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Slide
9-1
PLANT AND INTANGIBLE
ASSETS
Slide
9-2
Long-lived assets acquired for use in
business operations.
Long-lived assets acquired for use in
business operations.
Similar to long-term prepaid expenses
The cost of plant assets
is the advance purchase
of services.
As years pass, and the
services are used, the
cost is transferred to
depreciation expense.
Plant AssetsPlant Assets
Slide
9-3
L a n d , b u ild in g s ,
e q u ip m e n t ,
fu r n it u r e , fix t u r e s .
L o n g - t e r m
a s s e t s h a v in g
p h y s ic a l s u b s t a n c e .
T a n g i b l e P l a n t
A s s e t s
P a t e n t s , c o p y r ig h t s ,
t r a d e m a r k s ,
fr a n c h is e s , g o o d w ill.
N o n c u r r e n t a s s e t s
w it h n o p h y s ic a l
s u b s t a n c e .
I n t a n g i b l e
A s s e t s
O il r e s e r v e s ,
t im b e r , o t h e r
m in e r a ls .
S it e s a c q u ir e d fo r
e x t r a c t in g v a lu a b le
r e s o u r c e s .
N a t u r a l
R e s o u r c e s
Major Categories of Plant AssetsMajor Categories of Plant Assets
Slide
9-4
Acquisition.
Allocation of the
acquisition cost to
expense over the
asset’s useful life
(depreciation).
Sale or disposal.
Acquisition.
Allocation of the
acquisition cost to
expense over the
asset’s useful life
(depreciation).
Sale or disposal.
Accountable EventsAccountable Events
Slide
9-5
Asset
price
Asset
price
Reasonable and
necessary costs . . .
Reasonable and
necessary costs . . .
. . . for getting
the asset to the
desired location.
. . . for getting
the asset to the
desired location.
. . . for getting
the asset ready
for use.
. . . for getting
the asset ready
for use.
CostCost
Acquisition of Plant AssetsAcquisition of Plant Assets
+
Slide
9-6
On May 4, Heat Co., an Ohio maker of stoves,
buys a new machine from a Texas company.
The new machine has a price of $52,000.
Sales tax was computed at 8%.
Heat Co. pays $500 shipping cost to get the
machine to Ohio. After the machine arrives,
set-up costs of $1,300 are incurred, along with
$4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.
On May 4, Heat Co., an Ohio maker of stoves,
buys a new machine from a Texas company.
The new machine has a price of $52,000.
Sales tax was computed at 8%.
Heat Co. pays $500 shipping cost to get the
machine to Ohio. After the machine arrives,
set-up costs of $1,300 are incurred, along with
$4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.
Determining CostDetermining Cost
Slide
9-7
Prepare the journal entry.
Determining CostDetermining Cost
Slide
9-8
Improvements to land
such as driveways,
fences, and landscaping
are recorded separately.
Improvements to land
such as driveways,
fences, and landscaping
are recorded separately.
Cost includes real estate
commissions, escrow
fees, legal fees, clearing
and grading the property.
Cost includes real estate
commissions, escrow
fees, legal fees, clearing
and grading the property.
Land
Improvements
Land
Improvements
LandLand
Special ConsiderationsSpecial Considerations
Slide
9-9
Repairs made prior to the
building being put in use
are considered part of the
building’s cost.
Repairs made prior to the
building being put in use
are considered part of the
building’s cost.
BuildingsBuildings
Special ConsiderationsSpecial Considerations
EquipmentEquipment
Related interest,
insurance, and property
taxes are treated as
expenses of the current
period.
Related interest,
insurance, and property
taxes are treated as
expenses of the current
period.
Slide
9-10
I think I’ll buy the
whole thing; barn,
land, and animals.
Special ConsiderationsSpecial Considerations
The allocation
is based on
the relative
Fair Market
Value of each
asset
purchased.
The allocation
is based on
the relative
Fair Market
Value of each
asset
purchased.
The total cost
must be
allocated to
separate
accounts for
each asset.
The total cost
must be
allocated to
separate
accounts for
each asset.
Allocation of a Lump-Sum PurchaseAllocation of a Lump-Sum Purchase
Slide
9-11
Capital
Expenditure
Capital
Expenditure
Revenue
Expenditure
Revenue
Expenditure
Any material expenditure
that will benefit several
accounting periods.
Any material expenditure
that will benefit several
accounting periods.
To capitalize an expenditure
means to charge it to an
asset account.
To capitalize an expenditure
means to charge it to an
asset account.
Expenditure for
ordinary repairs
and maintenance.
Expenditure for
ordinary repairs
and maintenance.
To expense an expenditure
means to charge it to an
expense account.
To expense an expenditure
means to charge it to an
expense account.
Capital Expenditures and Revenue
Expenditures
Capital Expenditures and Revenue
Expenditures
Slide
9-12
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.
Cost of
plant
assets
Balance SheetBalance Sheet
Assets:
Plant and
equipment
Assets:
Plant and
equipment
Income StatementIncome Statement
Revenues:
Expenses:
Depreciation
Revenues:
Expenses:
Depreciation
as the services
are received
DepreciationDepreciation
Slide
9-13
Book Value
 Cost – Accumulated Depreciation
Accumulated Depreciation
 Contra-asset
 Represents the portion of an
asset’s cost that has already
been allocated to expense.
Causes of Depreciation
 Physical deterioration
 Obsolescence
Book Value
 Cost – Accumulated Depreciation
Accumulated Depreciation
 Contra-asset
 Represents the portion of an
asset’s cost that has already
been allocated to expense.
Causes of Depreciation
 Physical deterioration
 Obsolescence
DepreciationDepreciation
Slide
9-14
Cost - Residual Value
Years of Useful Life
Depreciation
Expense per Year
=
Straight-Line DepreciationStraight-Line Depreciation
Slide
9-15
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
straight-line method.
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
straight-line method.
Straight-Line DepreciationStraight-Line Depreciation
Slide
9-16
Bass Co. will record $4,200 depreciation each year for
five years. Total depreciation over the estimated useful
life of the boat is:
Bass Co. will record $4,200 depreciation each year for
five years. Total depreciation over the estimated useful
life of the boat is:
Salvage ValueSalvage Value
Straight-Line DepreciationStraight-Line Depreciation
Slide
9-17
When an asset is acquired during the year,
depreciation in the year of acquisition must be
prorated.
When an asset is acquired during the year,
depreciation in the year of acquisition must be
prorated.
Half-Year Convention
In the year of
acquisition, record six
months of
depreciation.
Half-Year Convention
In the year of
acquisition, record six
months of
depreciation.
½
Depreciation for Fractional PeriodsDepreciation for Fractional Periods
Slide
9-18
Half-Year ConventionHalf-Year Convention
Using the half-year convention, calculate the
straight-line depreciation on December 31,
2001, for equipment purchased in 2003. The
equipment cost $75,000, has a useful life of 10
years and an estimated salvage value of
$5,000.
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
Depreciation = $7,000 × 1
/2 = $3,500
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
Depreciation = $7,000 × 1
/2 = $3,500
Slide
9-19
Depreciation in the early years of an asset’s estimated
useful life is higher than in later years.
Depreciation in the early years of an asset’s estimated
useful life is higher than in later years.
The double-declining balance depreciation
rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
The double-declining balance depreciation
rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
Declining-Balance MethodDeclining-Balance Method
Slide
9-20
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
double-declining balance method.
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
double-declining balance method.
Declining-Balance MethodDeclining-Balance Method
Slide
9-21
Compute depreciation for the rest of the
boat’s estimated useful life.
Compute depreciation for the rest of the
boat’s estimated useful life.
Declining-Balance MethodDeclining-Balance Method
Total depreciation over the estimated useful life of an
asset is the same using either the straight-line method or
the declining-balance method.
Total depreciation over the estimated useful life of an
asset is the same using either the straight-line method or
the declining-balance method.

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PLANT AND INTANGIBLE ASSETS

  • 2. Slide 9-2 Long-lived assets acquired for use in business operations. Long-lived assets acquired for use in business operations. Similar to long-term prepaid expenses The cost of plant assets is the advance purchase of services. As years pass, and the services are used, the cost is transferred to depreciation expense. Plant AssetsPlant Assets
  • 3. Slide 9-3 L a n d , b u ild in g s , e q u ip m e n t , fu r n it u r e , fix t u r e s . L o n g - t e r m a s s e t s h a v in g p h y s ic a l s u b s t a n c e . T a n g i b l e P l a n t A s s e t s P a t e n t s , c o p y r ig h t s , t r a d e m a r k s , fr a n c h is e s , g o o d w ill. N o n c u r r e n t a s s e t s w it h n o p h y s ic a l s u b s t a n c e . I n t a n g i b l e A s s e t s O il r e s e r v e s , t im b e r , o t h e r m in e r a ls . S it e s a c q u ir e d fo r e x t r a c t in g v a lu a b le r e s o u r c e s . N a t u r a l R e s o u r c e s Major Categories of Plant AssetsMajor Categories of Plant Assets
  • 4. Slide 9-4 Acquisition. Allocation of the acquisition cost to expense over the asset’s useful life (depreciation). Sale or disposal. Acquisition. Allocation of the acquisition cost to expense over the asset’s useful life (depreciation). Sale or disposal. Accountable EventsAccountable Events
  • 5. Slide 9-5 Asset price Asset price Reasonable and necessary costs . . . Reasonable and necessary costs . . . . . . for getting the asset to the desired location. . . . for getting the asset to the desired location. . . . for getting the asset ready for use. . . . for getting the asset ready for use. CostCost Acquisition of Plant AssetsAcquisition of Plant Assets +
  • 6. Slide 9-6 On May 4, Heat Co., an Ohio maker of stoves, buys a new machine from a Texas company. The new machine has a price of $52,000. Sales tax was computed at 8%. Heat Co. pays $500 shipping cost to get the machine to Ohio. After the machine arrives, set-up costs of $1,300 are incurred, along with $4,000 in testing costs. Compute the cost of Heat Co.’s new machine. On May 4, Heat Co., an Ohio maker of stoves, buys a new machine from a Texas company. The new machine has a price of $52,000. Sales tax was computed at 8%. Heat Co. pays $500 shipping cost to get the machine to Ohio. After the machine arrives, set-up costs of $1,300 are incurred, along with $4,000 in testing costs. Compute the cost of Heat Co.’s new machine. Determining CostDetermining Cost
  • 7. Slide 9-7 Prepare the journal entry. Determining CostDetermining Cost
  • 8. Slide 9-8 Improvements to land such as driveways, fences, and landscaping are recorded separately. Improvements to land such as driveways, fences, and landscaping are recorded separately. Cost includes real estate commissions, escrow fees, legal fees, clearing and grading the property. Cost includes real estate commissions, escrow fees, legal fees, clearing and grading the property. Land Improvements Land Improvements LandLand Special ConsiderationsSpecial Considerations
  • 9. Slide 9-9 Repairs made prior to the building being put in use are considered part of the building’s cost. Repairs made prior to the building being put in use are considered part of the building’s cost. BuildingsBuildings Special ConsiderationsSpecial Considerations EquipmentEquipment Related interest, insurance, and property taxes are treated as expenses of the current period. Related interest, insurance, and property taxes are treated as expenses of the current period.
  • 10. Slide 9-10 I think I’ll buy the whole thing; barn, land, and animals. Special ConsiderationsSpecial Considerations The allocation is based on the relative Fair Market Value of each asset purchased. The allocation is based on the relative Fair Market Value of each asset purchased. The total cost must be allocated to separate accounts for each asset. The total cost must be allocated to separate accounts for each asset. Allocation of a Lump-Sum PurchaseAllocation of a Lump-Sum Purchase
  • 11. Slide 9-11 Capital Expenditure Capital Expenditure Revenue Expenditure Revenue Expenditure Any material expenditure that will benefit several accounting periods. Any material expenditure that will benefit several accounting periods. To capitalize an expenditure means to charge it to an asset account. To capitalize an expenditure means to charge it to an asset account. Expenditure for ordinary repairs and maintenance. Expenditure for ordinary repairs and maintenance. To expense an expenditure means to charge it to an expense account. To expense an expenditure means to charge it to an expense account. Capital Expenditures and Revenue Expenditures Capital Expenditures and Revenue Expenditures
  • 12. Slide 9-12 The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset. The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset. Cost of plant assets Balance SheetBalance Sheet Assets: Plant and equipment Assets: Plant and equipment Income StatementIncome Statement Revenues: Expenses: Depreciation Revenues: Expenses: Depreciation as the services are received DepreciationDepreciation
  • 13. Slide 9-13 Book Value  Cost – Accumulated Depreciation Accumulated Depreciation  Contra-asset  Represents the portion of an asset’s cost that has already been allocated to expense. Causes of Depreciation  Physical deterioration  Obsolescence Book Value  Cost – Accumulated Depreciation Accumulated Depreciation  Contra-asset  Represents the portion of an asset’s cost that has already been allocated to expense. Causes of Depreciation  Physical deterioration  Obsolescence DepreciationDepreciation
  • 14. Slide 9-14 Cost - Residual Value Years of Useful Life Depreciation Expense per Year = Straight-Line DepreciationStraight-Line Depreciation
  • 15. Slide 9-15 On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the straight-line method. On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the straight-line method. Straight-Line DepreciationStraight-Line Depreciation
  • 16. Slide 9-16 Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful life of the boat is: Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful life of the boat is: Salvage ValueSalvage Value Straight-Line DepreciationStraight-Line Depreciation
  • 17. Slide 9-17 When an asset is acquired during the year, depreciation in the year of acquisition must be prorated. When an asset is acquired during the year, depreciation in the year of acquisition must be prorated. Half-Year Convention In the year of acquisition, record six months of depreciation. Half-Year Convention In the year of acquisition, record six months of depreciation. ½ Depreciation for Fractional PeriodsDepreciation for Fractional Periods
  • 18. Slide 9-18 Half-Year ConventionHalf-Year Convention Using the half-year convention, calculate the straight-line depreciation on December 31, 2001, for equipment purchased in 2003. The equipment cost $75,000, has a useful life of 10 years and an estimated salvage value of $5,000. Depreciation = ($75,000 - $5,000) ÷ 10 = $7,000 for a full year Depreciation = $7,000 × 1 /2 = $3,500 Depreciation = ($75,000 - $5,000) ÷ 10 = $7,000 for a full year Depreciation = $7,000 × 1 /2 = $3,500
  • 19. Slide 9-19 Depreciation in the early years of an asset’s estimated useful life is higher than in later years. Depreciation in the early years of an asset’s estimated useful life is higher than in later years. The double-declining balance depreciation rate is 200% of the straight-line depreciation rate of 1/Useful Life. The double-declining balance depreciation rate is 200% of the straight-line depreciation rate of 1/Useful Life. Declining-Balance MethodDeclining-Balance Method
  • 20. Slide 9-20 On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the double-declining balance method. On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years. Compute depreciation for 2003 using the double-declining balance method. Declining-Balance MethodDeclining-Balance Method
  • 21. Slide 9-21 Compute depreciation for the rest of the boat’s estimated useful life. Compute depreciation for the rest of the boat’s estimated useful life. Declining-Balance MethodDeclining-Balance Method Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or the declining-balance method. Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or the declining-balance method.