fractional Periods
  • 18.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-18 Half-Year ConventionHalf-Year Convention Using the half-year convention, calculate the straight-line depreciation on December 31, 2003, for equipment purchased in 2003. The equipment cost $75,000, has a useful life of 10 years and an estimated salvage value of $5,000. Depreciation = ($75,000 - $5,000) ÷ 10 = $7,000 for a full year Depreciation = $7,000 × 1 /2 = $3,500 Depreciation = ($75,000 - $5,000) ÷ 10 = $7,000 for a full year Depreciation = $7,000 × 1 /2 = $3,500
  • 19.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-19 Depreciation in the early years of an asset’s estimated useful life is higher than in later years. Depreciation in the early years of an asset’s estimated useful life is higher than in later years. The double-declining balance depreciation rate is 200% of the straight-line depreciation rate of 1/Useful Life. The double-declining balance depreciation rate is 200% of the straight-line depreciation rate of 1/Useful Life. Declining-Balance MethodDeclining-Balance Method
  • 20.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-20 On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the double-declining balance method. On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the double-declining balance method. Declining-Balance MethodDeclining-Balance Method
  • 21.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-21 Compute depreciation for the rest of the boat’s estimated useful life. Compute depreciation for the rest of the boat’s estimated useful life. Declining-Balance MethodDeclining-Balance Method Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or the declining-balance method. Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or the declining-balance method.
  • 22.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-22 Estimates of Useful Life and Residual Value  May differ from company to company.  The reasonableness of management’s estimates is evaluated by external auditors. Principle of Consistency  Companies should avoid switching depreciation methods from period to period. Estimates of Useful Life and Residual Value  May differ from company to company.  The reasonableness of management’s estimates is evaluated by external auditors. Principle of Consistency  Companies should avoid switching depreciation methods from period to period. Financial Statement DisclosuresFinancial Statement Disclosures
  • 23.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-23 So depreciation is an estimate. So depreciation is an estimate. Predicted salvage value Predicted salvage value Predicted useful life Predicted useful life Over the life of an asset, new information may come to light that indicates the original estimates need to be revised. Over the life of an asset, new information may come to light that indicates the original estimates need to be revised. Revising Depreciation RatesRevising Depreciation Rates
  • 24.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-24 Revising Depreciation RatesRevising Depreciation Rates On January 1, 2003, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2006, the useful life was revised to 8 years total (5 years remaining). Calculate depreciation expense for the year ended December 31, 2006, using the straight-line method. On January 1, 2003, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2006, the useful life was revised to 8 years total (5 years remaining). Calculate depreciation expense for the year ended December 31, 2006, using the straight-line method.
  • 25.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-25 When our estimates change, depreciation is: When our estimates change, depreciation is: Book value at date of change Salvage value at date of change Remaining useful life at date of change – Revising Depreciation RatesRevising Depreciation Rates Asset cost 30,000$ Accumulated depreciation, 12/31/2005 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5 Revised annual depreciation 4,200$
  • 26.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-26 If the cost of an asset cannot be recovered through future use or sale, the asset should be written down to its net realizable value. If the cost of an asset cannot be recovered through future use or sale, the asset should be written down to its net realizable value. Impairment of AssetsImpairment of Assets
  • 27.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-27 Update depreciation to the date of disposal. Update depreciation to the date of disposal. Recording cash received (debit) or paid (credit). Recording cash received (debit) or paid (credit). Removing accumulated depreciation (debit). Removing accumulated depreciation (debit). Removing the asset cost (credit). Removing the asset cost (credit). Recording a gain (credit) or loss (debit). Recording a gain (credit) or loss (debit). Disposal of Plant and EquipmentDisposal of Plant and Equipment Journalize disposal by:Journalize disposal by:
  • 28.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-28 If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. Recording cash received (debit) or paid (credit). Recording cash received (debit) or paid (credit). Removing accumulated depreciation (debit). Removing accumulated depreciation (debit). Removing the asset cost (credit). Removing the asset cost (credit). Recording a gain (credit) or loss (debit). Recording a gain (credit) or loss (debit). Disposal of Plant and EquipmentDisposal of Plant and Equipment
  • 29.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-29 On September 30, 2003, Evans Map Company sells a machine that originally cost $100,000 for $60,000 cash. The machine was placed in service on January 1, 1998. It has been depreciated using the straight-line method with an estimated salvage value of $20,000 and an estimated useful life of 10 years. Let’s answer the following questions. On September 30, 2003, Evans Map Company sells a machine that originally cost $100,000 for $60,000 cash. The machine was placed in service on January 1, 1998. It has been depreciated using the straight-line method with an estimated salvage value of $20,000 and an estimated useful life of 10 years. Let’s answer the following questions. Disposal of Plant and EquipmentDisposal of Plant and Equipment
  • 30.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-30 The amount of depreciation recorded on September 30, 2003, to bring depreciation up to date is: a. $8,000. b. $6,000. c. $4,000. d. $2,000. The amount of depreciation recorded on September 30, 2003, to bring depreciation up to date is: a. $8,000. b. $6,000. c. $4,000. d. $2,000. Annual Depreciation: ($100,000 - $20,000) ÷ 10 Yrs. = $8,000 Depreciation to Sept. 30: 9/12 × $8,000 = $6,000 Disposal of Plant and EquipmentDisposal of Plant and Equipment
  • 31.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-31 After updating the depreciation, the machine’s book value on September 30, 2003, is: a. $54,000. b. $46,000. c. $40,000. d. $60,000. After updating the depreciation, the machine’s book value on September 30, 2003, is: a. $54,000. b. $46,000. c. $40,000. d. $60,000. Cost 100,000$ Accumulated Depreciation: (5 yrs. × $8,000) + $6,000 = 46,000 Book Value 54,000$ Disposal of Plant and EquipmentDisposal of Plant and Equipment
  • 32.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-32 The machine’s sale resulted in: a. a gain of $6,000. b. a gain of $4,000. c. a loss of $6,000. d. a loss of $4,000. The machine’s sale resulted in: a. a gain of $6,000. b. a gain of $4,000. c. a loss of $6,000. d. a loss of $4,000. Cost 100,000$ Accum. Depr. 46,000 Book value 54,000$ Cash received 60,000 Gain 6,000$ Disposal of Plant and EquipmentDisposal of Plant and Equipment
  • 33.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-33 Accounting depends on whether assets are similar or dissimilar. Accounting depends on whether assets are similar or dissimilar. Airplane for Airplane Airplane for Airplane Truck for Airplane Truck for Airplane Only situations where cash is paid will be demonstrated. Only situations where cash is paid will be demonstrated. Trading in Used Assets for New Ones Trading in Used Assets for New Ones
  • 34.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-34 Recognize Gains? Recognize Losses? Similar Assets and Cash Paid Yes No Yes Yes Dissimilar Assets Trading in Used Assets for New Ones Trading in Used Assets for New Ones
  • 35.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-35 On May 30, 2003, Essex Company exchanged a used airplane and $35,000 cash for a new airplane. The old airplane originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and a fair value of $4,000. On May 30, 2003, Essex Company exchanged a used airplane and $35,000 cash for a new airplane. The old airplane originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and a fair value of $4,000. SIMILAR Trading in Used Assets for New Ones – Similar Assets Trading in Used Assets for New Ones – Similar Assets
  • 36.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-36 The exchange resulted in a: a. gain of $6,000. b. loss of $6,000. c. loss of $4,000. d. gain of $4,000. The exchange resulted in a: a. gain of $6,000. b. loss of $6,000. c. loss of $4,000. d. gain of $4,000. Cost 40,000$ Accum. Depr. 30,000 Book Value 10,000$ Fair Value 4,000 Loss 6,000$ Prepare a journal entry to record the exchange. Trading in Used Assets for New Ones – Similar Assets Trading in Used Assets for New Ones – Similar Assets
  • 37.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-37 Trading in Used Assets for New Ones – Similar Assets Trading in Used Assets for New Ones – Similar Assets Prepare the journal entry to record the trade. Prepare the journal entry to record the trade.
  • 38.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-38 Noncurrent assets without physical substance. Noncurrent assets without physical substance. Useful life is often difficult to determine. Useful life is often difficult to determine. Usually acquired for operational use. Usually acquired for operational use. Often provide exclusive rights or privileges. Often provide exclusive rights or privileges. Intangible AssetsIntangible Assets CharacteristicsCharacteristics
  • 39.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-39  Patents  Copyrights  Leaseholds  Leasehold Improvements  Goodwill  Trademarks and Trade Names Record at current cash equivalent cost, including purchase price, legal fees, and filing fees. Intangible AssetsIntangible Assets
  • 40.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-40 Amortize over shorter of economic life or legal life, subject to a maximum of 40 years. Use straight-line method. Research and development costs are normally expensed as incurred. Amortize over shorter of economic life or legal life, subject to a maximum of 40 years. Use straight-line method. Research and development costs are normally expensed as incurred. Intangible AssetsIntangible Assets
  • 41.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-41 The amount by which the purchase price exceeds the fair market value of net assets acquired. The amount by which the purchase price exceeds the fair market value of net assets acquired. Occurs when one company buys another company. Occurs when one company buys another company. Only purchased goodwill is an intangible asset. Only purchased goodwill is an intangible asset. Intangible Assets – GoodwillIntangible Assets – Goodwill GoodwillGoodwill
  • 42.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-42 Not amortized.Not amortized. Subject to assessment for impairment value and may be written down. Subject to assessment for impairment value and may be written down. Intangible Assets – GoodwillIntangible Assets – Goodwill GoodwillGoodwill
  • 43.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-43 Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised at a fair value of $900,000. Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised at a fair value of $900,000. Intangible Assets – GoodwillIntangible Assets – Goodwill
  • 44.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-44 What amount of goodwill should be recorded on Eddy Company books? a. $100,000. b. $200,000. c. $300,000. d. $400,000. What amount of goodwill should be recorded on Eddy Company books? a. $100,000. b. $200,000. c. $300,000. d. $400,000. Intangible Assets – GoodwillIntangible Assets – GoodwillIntangible Assets – Goodwill
  • 45.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-45 Exclusive right granted by federal government to sell or manufacture an invention. Exclusive right granted by federal government to sell or manufacture an invention. Cost is purchase price plus legal cost to defend. Cost is purchase price plus legal cost to defend. Amortize cost over the shorter of useful life or 17 years. Amortize cost over the shorter of useful life or 17 years. Intangible Assets – PatentsIntangible Assets – Patents
  • 46.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-46 A symbol, design, or logo associated with a business. A symbol, design, or logo associated with a business. Purchased trademarks are recorded at cost, and amortized over shorter of legal or economic life, or 40 years. Internally developed trademarks have no recorded asset cost. Intangible Assets – Trademarks and Trade Names Intangible Assets – Trademarks and Trade Names
  • 47.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-47 Legally protected right to sell products or provide services purchased by franchisee from franchisor. Legally protected right to sell products or provide services purchased by franchisee from franchisor. Purchase price is intangible asset which is amortized over the shorter of the protected right or 40 years. Purchase price is intangible asset which is amortized over the shorter of the protected right or 40 years. Intangible Assets – FranchisesIntangible Assets – Franchises
  • 48.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-48 Exclusive right granted by the federal government to protect artistic or intellectual properties. Exclusive right granted by the federal government to protect artistic or intellectual properties. Amortize cost over a period not to exceed 40 years. Amortize cost over a period not to exceed 40 years. Legal life is life of creator plus 50 years. Legal life is life of creator plus 50 years. Intangible Assets – CopyrightsIntangible Assets – Copyrights
  • 49.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-49 Total cost, including exploration and development, is charged to depletion expense over periods benefited. Total cost, including exploration and development, is charged to depletion expense over periods benefited. Examples: oil, coal, goldExamples: oil, coal, gold Extracted from the natural environment and reported at cost less accumulated depletion. Extracted from the natural environment and reported at cost less accumulated depletion. Natural ResourcesNatural Resources
  • 50.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-50 Depletion is calculated using the units-of-production method. Unit depletion rate is calculated as follows: Total Units of Capacity Cost – Salvage Value Depletion of Natural ResourcesDepletion of Natural Resources
  • 51.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-51 Total depletion cost for a period is: Unit Depletion Rate Number of Units Extracted in Period× Total depletion cost Total depletion cost Inventory for sale Inventory for sale Unsold Inventory Unsold Inventory Cost of goods sold Cost of goods sold Depletion of Natural ResourcesDepletion of Natural Resources
  • 52.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-52 Specialized plant assets may be required to extract the natural resource. These assets are recorded in a separate account and depreciated. Depletion of Natural ResourcesDepletion of Natural Resources
  • 53.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-53 Cost per Unit of Output = Cost - Residual Value Estimated Units of Output Depreciation Expense = Cost per Unit of Output × Number of Units Produced The Units-of-Output MethodThe Units-of-Output Method
  • 54.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-54 MACRS = Modified Accelerated Cost Recovery SystemMACRS = Modified Accelerated Cost Recovery System Based on Declining-Balance Methods Based on Declining-Balance Methods Asset Cost × MACRS rate Rates are available from tables provided by the IRS. Asset Cost × MACRS rate Rates are available from tables provided by the IRS. The only accelerated method allowed by the IRS when computing depreciation for tax return purposes. The only accelerated method allowed by the IRS when computing depreciation for tax return purposes. MACRS: The “Tax Method”MACRS: The “Tax Method”
  • 55.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-55 A survey of 600 Publicly Owned Corporations 563 44 11 70 53 9 Straight-line Declining-balance Sum-of-the-years'-digits Accelerated methods (not specified) Units-of-output Other Which Depreciation Methods Do Most Businesses Use? Which Depreciation Methods Do Most Businesses Use?
  • 56.
    © The McGraw-HillCompanies, Inc., 2003McGraw-Hill/Irwin Slide 9-56 End of Chapter 9End of Chapter 9