Unit 1

Plant Assets and Non-Current Assets

Plant Assets (FRS 116)

Tangible in Nature

Actively Used in Operations

Expected to Benefit Future Periods Called Property, Plant, & Equipment/ Fixed Assets

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

Acquisition 1. Compute cost.

Use 2. Allocate cost to periods benefited. 3. Account for subsequent expenditures.

Disposal 4. Record disposal.

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

Acquisition Cost
The initial estimate of the costs of dismantlement and removing the item and restoring the site on which it is located, the obligation of which an entity has incurred.

Land
Title insurance premiums Purchase price Delinquent taxes

Real estate commissions Title search and transfer fees

Surveying fees

Land is not depreciable.

Land Improvements
Parking lots, driveways, fences, walks, shrubs, and lighting systems.
Depreciate over useful life of improvements.

Buildings
Cost of purchase or construction Title fees

Brokerage fees

Attorney fees

Taxes

Machinery and Equipment

Purchase price

Taxes

Transportation charges Installing, assembling, and testing

Insurance while in transit

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 RM200,000 cash. The appraised values are building, RM162,500, and land, RM87,500. How much of the RM200,000 purchase price will be charged to the building and land accounts?

Lump-Sum Asset Purchase

Appraised Value a $ 87,500 162,500 $ 250,000 % of Value b* Purchase Price Apportioned Cost

Asset Land Building Total

c b c 35% $ 200,000 = $ 70,000 35% 65% 65% 200,000 = 130,000 100% 100% $ 200,000

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

Revaluation of Plant Assets

Revaluation is permissible under FRS 116 Revalued amount should be supported by market-based evidence or appraisal. If revalued amount> carrying amount=Revaluation Surplus Credit to Revaluation Reserve If revalued amount< carrying amount=Revaluation Deficit Debit to Statement of Comprehensive Income as revaluation deficit expense

Depreciation
Depreciation is the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use.
Statement of Financial Position Cost Acquisition

Statement of Compreh

Cost
(Unused)

Allocation

Expense
(Used)

Factors in Computing Depreciation

The calculation of depreciation involves the following factors for each asset:
1.

Cost Salvage Value Useful Life Depreciation Methods used

1. 1. 2.

Depreciation Methods
1. 1. 1. 2.

Straight-line Units-of-production Double Declining-balance Sum-of-digit

Straight-Line Method
Depreciation = Expense for Period Cost - Salvage Value Useful life

On January 1, 2007, equipment was purchased for RM50,000 cash. The equipment has an estimated useful life of five years and an estimated residual value of RM5,000.

Straight-Line Method
Depreciation = Expense for Period
Depreciation = Expense per Year

Cost - Salvage Value Useful life

RM50,000 RM5,000 5 years = RM9,0

00
Dr. 9,000 Cr. 9,000

Depreciation Expense Accumulated Depreciation - Equipment

To record annual depreciation

Straight-Line Method
Depreciation Expense (debit) $ 9,000 9,000 9,000 9,000 9,000 45,000 Accumulated Depreciation (credit) $ 9,000 9,000 9,000 9,000 9,000 45,000

Year 2007 2008 2009 2010 2011

Accumulated Depreciation $ 9,000 18,000 27,000 36,000 45,000

Book Value $ 50,000 41,000 32,000 23,000 14,000 5,000

Salvage Value
Depreciation = (100% 5 years) = 20% per year Rate

Depreciation Expense

RM9,000 RM7,000 RM5,000 RM3,000 RM1,000 RM0 2007 2008 2009 2010 2011 For the year ended December 31

Depreciation Expense reported on the Statement of Comprehensive Income.

Book Value reported on the Statement of Financial Position.

$45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $-

$41,000 $32,000 $23,000 $14,000 $5,000 2007 2008 2009 2010 2011

Book Value

For the year ended December 31

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

Step 2:

Depreciation Expense

Number of Depreciation Units Produced Per Unit in the Period

Units-of-Production Method

On December 31, 2007, equipment was purchased for RM50,000 cash. The equipment is expected to produce 100,000 units during its useful life and has an estimated salvage value of RM5,000.
If 22,000 units were produced in 2008, what is the amount of depreciation expense?

Units-of-Production Method
Step 1:
Depreciation Per Unit = RM50,000 - RM5,000 = RM.45 per 100,000 units unit

Step 2:
Depreciation = RM.45 per unit 22,000 units = Expense RM9,900

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

No depreciation expense if the equipment is idle.

Double-Declining-Balance Method
Step 1: Straight-line = 100 % Useful life = 100% 5 = 20% rate Step 2: Double-declining= 2 Straight-line rate = 2 20% = balance rate 40% Step 3: Depreciation Double-decliningBeginning period = expense balance rate book value 40% RM50,000 = RM20,000 for 2008

Double-Declining-Balance Method
2008 Depreciation: 40% RM50,000 = RM20,000

2009 Depreciation: 40% (RM50,000 - RM20,000) = RM12,000

Double-Declining-Balance Method
Depreciation Accumulated Expense Depreciation $ 20,000 12,000 7,200 4,320 2,592 46,112 $ Book Value $ 50,000 20,000 30,000 32,000 18,000 39,200 10,800 43,520 6,480 46,112 3,888 Below salvage value

Year 2008 2009 2010 2011 2012

Double-Declining-Balance Method

Year 2008 2009 2010 2011 2012

Depreciation Expense $ 20,000 12,000 7,200 4,320 1,480 45,000

Accumulated Depreciation $ 20,000 32,000 39,200 43,520 45,000

Book Value $ 50,000 30,000 18,000 10,800 6,480 5,000

We usually must force depreciation expense in the last year so that book value equals salvage value.

Sum-of-Digit Method
Year 2008 2009 2010 2011 2012 Weighted Factor (WF) 5 4 3 2 1 WF/15 x 45,000 Yearly depreciation

45,000 x 5/15 15,000 45,000 x 4/15 12,000 45,000 x 3/15 9,000 45,000 x 2/15 6,000 45,000 x 1/15 3,000

Sum of-digit Method

Year 2008 2009 2010 2011 2012

Depreciation Expense $ 15,000 12,000 9,000 6,000 3,000 45,000

Accumulated Depreciation $ 15,000 27,000 36,000 42,000 45,000

Book Value $ 50,000 35,000 23,000 14,000 8,000 5,000

We usually must force depreciation expense in the last year so that book value equals salvage value.

Comparing Depreciation Methods

Method Formula Effect on Annual Depreciation

Straight-line

(Cost-Salvage value)/ Useful Consistent amount life in periods Depreciation per unit x Units Varying amount (depends on produced in period the number of units produced) Double-declining balance Decreasing amount rate x Beginning-period book value (Cost-Salvage value) x weighted factor/sum-of-the digits Decreasing amount

Units-ofproduction Doubledeclining balance Sum-of-digit

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

Partial-Year Depreciation
Calculate the straight-line depreciation on December 31, 2007, for equipment purchased on June 30, 2007. The equipment cost RM75,000, has a useful life of 10 years, and an estimated salvage value of RM5,000. Depreciation= Depreciation= Depreciation Depreciation (RM75,000 - RM5,000) 10 (RM75,000 - RM5,000) 10 = RM7,000 for all 2007 = RM7,000 for all 2007 = RM7,000 66//12 = RM3,500 = RM7,000 12 = RM3,500

Change in Estimates for Depreciation

Predicted salvage value Predicted 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.

Change in Estimates for Depreciation

On January 1, 2004, equipment was purchased that cost RM30,000, 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 date of change

Salvage value at date of change

Remaining useful life at date of change

Change in Estimates for Depreciation

Asset cost Accumulated depreciation, 12/31/2006 ($3,000 per year 3 years) Remaining book value Divide by remaining life Revised annual depreciation $ 30,000 9,000 $ 21,000 5 $ 4,200
Dr. 4,200 Cr. 4,200

Dec. 31 Depreciation Expense Accumulated Depreciation - Equipment

To record depreciation for 2007

Reporting Depreciation

Property, plant, and equipment: Land and buildings Machinery and equipment Office furniture and equipment Land improvements Total Less Accumulated depreciation Net property, plant, and equipment

$ 150,000 200,000 175,000 50,000 $ 575,000 (122,000) $ 453,000

Additional Expenditures
Financial Statement Effect Current Current Statement Expense Income Taxes

Treatment

Capital Balance sheet Expenditure account debited Deferred Higher Revenue Income statement Currently Expenditure account debited recognized Lower

Higher Lower

If the amounts involved are not material, most If the amounts involved are not material, most companies expense the item. companies expense the item.

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

Disposals of Plant Assets

Update depreciation to the date of disposal. Journalize disposal by:
Recording cash received (debit) or paid (credit). Removing accumulated depreciation (debit). Recording a gain (credit) or loss (debit). Removing the asset cost (credit).

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 = BV, no gain or loss. Journalize disposal by:
Recording cash received (debit) or paid (credit). Removing accumulated depreciation (debit).

Recording a gain (credit) or loss (debit). Removing the asset cost (credit).

Selling Plant Assets

On September 30, 2007, Evans Company sells a machine that originally cost RM100,000 for RM60,000 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 RM20,000 and a useful life of 10 years.

Update Depreciation to Date of Disposal

Annual Depreciation: (RM100,000 - RM20,000) 10 Yrs. = RM8,000 Depreciation to September 30, 2007: 9/12 RM8,000 = RM6,000
Dr. Sep. 30 Depreciation expense 6,000 Accumulated Depreciation - Machine
To update depreciation to date of disposal

Cr. 6,000

Determine Book Value of Asset

C o st $ 100,000 A ccu m u la te d D e p re cia tio n : ( 3 yrs. $8,000) + $6,000 30,000 = B o o k V a lu e $ 70,000

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 Accumulated depreciation Book Value Cash Received Loss on disposal $ 100,000 30,000 70,000 60,000 $ (10,000)

Record the Disposal in the Journal

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

Cr.

100,000

Lets Talk About Natural Resources!

Natural Resources
Total cost, including exploration and development, is charged to depletion expense over periods benefited. Extracted from the natural environment and reported at cost less accumulated depletion.

Examples: oil, coal, gold

Cost Determination and Depletion

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

Step 2:
Depletion Expense = Depletion Per Unit

Units Extracted and Sold in Period

Depletion of Natural Resources

Apex Mining acquired a tract of land containing ore deposits. Total costs of acquisition and development were RM1,000,000 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.

Depletion Expense
Step 1:
Depletion Per Unit = RM1,000,000 - RM0 = 40,000 tons RM25 per ton

Step 2:
Depletion Expense = RM25 per ton RM325,000 13,000 units =

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.

Lets Look at Intangible Assets!

Intangible Assets (FRS 138)

Noncurrent assets Noncurrent assets without physical without physical substance. substance. Often provide Often provide exclusive rights exclusive rights or privileges. or privileges.

Intangible Assets
Useful life is Useful life is often difficult often difficult to determine. to determine. Usually acquired Usually acquired for operational for operational use. use.

Cost Determination and Amortization

Record at current cash equivalent cost, including purchase price, legal fees, and filing fees.
o o o o o o o

Patents Copyrights Leaseholds Leasehold Improvements Franchises & Licenses Goodwill Trademarks & Trade Names

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.

Types of Intangibles
Patents
Matrix, Inc. purchased a patent for RM10,000. The patent is expected to have a useful life of 10 years.
Amortization Expense - Patents Accumulated Amortization - Patents
To amortize patent costs

Dr. 1,000

Cr. 1,000

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.

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.

Types of Intangibles

Trademarks and Trade Names

A symbol, name, phrase, or jingle identified with a company, product, or service.

Goodwill

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

Goodwill is not amortized. It is tested each year to determine if there has been any impairment in carrying value.

End of Unit 1