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CHAPTER 8 REPORTING AND INTERPRETING PROPERTY, PLANT, AND EQUIPMENT; INTANGIBLES; AND NATURAL RESOURCES 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 McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. CLASSIFYING LONG-LIVED ASSETS Land Assets subject to depreciation Buildings and equipment Furniture and fixtures Natural resource assets subject to depletion Mineral deposits and timber Definite life Patents Copyrights Franchises Indefinite life Trademarks Goodwill Tangible Intangible Physical Substance No Physical Substance 8-2 MEASURING AND RECORDING ACQUISITION COST Acquisition cost includes the purchase price and all expenditures needed to prepare the asset for its intended use. Acquisition cost does not include financing charges and cash discounts. Buildings • Purchase price • Renovation and repair costs • Legal and realty fees • Title fees 8-3 MEASURING AND RECORDING ACQUISITION COST Equipment • Purchase price • Installation costs • Modification to building necessary to install equipment • Transportation costs Land • Purchase price • Real estate commissions • Title insurance premiums • Delinquent taxes • Surveying fees • Title search and transfer fees Land is not depreciated 8-4 ACQUISITION BY CONSTRUCTION Asset cost includes: All materials and labor traceable to the construction. A reasonable amount of overhead. Interest on debt incurred during the construction. 8-5 REPAIRS, MAINTENANCE, AND IMPROVEMENTS Type of Expenditure Identifying Characteristics 1. Maintains normal operating condition Ordinary repairs and 2. Does not increase productivity maintenance 3. Does not extend life beyond original estimate 4. Recurring in nature and involve small amounts of money at each occurence Additions and 1. Major overhauls or partial replacements Improvements 2. Usually occur infrequently 3. Increases efficiency 4. May extend useful life 5. Involve large amounts of money Accounting Treatment Expense in period incurred Add to asset account (Capitalize) 8-6 REPAIRS, MAINTENANCE, AND IMPROVEMENTS Financial Statement Effect Treatment Statement Expense Current Current Income Taxes Capitalize Balance sheet account debited Deferred Higher Higher Lower Lower Expense Income statement Currently account debited recognized To aid with the capitalize/expense decision, many companies record all expenditures below a certain dollar amount as expenses. 8-7 DEPRECIATION CONCEPTS Depreciation is the process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method. Balance Sheet Acquisition Cost (Unused) Income Statement Cost Allocation Expense (Used) Depreciation Expense Depreciation for the current year Income Statement Accumulated Depreciation Total depreciation to date on an asset Balance Sheet 8-8 DEPRECIATION CONCEPTS The calculation of depreciation requires three amounts for each asset: Acquisition cost. Estimated useful life. Estimated residual value. 8-9 MEASURING ASSET IMPAIRMENT Impairment is the loss of a significant portion of the utility of an asset through . . . • Casualty. • Obsolescence. • Lack of demand for the asset’s services. Recognize a loss when an asset suffers a permanent impairment. 8-10 DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT Disposal of Property, Plant and Equipment Voluntary disposals: • Sale • Trade-in • Retirement Involuntary disposals: • Fire • Accident 8-11 DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT Update depreciation to the date of disposal. Journalize disposal by: Recording cash received (debit) or paid (credit). Recording a gain (credit) or loss (debit). Writing off accumulated depreciation (debit). Writing off the asset cost (credit). 8-12 ACQUISITION AND AMORTIZATION OF INTANGIBLE ASSETS Noncurrent assets without physical substance. Useful life is often difficult to determine. Intangible Assets Often provide exclusive rights or privileges. Usually acquired for operational use. Only purchased intangibles are recorded, and they are normally recorded at current cash equivalent cost, including purchase price, legal fees, and filing fees. 8-13 ACQUISITION AND AMORTIZATION OF INTANGIBLE ASSETS Definite Life • Amortize over shorter of economic life or legal life. • Use straight-line method. Indefinite Life • Not amortized. • Tested at least annually for possible impairment, and book value is reduced to fair value if impaired. Amortization is a cost allocation process similar to depreciation and depletion. 8-14 ACQUISITION AND AMORTIZATION OF INTANGIBLE ASSETS Goodwill Occurs when one company buys another company. Only purchased goodwill is an intangible asset. The amount by which the purchase price exceeds the fair market value of net assets acquired. Goodwill is not amortized. Its value must be reviewed at least annually for possible impairment, and the book value is reduced to fair value if impaired. 8-15 ACQUISITION AND DEPLETION OF NATURAL RESOURCES Extracted from the natural environment. A noncurrent asset presented at cost less accumulated depletion. Total cost of asset is the cost of acquisition, exploration, and development. Total cost is allocated over periods benefited by means of depletion. Examples: oil, coal, gold Depletion is like units-of-production depreciation. 8-16 ACQUISITION AND DEPLETION OF NATURAL RESOURCES The unit depletion rate is calculated as follows: Acquisition and Development Cost – Residual Value Estimated Recoverable Units Depletion cost for a period is: UNIT DEPLETION RATE × NUMBER OF UNITS EXTRACTED IN PERIOD Cost of goods sold Depletion cost Inventory for sale Unsold Inventory 8-17 END OF CHAPTER 8 8-18