Accounting principle

6. Section 1 – Plant Assets Illustration 9-1 Percentages of plant assets in relation to total assets

8. Determining the Cost of Plant Assets Illustration: Assume that Hayes Manufacturing Company acquires real estate at a cash cost of $100,000. The property contains an old warehouse that is razed at a net cost of $6,000 ($7,500 in costs less $1,500 proceeds from salvaged materials). Additional expenditures are the attorney’s fee, $1,000, and the real estate broker’s commission, $8,000. The cost of the land is $115,000, computed as follows. Required: Determine amount to be reported as the cost of the land. SO 1 Describe how the cost principle applies to plant assets.

9. Determining the Cost of Plant Assets Land Required: Determine amount to be reported as the cost of the land. SO 1 Describe how the cost principle applies to plant assets. Cash price of property of $100,000 Net removal cost of warehouse of $6,000 Attorney's fees of $1,000 1,000 6,000 $100,000 $115,000 Cost of Land Real estate broker’s commission of $8,000 8,000 Land 115,000 Cash 115,000 Journal Entry

13. Determining the Cost of Plant Assets Illustration: Assume Merten Company purchases factory machinery at a cash price of $50,000. Related expenditures are for sales taxes $3,000, insurance during shipping $500, and installation and testing $1,000. Determine amount to be reported as the cost of the machinery. SO 1 Describe how the cost principle applies to plant assets. Machinery Cash price Sales taxes Insurance during shipping 500 3,000 $50,000 $54,500 Cost of Machinery Installation and testing 1,000

14. Answer on notes page

16. Depreciation Factors in Computing Depreciation Cost SO 2 Explain the concept of depreciation. Useful Life Residual Value Illustration 9-6

18. Depreciation Illustration: Barb’s Florists purchased a small delivery truck on January 1, 2011. Required: Compute depreciation using the following. (a) Straight-Line (b) Units-of-Activity (c) Declining Balance. SO 3 Compute periodic depreciation using different methods. Illustration 9-7

20. Depreciation SO 3 Compute periodic depreciation using different methods. Illustration: (Straight-Line Method) 2011 $ 12,000 20% $ 2,400 $ 2,400 $ 10,600 2012 12,000 20 2,400 4,800 8,200 2013 12,000 20 2,400 7,200 5,800 2014 12,000 20 2,400 9,600 3,400 2015 12,000 20 2,400 12,000 1,000 2011 Journal Entry Depreciation expense 2,400 Accumulated depreciation 2,400 Illustration 9-9

22. Depreciation Illustration: (Units-of-Activity Method) 2011 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200 2012 30,000 0.12 3,600 5,400 7,600 2013 20,000 0.12 2,400 7,800 5,200 2014 25,000 0.12 3,000 10,800 2,200 2015 10,000 0.12 1,200 12,000 1,000 Depreciation expense 1,800 Accumulated depreciation 1,800 2011 Journal Entry Illustration 9-11 SO 3 Compute periodic depreciation using different methods.

24. Depreciation Illustration: (Declining-Balance Method) 2011 13,000 40% $ 5,200 $ 5,200 $ 7,800 2012 7,800 40 3,120 8,320 4,680 2013 4,680 40 1,872 10,192 2,808 2014 2,808 40 1,123 11,315 1,685 2015 1,685 40 685* 12,000 1,000 * Computation of $674 ($1,685 x 40%) is adjusted to $685. Depreciation expense 5,200 Accumulated depreciation 5,200 2011 Journal Entry Illustration 9-13

25. Depreciation SO 3 Compute periodic depreciation using different methods. Comparison of Methods Illustration 9-14 Illustration 9-15

26. Depreciation is a process of: a. valuation. b. cost allocation. c. cash accumulation. d. appraisal. Review Question Depreciation SO 3 Compute periodic depreciation using different methods.

27. Depreciation for Partial Year The following four slides are included to illustrate the calculation of partial-year depreciation expense. The amounts are consistent with the previous slides illustrating the calculation of depreciation expense. SO 3 Compute periodic depreciation using different methods.

28. Depreciation for Partial Year Illustration: Barb’s Florists purchased a small delivery truck on October 1, 2011 . SO 3 Compute periodic depreciation using different methods. Required: Compute depreciation using the following. (a) Straight-Line (b) Units-of-Activity (c) Declining Balance. Illustration 9-7

29. Depreciation for Partial Year SO 3 Compute periodic depreciation using different methods. Illustration: (Straight-line Method)

30. Depreciation for Partial Year Illustration: (Units-of-Activity Method) 2011 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200 2012 30,000 0.12 3,600 5,400 7,600 2013 20,000 0.12 2,400 7,800 5,200 2014 25,000 0.12 3,000 10,800 2,200 2015 10,000 0.12 1,200 12,000 1,000 Depreciation expense 1,800 Accumulated depreciation 1,800 2011 Journal Entry Illustration 9-12 SO 3 Compute periodic depreciation using different methods.

31. Depreciation for Partial Year Illustration: (Declining-Balance Method) SO 3 Compute periodic depreciation using different methods.

32. Depreciation Tax laws often do not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements. Many corporations use straight-line in their financial statements to maximize net income. At the same time, they use an accelerated-depreciation method on their tax returns to minimize their income taxes. Depreciation and Income Taxes SO 3 Compute periodic depreciation using different methods.

35. Depreciation Depreciation expense 1,600 Accumulated depreciation 1,600 Journal entry for 2014 SO 4 Describe the procedure for revising periodic depreciation. Book value, 1/1/14 $5,800 Residual value Depreciable cost Useful life (revised) / Annual depreciation First, establish Book Value at the date of change in estimate. - 1,000 4,800 3 years $ 1,600 Illustration 9-17

36. When there is a change in estimated depreciation: a. previous depreciation should be corrected. b. current and future years’ depreciation should be revised. c. only future years’ depreciation should be revised. d. None of the above. Review Question Depreciation SO 4 Describe the procedure for revising periodic depreciation.

38. Revaluation of Plant Assets Illustration: Pernice Company applies revaluation to plant assets with a carrying value of $1,000,000, a useful life of 5 years, and no residual value. Pernice makes the following journal entries in year 1, assuming straight-line depreciation. Depreciation expense 200,000 Accumulated depreciation 200,000 SO 4 Describe the procedure for revising periodic depreciation. After this entry, Pernice’s plant assets have a carrying amount of $800,000 ($1,000,000 - $200,000).

39. Revaluation of Plant Assets Illustration: At the end of year 1, independent appraisers determine that the asset has a fair value of $850,000. To report the plant assets at fair value, Pernice makes the following entry. Accumulated depreciation 200,000 Plant assets 150,000 SO 4 Describe the procedure for revising periodic depreciation. Revaluation surplus is an example of an item reported as other comprehensive income, as discussed in Chapter 5. Revaluation surplus 50,000

40. Revaluation of Plant Assets Pernice now reports the following information in its statement of financial position at the end of year 1. SO 4 Describe the procedure for revising periodic depreciation. $850,000 is the new basis of the asset. Pernice reports depreciation expense of $200,000 in the income statement and $50,000 in other comprehensive income. Depreciation in year 2 will be $212,500 ($850,000 / 4). Illustration 9-18

42. Plant Asset Disposals Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix). SO 6 Explain how to account for the disposal of a plant asset. Illustration 9-19 Record depreciation up to the date of disposal. Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.

43. Plant Asset Disposals - Retirement Illustration: Assume that Hobart Enterprises retires its computer printers, which cost $32,000. The accumulated depreciation on these printers is $32,000. The journal entry to record this retirement is: SO 6 Explain how to account for the disposal of a plant asset. Accumulated depreciation 32,000 Printing equipment 32,000 Question: What happens if a fully depreciated plant asset is still useful to the company? Retirement of Plant Assets

44. Plant Asset Disposals - Retirement Illustration: Assume that Sunset Company discards delivery equipment that cost $18,000 and has accumulated depreciation of $14,000. The journal entry is: SO 6 Explain how to account for the disposal of a plant asset. Accumulated depreciation 14,000 Loss on disposal 4,000 Companies report a loss on disposal in the “Other income and expense” section of the income statement. Delivery equipment 18,000

46. Plant Asset Disposals - Sale Illustration: Assume that on July 1, 2011, Wright Company sells office furniture for $16,000 cash. The office furniture originally cost $60,000. As of January 1, 2011, it had accumulated depreciation of $41,000. Depreciation for the first six months of 2011 is $8,000. Prepare the journal entry to record depreciation expense up to the date of sale. SO 6 Explain how to account for the disposal of a plant asset. Depreciation expense 8,000 Accumulated depreciation 8,000 Gain on Disposal

47. Plant Asset Disposals - Sale Illustration: Wright records the sale as follows. SO 6 Explain how to account for the disposal of a plant asset. Cash 16,000 Accumulated depreciation 49,000 Illustration 9-20 Computation of gain on disposal Office equipment 60,000 Gain on disposal 5,000 July 1

48. Plant Asset Disposals - Sale Illustration: Assume that instead of selling the office furniture for $16,000, Wright sells it for $9,000. SO 6 Explain how to account for the disposal of a plant asset. Loss on Disposal Cash 9,000 Accumulated depreciation 49,000 Office equipment 60,000 Loss on disposal 5,000 July 1 Illustration 9-21 Computation of loss on disposal

49. Section 2 – Natural Resources Natural resources consist of standing timber and resources extracted from the ground, such as oil, gas, and minerals. Standing timber is considered a biological asset under IFRS. In the years before they are harvested, the recorded value of biological assets is adjusted to fair value each period. SO 7 Compute periodic depletion of extractable natural resources.

51. Section 2 – Natural Resources Illustration: Assume that Lane Coal Company invests $5 million in a mine estimated to have 10 million tons of coal and no salvage value. In the first year, Lane extracts and sells 800,000 tons of coal. Lane computes the depletion expense as follows: $5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton $.50 x 800,000 = $400,000 depletion expense Depletion expense 400,000 Accumulated depletion 400,000 Journal entry: SO 7 Compute periodic depletion of extractable natural resources.

52. Financial Statement Presentation Illustration 9-23 Statement presentation of accumulated depletion Extracted resources that have not been sold are reported as inventory in the current assets section. SO 7 Compute periodic depletion of extractable natural resources.

55. Accounting for Intangible Assets Intangible assets are typically amortized on a straight-line basis. Illustration: Assume that National Labs purchases a patent at a cost of $60,000. National estimates the useful life of the patent to be eight years. National records the annual amortization as follows. SO 8 Explain the basic issues related to accounting for intangible assets. Amortization expense 7,500 Patent 7,500

59. Accounting for Intangible Assets Goodwill Includes exceptional management, desirable location, good customer relations, skilled employees, high-quality products, etc. Only recorded when an entire business is purchased. Goodwill is recorded as the excess of ... purchase price over the fair value of the identifiable net assets acquired . Internally created goodwill should not be capitalized. SO 8 Explain the basic issues related to accounting for intangible assets.

60. Answer on notes page

62. Statement Presentation and Analysis Presentation SO 9 Indicate how plant assets, natural resources, and intangible assets are reported. Illustration 9-24

63. Statement Presentation and Analysis Analysis Each dollar invested in assets produced in sales. If a company is using its assets efficiently, each investment in assets will create a high amount of sales. SO 9 Indicate how plant assets, natural resources, and intangible assets are reported. Illustration 9-25

69. Exchange of Plant Assets Cost of old trucks $64,000 Less: Accumulated depreciation 22,000 Book value 42,000 Fair value of old trucks 26,000 Loss on disposal $16,000 Fair value of old trucks $26,000 Cash paid 17,000 Cost of new semi-truck $43,000 Illustration: Roland Co. exchanged old trucks (cost $64,000 less $22,000 accumulated depreciation) plus cash of $17,000 for a new semi-truck. The old trucks had a fair value of $26,000. SO 10 Explain how to account for the exchange of plant assets. Loss Treatment

70. Exchange of Plant Assets Illustration: Roland Co. exchanged old trucks (cost $64,000 less $22,000 accumulated depreciation) plus cash of $17,000 for a new semi-truck. The old trucks had a fair market value of $26,000. Prepare the entry to record the exchange of assets by Roland Co. SO 10 Explain how to account for the exchange of plant assets. Semi-truck 43,000 Accumulated depreciation 22,000 Loss on disposal 16,000 Used trucks 64,000 Cash 17,000

71. Exchange of Plant Assets Illustration: Mark Express Delivery trades its old delivery equipment (cost $40,000 less $28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair value of $19,000. Mark also paid $3,000. SO 10 Explain how to account for the exchange of plant assets. Cost of old equipment $40,000 Less: Accumulated depreciation 28,000 Book value 12,000 Fair value of old equipment 19,000 Gain on disposal $ 7,000 Fair value of old equipment $19,000 Cash paid 3,000 Cost of new equipment $22,000 Gain Treatment

72. Exchange of Plant Assets Illustration: Mark Express Delivery trades its old delivery equipment (cost $40,000 less $28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair value of $19,000. Mark also paid $3,000. Prepare the entry to record the exchange of assets by Mark Express. SO 10 Explain how to account for the exchange of plant assets. Delivery equipment (new) 22,000 Accumulated depreciation 28,000 Delivery equipment (used) 40,000 Gain on disposal 7,000 Cash 3,000

73. In exchanges of assets in which the exchange has commercial substance: a. neither gains nor losses are recognized immediately. b. gains, but not losses, are recognized immediately. c. losses, but not gains, are recognized immediately. d. both gains and losses are recognized immediately. Review Question SO 10 Explain how to account for the exchange of plant assets. Exchange of Plant Assets

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