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PlantAssets,NaturalResources,andIntangiblesChapter10PlantAssetsTangibleinNatureC1PLANTASSETSC1Acquisition
CostAcquisitioncostexcludesfinancingchargesand
cashdiscountsAllexpendituresneededtopreparetheassetforitsintendedusePurchase
priceCostDeterminationC1Landisnotdepreciable.Purchase
priceRealestatecommissionsTitleinsurancepremiumsDelinquenttaxesSurveying
feesTitlesearchandtransferfeesLandC1LandImprovementsParkinglots,driveways,fences,walks,shrubs,andlightingsystems.Depreciate
overusefullifeofimprovements.C1CostofpurchaseorconstructionBrokerage
feesTaxesTitlefeesAttorneyfeesBuildingsC1Purchase
priceInstalling,
assembling,and
testingInsurancewhile
intransitTaxesTransportationchargesMachineryandEquipmentC1Lump-SumPurchase
CarMaxpaid$90,000cashtoacquireagroupofitemsconsistingoflandappraisedat$30,000,landimprovementsappraisedat$10,000,andabuildingappraisedat$60,000.The$90,000costwillbeallocatedonthebasisofappraisedvaluesasshown:Thetotalcostofacombinedpurchaseoflandandbuildingisseparatedonthebasisoftheirrelativefairmarketvalues.P1.
Plantassetsareusedinoperationsandhaveusefullivesthatextendovermorethanoneaccountingperiod.
Iflandispurchasedasabuildingsite,thecostofremovingexistingstructuresisnotchargedtotheLandaccount.
Depreciationistheprocessofallocatingthecostofaplantassettoexpenseintheaccountingperiodsbenefitingfromitsuse.
Anasset'scostincludesallnormalandreasonableexpendituresnecessarytogettheassetinplaceandreadyforitsintendeduse.
Thepurchaseofapropertythatincludedland,building,andrelatedimprovementsiscalledalump-sumpurchase.
Landisnotsubjecttodepreciationbecauseithasanunlimitedlife.Thismeansthatitemswhichincreasetheusefulnessofthelandsuchasparkinglotsarenotdepreciated.
Thecostoffeesforinsuringthetitleandanyaccruedpropertytaxesareincludedinthecostofland.
Depreciationistheprocessofallocatingthecostofaplantassettoexpenseintheaccountingperiodsbenefitingfromitsuse.
CostAllocationAcquisition
Cost(Unused)BalanceSheet(Used)IncomeStatementExpenseDepreciationP1FactorsinComputingDepreciation
Thecalculationofdepreciationrequiresthreeamountsforeachasset:
1.Cost 2.
SalvageValue 3.UsefulLifeP1DepreciationMethods
Straight-lineUnits-of-productionDeclining-balanceAssetwewilldepreciateinfuturescreensP1Straight-LineMethodP1BalanceSheetPresentationMachinery$10,000
Less:accumulateddepreciation3,600
$6,400
P1Straight-LineMethodStraight-LineDepreciationScheduleP1SalvageValueUnits-of-ProductionMethodStep2:DepreciationExpense=DepreciationPerUnit×NumberofUnitsProduced
inthePeriodDepreciationPerUnit=Cost-SalvageValueTotalUnitsofProductionStep1:P1Units-of-ProductionMethodDepreciationPerUnit=Cost-SalvageValueTotalUnitsofProductionStep1:=$9,000
36,000=$0.25/unitStep2:DepreciationExpense=DepreciationPerUnit×NumberofUnitsProduced
inthePeriod=$0.25×7,000=$1,750Assumethat7,000unitswereinspectedduring2013.Depreciationwouldbecalculatedasfollows:P1Units-of-Production
DepreciationScheduleP1Unitsproducedandsoldduringtheperiod.Double-Declining-BalanceMethodP1Double-Declining-BalanceMethodP1ComparingDepreciationMethodsP1MethodsUsedbyCompaniesDepreciationforTaxReportingMostcorporationsusetheModifiedAcceleratedCostRecoverySystem(MACRS)fortaxpurposes.MACRSdepreciationprovidesforrapidwrite-offofanasset’scostinordertostimulatenewinvestment.P1Partial-YearDepreciationWhenaplantassetisacquiredduringtheyear,depreciationiscalculatedforthefractionoftheyeartheassetisowned.Cost$10,000Salvagevalue1,000Depreciablecost$9,000Usefullife
Accountingperiods5yearsUnitsinspected36,000unitsAssumeourmachinerywaspurchasedonOctober8,2013.Let’scalculatedepreciationexpensefor2013,assumingweusestraight-linedepreciation.C2Depreciation
isanestimatePredicted
salvagevaluePredicted
usefullifeChangesinEstimatesforDepreciationOverthelifeofanasset,newinformationmaycometolightthatindicatestheoriginalestimateswereinaccurate.C2ChangesinEstimatesforDepreciationLet’slookatourmachineryfromthepreviousexamplesandassumethatatthebeginningoftheasset’sthirdyear,itsbookvalueis$6,400($10,000costless$3,600accumulateddepreciationusingstraight-linedepreciation).Atthattime,itisdeterminedthatthemachinerywillhavearemainingusefullifeof4years,andtheestimatedsalvagevaluewillbereviseddownwardfrom$1,000to$400.C2ReportingDepreciationDaleJarrettRacingAdventureOfficefurnitureandequipment
$54,593Shopandtrackequipment
202,973Racevehiclesandother
975,084Propertyandequipment,gross
1,232,650
Less:accumulateddepreciation
628,355Propertyandequipment,net
$604,295
C2AdditionalExpenditures
Iftheamountsinvolvedarenotmaterial,mostcompaniesexpensetheitem.C3RevenueandCapital
ExpendituresC3Recordingcash
received(debit)
orpaid(credit).Removingaccumulated
depreciation(debit).
Updatedepreciation
tothedateofdisposal.Journalizedisposalby:Removingthe
assetcost(credit).Recordinga
gain(credit)orloss(debit).DisposalsofPlantAssetsP2Updatedepreciation
tothedateofdisposal.Journalizedisposalby:DiscardingPlantAssetsRecordingcash
received(debit)
orpaid(credit).Removingaccumulated
depreciation(debit).Removingthe
assetcost(credit).Recordinga
gain(credit)orloss(debit).P2Amachinecosting$9,000,withaccumulateddepreciationof$9,000onDecember31stofthepreviousyearwasdiscardedonJune5thofthecurrentyear.Thecompanyisdepreciatingtheequipmentusingthestraight-linemethodovereightyearswithzerosalvagevalue.DiscardingPlantAssetsP2Equipmentcosting$8,000,withaccumulateddepreciationof$6,000onDecember31stofthepreviousyearwasdiscardedonJuly1stofthecurrentyear.Thecompanyisdepreciatingtheequipmentusingthestraight-linemethodovereightyearswithzerosalvagevalue.DiscardingPlantAssetsStep1:Bringthedepreciationup-to-date.Step2:Recorddiscardingofasset.P2SellingPlantAssetsOnMarch31st,BTOsellsequipmentthatoriginallycost$16,000andhasaccumulateddepreciationof$12,000atDecember31stofthepriorcalendaryear-end.Annualdepreciationonthisequipmentis$4,000usingstraight-linedepreciation.Theequipmentissoldfor$3,000cash.P2Step1:UpdatedepreciationtoMarch31st.Step2:Recordsaleofassetatbookvalue($16,000-$13,000=$3,000).SellingPlantAssetsP2OnMarch31st,BTOsellsequipmentthatoriginallycost$16,000andhasaccumulateddepreciationof$12,000atDecember31stofthepriorcalendaryear-end.Annualdepreciationonthisequipmentis$4,000usingstraight-linedepreciation.Theequipmentissoldfor$2,500cash.Step1:UpdatedepreciationtoMarch31st.Step2:Recordsaleofassetataloss(Bookvalue$3,000-$2,500cashreceived).Totalcost,
including
explorationand
development,
ischargedto
depletionexpense
overperiods
benefited.Extractedfrom
thenatural
environment
andreported
atcostless
accumulated
depletion.NaturalResourcesExamples:oil,coal,goldP3CostDetermination
andDepletionP3Let’sconsideramineraldepositwithanestimated250,000tonsofavailableore.Itispurchasedfor$500,000,andweexpectzerosalvagevalue.DepletionofNaturalResourcesP3Depletionexpenseinthefirstyearwouldbe:BalanceSheetpresentationofnaturalresources:PlantAssetsUsedinExtractingSpecializedplantassetsmayberequiredtoextractthenaturalresource.Theseassetsarerecordedinaseparateaccountanddepreciated.P3Noncurrentassets
withoutphysical
substance.Usefullifeis
oftendifficult
todetermine.Usuallyacquired
foroperational
use.Intangible
AssetsOftenprovide
exclusiverights
orprivileges.IntangibleAssetsP4CostDeterminationandAmortizationPatentsCopyrightsLeaseholdsLeaseholdImprovementsFranchisesandLicensesGoodwillTrademarksandTradeNamesOtherIntangibles
Recordatcurrentcashequivalentcost,includingpurchaseprice,legalfees,andfilingfees.P4GlobalViewThereisoneareawherenotabledifferencesexist,andthatisinaccountingforchangesinthevalueofplantassets(betweenthetimetheyareacquiredanddisposedof).Namely,howdoesIFRSandU.S.GAAPtreatdecreasesandincreasesinthevalueofplantassetssubsequenttoacquisition?DecreasesintheValueofPlantAssetsBothU.S.GAAPandIFRSrequirethatanimpairmentinvalueberecognized.IncreasesintheValueofPlantAssetsU.S.GAAPprohibitsrecordingincreaseinvalueofplantassets.IFRSpermitsupwardassetrevaluation.Providesinformationaboutacompany’s
efficiencyinusingitsassets.TotalAssetTurnover=NetSalesAverageTotalAssetsTotalAssetTurnoverA110A–ExchangingPlantAssetsP5AManyplantassetssuchasmachinery,automobiles,andofficeequipmentaredisposedofbyexchangingthemfornewerassets.Inatypicalexchangeofplantassets,atrade-inallowanceisreceivedontheoldassetandthebalanceispaidincash.Accountingfortheexchangeofassetsdependsonwhetherthetransactionhascommercialsubstance.Commercialsubstanceimpliesthecompany’sfuturecashflowswillbealtered.ExchangewithCommercialSubstance:ALossAcompanyacquires$42
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