Reporting and Interpreting

Property, Plant and Equipment;

Natural Resources; and
Intangibles
Chapter 8

McGraw-Hill/Irwin

2009 The McGraw-Hill Companies, Inc.

Measuring and Recording Acquisition

Cost
Acquisition cost includes the purchase price and all
expenditures needed to prepare the asset for its intended use.
Acquisition cost does not include
financing charges and cash discounts.
Buildings
Buildings
Purchase
Purchase price
price
Renovation
Renovation and
and repair
repair costs
costs
Legal
Legal and
and realty
realty fees
fees
Title
Title fees
fees
McGraw-Hill/Irwin

Slide 2

Measuring and Recording Acquisition

Cost
Equipment
Equipment
Purchase
Purchase price
price

Installation
Installation costs
costs
Modification
Modification to
to building
building
necessary
necessary to
to install
install
equipment
equipment
Transportation
Transportation costs
costs

Land
Land
Purchase
Purchase price
price
Real
Real estate
estate commissions
commissions
Title
Title insurance
insurance premiums
premiums
Delinquent
Delinquent taxes
taxes
Surveying
Surveying fees
fees
Title
Title search
search and
and transfer
transfer fees
fees

Land
Land is
is not
not depreciable.
depreciable.
McGraw-Hill/Irwin

Slide 3

Acquisition by Construction
Asset
Asset cost
cost includes:
includes:

All materials and

labor traceable to
the construction.

McGraw-Hill/Irwin

A reasonable
amount of
overhead.

Interest on debt
incurred during
the construction.

Slide 4

Repairs, Maintenance, and Additions

Type of
Capital or
Expenditure Revenue

Identifying Characteristics

Ordinary
Revenue 1. Maintains normal operating condition
repairs and
2. Does not increase productivity
maintenance
3. Does not extend life beyond original
estimate
Extraordinary
repairs

Capital

1. Major overhauls or partial

replacements
2. Extends life beyond original estimate

Additions

Capital

1. Increases productivity
2. May extend useful life
3. Improvements or expansions

McGraw-Hill/Irwin

Slide 5

Depreciation Concepts
Depreciation
Depreciation is
is aa cost
cost allocation
allocation process
process that
that
systematically
systematically and
and rationally
rationally matches
matches acquisition
acquisition costs
costs
of
of operational
operational assets
assets with
with periods
periods benefited
benefited by
by their
their use.
use.
Balance Sheet
Acquisition
Cost
(Unused)

Income Statement
Cost

Expense

Allocation

(Used)

Depreciation
Expense

Depreciation for
the current year

Income
Statement

Accumulated
Depreciation

Total of depreciation
to date on an asset

Balance
Sheet

McGraw-Hill/Irwin

Slide 6

Depreciation Concepts
The
The calculation
calculation of
of depreciation
depreciation requires
requires
three
three amounts
amounts for
for each
each asset:
asset:

Acquisition
Acquisition cost.
cost.

Estimated
Estimated useful
useful life.
life.

Estimated
Estimated residual
residual value.
value.

Alternative
Alternative depreciation
depreciation
methods:
methods:

Straight-line
Straight-line

Units-of-production
Units-of-production

Accelerated
Accelerated Method:
Method: Declining
Declining

McGraw-Hill/Irwin

Slide 7

Measuring Asset Impairment

Impairment is the loss of a significant portion
of the utility of an asset through . . .
Casualty.
Obsolescence.
Lack of demand for the assets services.

Recognize a
loss when
an asset
suffers a
permanent
impairment.

Disposal
Disposal of
of Property,
Property, Plant
Plant and
and Equipment
Equipment
Voluntary
Voluntary disposals:
disposals:
Sale
Sale
Trade-in
Trade-in
Retirement
Retirement
Involuntary
Involuntary disposals:
disposals:
Fire
Fire
Accident
Accident

McGraw-Hill/Irwin

Slide 8

Disposal of Property, Plant, and

Equipment
Update depreciation
to the date of disposal.
Journalize disposal by:
Recording cash
received (debit)
or paid (credit).

Recording a
gain (credit)
or loss (debit).

Writing off accumulated

depreciation (debit).

Writing off the

asset cost (credit).

McGraw-Hill/Irwin

Slide 9

Acquisition and Depletion of Natural

Resources
Extracted from
the natural
environment.

A noncurrent
asset presented
at cost less
accumulated
depletion.

Total cost of
asset is the cost
of acquisition,
exploration,
and development.

Total cost is
allocated over
periods benefited
by means of
depletion.

Examples: oil, coal, gold

Depletion is like units-of-production depreciation.

McGraw-Hill/Irwin

Slide 10

Acquisition and Amortization of

Intangible Assets
Noncurrent
Noncurrent assets
assets
without
without physical
physical
substance.
substance.
Useful
Useful life
life is
is
often
often difficult
difficult
to
to determine.
determine.

Intangible
Assets

Often
Often provide
provide
exclusive
exclusive rights
rights
or
or privileges.
privileges.
Usually
Usually acquired
acquired
for
for operational
operational
use.
use.

Record at current cash equivalent cost, including

purchase price, legal fees, and filing fees.
McGraw-Hill/Irwin

Slide 11

Acquisition and Amortization of

Intangible Assets
Goodwill
Occurs when one
company buys
another company.

Only purchased
goodwill is an
intangible asset.

The amount by which the purchase price exceeds

the fair market value of net assets acquired.
Goodwill
Goodwill is
is not
not amortized.
amortized. Its
Its value
value must
must be
be reviewed
reviewed
at
at least
least annually
annually for
for possible
possible impairment,
impairment, and
and the
the
book
book value
value is
is reduced
reduced to
to fair
fair value
value ifif impaired.
impaired.
McGraw-Hill/Irwin

Slide 12

Acquisition and Amortization of

Intangible Assets
Trademarks
Trademarks

Copyrights
Copyrights

AA symbol,
symbol, design,
design, or
or
logo
logo associated
associated with
with
aa business.
business.

The
The exclusive
exclusive right
right to
to
publish,
publish, use,
use, and
and sell
sell aa
literary,
literary, musical,
musical, or
or
artistic
artistic work.
work.

An
An exclusive
exclusive legal
legal right
right
to
to use
use aa name,
name, image
image
or
or slogan.
slogan.
Purchased
Purchased trademarks
trademarks
are
are recorded
recorded at
at cost.
cost.

McGraw-Hill/Irwin

Legal
Legal life
life is
is life
life of
of
creator
creator plus
plus 70
70 years.
years.
Amortize
Amortize cost
cost over
over the
the
period
period benefited.
benefited.

Slide 13

Acquisition and Amortization of

Intangible Assets
Patents
Patents
Exclusive
Exclusive right
right granted
granted by
by the
the federal
federal government
government to
to sell
sell or
or
manufacture
manufacture an
an invention.
invention.
Cost
Cost is
is purchase
purchase price
price plus
plus legal
legal cost
cost to
to defend.
defend.
Amortize
Amortize cost
cost over
over the
the shorter
shorter of
of useful
useful life
life or
or 20
20 years.
years.
Research
Research and
and development
development costs
costs that
that might
might result
result in
in aa patent
patent
are
are normally
normally expensed
expensed as
as incurred.
incurred.
Technology
Technology
AA category
category of
of intangible
intangible assets
assets that
that includes
includes aa companys
companys
website
website and
and any
any computer
computer programs
programs written
written by
by its
its employees.
employees.
McGraw-Hill/Irwin

Slide 14

Acquisition and Amortization of

Intangible Assets
Franchises
Franchises
Legally
Legally protected
protected right
right
purchased
purchased by
by aa
franchisee
franchisee to
to sell
sell
products
products or
or provide
provide
services
services for
for aa specified
specified
period
period and
and purpose.
purpose.
Purchase
Purchase price
price is
is an
an
intangible
intangible asset
asset that
that is
is
amortized.
amortized.

McGraw-Hill/Irwin

Licenses
Licenses and
and Operating
Operating
Rights
Rights
Limited
Limited permissions
permissions to
to
use
use aa product
product or
or service
service
according
according to
to specific
specific
terms
terms and
and conditions.
conditions.
You
You may
may be
be using
using
computer
computer software
software that
that
is
is made
made available
available to
to you
you
through
through aa campus
campus
licensing
licensing agreement.
agreement.

Slide 15

Focus on Cash Flows

Operating Activity
(Indirect method)
Depreciation and amortization
Gain on sale
Loss on sale
Loss due to impairment

Investing Activities
Purchases of long-lived assets
Sales of long-lived assets

McGraw-Hill/Irwin

Effect on
Cash Flows

+
+

+
Slide 16

End of Chapter 8

2008 The McGraw-Hill Companies, Inc.