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					   Chapter 4
Cash, Short-term Investments
  and Accounts Receivable




            Chapter 4          1
       Chapter 6
Long-term Assets: Property, Plant and
   Equipment, and Intangibles
                  Chapter 6
             Learning Objectives
•   Determine the acquisition cost of property, plant and
    equipment assets.
•   Compute depreciation expense using three depreciation
    methods.
•   Account for disposals of property, plant and
    equipment.
•   Identify major types of intangible assets and the key
    accounting issues related to these assets.
•   Determine the treatment of costs made for property,
    plant and equipment assets after acquisition.
•   Identify the key information needs of decision makers
    regarding long-term assets.
                          Chapter 6                       3
   Acquisition Costs
The acquisition cost of a PP&E
asset includes all reasonable and
necessary expenditures incurred
to obtain the asset and to prepare
it for use.
               Chapter 6             4
       Acquisition of PP&E
Elmer company purchases a large pneumatic heat
transfer press machine on account with a retail
price of $40,000. Elmer is allowed a 10% discount
off the retail price. Freight charges to deliver the
heat press are $550, and installation expenses total
$320. During installation, the press is damaged,
resulting in a repair cost of $410.




                      Chapter 6                    5
     Journal Entries to Record the
         Acquisition of PP&E
Elmer Company would prepare the following entries for the
previous transactions.




                          Chapter 6                         6
    Relative Market Valuation



            Market        Proportion of        Total    Allocated
            Value         Total Market Value   Cost     Cost
Land        $160,000   160/800 = 20%           $600,000 $120,000
Building     400,000   400/800 = 50%           $600,000 150,000
Equipment    240,000   240/800 = 30%           $600,000 180,000
            $800,000                                    $600,000


                       Chapter 6                             7
        Journal Entries to Record the
            Acquisition of PP&E
The journal entry on May 10 to record the acquisition of
the assets in the previous slide would be prepared as
follows:




                             Chapter 6                     8
            Depreciation
Salvage value is the estimated value of an asset at the
end of its useful life.

When computing depreciation, the term depreciable
cost is often used, which refers to the asset's
acquisition cost less its salvage value. Thus,
depreciable cost is the amount of asset cost that is
expected to be consumed or "used up" over its useful
life.

                          Chapter 6                       9
 Depreciation Methods

•Straight-line
•Units-of-production
•Double-declining-balance

                 Chapter 6   10
Depreciation Example
Assume that Movie Mogul acquired a motor home
on January 1, 2009. The following data are used to
illustrate the three depreciation methods.

Equipment: Motor home (Asset #1427B)
Acquisition Date: January 1, 2009
Acquisition Cost: $168,000
Useful Life: 5 years or 100,000 miles
Salvage Value: $48,000
Depreciable Cost: $168,000 - $48,000 = $120,000

                       Chapter 6                     11
      Straight-line Method
   Under the straight-line method, a business
   allocates an equal amount of depreciation
   expense to each year of an asset's estimated
   useful life.
Depreciation Expense = Depreciable Cost/ Useful Life in Years

      Depreciation Expense 24,000
        Accumulated Depreciation - #1427B          24,000
         Record annual depreciation on
         motor home.
                           Chapter 6                     12
       Units of Production Method
    Under the units of production method, a business
    allocates an equal amount of depreciation expense to
    each unit produced by the asset.

Depreciation Expense = Depreciable amount / useful life in units


   Assume 18,900 miles were driven during year 1.
   Dec. 31 Depreciation Expense              22,680
                 Accumulated Depreciation - #1427B           22,680
           Record annual depreciation on motor home.
                                 Chapter 6                         13
Double Declining Balance
Under the double-declining-balance method
(DDB) of depreciation, annual depreciation
expense is computed by multiplying an asset's
book value at the beginning of a year by twice
the straight-line rate of depreciation.




                    Chapter 6               14
         Double Declining Balance
                Continued

  The entry to record depreciation on the motor home for year 1
  under double declining balance is prepared as follows:


Dec. 31 Depreciation Expense                  67,200
             Accumulated Depreciation - #1427B           67,200
        Record annual depreciation on motor home.




                            Chapter 6                       15
Brent Company acquired an asset on
January 1, 2009 for $50,000 with a 5-year
life and a salvage value of $5,000. Brent
will record depreciation under the straight-
line method for 2010 of:

a.   $9,500.
b.   $9,000.
c.   $10,000.
d.   $8,000.                   5
                       Chapter 6               16
Brent Company acquired an asset on
January 1, 2009 for $50,000 with a 5-year
life and a salvage value of $5,000. Brent
will record depreciation under the straight-
line method for 2010 of:

a.   $9,500.
b.   $9,000.
c.   $10,000.
d.   $8,000.                   5
                       Chapter 6               17
Brent Company acquired an asset on
January 1, 2009 for $50,000 with a 5-year
life and a salvage value of $5,000. Brent
will record depreciation under the double
declining balance method for 2010 of:

a.   $10,000.
b.   $20,000.
c.   $12,000.
d.   $10,800.                 5
                      Chapter 6             18
Brent Company acquired an asset on
January 1, 2009 for $50,000 with a 5-year
life and a salvage value of $5,000. Brent
will record depreciation under the double
declining balance method for 2010 of:

a.   $10,000.
b.   $20,000.
c.   $12,000.
d.   $10,800.                 5
                      Chapter 6             19
Brent Company acquired an asset on January 1,
2009 for $50,000. The asset is expected to
produce 75,000 units and have a salvage value of
$5,000. In 2010, the asset produced 20,000 units.
Brent will record depreciation under the units of
production method for 2010 of:

a.   $12,000.
b.   $13,333.
c.   $9,000.
d.   $10,000.                    5
                         Chapter 6                  20
Brent Company acquired an asset on January 1,
2009 for $50,000. The asset is expected to
produce 75,000 units and have a salvage value of
$5,000. In 2010, the asset produced 20,000 units.
Brent will record depreciation under the units of
production method for 2010 of:

a.   $12,000.
b.   $13,333.
c.   $9,000.
d.   $10,000.                    5
                         Chapter 6                  21
   Disposal of Assets
Depreciate to the date of the
disposal or sale.
Record any cash or other assets at
FMV
Reduce the asset and its related
accumulated depreciation to zero
Record the gain or loss
               Chapter 6          22
 Disposal of PP&E at a Loss
Assume on January 2, 2012, the motor home was
wrecked. The insurance company determined the
value of the motor home to be $60,000 and writes
Movie Mogul a check. Movie Mogul has been
using straight-line depreciation. The following
entry records the disposal of the motor home.




                     Chapter 6                 23
  Disposal of PP&E at a Gain
Assume on March 31, 2012, Movie Mogul sells
the motor home for $98,600. Movie Mogul must
first record depreciation using straight-line for the
first three months of 2012. Then the entry can be
prepared to sell the motor home. The following
entry records the depreciation for the first quarter
of 2012.




                       Chapter 6                        24
  Disposal of PP&E at a Gain

The following entry records the sale of the motor
home on March 31, 2012.




                      Chapter 6                     25
Jake Company acquires equipment on January 1,
2009 for $100,000. The equipment has a 5-year life
and an estimated salvage value of $10,000. Jake
uses straight-line depreciation. On June 30, 2011,
Jake sells the equipment for $62,000. Prepare the
entry to record the sale of the equipment.




                                5
                        Chapter 6                    26
Date    Description                    Debit    Credit
2011
Jun. 30 Cash                           62,000
        Accumulated Depreciation       45,000
           Equipment                            100,000
           Gain on Disposal of Asset              7,000


                                5
                        Chapter 6                   27
Jake Company acquires equipment on January 1,
2009 for $100,000. Jake uses units of production
depreciation. The equipment is estimated to
produce 75,000 units and an estimated salvage
value of $10,000. On June 30, 2011, after the asset
has produced 32,000 units, Jake sells the
equipment for $57,000. Prepare the entry to record
the sale of the equipment.


                                 5
                         Chapter 6                    28
Date    Description                  Debit    Credit
2011
Jun. 30 Cash                         57,000
        Accumulated Depreciation     38,400
        Loss on Disposal of Equip.    4,600
           Equipment                          100,000


                                5
                        Chapter 6                 29
     Natural Resources
  Natural resources include long-term
assets that are extracted or harvested from
       or beneath the earth's surface.




                   Chapter 6             30
     Accounting for Depletion
• Assume Joyner Oil pays $20 million for oil
  rights on a property that has an estimated
  two million barrels of oil.
• $20,000,000/2,000,000 barrels = $10 per
  barrel
• Joyner Oil extracts 300,000 barrels and
  sells 200,000 barrels of oil during 2009.

                    Chapter 6                  31
               Depletion Entries
Joyner Oil prepares the following entries to record depletion
and cost of goods sold.




                            Chapter 6                           32
Brent Company acquired a natural asset on
January 1, 2009 for $2,500,000. The asset has an
estimated 2,000,000 tons of ore. In 2010, 400,000
tons were extracted and 350,000 tons of ore were
sold. Brent Company will record cost of goods
sold on its income statement at:

a.   $500,000.
b.   $400,000.
c.   $450,000.
d.   $437,500.                   5
                         Chapter 6                  33
Brent Company acquired a natural asset on
January 1, 2009 for $2,500,000. The asset has an
estimated 2,000,000 tons of ore. In 2010, 400,000
tons were extracted and 350,000 tons of ore were
sold. Brent Company will record cost of goods
sold on its income statement at:

a.   $500,000.
b.   $400,000.
c.   $450,000.
d.   $437,500.                   5
                         Chapter 6                  34
       Intangible Assets
Long-term assets that do not have a physical
form or substance are called intangible assets.
                   •Patents
                 •Copyrights
                •Trademarks
                  •Goodwill
                     Chapter 6                35
                       Goodwill
The general rule is that most intangible assets should be
amortized over the shorter of their legal life, their useful life, or
forty years (which is an arbitrary period established for
financial accounting purposes).




Goodwill, however, should be analyzed annually to determine
any decreases in it value.
                                Chapter 6                           36
       Amortization of Intangibles
A company purchases a patent for $1,000,000 with a useful life of
10 years. Intangibles are amortized using the straight-line
method. At the end of the first year, the following entry would be
prepared.




                              Chapter 6                       37
  Capitalization versus Expensing
When a company makes an expenditure related to a long-term
assets, the amount may be capitalized or expensed depending
on the circumstances.




                           Chapter 6                      38
                 Ratio Analysis

Two ratios can be used to assess the age and useful life of
PP&E accounts.

Average useful life =
Average investment in PP&E / Depreciation expense


Average asset age =
Accumulated depreciation / Depreciation expense

                            Chapter 6                         39
Long-Term Assets: Acquisition and
      Use under US GAAP




              Chapter 6         40
THE END!




           5
   Chapter 6   41

				
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