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Reporting and Analyzing Long-Term Assets: © The Mcgraw-Hill Companies, Inc., 2010 Mcgraw-Hill/Irwin
Reporting and Analyzing Long-Term Assets: © The Mcgraw-Hill Companies, Inc., 2010 Mcgraw-Hill/Irwin
McGraw-Hill/Irwin
McGraw-Hill/Irwin
C1
C1
Acquisition
1. Compute cost.
McGraw-Hill/Irwin
Use
2. Allocate cost to periods
benefited.
3. Account for subsequent
expenditures.
Disposal
4. Record disposal.
P1
Cost Determination
Purchase
price
Acquisition
Cost
All
expenditures
needed to
prepare the
asset for its
intended use
P1
Land
Title insurance premiums
Purchase
price
Delinquent
taxes
Real estate
commissions
Surveying
fees
Title search and transfer fees
P1
Land Improvements
Parking lots, driveways, fences, walks,
shrubs, and lighting systems.
Depreciate over
useful life of
improvements.
McGraw-Hill/Irwin
P1
Buildings
Cost of purchase or
construction
Title fees
Brokerage
fees
Attorney fees
Taxes
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P1
Taxes
Transportation
charges
Installing,
assembling, and
testing
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Insurance while
in transit
The McGraw-Hill Companies, Inc., 2010
P1
P1
McGraw-Hill/Irwin
C2
Depreciation
Acquisition
Cost
(Unused)
McGraw-Hill/Irwin
Income Statement
Cost
Allocation
Expense
(Used)
Factors in Computing
Depreciation
C2
Cost
2.
Salvage Value
3.
Useful Life
McGraw-Hill/Irwin
P2
Depreciation Methods
1.
Straight-line
2.
Units-of-production
3.
Declining-balance
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P2
Straight-Line Method
Depreciation
=
Expense for Period
McGraw-Hill/Irwin
P2
Straight-Line Method
Depreciation
=
Expense for Period
Depreciation
Expense per Year =
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P2
Straight-Line Method
Salvage
Value
Depreciation
= (100% 5 years) = 20% per year
Rate
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Depreciation
Expense
$9,000
Depreciation Expense
reported on the
Income Statement.
$7,000
$5,000
$3,000
$1,000
$0
2007
2008
2009
2010
2011
Book Value
reported on the
Balance Sheet.
Book Value
P2
P2
Units-of-Production Method
Step 1:
Depreciation
Per Unit
Step 2:
Depreciation
Expense
McGraw-Hill/Irwin
Number of
Depreciation
Units Produced
Per Unit
in the Period
P2
Units-of-Production Method
P2
Units-of-Production Method
Step 1:
Depreciation =
Per Unit
$50,000 - $5,000
100,000 units
Step 2:
Depreciation
= $.45 per unit 22,000 units = $9,900
Expense
McGraw-Hill/Irwin
P2
Units-of-Production Method
P2
Low
Repair
Expense
Low
High
McGraw-Hill/Irwin
P2
Double-Declining-Balance Method
Step 1:
Straight-line
rate
Step 2:
Double-declining- = 2 Straight-line rate
balance rate = 2 20%
= 40%
Step 3:
Depreciation
=
expense
=
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Double-decliningbalance rate
Beginning period
book value
40% $50,000
$20,000 for 2008
The McGraw-Hill Companies, Inc., 2010
P2
Double-Declining-Balance Method
2008
Depreciation:
40% $50,000 = $20,000
2009
Depreciation:
40% ($50,000 - $20,000) = $12,000
McGraw-Hill/Irwin
P2
Double-Declining-Balance Method
McGraw-Hill/Irwin
P2
Double-Declining-Balance Method
Annual Production
Depreciation
Comparing Depreciation
Methods
Annual SL
Depreciation
A1
Life in Years
Annual DDB
Depreciation
Life in Years
Life in Years
McGraw-Hill/Irwin
C3
Partial-Year Depreciation
When
When an
an item
item of
of property,
property, plant
plant or
or
equipment
equipment is
is acquired
acquired during
during the
the
year,
year, depreciation
depreciation is
is calculated
calculated for
for
the
the fraction
fraction of
of the
the year
year the
the asset
asset is
is
owned.
owned.
June
30
McGraw-Hill/Irwin
C3
Partial-Year Depreciation
Calculate the straight-line depreciation on
December 31, 2010, for equipment purchased
on June 30, 2010. The equipment cost $75,000,
has a useful life of 10 years, and an estimated
salvage value of $5,000.
Depreciation
Depreciation
Depreciation
Depreciation
McGraw-Hill/Irwin
==
==
==
($75,000
($75,000 -- $5,000)
$5,000) 10
10
$7,000
$7,000 for
for all
all 2007
2007
6
$7,000
= $3,500
$7,000 6//12
12 = $3,500
C3
Predicted
salvage value
Predicted
useful life
So depreciation
is an estimate.
C3
Book value at
date of change
Salvage value at
date of change
C3
McGraw-Hill/Irwin
C3
Reporting Depreciation
McGraw-Hill/Irwin
$ 150,000
200,000
175,000
50,000
$ 575,000
(122,000)
$ 453,000
P3
Additional Expenditures
IfIf the
the amounts
amounts involved
involved are
are not
not material,
material, most
most
companies
companies expense
expense the
the item.
item.
McGraw-Hill/Irwin
P3
McGraw-Hill/Irwin
P4
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
McGraw-Hill/Irwin
Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
The McGraw-Hill Companies, Inc., 2010
P4
Update
depreciation
If Cash > BV,
record
a gain (credit).
to the date of disposal.
If Cash < BV, record a loss (debit).
If Cash =Journalize
BV, no gain
or loss.
disposal
by:
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
McGraw-Hill/Irwin
Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
The McGraw-Hill Companies, Inc., 2010
P4
P4
Annual Depreciation:
($100,000 - $20,000) 10 Yrs. = $8,000
Depreciation to September 30, 2011:
9/12 $8,000 = $6,000
McGraw-Hill/Irwin
P4
McGraw-Hill/Irwin
P4
McGraw-Hill/Irwin
P4
McGraw-Hill/Irwin
P5
McGraw-Hill/Irwin
P5
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.
P5
Step 2:
Depletion
Expense
McGraw-Hill/Irwin
Depletion
Per Unit
Units Extracted
and Sold in
Period
P5
McGraw-Hill/Irwin
P5
Depletion Expense
Step 1:
Depletion
Per Unit
$1,000,000 - $0
40,000 tons
Step 2:
Depletion
Expense = $25 per ton
McGraw-Hill/Irwin
P5
McGraw-Hill/Irwin
P6
McGraw-Hill/Irwin
P6
Intangible Assets
Often
Often provide
provide
exclusive
exclusive rights
rights
or
or privileges.
privileges.
Noncurrent
Noncurrent assets
assets
without
without physical
physical
substance.
substance.
Intangible
Assets
Useful
Useful life
life is
is
often
often difficult
difficult
to
to determine.
determine.
McGraw-Hill/Irwin
Usually
Usually acquired
acquired
for
for operational
operational
use.
use.
The McGraw-Hill Companies, Inc., 2010
P6
Record at current
cash equivalent
cost, including
purchase price,
legal fees, and
filing fees.
o
o
o
o
o
o
o
McGraw-Hill/Irwin
Patents
Copyrights
Leaseholds
Leasehold Improvements
Franchises & Licenses
Goodwill
Trademarks & Trade Names
P6
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.
McGraw-Hill/Irwin
P6
Types of Intangibles
Patents
McGraw-Hill/Irwin
P6
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.
McGraw-Hill/Irwin
P6
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.
Types of Intangibles
P6
McGraw-Hill/Irwin
P6
Goodwill
Goodwill
Occurs when one
company buys
another company.
Only purchased
goodwill is an
intangible asset.
A2
Net Sales
Average Total Assets
Provides
Provides information
information about
about aa companys
companys
efficiency
efficiency in
in using
using its
its assets.
assets.
McGraw-Hill/Irwin
P7
Appendix 8A
McGraw-Hill/Irwin
P7
McGraw-Hill/Irwin
P7
A gain is recognized
when the book value
given up is less than
the market value
received.
The McGraw-Hill Companies, Inc., 2010
P7
McGraw-Hill/Irwin
P7
McGraw-Hill/Irwin
10,000
35,000
$ 39,000
45,000
$ 6,000
P7
McGraw-Hill/Irwin
P7
McGraw-Hill/Irwin
10,000
35,000
$ 49,000
45,000
$ 4,000
P7
McGraw-Hill/Irwin
P7
10,000
35,000
$ 49,000
45,000
$ 4,000
End of Chapter 8
McGraw-Hill/Irwin