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Plant and
Equipment
and
Intangibles
CHAPTER
10
PowerPoint Slides to accompany
Fundamental Accounting Principles, 14ce
Prepared by
Joe Pidutti, Durham College
2013 McGraw-Hill Ryerson Limited.
Learning Objectives
1.
Describe property, plant and equipment (PPE) and calculate their cost. (LO1)
2.
3.
4.
5.
6.
7.
LO 1
Intangible Assets
Lack physical substance.
Examples: patents, trademarks, copyrights, leaseholds
and drilling rights.
Cost of PPE
PPE are recorded at cost, which includes all normal and
reasonable expenditures necessary to get the asset in
place and ready for its intended use.
LO 1
Capital Expenditures
(Cost of machine, freight charges, unpacking cost, assembling cost, less discount,
non refundable sales tax (PST) cost of installation and testing of machine ,
adjusting the machine before operation etc.)
LO 1
Revenue Expenditures
LO 1
Subsequent Expenditures
LO 1
Land
Is not subject to depreciation.
Cost of land includes:
Purchase price
Legal fees
LO 1
Land Improvements
Assets that increase the usefulness of the land but
have a limited life.
Costs are charged to a separate PPE account.
Costs are allocated over the period they benefit.
Cost examples include parking lot surfaces, driveways,
fences and lighting systems.
LO 1
Buildings
Costs include all expenditures to make the building ready for its
intended use.
Costs are depreciated over the period they benefit.
Cost examples include purchase price, brokerage fees, taxes, title
fees and legal costs.
Leasehold improvement
Costs of alterations or improvements to leased property.
Costs are depreciated over the life of the improvements or the life
of the lease, whichever is shorter.
Examples include flooring, painting, storefronts, and partitions.
10
LO 1
11
LO 1
QS- 1
Sydney Lanes installed automatic scorekeeping
equipment. The electrical work required to prepare for the
installation was $18,000. The invoice price of the
equipment was $180,000. Additional costs were $3,000
for delivery and $600 for insurance during transportation.
During the installation, a component of the equipment was
damaged because it was carelessly left on a lane and hit
by the automatic lane cleaning machine during a daily
maintenance run. The cost of repairing the component
was $2,250. What is the cost of the automatic
scorekeeping equipment?
12-12
Solution
Price of equipment
Installation Charges
Delivery charges
Insurance Expense
TOTAL
12-13
$180,000
18,000
3,000
600
201,600
Exercise 10-1
12-14
Solution
Item
Amount
Machine Costs
$ 12,000
Freight
n/a
Mounting
800
Assembly
600
Repairs
n/a
Testing materials
400
Invoice Discount
n/a
Total
12-15
$ 13,800
Exercise
ABC Manufacturing purchased a machine on August 1, 2014, and it was
installed and ready to run on January 1, 2015. The following costs were
incurred in the purchase and installation of the machine.
Invoice Price
Freight Costs
Purchase Discount
Installation Costs
Electrical and Utility Connections
Repairs to correct damage incurred during uncrating
Setting Adjustment costs
Spare parts for future use
Provincial Sales Tax
Fines incurred during transport of the machine
Cost of special foundation for the machine
Calculate the depreciable cost of the machine.
12-16
$ 1,300,000
7,000
2,500
66,000
32,000
12,000
36,000
25,000
91,000
500
6,500
Solution
TOTAL COST OF MACHINE =
Invoice price + freight costs- purchase discount+ installation cost +
electrical and utility connections + adjustment costs + provincial
sales tax + and special foundation for machine
= $1,536,000
12-17
Depreciation
The cost of these PPE are depreciated (spread out) over these
same periods.
18
LO 2
Depreciation
Factors relevant in determining depreciation:
1.
2.
3.
19
Cost
Residual value (Value of assets at the end of
life)
Useful (service) life
LO 2
Depreciation Methods
The most commonly used methods are:
1.
2.
3.
20
Straight-line
Units-of-production
Double-declining balance
LO 2
Straight-Line Method
The same amount is expensed each period
of the assets useful life.
Straight-line
depreciation
expense
21
LO 2
Illustration
A piece of shoe-inspection machinery is purchased
on January 1, 2014.
The relevant data is as follows:
Cost
Estimated residual value
Cost to be depreciated
Estimated useful life:
Accounting periods
Units inspected
22
$10,000
-1,000
$9,000
5 years
36,000 shoes
LO 2
=
=
23
$10,000 $1,000
5 years
$1,800/ year
LO 2
24
2015
2016
1,800
2017
2018
3,600
5,400
7,200
9,000
$8,200
$6,400
$4,600
$2,800
$1,000
LO 2
Units-of-Production Method
Annual
depreciation =
expense
Actual
depreciation per unit
x
production
25
LO 2
$10,000 $1,000
36,000 units (shoes)
= $.25/shoe
Assume actual production is as follows:
2014
2015
2016
2017
2018
8,000
9,000
7,000
6,000
x.25
x.25
x.25
x.25
x.25
$1,250*
LO 2
27
2015
2016
2017
2018
3,750
6,000
7,750
9,000
$8,250
$6,250
$4,000
$2,250
$1,000
LO 2
Declining-Balance Method
28
LO 2
2.
29
LO 2
Book Value at
start of period
Depreciation
Expense
Accumulated
Depreciation
Book Value at
end of period
2014
$10,000
40% x 10,000
= $4,000
$4,000
$6,000
2015
6,000
40% x 6,000
= 2,400
6,400
3,600
2016
3,600
40% x 3,600
= 1,440
7,840
2,160
2017
2,160
40% x 2,160
= 864
8,704
1,296
2018
1,296
296
(maximum)
9,000
30
1,000
(residual value)
LO 2
31
2015
2016
2017
2018
6,400
7,840
8,704
9,000
$6,000
$3,600
$2,160
$1,296
$1,000
LO 2
Comparison of Methods
Period
Straightline
Units-ofproduction
DoubleDeclining
Balance
2014
$1,800
$1,750
$4,000
2015
1,800
2,000
2,400
2016
1,800
2,250
1,440
2017
1,800
1,750
864
1,250
296
$9,000
$9,000
2018
1,800
$9,000
32
LO 2
Exercise 10-8
On
12-33
Solution:
Straight-Line1
Double-Declining-Balance2
Units-of-Production3
Year
Depreciation
Expense
BookValueat
December31
Depreciation
Expense
BookValueat
December31
Depreciation
Expense
BookValueat
December31
2014
21,250
104,000
50,100
75,150
16,875
108,375
2015
21,250
82,750
30,060
45,090
22,250
86,125
2016
21,250
61,500
18,036
27,054
30,000
56,125
2017
21,250
40,250
8,054
19,000
37,125
19,000
2018
21,250
19,000
19,000
19,000
12-34
Calculations:
1. 125,250 19,000 = 106,250/5 = 21,250
2. 2/5 = .4 or 40%; .4 x 125,250 = 50,100; .4 x (125,250 50,100) = 30,060;
.4 x (125,250 50,100 30,060) = 18,036;
.4 x (125,250 50,100 30,060 18,036) = 10,822; maximum =
8,054 calculated as cost less residual = 125,250 19,000 = 106,250 less total
deprec. taken of 98,196 = 8,054.
3. 125,250 19,000 = 106,250/8,500 = $12.50/hour;
2014 12.50 x 1,350 = 16,875;
2015 12.50 x 1,780 = 22,250;
2016 12.50 x 2,400 = 30,000;
2017 12.50 x 2,980 = 37,250;
maximum = 37,125; calculated as cost less residual = 125,250 19,000 =
106,250 less total deprec. taken of 69,125 = 37,125.
12-35
Partial-Year Depreciation
36
LO 3
Partial-Year Depreciation
Methods:
1.
Nearest whole month
Half-year convention
2.
37
LO 3
Mini-Quiz
Gamma Company purchased a computer costing $4,000
on April 18. It is expected to last for three years and then
sell for $400.
Calculate depreciation for the first year using the:
1.
Straight-line method.
2.
38
Mini-Quiz
Gamma Company purchased a computer costing
$4,000 on April 18. It is expected to last for three
years and then sell for $400.
Straight-line
depreciation
expense
=
=
39
3 years
$800
2013 McGraw-Hill Ryerson Limited.
Portion
X
of year
X 8/12 year
Mini-Quiz
Gamma Company purchased a computer costing
$4,000 on April 18. It is expected to last for three
years and then sell for $400.
DDB
depreciation = DDB rate x Cost x Portion of year
expense
$1,778 (rounded)
2013 McGraw-Hill Ryerson Limited.
Exercise 10-13
VanHoutte Foods bought machinery on September 10,
2014, for $156,000. It was determined that the
machinery would be used for six years or until it
produced 200,000 units and then would be sold for about
$26,400. Calculate annual depreciation to the nearest
whole month for 2014, 2015, and 2016. VanHoutte's
year-end is December 31. Assume the actual unit
produced are:
2014 31,000; 2015 67,000; 2016 52,000.
Solution (1)
Calculate straight line depreciation.
156,000 26,400 = 129,600/6 = 21,600
21,600 x 4/12 = 7,200
Year
2014
2015
2016
12-42
Straight-Line
7,200
21,600
21,600
2013 McGraw-Hill Ryerson Limited.
Solution (2)
Calculate Units-of-Production depreciation.
156,000 26,400 = 129,600
129,600/200,000 = $0.648/unit
2014 - 0.648 x 31,000 = 20,088
2015 - 0.648 x 67,000 = 43,416
2016 - 0.648 x 52,000 = 33,696
12-43
2.
44
LO 4
45
LO 4
46
Remaining
book value
Revised residual
value
LO 4
47
LO 4
48
LO 4
Problem 10-11B
Cont
During 2015, a major increase in market demand for
building space caused the company to assess the useful life
and residual value of the building. It was decided that the
useful life would be increased by five years and the residual
value increased by $48,000. At the beginning of 2015, it was
determined that the remaining estimated life of the
equipment should be 10 years and the residual value
$6,000.
Ondine Biomedical calculates depreciation using the
straight-line method to the nearest month (round
calculations to the nearest whole dollar).
Required
Prepare the entries to record depreciation on the building
and equipment for the year ended December 31, 2015.
Solution
2015
Dec
31
1620
Accumulated Depreciation
(To record annual Dep.)
Dec
31
1620
7,320
7,320
Calculation
53
LO 5
54
LO 5
55
LO 6
Disposal of PPE
Accounting for disposal involves:
Record depreciation up to date of disposal.
Compare the assets book value with the net amount
received/paid at disposal and record any resulting
gain/loss.
Remove the balances of the disposed asset and
related accumulated depreciation accounts.
Record any cash (and other assets) received or paid
in the disposal.
1.
2.
3.
4.
56
LO 6
Exercise 10-21
Gandalf Co. purchased and installed a machine on January 1,
2014, at a total cost of $296,800. Straight-line depreciation was
taken each year for four years, based on the assumption of a
seven-year life and no residual value. The machine was
disposed of on July 1, 2018, during its fifth year of service.
Gandalf's year-end is December 31.
Required: Present the entries to record the partial year's
depreciation on July 1, 2018, and to record the disposal under
each of the following unrelated assumptions:
A.The
Exercise 10-21
Depreciation up to the beginning of 2018:
(296,800/7) 4 years = 169,600
Depreciation for 2018:
(296,800/7) 6/12 = 21,200
Exercise 10-21
2018
July 1 Depreciation Expense
Accumulated Depreciation
To record partial year
depreciation in year of disposal
21,200
21,200
190,800
112,000
Machine
Gain on Disposal
To record sale of machine for
$112,000
296,800
6,000
190,800
Cash
96,000
Loss on Disposal
10,000
Machine
To record receipt of $96,000
from insurance settlement
296,800
45,250
32,500
Loss on Disposal
Machine
To record sale of machine
6,250
84,000
45,250
115,750
Cash
77,000
Machine
84,000
45,250
104,000
2,750
68,000
84,000
45,250
75,000
25,000
Gain on Disposal
11,250
Machine
84,000
To record exchange
Exercise 10-27
Other
information:
All accounts
have normal
balances.
$38,000 of the
note payable is
due after
October 31,
2015.
Assets
Current assets:
Cash
Exercise 10-27
Accounts receivable
Less: Allowance for doubtful accounts
$ 9,600
$ 27,200
1,920
25,280
$ 34,880
$ 89,600
$ 147,200
81,600
65,600
$184,000
110,400
73,600
228,800
$ 57,600
30,400
$ 33,600
22,400
$ 27,200
11,200
38,400
$302,080
$18,400
34,000
$ 52,400
Intangible Assets
72
LO 7
Intangible Assets
73
LO 7
Goodwill
The amount by which the price paid for a company exceeds
the fair market value of the companys net assets if
purchased separately.
Goodwill
Is not an intangible asset.
Is reported separately on the balance sheet.
Is not amortized but may be decreased if it is impaired.
74
LO 7
220,800
40,480
Problem 10-18B(2)
On December 31, 2014, the company's adjusted trial balance showed the additional asset accounts shown below.
Prepare the asset section of the balance sheet at December 31, 2014, including the patent purchased on
February 3, 2014
Solution (2)
Abacus Software Group
Partial Balance Sheet
December 31, 2014
Assets
Current assets:
Cash ...................................................................... $103,200
Accounts receivable (net) ..................................... 277,200
Merchandise inventory ....................................... .135,600
Total current assets ...............................................................................................................$ 516,000
Property, plant and equipment:
Land ...................................................................... $110,400
Building ................................................................ $595,200
Less: Accumulated depreciation, building
(189,000)
406,200
Equipment ............................................................ $477,600
Less: Accumulated depreciation, equip. .................. (259,200 )
218,400
Total property, plant and equipment ..735,000
Intangible assets:
Patent .................................................................... $220,800
Less: Accumulated amortization, patent ................... 40,480
180,320
Total assets ................................................................... ..$1,431,320
Excercise
Xeno Co. incurred the following transactions concerning its machinery:
8-Jan-14
1-Jan-15
5-Jan-15
1-Jan-16
Purchased a machine for $55,000 cash and also paid $3,000 cash to have it installed.
Estimated useful life is 10 years and residual value is $5,000. Straight line depreciation is
used.
The machines useful life is changed from 10 years to 9.
General Maintenance on the machine was completed for $800.
Paid $3,800 to replace a motor in the machine. This was considered a major overhaul but
did not alter the machines useful life.
12-79
Solution
12-80
End of Chapter
81