Chapter 9

LONG-TERM ASSETS

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
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C1

PROPERTY, PLANT AND EQUIPMENT

Tangible in Nature

Actively Used in Operations

Expected to Benefit Future Periods

Called Property, Plant, & Equipment

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PROPERTY, PLANT AND EQUIPMENT

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COST DETERMINATION

Purchase All expenditures

price needed to
prepare the
Acquisition asset for its
Cost intended use

Acquisition cost excludes

financing charges and
cash discounts
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LAND
Title insurance premiums
Purchase Delinquent
price taxes

Real estate Surveying

commissions fees

Title search and transfer fees

Land is not depreciable.

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LAND IMPROVEMENTS

Parking lots, driveways, fences, walks, shrubs,

and lighting systems.

Depreciate
over useful life of
improvements.
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BUILDINGS
Cost of purchase or Title fees
construction

Brokerage Attorney fees

fees

Taxes
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MACHINERY AND EQUIPMENT

Purchase
price Taxes

Transportation
charges

Installing,
assembling, and Insurance while
testing in transit
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LUMP-SUM ASSET PURCHASE

The total cost of a combined purchase of land and building is
separated on the basis of their relative fair market values.

CarMax paid $90,000 cash to acquire a group of items

consisting of land appraised at $30,000, land improvements
appraised at $10,000, and a building appraised at $60,000.
The $90,000 cost will be allocated on the basis of appraised
values as shown:
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DEPRECIATION

Depreciation is the process of allocating the

cost of an item of property, plant and
equipment to expense in the accounting
periods benefiting from its use.
Statement of Financial Position Income Statement
Acquisition Cost
Expense
Cost Allocation
(Unused) (Used)
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FACTORS IN COMPUTING DEPRECIATION

The calculation of depreciation requires

three amounts for each asset:
1. Cost
2. Residual Value
3. Useful Life
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DEPRECIATION METHODS
1. Straight-line
2. Units-of-production
3. Declining-balance
Asset we will depreciate in future screens
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Straight-Line Method
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Straight-Line Method

Statement of Financial Position Presentation

Machinery $ 10,000
Less: accumulated depreciation 3,600 $ 6,400
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STRAIGHT-LINE DEPRECIATION SCHEDULE

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UNITS-OF-PRODUCTION METHOD

Step 1:
Depreciation = Cost - Residual Value
Per Unit Total Units of Production

Step 2:
Number of Units
Depreciation Depreciation × Produced
=
Expense Per Unit in the Period
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UNITS-OF-PRODUCTION METHOD
Assume that 7,000 units were inspected
during 2011. Depreciation would be
calculated as follows:

Step 1:
Depreciation = Cost - Residual Value = $9,000 = $0.25/unit
Per Unit Total Units of Production 36,000

Step 2:
Number of Units
Depreciation Depreciation = $0.25 × 7,000 = $1,750
= × Produced
Expense Per Unit
in the Period
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UNITS-OF-PRODUCTION
DEPRECIATION SCHEDULE

Units produced and sold during the period.

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DOUBLE-DECLINING-BALANCE METHOD
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DOUBLE-DECLINING-BALANCE METHOD
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COMPARING DEPRECIATION METHODS

Double-
Straight- Units of Declining-
Period Line Production Balance
2011 $ 1,800 $ 1,750 $ 4,000
2012 1,800 2,000 2,400
2013 1,800 2,250 1,440
2014 1,800 1,750 864
2015 1,800 1,250 296
Totals $ 9,000 $ 9,000 $ 9,000

$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$-
2011 2012 2013 2014 2015

Straight-Line Units-of-Production Double-Declining-Balance

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C2

PARTIAL-YEAR DEPRECIATION
When an item of property, plant and equipment is
acquired during the year, depreciation is calculated for
the fraction of the year the asset is owned.

Cost $ 10,000
Assume our machinery was purchased
Residual value 1,000
on October 8, 2010. Let’s calculate
Depreciable cost $ 9,000
Useful life
depreciation expense for 2010,
Accounting periods 5 years assuming we use straight-line
Units inspected 36,000 units depreciation.
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CHANGE IN ESTIMATES FOR DEPRECIATION

Predicted Predicted
residual value useful life

Depreciation
is an estimate

Over the life of an asset, new information may

come to light that indicates the original estimates
were inaccurate.
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CHANGE IN ESTIMATES FOR DEPRECIATION

Let’s look at our machinery from the previous examples
and assume that at the beginning of the asset’s third year,
its carrying amount is $6,400 ($10,000 cost less $3,600
accumulated depreciation using straight-line depreciation).
At that time, it is determined that the machinery will have a
remaining useful life of 4 years, and the estimated residual
value will be revised downward from $1,000 to $400.
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REPORTING DEPRECIATION
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ADDITIONAL EXPENDITURES
Financial Statement Effect
Current Current
Treatment Statement Expense Income Taxes
Statement of
Capital financial position Deferred Higher Higher
Expenditure account debited
Revenue Income statement Currently
Lower Lower
Expenditure account debited recognized

If the amounts involved are not material,

most companies expense the item.
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C3

REVENUE AND CAPITAL EXPENDITURES

Capital or
Revenue Identifying Characteristics
1. Maintains normal operating condition.
2. Does not increase productivity.
Revenue
3. Does not extend life beyond original
estimate.
1. Major overhauls or partial
replacements.
Capital 2. Extends life beyond original estimate.
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C4

MEASUREMENT MODELS
The Cost Model states that after recognition as an asset, an
item of PPE shall be carried at its cost less any accumulated
depreciation and any accumulated impairment losses.

The Revaluation Model states that after recognition as an

asset, an item of PPE whose fair value can be measured
reliably shall be carried at a revalued amount, being its fair
value at the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated
impairment losses. The fair value of PPE is usually
determined from market-based evidence by professional
appraisal or valuation.
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REVALUATION MODEL
If land which was bought for $1 million in 2010 is revalued to
$1.5 million on June 30, 2012 (no depreciation for land), the
journal entry for the revaluation on that date is:

Revaluation surplus or reserve is part of other comprehensive income

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REVALUATION MODEL
KC Corp has an equipment bought on July 1, 20101 with a cost of
$200,000, no residual value and estimated useful life of five years. After
two years on June 30, 2012, KC obtains market information for
revaluation suggesting that the fair value of the equipment is $300,000.
Method (a):
Restated accumulated depreciation proportionately with the change in
the gross carrying amount of the asset so that the carrying amount of the
asset after revaluation equals its revalued amount.
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REVALUATION MODEL
KC Corp has an equipment bought on July 1, 20101 with a cost of
$200,000, no residual value and estimated useful life of five years. After
two years on June 30, 2012, KC obtains market information for
revaluation suggesting that the fair value of the equipment is $300,000.
Method (b):
Eliminate accumulated depreciation against the gross carrying amount of
the asset and the net amount restated to the revalued amount of the
asset
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IMPAIRMENT
An impairment is the amount by which the carrying amount
of an asset exceeds its recoverable amount.
For example, an equipment bought before 2012 has a
carrying amount of $8,000 ($9,000 cost less $1,000
accumulated depreciation) and a recoverable amount of
$7,500.
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P2 DISPOSALS OF PROPERTY, PLANT AND

EQUIPMENT

Update depreciation
to the date of disposal.

Journalize disposal by:

Recording cash Recording a

received (debit) gain (credit)
or paid (credit). or loss (debit).

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
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DISCARDING PROPERTY, PLANT AND EQUIPMENT

If Cash >Update depreciation

CA, record a gain (credit).
to the date of disposal.
If Cash < CA, record a loss (debit).
If CashJournalize
= CA, nodisposal
gain orby:
loss.

Recording cash Recording a

received (debit) gain (credit)
or paid (credit). or loss (debit).

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
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DISCARDING PROPERTY, PLANT AND EQUIPMENT

A machine costing $9,000, with accumulated depreciation of

$9,000 on December 31st of the previous year was
discarded on June 5th of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero residual value.
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P2

DISCARDING PROPERTY, PLANT AND EQUIPMENT

Equipment costing $8,000, with accumulated depreciation of

$6,000 on December 31st of the previous year was
discarded on July 1st of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero residual value.
Step 1: Bring the depreciation up-to-date.

Step 2: Record discarding of asset.

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P2

SELLING PROPERTY, PLANT AND EQUIPMENT

On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $3,000 cash.
Step 1: Update depreciation to March 31st.

Step 2: Record sale of asset at carrying amount ($16,000 - $13,000 = $3,000).

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P2

SELLING PROPERTY, PLANT AND EQUIPMENT

On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $2,500 cash.
Step 1: Update depreciation to March 31st.

Step 2: Record sale of asset at a loss (Carrying amount $3,000 - $2,500 cash
received).
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P3

NATURAL RESOURCES

Total cost,
Extracted from
including
the natural
exploration and
environment
development,
and reported
is charged to
at cost less
depletion expense
accumulated
over periods
depletion.
benefited.

Examples: oil, coal, gold

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COST DETERMINATION AND DEPLETION

Let’s consider a mineral deposit with an estimated 250,000
tons of available ore. It is purchased for $500,000, and we
expect zero residual value.
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DEPLETION OF NATURAL RESOURCES

Depletion expense in the first year would be:

Statement of Financial Position presentation of natural resources:

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P3 PROPERTY, PLANT AND EQUIPMENT USED IN

EXTRACTING

 Specialized property, plant and equipment

may be required to extract the natural
resource.
 These assets are recorded in a separate
account and depreciated.
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INTANGIBLE ASSETS
Noncurrent assets Often provide
without physical exclusive rights
substance. or privileges.

Intangible
Assets

Useful life is Usually acquired

often difficult for operational
to determine. use.
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COST DETERMINATION AND AMORTIZATION

Record at current
cash equivalent o Patents
cost, including o Copyrights
purchase price, o Franchises and Licenses
legal fees, and o Goodwill
filing fees.
o Trademarks and Trade Names
o Other Intangibles
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TOTAL ASSET TURNOVER

Total Asset = Net Sales
Turnover Average Total Assets

Provides information about a company’s

efficiency in using its assets.
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P5
10A – EXCHANGING PROPERTY, PLANT
AND EQUIPMENT
Many property, plant and equipment such as machinery,
automobiles, and office equipment are disposed of by
exchanging them for newer assets. In a typical exchange
of property, plant and equipment, a trade-in allowance is
received on the old asset and the balance is paid in cash.
Accounting for the exchange of assets depends on
whether the transaction has commercial substance.

Commercial substance implies the

company’s future cash flows will be
altered.
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P5
EXCHANGE WITH COMMERCIAL
SUBSTANCE: A LOSS
A company acquires $42,000 in new equipment. In exchange, the company
pays $33,000 cash and trades in old equipment. The old equipment
originally cost $36,000 and has accumulated depreciation of $20,000
(carrying amount is $16,000). This exchange has commercial substance.
The old equipment has a trade-in allowance of $9,000.
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END OF CHAPTER 9