Chapter 8

Reporting and Analyzing

Long-Term Assets

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 Conceptual Learning Objectives

C1: Describe plant assets and issues in

accounting for them.
C2: Explain depreciation and the factors
affecting its computation.
C3: Explain depreciation for partial years
and changes in estimates.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 Analytical Learning Objectives

A1: Compare and analyze alternative

depreciation methods.
A2: Compute total asset turnover and
apply it to analyze a company’s use
of assets.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 Procedural Learning Objectives

P1: Apply the cost principle to compute the cost of

plant assets.
P2: Compute and record depreciation using the
straight-line, units-of-production, and declining-
balance methods.
P3: Distinguish between revenue and capital
expenditures, and account for them.
P4: Account for asset disposal through discarding or
selling an asset.
P5: Account for natural resource assets and their
depletion.
P6: Account for intangible assets.
P7: Appendix 10A: Account for asset exchanges
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 C1

Plant Assets
Tangible in Nature

Actively Used in Operations

Expected to Benefit Future Periods

Called Property, Plant, & Equipment

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 C1
Plant Assets

Plant Assets as a Percent of Total Assets

100%
90%
80% 74%
70%
60% 55%
54%
50%
40%
30%
20%
9%
10%
0%
eBay Wal-Mart Anheuser- McDonald's
Busch

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 C1

Plant Assets

Decl
ine in
over asse
its u t valu
sefu e
l life

Use
Acquisition 2. Allocate cost to periods Disposal
1. Compute cost. benefited. 4. Record disposal.
3. Account for subsequent
expenditures.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
P1
Cost Determination

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

Acquisition cost excludes

financing charges and
cash discounts.

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 P1
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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 P1
Land Improvements

Parking lots, driveways, fences, walks,

shrubs, and lighting systems.

Depreciate over
useful life of
improvements.

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 P1
Buildings

Cost of purchase or Title fees

construction

Brokerage Attorney fees

fees

Taxes

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 P1
Machinery and Equipment

Purchase
price Taxes

Transportation
charges

Installing,
assembling, and Insurance while
testing in transit

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 P1
Lump-Sum Asset Purchase
The total cost of a combined
purchase of land and building
is separated on the basis of
their relative market values.
On January 1, Matrix, Inc. purchased land and
building for $200,000 cash. The appraised
values are building, $162,500, and land,
$87,500.
How much of the $200,000 purchase price will
be charged to the building and land accounts?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P1
Lump-Sum Asset Purchase

Appraised % of Purchase Apportioned

Asset Value Value Price Cost
a b* c b × c
Land $ 87,500 35%
35% × $ 200,000 = $ 70,000
Building 162,500 65%
65% × 200,000 = 130,000
Total $ 250,000 100%
100% $ 200,000

* $87,500
$87,500÷÷$250,000
$250,000==35%
35%
$162,500 ÷ $250,000 = 65%

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 C2
Depreciation

Depreciation is the process of allocating

the cost of a plant asset to expense in the
accounting periods benefiting from its use.

Balance Sheet Income Statement

Acquisition Cost
Expense
Cost Allocation
(Unused) (Used)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 C2 Factors in Computing
Depreciation

The calculation of depreciation requires

three amounts for each asset:

 Cost
 Salvage Value
 Useful Life
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 C2

Depreciation Methods

 Straight-line
 Units-of-production
 Declining-balance
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 P2
Straight-Line Method

Depreciation Cost - Salvage Value

=
Expense for Period Useful life

On January 1, 2007, equipment

was purchased for $50,000 cash.
The equipment has an estimated
useful life of five years and an
estimated residual value of
$5,000.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P2
Straight-Line Method

Depreciation Cost - Salvage Value

=
Expense for Period Useful life

Depreciation $50,000 - $5,000

= = $9,000
Expense per Year 5 years
Dr. Cr.
Depreciation Expense 9,000
Accumulated Depreciation - Equipment 9,000
To record annual depreciation

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 P2
Straight-Line Method

Depreciation Accumulated
Expense Depreciation Accumulated Book
Year (debit) (credit) Depreciation Value
$ 50,000
2007 $ 9,000 $ 9,000 $ 9,000 41,000
2008 9,000 9,000 18,000 32,000
2009 9,000 9,000 27,000 23,000
2010 9,000 9,000 36,000 14,000
2011 9,000 9,000 45,000 5,000
$ 45,000 $ 45,000
Salvage
Value
Depreciation
= (100% ÷ 5 years) = 20% per year
Rate
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 $9,000
P2

Depreciation
Expense
$7,000 Depreciation Expense
$5,000 reported on the
$3,000
Income Statement.

$1,000
$0
2007 2008 2009 2010 2011
For the year ended December 31

$45,000
$40,000 $41,000
$35,000
$32,000
Book Value

$30,000
Book Value
$25,000
reported on the $20,000
$23,000

Balance Sheet. $15,000 $14,000

$10,000
$5,000 $5,000
$-
2007 2008 2009 2010 2011
For the year ended December 31
 P2
Units-of-Production Method

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

Step 2:
Number of
Depreciation Depreciation
= × Units Produced
Expense Per Unit
in the Period

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 P2
Units-of-Production Method

On December 31, 2007, equipment was

purchased for $50,000 cash. The
equipment is expected to produce 100,000
units during its useful life and has an
estimated salvage value of $5,000.

If 22,000 units were produced in 2008, what

is the amount of depreciation expense?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P2
Units-of-Production Method

Step 1:
Depreciation = $50,000 - $5,000
= $.45 per unit
Per Unit 100,000 units

Step 2:
Depreciation
Expense = $.45 per unit × 22,000 units = $9,900

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P2
Units-of-Production Method

Depreciation Accumulated Book

Year Units Expense Depreciation Value
$ 50,000
2008 22,000 $ 9,900 $ 9,900 40,100
2009 28,000 12,600 22,500 27,500
2010 - - 22,500 27,500
2011 32,000 14,400 36,900 13,100
2012 18,000 8,100 45,000 5,000
100,000 $ 45,000

No depreciation expense if the equipment is idle.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 P2
Declining Balance Method

Depreciation Repair
Expense Expense
Early Years High Low
Later Years Low High

Early years’ total expense approximates

later years’ total expense.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P2
Double-Declining-Balance Method

Step 1:
Straight-line
= 100 % ÷ Useful life = 100% ÷ 5 = 20%
rate
Step 2:
Double-declining-
balance rate = 2 × Straight-line rate = 2 × 20% =
40%

Step 3:
Depreciation Double-declining- Beginning period
= ×
expense balance rate book value
40% × $50,000 = $20,000 for 2008

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 P2
Double-Declining-Balance Method

2008
Depreciation:
40% × $50,000 = $20,000

2009
Depreciation:
40% × ($50,000 - $20,000) = $12,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P2
Double-Declining-Balance Method

Depreciation Accumulated Book

Year Expense Depreciation Value
$ 50,000
2008 $ 20,000 $ 20,000 30,000
2009 12,000 32,000 18,000
2010 7,200 39,200 10,800
2011 4,320 43,520 6,480
2012 2,592 46,112 3,888
$ 46,112 Below salvage value

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P2
Double-Declining-Balance Method

Depreciation Accumulated Book

Year Expense Depreciation Value
$ 50,000
2008 $ 20,000 $ 20,000 30,000
2009 12,000 32,000 18,000
2010 7,200 39,200 10,800
2011 4,320 43,520 6,480
2012 1,480 45,000 5,000
$ 45,000

We usually must force depreciation expense in the

last year so that book value equals salvage value.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 A1 Comparing Depreciation
Methods
$10,000 $16,000

Annual Production
$14,000
$8,000
Depreciation

Depreciation
Annual SL

$12,000
$6,000 $10,000
$8,000
$4,000
$6,000
$2,000 $4,000
$2,000
P2
$0 $0
1 2 3 4 5 1 2 3 4 5
Life in Years Life in Years

$20,000
Depreciation
Annual DDB

$15,000

$10,000

$5,000

$0
1 2 3 4 5
Life in Years

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 A1
Depreciation for Tax Reporting

Most corporations use the Modified

Accelerated Cost Recovery System
(MACRS) for tax purposes.

MACRS depreciation provides for rapid

write-off of an asset’s cost in order to
stimulate new investment.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 C3
Partial-Year Depreciation

When a plant asset is

acquired during the year,
depreciation is calculated for
the fraction of the year the
asset is owned.

June
30
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 C3
Partial-Year Depreciation

Calculate the straight-line depreciation on

December 31, 2007, for equipment purchased
on June 30, 2007. 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 all 2007
Depreciation = $7,000 × 6/12 = $3,500

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 C3
Change in Estimates for
Depreciation

Predicted Predicted
salvage value useful life

So depreciation
is an estimate.

Over the life of an asset, new information

may come to light that indicates the
original estimates were inaccurate.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 C3 Change in Estimates for
Depreciation

On January 1, 2004, equipment was purchased that

cost $30,000, has a useful life of 10 years, and no
salvage value. During 2007, the useful life was revised
to eight years total (five years remaining).
Calculate depreciation expense for the year
ended December 31, 2007, using the
straight-line method.

Book value at Salvage value at

date of change
– date of change
Remaining useful life at date of change
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 C3
Change in Estimates for
Depreciation

Asset cost $ 30,000

Accumulated depreciation, 12/31/2006
($3,000 per year × 3 years) 9,000
Remaining book value $ 21,000
Divide by remaining life ÷ 5
Revised annual depreciation $ 4,200

Dr. Cr.
Dec. 31 Depreciation Expense 4,200
Accumulated Depreciation - Equipment 4,200
To record depreciation for 2007

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 C3
Reporting Depreciation

Property, plant, and equipment:

Land and buildings $ 150,000
Machinery and equipment 200,000
Office furniture and equipment 175,000
Land improvements 50,000
Total $ 575,000
Less Accumulated depreciation (122,000)
Net property, plant, and equipment $ 453,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P3
Additional Expenditures

Financial Statement Effect

Current Current
Treatment Statement Expense Income Taxes

Capital Balance sheet

Expenditure account debited Deferred Higher Higher
Revenue Income statement Currently
Expenditure account debited recognized Lower Lower

If the amounts involved are not material, most

companies expense the item.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P3 Revenue and Capital
Expenditures
Type of Capital or
Expenditure Revenue Identifying Characteristics
Ordinary Revenue 1. Maintains normal operating condition.
Repairs 2. Does not increase productivity.
3. Does not extend life beyond original
estimate.
Betterments Capital 1. Major overhauls or partial
and replacements.
Extraordinary 2. Extends life beyond original estimate.
Repairs

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 P4
Disposals of Plant Assets

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).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 P4
Discarding Plant Assets

Update depreciation
If Cash > BV, record a gain (credit).
to the date of disposal.
If Cash < BV, record a loss (debit).
If Cash =Journalize
BV, no gain or loss.
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).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 P4
Selling Plant Assets

On September 30, 2007, Evans Company

sells a machine that originally cost
$100,000 for $60,000 cash. The machine
was placed in service on January 1, 2004.
It was depreciated using the straight-line
method with an estimated salvage value
of $20,000 and a useful life of 10 years.

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 P4
Update Depreciation to Date of
Disposal

Annual Depreciation:
($100,000 - $20,000) ÷ 10 Yrs. = $8,000

Depreciation to September 30, 2007:

9/12 × $8,000 = $6,000

Dr. Cr.
Sep. 30 Depreciation expense 6,000
Accumulated Depreciation - Machine 6,000
To update depreciation to date of disposal

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 P4
Determine Book Value of Asset

Cost $ 100,000
Accumulated Depreciation:
( 3 yrs. × $8,000) + $6,000 = 30,000
Book Value $ 70,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P4
Determine Gain or Loss on
Disposal

If Cash > BV, record a gain (credit).

If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Cost $ 100,000
Accumulated depreciation 30,000
Book Value 70,000
Cash Received 60,000
Loss on disposal $ (10,000)

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 P4
Record the Disposal in the
Journal

Dr. Cr.
Sep. 30 Cash 60,000
Accumulated Depreciation - Machine 30,000
Loss on Disposal of Asset 10,000
Machine 100,000
To record disposal of equipment

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 P5
Let’s Talk About Natural
Resources!

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 P5
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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 P5
Cost Determination and Depletion

Step 1:
Depletion = Cost - Salvage Value
Per Unit Total Units of Capacity

Step 2:
Units Extracted
Depletion Depletion
= × and Sold in
Expense Per Unit
Period

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 P5
Depletion of Natural Resources

Apex Mining acquired a tract of land

containing ore deposits. Total costs of
acquisition and development were
$1,000,000 and Apex estimates the land
contained 40,000 tons of ore. During the
first year of operations Apex extracted
and sold 13,000 tons of ore.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P5
Depletion Expense

Step 1:
Depletion $1,000,000 - $0
= = $25 per ton
Per Unit 40,000 tons

Step 2:
Depletion
Expense = $25 per ton × 13,000 units = $325,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P5
Plant Assets Used in Extracting
Natural Resources

 Specialized plant assets may be required to

extract the natural resource.
 These assets are recorded in a separate
account and depreciated.

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 P6
Let’s Look at Intangible Assets!

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 P6
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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 P6
Cost Determination and
Amortization
Record at current
cash equivalent
o Patents
cost, including o Copyrights
purchase price, o Leaseholds
legal fees, and
filing fees.
o Leasehold Improvements
o Franchises & Licenses
o Goodwill
o Trademarks & Trade
Names

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 P6
Types of Intangibles

Patents

The exclusive right granted to its owner to

manufacture and sell a patented item or use a
process for 20 years. A patent is generally
amortized, using the straight-line method, over its
useful life not to exceed 20 years.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P6
Types of Intangibles

Patents
Matrix, Inc. purchased a patent for $10,000. The
patent is expected to have a useful life of 10 years.
Dr. Cr.
Amortization Expense - Patents 1,000
Accumulated Amortization - Patents 1,000
To amortize patent costs

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P6
Types of Intangibles

Copyrights
The exclusive right to publish and sell a musical,
literary, or artistic work during the life of the
creator plus 70 years.

Leaseholds
The rights the lessor grants to the lessee under
the terms of a lease. Most leases have a
determinable life.

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 P6
Types of Intangibles

Leasehold Improvements
A lessee may pay for alterations or improvements
to the leased property such as partitions, painting,
and storefronts. These costs are usually
amortized over the term of the lease.
Franchises and Licenses
The right granted by a company or the
government to deliver a product or service under
specified conditions.

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 P6
Types of Intangibles

Trademarks and Trade Names

A symbol, name, phrase, or jingle identified with a

company, product, or service.

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 P6
Goodwill

Goodwill
Occurs when one Only purchased
company buys goodwill is an
another company. intangible asset.

Goodwill is not amortized. It is tested

each year to determine if there has been
any impairment in carrying value.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 A2

Total Asset Turnover

Total Asset Net Sales

Turnover = Average Total Assets

Provides information about a company’s

efficiency in using its assets.

2004 2003 2002 2001

Coors 0.92 0.89 0.87 1.44
Anheuser-Busch 0.92 0.96 0.96 0.95

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P7

Appendix 10A
 Exchanging Plant Assets

 Many plant assets are disposed of by

exchanging them for newer assets.
The next few slides will explain how
exchanges are recorded.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P7
Exchanging Plant Assets

SIMILAR

Accounting for exchanges of similar assets

depends on whether the book value of the asset(s)
given up is less or more than the market value of
the asset(s) received.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P7
Exchanging Plant Assets

SIMILAR

Accounting for exchanges of similar assets

depends on whether the book value of the asset(s)
given up is less or more than the market value of
the asset(s) received.

A loss is recognized A gain is not

when the book value
given up is more than
the market value
received.
McGraw-Hill/Irwin
recognized when the
book value given up is
less than the market
value received.
© The McGraw-Hill Companies, Inc., 2008
 P7
Exchanging Plant Assets

On May 30, 2007, Matrix, Inc. exchanged a used

bus and $35,000 cash for a new European-style
bus. The old bus originally cost $40,000, had up-
to-date accumulated depreciation of $30,000. The
new bus had a market value of $39,000.

SIMILAR

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 P7
Exchanging Plant Assets
Market value of asset received $ 39,000
Cost of old bus $ 40,000
Accumulated depreciation 30,000
Book value of old bus 10,000
Cash 35,000 45,000
Loss on exchange $ 6,000

Dr. Cr.
May 30 Bus (new) 39,000
Accumulated Depreciation - Bus 30,000
Loss on Exchange 6,000
Bus (old) 40,000
Cash 35,000

Remember -- Losses are always recorded immediately.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 P7
Exchanging Plant Assets

On May 30, 2007, Matrix, Inc. exchanged a

used bus and $35,000 cash for a new
European-style bus. The old bus originally
cost $40,000, had up-to-date accumulated
depreciation of $30,000. The new bus had a
market value of $49,000.

SIMILAR

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

 P7
Exchanging Plant Assets

Market value of asset received $ 49,000

Cost of old bus $ 40,000
Accumulated depreciation 30,000
Book value of old bus 10,000
Cash 35,000 45,000
Gain on exchange $ 4,000
Dr. Cr.
Bus (new) 45,000
Accumulated Depreciation - Bus 30,000
Bus (old) 40,000
Cash 35,000

Market value of new bus – Gain not recognized

$49,000 - $4,000 = $45,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 End of Chapter 8

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