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Cost of inventory
Account for inventory perpetual, periodic
Costing inventory methods:
Specific ID, Weighted Average, FIFO
Accounting principles: comparability, disclosure
Lower of Cost-and-Net-Realizable Value Rule
Effect of inventory errors
Cost of goods sold model
Ratios: Gross profit percentage and inventory turnover
Review Question #1
Using the information on the overhead projector,
the cost of inventory at July 31, 2014 using
the FIFO method is:
a.
b.
c.
d.
9,500
$10,800
$11,000
$13,400
Learning Objective 1
Describe the types
of tangible and intangible
assets a business may own
Long-Lived Assets
Asset Account
(Balance Sheet)
Tangible assets
Land
Depreciation
Depreciation
Amortization
Learning Objective 2
Measure and account for the cost
of property, plant, and
equipment
7-6
$300,000
24,000
$324,000
$1,000,000
1,000,000
Capital Expenditures:
Record an asset
Expenses:
Record an expense
Extraordinary repairs:
Major engine overhaul
Modification of body
for new use of truck
Addition to storage
capacity of truck
Ordinary repairs:
Repair of transmission
or other mechanism
Oil change, lubrication, etc.
Replacement tires, windshield
Paint job
Question #2
Land and building were bought for a total of
$485,000. The market value for the land was
$175,000 and $325,000 for the building. What
amounts should be recorded for them?
Land
Building
a. $175,000
$325,000
b. $160,000
$325,000
c. $175,000
$310,000
d. $169,750
$315,250
Learning Objective 3
Calculate and record
depreciation on
property, plant, and
equipment
Depreciation
Depreciation allocates the cost of the property, plant and
equipment to expense over future periods
Limited life caused by physical wear and tear and
obsolescence (except for land)
The cost of using it is recorded in the same period the
revenue is earned
An adjusting entry is prepared using an estimate
Depreciation - Terminology
Cost all costs incurred to get the asset ready for use
Accumulated depreciation depreciation expensed
over the accounting periods
Estimated useful life the length of service the
business expects from the asset
Estimated residual value it is the expected cash
value of an asset at the end of its useful life
Depreciation Methods
Straight-line (SL)
Units-of-production (UOP)
Diminishing balance or
Double-diminishing-balance (DDB)
Straight-Line Method
(Cost Residual value) Years of useful life
($55,000 $5,000) 4 = $12,500
Year 1 depreciation:
Year 2 depreciation:
Year 3 depreciation:
Year 4 depreciation:
Total depreciation:
$12,500
12,500
12,500
12,500
$50,000
Units-of-Production Method
Double-Diminishing-Balance
Method
Straight-line rate per year: 100% 4 = 25%
Double-diminishing balance:
2 times the straight-line rate = 50%
Year 1: 55,000 0.50 =
$27,500
Year 2: 55,000-27,500 x .50 =
$13,750
Year 3: 55,000-27,500-13,750 x .50 = $6,875
Year 4:
$1,875**
Total accumulated depreciation
=$50,000
**The asset is not depreciated below residual value
Year
SL
UOP
DDB
1 $ 12,500 $13,000 $27,500
2
12,500 12,000
13,750
3
12,500 11,750
6,875
4
12,500 13,250
1,875
Total $50,000
$50,000
$50,000
Question #3
On Jan. 1, three years ago, the company bought a
machine for $15,000. The estimated useful
life was 10 years and the residual value was
$3,000. If double diminishing balance is
used, what is the depreciation expense for the
third year?
a. $1,500
b. $1,536
c. $1,920
d. $3,000
Learning Objective 4
Explain additional
depreciation topics in
accounting for long-lived
tangible assets
Derecognition of Property,Plant
and Equipment
Derecognition is used to refer to property, plant
and equipment that is either no longer useful or
it is sold
If assets are junked before being full
depreciated, the company incurs a loss on the
disposal
Before accounting for the derecognition, bring
the depreciation up to date
Derecognition of Property,Plant
and Equipment
Example: A company disposes of equipment
that cost $8,000. Accumulated depreciation is
$6,000 and the carrying amount is $2,000.
The journal entry is:
Accumulated depreciation 6,000
Loss on disposal
2,000
Equipment
8,000
10,000
Depreciating Significant
Components
IFRS require that significant components of an
item of property, plant and equipment be
depreciated separately
Impairment
At each reporting date, a company should review
its property, plant and equipment to see if an
asset is impaired
Impairment occurs when then the carrying
amount exceeds its recoverable amount ie
obsolescence, physical damage and loss in
market value
Impairment
Loss on impairment
xxx
Accumulated depreciation
xxx
Revaluation Model
Under the revaluation model, the asset is
recorded at cost when purchased but then
measured at its fair value less any accumulated
depreciation less any accumulated losses
Fair value is the price at which the asset could
be sold
Learning Objective 5
Account for intangible
assets
Intangible Assets
Patents
Copyrights
Trademarks
Franchises
Licences
Goodwill
Intangible Assets
Intangible assets are recorded at acquisition
cost and are often the most valuable assets.
The residual value is often zero.
Intangible assets fall into 2 categories:
1. Intangibles with finite lives amortized
2. Intangibles with indefinite lives not
amortized but checked for impairment
170,000
December 31
Amortization Expense
34,000
Accumulated amortization
To amortize the cost of a patent
170,000
34,000
Intangible Assets
Copyrights films, novels, software, etc - extend
50 years beyond the creators life
Tradenames are assets that represent distinctive
identifications of a product or service
Franchises/Licences granted by private business
or government to sell a product or service
Question #4
A company paid $80,000 to acquire a patent, with an
expected useful life of 4 years, on June 30, 2014.The
entry to record amortization expense at Dec. 31/14 is:
a.
20,000
10,000
10,000
20,000
Learning Objective 6
Analyze and evaluate a companys
return on assets
7 - 52
Net income
Average total assets
DuPont Analysis
Net income
Net profit
margin
Net sales
Net sales
Total asset
turnover
Average total
assets
Net profit
margin
Total asset
turnover
Return on
assets
Learning Objective 7
Interpret tangible and intangible
asset activities on the
statement of cash flows
End of Chapter 7