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Financial Accounting and Accounting Standards - masif-emba-fais .._3_

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Financial Accounting and Accounting Standards - masif-emba-fais .._3_ Powered By Docstoc
					          Financial Accounting & Information
                       Systems

    Objectives:                        Session 7
    •Fundamentals of Accounting for fixed assets
    (Chapter 10)
    •Review of Examination Paper




Chapter
 10-1
Chapter
 10-2
     Chapter    10
          Plant Assets, Natural
             Resources, and
            Intangible Assets

Chapter
 10-3          Accounting Principles, Ninth Edition
   Section 1 – Plant Assets
   Section 1 – Plant Assets

      Plant assets include land, land improvements,
      buildings, and equipment (machinery, furniture, tools).
      Major characteristics include:
          “Used in operations” and not for resale.
          Long-term in nature and usually depreciated.
          Possess physical substance.

      Referred to as property, plant, and equipment; plant and
      equipment; and fixed assets.

Chapter
 10-4
   Determining the Cost of Plant Assets
   Determining the Cost of Plant Assets


          While recording Fixed Assets, all of the direct costs
          incurred in association with the acquiring of that
          asset are recorded as part of the cost of the asset.
          Direct costs include purchase price, attorney’s fee,
          title deed / documents charges, Excise duty, import
          duty, un-adjustable sales tax broker’s commissionetc.
          Borrowing costs and closing costs also need to be
          capitalized


Chapter
 10-5                SO 1 Describe how the cost principle applies to plant assets.
   Determining the Cost of Plant Assets
   Determining the Cost of Plant Assets

    Illustration: Assume that Hayes Manufacturing Company
    acquires real estate at a cash cost of $100,000. The
    property contains an old warehouse that is razed at a net
    cost of $6,000 ($7,500 in costs less $1,500 proceeds from
    salvaged materials). Additional expenditures are the
    attorney’s fee, $1,000, and the real estate broker’s
    commission, $8,000.
    Required: Determine amount to be reported as the cost of
    the land.




Chapter
 10-6              SO 1 Describe how the cost principle applies to plant assets.
   Determining the Cost of Plant Assets
   Determining the Cost of Plant Assets
     Required: Determine amount to be reported as the cost of
     the land.
                                                                    Land
     Cash price of property of $100,000                          $100,000
     Old warehouse razed at a cost of $6,000                          6,000
     Attorney's fees of $1,000                                        1,000
     Real estate broker’s commission of $8,000                        8,000
                                           Cost of Land          $115,000




Chapter
 10-7              SO 1 Describe how the cost principle applies to plant assets.
   Some Types of Property Plant and Equipments
   Some Types of Property Plant and Equipments

      Land, Land Improvements, Plant &
      Machinery, Equipments, Buildings, Furniture,
      Vehicles etc.
          Note that Property Plant and Equipment
          (Fixed Assets) is just one type of non
          current asssets


          Imagine other types!

Chapter
 10-8              SO 1 Describe how the cost principle applies to plant assets.
   Depreciation
   Depreciation

      Depreciation is the process of allocating the cost of
      tangible assets to expense in a systematic and rational
      manner to those periods expected to benefit from the
      use of the asset.
          Process of cost allocation, not asset valuation
          (Imp)
          Applies to land improvements, buildings, and
          equipment, not land unless it’s a mine etc..
          Depreciable, because the revenue-producing
          ability of asset will decline over the asset’s
          useful life.
Chapter
 10-9                              SO 2 Explain the concept of depreciation.
   Depreciation
   Depreciation

      Factors in Computing Depreciation
                                                    Illustration 10-6


          Cost       Useful Life          Salvage Value




Chapter
 10-10                       SO 2 Explain the concept of depreciation.
   Depreciation
   Depreciation

      Depreciation Methods
      Objective is to select the method that best
      measures an asset’s contribution to revenue over its
      useful life. Examples include:
          (1) Straight-line method
          (2) Units-of-Activity method
          (3) Declining-balance method


          All methods are allowed under
              IAS 16
Chapter
 10-11               SO 3 Compute periodic depreciation using different methods.
   Depreciation
   Depreciation
    Illustration: Barb’s Florists purchased a small delivery
    truck on January 1, 2010.
                                                         Illustration 10-7




    Required: Compute depreciation using the following.
    (a) Straight-Line.
    (b) Units-of-Activity.
    (c) Declining Balance.

Chapter
 10-12                   SO 3 Compute periodic depreciation using different methods.
   Depreciation
   Depreciation

      Straight-Line
          Expense is same amount for each year.
          Depreciable cost is cost of the asset less its
          salvage value.                            Illustration 10-9




Chapter
 10-13               SO 3 Compute periodic depreciation using different methods.
   Depreciation
   Depreciation
   Illustration: (Straight-Line Method)
                                                                     Illustration 10-10




  2010         $ 12,000       20%         $ 2,400       $ 2,400        $ 10,600
  2011          12,000        20             2,400           4,800          8,200
  2012          12,000        20             2,400           7,200          5,800
  2013          12,000        20             2,400           9,600          3,400
  2014          12,000        20             2,400        12,000             1,000


      2010       Depreciation expense                2,400
     Journal
      Entry          Accumulated depreciation                        2,400
Chapter
 10-14                SO 3 Compute periodic depreciation using different methods.
   Depreciation
   Depreciation

      Units-of-Activity
          Companies estimate total units of activity to calculate
          depreciation cost per unit.
          Expense varies based on units of activity.
          Depreciable cost is
                                                                   Illustration 10-11


          cost less salvage
          value.




Chapter
 10-15               SO 3 Compute periodic depreciation using different methods.
  Depreciation
  Depreciation

   Illustration: (Units-of-Activity Method)
                                                                     Illustration 10-12




    2010       15,000      $ 0.12          $ 1,800       $ 1,800       $ 11,200
    2011       30,000         0.12           3,600         5,400            7,600
    2012       20,000         0.12           2,400         7,800            5,200
    2013       25,000         0.12           3,000        10,800            2,200
    2014       10,000         0.12           1,200        12,000             1,000


      2010       Depreciation expense                 1,800
     Journal
      Entry         Accumulated depreciation                         1,800
Chapter
 10-16                  SO 3 Compute periodic depreciation using different methods.
   Depreciation
   Depreciation

      Declining-Balance
          Decreasing annual depreciation expense over the
          asset’s useful life.
          Declining-balance rate is double the straight-line
          rate.
          Rate applied to book value.
                                                              Illustration 10-13




Chapter
 10-17             SO 3 Compute periodic depreciation using different methods.
   Depreciation
   Depreciation
   Illustration: (Declining-Balance Method)
                                                                       Illustration 10-14




  2010         13,000         40%         $ 5,200        $ 5,200        $ 7,800
  2012         7,800           40            3,120          8,320           4,680
  2013         4,680           40            1,872         10,192           2,808
  2014         2,808           40            1,123         11,315            1,685
  2015          1,685          40              685*        12,000            1,000

      2010      Depreciation expense                   5,200
     Journal
      Entry          Accumulated depreciation                          5,200

Chapter
 10-18     * Computation of $674 ($1,685 x 40%) is adjusted to $685.
   Depreciation
   Depreciation

          Comparison of Depreciation Methods
                           Illustration 10-15




                                                                 Illustration 10-16




Chapter
 10-19             SO 3 Compute periodic depreciation using different methods.
   Depreciation for Partial Year
   Depreciation for Partial Year

          The following five slides are included to
          illustrate the calculation of partial-year
          depreciation expense.
          The amounts are consistent with the previous
          slides illustrating the calculation of depreciation
          expense.




Chapter
 10-20                SO 3 Compute periodic depreciation using different methods.
   Depreciation for Partial Year
   Depreciation for Partial Year
    Illustration: Barb’s Florists purchased a small delivery
    truck on October 1, 2010.
                                                         Illustration 10-7




    Required: Compute depreciation using the following.
    (a) Straight-Line.
    (b) Units-of-Activity.
    (c) Declining Balance.

Chapter
 10-21                   SO 3 Compute periodic depreciation using different methods.
   Depreciation for Partial Year
   Depreciation for Partial Year
   Illustration: (Straight-line Method)




Chapter
 10-22             SO 3 Compute periodic depreciation using different methods.
   Depreciation for Partial Year
   Depreciation for Partial Year

   Illustration: (Units-of-Activity Method)                          Illustration 10-12




    2010       15,000      $ 0.12          $ 1,800       $ 1,800       $ 11,200
    2011       30,000         0.12           3,600         5,400            7,600
    2012       20,000         0.12           2,400         7,800            5,200
    2013       25,000         0.12           3,000        10,800            2,200
    2014       10,000         0.12           1,200        12,000             1,000


      2010       Depreciation expense                 1,800
     Journal
      Entry         Accumulated depreciation                         1,800
Chapter
 10-23                  SO 3 Compute periodic depreciation using different methods.
   Depreciation for Partial Year
   Depreciation for Partial Year
   Illustration: (Declining-Balance Method)




Chapter
 10-24             SO 3 Compute periodic depreciation using different methods.
   Depreciation
   Depreciation

      Depreciation and Income Taxes




Chapter
 10-25          SO 3 Compute periodic depreciation using different methods.
   Depreciation
   Depreciation

      Revising Periodic Depreciation
           Accounted for in the period of change and
           future periods (Change in Estimate).
           Not handled retrospectively.
           Not considered error.




Chapter
 10-26          SO 4 Describe the procedure for revising periodic depreciation.
   Depreciation
   Depreciation

    Illustration: Assume that Barb’s Florists decides on
    January 1, 2013, to extend the useful life of the truck one
    year because of its excellent condition. The company has
    used the straight-line method to depreciate the asset to
    date, and book value is $5,800 ($13,000 - $7,200).

    Questions:
          1.   What is the journal entry to correct                 No Entry
               the prior years’ depreciation?                       Required

          2.   Calculate the depreciation expense
               for 2013.

Chapter
 10-27               SO 4 Describe the procedure for revising periodic depreciation.
   Depreciation
   Depreciation

          Book value, 1/1/13             $5,800                         First,
                                                                         First,
          Salvage value                  - 1,000                      establish
                                                                       establish
                                                                     Book Value
                                                                      Book Value
          Depreciable cost              4,800
                                                                    at the date
                                                                     at the date
          Useful life (revised)      / 3 years                      of change in
                                                                     of change in
          Annual depreciation          $ 1,600                        estimate.
                                                                       estimate.
                                               Illustration 10-17

           Journal entry for 2013

              Depreciation expense                            1,600
                  Accumulated depreciation                               1,600

Chapter
 10-28                SO 4 Describe the procedure for revising periodic depreciation.
   Expenditures During Useful Life
   Expenditures During Useful Life

      Ordinary Repairs - expenditures to maintain the
      operating efficiency and productive life of the unit.
             Debit - Repair (or Maintenance) Expense.
             Referred to as revenue expenditures.

      Additions and Improvements - costs incurred to
      increase the operating efficiency, productive capacity, or
      useful life of a plant asset.
             Debit - the plant asset affected.
             Referred to as capital expenditures.

Chapter              SO 5 Distinguish between revenue and capital expenditures,
 10-29
                          and explain the entries for each.
   Plant Asset Disposals
   Plant Asset Disposals
      Companies dispose of plant assets in three ways —
      Retirement, Sale, or Exchange (appendix).
                                                                  Illustration 10-18




     Record depreciation up to the date of disposal.
     Eliminate asset by (1) debiting Accumulated Depreciation,
     and (2) crediting the asset account.
Chapter
 10-30             SO 6 Explain how to account for the disposal of a plant asset.
   Plant Asset Disposals - Retirement
   Plant Asset Disposals - Retirement
    Illustration: Assume that Hobart Enterprises retires
    its computer printers, which cost $32,000. The accumulated
    depreciation on these printers is $32,000. The journal entry
    to record this retirement is?

          Accumulated depreciation                  32,000
             Printing equipment                                   32,000



    Question: What happens if a fully depreciated plant asset is still
    useful to the company?


Chapter
 10-31              SO 6 Explain how to account for the disposal of a plant asset.
   Plant Asset Disposals - Retirement
   Plant Asset Disposals - Retirement
    Illustration: Assume that Sunset Company discards delivery
    equipment that cost $18,000 and has accumulated
    depreciation of $14,000. The journal entry is?

          Accumulated depreciation                  14,000
          Loss on disposal                           4,000
             Delivery equipment                                   18,000



    Companies report a loss on disposal in the “Other expenses and
    losses” section of the income statement.


Chapter
 10-32             SO 6 Explain how to account for the disposal of a plant asset.
   Plant Asset Disposals - Sale
   Plant Asset Disposals - Sale
    Illustration: Assume that on July 1, 2010, Wright Company
    sells office furniture for $16,000 cash. The office furniture
    originally cost $60,000. As of January 1, 2010, it had
    accumulated depreciation of $41,000. Depreciation for the
    first six months of 2010 is $8,000. Prepare the journal entry
    to record depreciation expense up to the date of sale.

          Depreciation expense                      8,000
             Accumulated depreciation                             8,000




Chapter
 10-33            SO 6 Explain how to account for the disposal of a plant asset.
   Revaluations under IAS16
   Revaluations under IAS16
    IAS16 gives option of revaluation of fixed assets. The
    skeleton entries for revaluation are:
    Upon Upward revaluation:
           Assets Dr.                   Revaluation Reserve Cr.
    Upon reversal:
           Revaluation Reserve Dr.      Assets Cr.

    Upon further reversal or first impairment:
          Loss on revaluation Dr.      Assets Cr.

    Note that new depreciation have to be worked out on
    revalued amount. Further technicalities involved for periodic
    adjustment of revaluation surplus
Chapter
 10-34            SO 6 Explain how to account for the disposal of a plant asset.
   Revaluations under IAS16
   Revaluations under IAS16
    Imagine the impact of revaluation on balance sheet and
    income statement




Chapter
 10-35           SO 6 Explain how to account for the disposal of a plant asset.
   Plant Asset Disposals - Sale
   Plant Asset Disposals - Sale

Illustration 10-19
Computation of gain on
disposal




  Illustration: Wright records the sale as follows.

  July 1       Cash                                          16,000
               Accumulated depreciation                     49,000
                    Office equipment                                      60,000
                     Gain on disposal                                       5,000

Chapter
 10-36                   SO 6 Explain how to account for the disposal of a plant asset.
   Section 2 – Natural Resources
   Section 2 – Natural Resources

      Natural resources consist of standing timber and
      underground deposits of oil, gas, and minerals.
      Distinguishing characteristics:
             Physically extracted in operations.
             Replaceable only by an act of nature.


          Depletion is recorded as an expense on periodic
            basis keeping in view the estimate of the
            mineral treasures, usually on units extracted
Chapter     basis
 10-37
   Section 3 – Intangible Assets
   Section 3 – Intangible Assets

      Intangible assets are rights, privileges, and
      competitive advantages that do not possess physical
      substance.
      Intangible assets are categorized as having either a limited life
      or an indefinite life.
      Common types of intangibles:
      Amortization is allowed usually on straight line method

          Patents                              Trademarks or trade names
          Copyrights                           Goodwill
          Franchises or licenses

Chapter
 10-38     SO 8 Explain the basic issues related to accounting for intangible assets.
   Accounting for Intangible Assets
   Accounting for Intangible Assets

      Goodwill
          Includes exceptional management, desirable location,
          good customer relations, skilled employees, high-quality
          products, etc.

          Only recorded when an entire business is purchased.

          Goodwill is recorded as the excess of ...
             purchase price over the FMV of the identifiable net
             assets acquired.
          Internally created goodwill should not be capitalized

           Goodwill is checked for impairment, not amortized
Chapter
 10-39       SO 8 Explain the basic issues related to accounting for intangible assets.
   Statement Presentation and Analysis
   Statement Presentation and Analysis
      Presentation
                                                                Illustration 10-24




     Companies usually include natural resources under “Property, plant,
     and equipment” and show intangibles separately.

Chapter                      SO 9 Indicate how plant assets, natural resources,
 10-40
                                  and intangible assets are reported.
   Statement Presentation and Analysis
   Statement Presentation and Analysis

      Analysis
                                                             Illustration 10-25




     Each dollar invested in assets produced $0.56 in sales.
     If a company is using its assets efficiently, each dollar
     of assets will create a high amount of sales.


Chapter                   SO 9 Indicate how plant assets, natural resources,
 10-41
                               and intangible assets are reported.
                       Explore Annual Report
                       Explore Annual Report

          -Searle Pakistan Revaluation Surplus Page 37 and Page 46.



          -Extract following information from the Searle Annual report
          -Cost, Accumulated depreciation and book value of fixed assets
          -Depreciation Rates in use
          -Depreciation Methods in use




Chapter
 10-42
          Explore Annual Report
          Explore Annual Report




Chapter
 10-43

				
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