Lecture Principles of financial accouting - Chapter 10: Long-term assets

Chapter 10

Long-term Assets

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CPA
McGraw­Hill/Irwin

        Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved.


10 ­ 2

C 1

property, plant and equipment
Tangible in Nature

Actively Used in Operations

Expected to Benefit Future Periods

Called Property, Plant, & Equipment


10 ­ 3

C 1

property, plant and equipment


10 ­ 4

C 1

Cost Determination
Purchase
price

Acquisition
Acquisition
Cost
Cost

Acquisition cost excludes
financing charges and
cash discounts

All expenditures
needed to
prepare the
asset for its
intended use


10 ­ 5

C 1

Land
Title insurance premiums
Purchase
price

Delinquent
taxes

Real estate
commissions

Surveying
fees
Title search and transfer fees

Land is not depreciable.


10 ­ 6

C 1

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

of
improvements.


10 ­ 7

C 1

Buildings
Cost of purchase or
construction

Title fees

Brokerage
fees

Attorney fees

Taxes


10 ­ 8

C 1

Machinery and Equipment
Purchase
price

Taxes

Transportation
charges
Installing,
assembling, and
testing

Insurance while
in transit


10 ­ 9

P 1

Lump-Sum Asset Purchase
The total cost of a combined purchase of land and building is
separated on the basis of their relative fair market values.
arMax paid $90,000 cash to acquire a group of items
consisting of land appraised at $30,000, land improvements
appraised at $10,000, and a building appraised at $60,000.
The $90,000 cost will be allocated on the basis of appraised
values as shown:


10 ­ 10

P 1

Depreciation
Depreciation
Depreciation is
is the
the process
process of
of allocating
allocating the
the
cost
cost of
of an
an item
item of
of property,
property, plant
plant and
and
equipment
equipment to
to expense
expense in
in the
the accounting
accounting
periods
periods benefiting
benefiting from
from its
its use.

use.
Balance Sheet

Acquisition
Cost
(Unused)

Income Statement
Cost
Allocation

Expense
(Used)


10 ­ 11

P 1

Factors in Computing Depreciation
The calculation of depreciation requires
three amounts for each asset:

1. Cost
2. Residual Value
3. Useful Life


10 ­ 12

P 1

Depreciation Methods
1.

Straight-line

2.

Units-of-production

3.

Declining-balance
Asset we will depreciate in future screens


10 ­ 13

P 1

Straight-Line Method


10 ­ 14

P 1

Straight-Line Method

For year ended December 31

As of December 31

Balance Sheet Presentation
Machinery
Less: accumulated depreciation

$ 10,000
3,600

$

6,400


10 ­ 15

P 1

Straight-Line Depreciation Schedule


10 ­ 16

P 1

Units-of-Production Method
Step 1:

Depreciation
Per Unit

=

Cost - Residual Value
Total Units of Production

Step 2:
Depreciation
Expense

=

Depreciation
Per Unit

Number of Units
×
Produced
in the Period


10 ­ 17

P 1

Units-of-Production Method
Assume that 7,000 units were inspected
during 2011. Depreciation would be

calculated as follows:
Step 1:
Depreciation = Cost - Residual Value
Per Unit
Total Units of Production

=

$9,000
36,000

= $0.25/unit

Step 2:
Number of Units
Depreciation
Depreciation
= $0.25 × 7,000 = $1,750
$
Produced
×
=
Expense
Per Unit
in the Period


10 ­ 18

P 1

Units-of-Production
Depreciation Schedule

Units
Units produced
produced and
and sold
sold during
during the
the period.
period.


10 ­ 19

P 1

Double-Declining-Balance Method


10 ­ 20

P 1

Double-Declining-Balance Method


10 ­ 21

P 1

Comparing Depreciation Methods
Period
2011
2012
2013
2014
2015
Totals

StraightLine
$ 1,800
1,800
1,800
1,800
1,800
$ 9,000

Units of
Production
$ 1,750
2,000
2,250
1,750
1,250
$ 9,000

DoubleDecliningBalance
$ 4,000

2,400
1,440
864
296
$ 9,000


10 ­ 22

C 2

Partial-Year Depreciation
When
When an
an item
item of
of property,
property, plant
plant and
and 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.
$
10,000

Cost
Residual value
Depreciable cost
Useful life
Accounting periods
Units inspected

1,000
$

9,000

5 years
36,000 units

Assume our machinery was purchased

on October 8, 2010. Let’s calculate
depreciation expense for 2010,
assuming we use straight-line
depreciation.


10 ­ 23

C 2

Change in Estimates for Depreciation
Predicted
residual value

Predicted
useful life

Depreciation
is an estimate
Over the life of an asset, new information may
come to light that indicates the original estimates
were inaccurate.


10 ­ 24

C 2

Change in Estimates for Depreciation
Let

Let’s
’s look
look at
at our
our machinery
machinery from
from the
the previous
previous examples
examples and
and
assume
assume that
that at
at the
the beginning
beginning of
of the
the asset’s
asset’s third
third year,
year, its
its
carrying
carrying amount
amount is
is $6,400
$6,400 ($10,000
($10,000 cost
cost less

less $3,600
$3,600
accumulated
accumulated depreciation
depreciation using
using straight-line
straight-line depreciation).
depreciation).
At
At that
that time,
time, itit is
is determined
determined that
that the
the machinery
machinery will
will have
have aa
remaining
remaining useful
useful life
life of
of 44 years,
years, and
and the
the estimated
estimated residual
residual
value

value will
will be
be revised
revised downward
downward from
from $1,000
$1,000 to
to $400.
$400.


10 ­ 25

C 2

Reporting Depreciation

Dale Jarrett Racing Adventure
Office furniture and equipment
$ 54,593
Shop and track equipment
202,973
Race vehicles and other
975,084
Property and equipment, gross
Less: accumulated depreciation
Property and equipment, net

1,232,650
628,355

$ 604,295