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1、Chapter 9Investments in Property, Plant, and Equipment and in Intangible AssetsAlbrecht, Stice, Stice, Swain1COPYRIGHT 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.Long-Term AssetsProperty, plant, an
2、d equipmentTangible assets acquired for the use in business operations.Land, buildings, and equipment.Intangible AssetsAssets without physical substance that are used in business.Licenses, patents, franchises, and goodwill.2Capital BudgetingCapital budgetingPlanning for investment in long-term asset
3、s.Long-term assets have value because they help companies generate future cash flows.Involves comparing the cost of the asset to the value of the expected cash flows, after adjusting for the time value of money.Time value of moneyThe concept that a dollar today is worth more than a dollar received i
4、n the future.3Asset AcquisitionInclude purchase price.Include costs incurred to acquire the asset and getting it ready for its intended use.Sales tax, shipping, installation, and other costs.Fork Lift. . . . . . . . . . . . . . . . . . . . . . . .12,500Cash. . . . . . . . . . . . . . . . . . . . . .
5、 . .3,500Notes Payable. . . . . . . . . . . . . . . .9,000Purchased a fork lift for $12,000 and paid $500 for shipping; paid $3,500 cash and issued a note for $9,000 to the bank.4LeasesLeaseA contract that specifies the terms under which the owner of an asset (the lessor) agrees to transfer the righ
6、t to use the asset to another party (the lessee). What terms should be included in a lease?TermPayment amountDue dates5Match Lease TermsThe party that is granted the right to use the property under the terms of a lease.LesseeLessorOperating LeaseCapital LeaseThe owner of property that is leased (ren
7、ted) to another party.A simple rental agreement.A leasing transaction that is recorded as a purchase by the lessee.6Classifying LeasesA lease is classified as a capital lease if it is non-cancelable and meets one of the following criteria:1.Lease transfers ownership of the asset.2.Lease contains a b
8、argain purchase option.3.Lease term is equal to 75% or more of the estimated life of the asset.4.Present value of the lease payments is equal to 90% or more of the fair market value of the asset.7Operating LeaseDahl & Sons, Attorneys at Law, leases a building with monthly rental payments of $1,000.
9、Make the appropriate entry if rent is paid in cash the first month.Rent (or Lease) Expense . . . . . . . . . .1,000 Cash. . . . . . . . . . . . . . . . . . . . . . . .1,000To record monthly rent of storage building.8Capital LeaseDahl & Sons enters into a non-cancelable lease agreement that requires
10、lease payments of $100,000 a year for 20 years. At the end of 20 years, Dahl & Sons will own the property. The present value of the lease payments at a 10% discount rate is $851,360. Make the appropriate entries.Leased Property. . . . . . . . . . . . . . . . 851,360Lease Liability. . . . . . . . . .
11、 . . . . . . 851,360To record commercial building acquired under a 20-year non-cancelable lease.Lease Liability. . . . . . . . . . . . . . . . . . 14,864 Interest Expense. . . . . . . . . . . . . . . . 85,136 Cash. . . . . . . . . . . . . . . . . . . . . . . . 100,000To record annual payment under c
12、apital lease.9Assets Acquired bySelf ConstructionSelf-constructed assetsRecorded at cost. Include all expenditures incurred to build the asset and make it ready for its intended use. Costs include:Materials used to build the asset.The construction labor. Capitalized interest.Some reasonable share of
13、 the general company overhead.10Basket Purchases %When two or more assets are acquired at a single price, the prices are allocated on the “relative fair market value” method. In this example, Dahl and Sons purchased land and a building at a total cost of $3,600,000. Prepare the entry to record the p
14、urchase.Land. . . . . . . . . . . . . . . . . . . . . . . . . . .900,000 Building. . . . . . . . . . . . . . . . . . . . . . . . 2,700,000Cash. . . . . . . . . . . . . . . . . . . . . . . .3,600,000To record building and land acquired for $3,600,000. 3,000,000100$3,600,000AssetFMV% of TotalValueCost
15、Land$1,000,000 25%0.25 x $3,600,000 = $ 900,000Building 750.75 x $3,600,000 = 2,700,000Total$4,000,00011DepreciationDepreciationThe process of cost allocation that assigns the original cost of plant and equipment to the periods benefited.Book valueThe assets original cost less any accumulated deprec
16、iation.Salvage valueThe amount expected to be received when the asset is sold at the end of its useful life.12Straight-Line DepreciationCosts assigned equally to all periods benefited.Annual DepreciationExpense=Cost - Salvage valueEstimated usefullife (years)=$24,000 - $2,0004 years$5,500Depreciatio
17、n Expense. . . . . . . . . . . . . . . . . 5,500Accumulated Depreciation. . . . . . . . . . . 5,500To record annual depreciation for truck.13Units-of-Production DepreciationAssigning depreciation according to what has been used during the year.Per UnitDepreciation=Cost - Salvage valueEstimated life
18、in unitsDepreciationExpense=Per unitdepreciationxUnitsproducedDepreciation Expense. . . . . . . . . . . . . . . . . 4,400Accumulated Depreciation. . . . . . . . . . . 4,400To record annual depreciation for truck.($24,000 - $2,000)60,000 milesx12,000miles=$4,40014Partial-Year DepreciationStraight-lin
19、e methodCalculate depreciation expense for the year.Distribute it evenly over the number of months the asset is held during the year.Units-of-production methodThe same as normal because it is based off of the actual usage.15Repairing and Improving AssetsOrdinary expendituresTypically benefit only th
20、e period in which they are made. (i.e. repairs, maintenance, and minor improvements.)Expense when incurred.Capital expendituresSignificant in amount and benefit more than the current period.Increase the productive life or capacity of the asset.(i.e. engine overhaul, components added.)Capitalize and
21、add to asset value.Depreciated over the remaining life of the asset.16ImpairmentsImpairmentA decline in the value of a long-term operating asset.Sum of Future Cash Flows from AssetBook Value of AssetIs Sum of Future Cash Flows Less than the Book Value?IMPAIRMENTRecognize Loss and Record Asset at FAI
22、R VALUE.NO IMPAIRMENTContinue to Recognize Asset at BOOK VALUE.YESNO17ImpairmentsJournal entry reduces property value as listed on balance sheet and clears out the accumulated depreciation.Increases in asset values can never be recognized according to GAAP.Accumulated Depreciation. . . . . . . . . .
23、 . . . 4,000Loss on Impairment of Equipment . . . . . . 1,000Building . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000To record impairment of building.18Discarding and Selling Long-Term AssetsAn assets cost and accumulated depreciation must be removed from the accounting records.Assets can
24、be:Discarded (scrapped)SoldExchanged19Discarding Property, Plant, and EquipmentAccumulated Depreciation, Conveyor . . . 15,000Loss on Disposal of Conveyor . . . . . . . . . 300 Conveyor. . . . . . . . . . . . . . . . . . . . . . . . 15,000 Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . .
25、300 Scrapped $15,000 copier and paid $300 disposal costs.Dahl & Sons purchased an advance copier system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If Frank pays $300 to have the copier removed, what is the appropriate entry?20Selling Property, P
26、lant, and EquipmentCash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600Accumulated Depreciation, Conveyor . . . 12,000Loss on Sale of Conveyor. . . . . . . . . . . . . 2,400Conveyor. . . . . . . . . . . . . . . . . . . . . . . . . 15,000Sold $15,000 copier at a loss of $2,400.Dahl &
27、 Sons purchased an advanced copier system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If the copier is sold for $600 after only four years of service, Dahl & Sons will experience a loss of $2,400. Make the appropriate entry.Losses are incurred wh
28、en the asset is sold for less than the book value and gains are recorded when the asset is sold for more than the book value.21Accounting for IntangiblesIntangiblesRights and privileges that are:Long-lived.Not held for resale.Have no physical substance.Providing owner with competitive advantage over
29、 other firms.AmortizationPeriodic allocation to expense of an intangible assets cost.Conceptually, the same as depreciation.Intangible assets generally use straight-line amortization.22Types of IntangiblesPatentAn exclusive right granted for 17 years by the U.S. Federal Government to manufacture and
30、 sell an invention.FranchiseAn entity that has been licensed to sell the product of a manufacturer or to offer a particular service in a given area.LicenseThe right to perform certain activities, generally granted by a government agency.23Recognizing Intangible AssetsIntangible assets are only recog
31、nized in the financial statements if they have been purchased.Amortize over the economic life of the intangible asset.Intangible assets with indefinite lives are not amortized.Intangible assets must be analyzed to determine if impairment has occurred.24GoodwillGoodwillAn intangible asset that exists
32、 when a business is valued at more than the fair market value of its net assets, usually due to:Strategic locationReputationGood customer relationsEqual to the excess of the purchase price over the fair market value of the net assets purchased.25Accounting for GoodwillDahl & Sons purchased Clark & A
33、ssociates for $1,200,000. At the time, the following market values existed for Clarks assets and liabilities:Inventory$750,000 Long-term operating assets220,000 Other assets25,000 Liabilities (18,000)Total Net Assets$977,000 Inventory. . . . . . . . . . . . . . . . . . . . . . 750,000Long-Term Opera
34、ting Assets . . . . 220,000Other Assets. . . . . . . . . . . . . . . . . . 25,000Goodwill . . . . . . . . . . . . . . . . . . . . . 223,000Liabilities. . . . . . . . . . . . . . . . . . 18,000Cash . . . . . . . . . . . . . . . . . . . . . .1,200,000Purchased Clark & Associates for $1,200,000.26Measu
35、ring the Management of Long-Term AssetsFixed Asset TurnoverThe amount of dollars in sales generated by each dollar of fixed assets.Standard values for this ratio differ from industry to industry.SalesAverage PP&E27Accelerated Depreciation MethodsDeclining-balance methodAn assets book value is multip
36、lied by a constant depreciation rate.This is double the straight-line percentage in the case of double-declining balance (DDB).Sum-of-the-years-digits methodA constant balance (cost minus salvage value) is multiplied by a declining depreciation rate calculated based off of the sum of the years.28Dou
37、ble-Declining-BalanceX 2 =Double-Declining BalanceDepreciation ExpenseBook ValueAssets Life in YearsBook Value = Cost Accumulated DepreciationYear 1($12,000 0) 4X 2 =$6,000Year 2($12,000 $6,000) 4X 2 =$3,000Dahl & Sons purchased a truck for $12,000. The truck has a salvage value of $2,000 and a usef
38、ul life of 4 years. Compute depreciation using the DDB depreciation method for the first 2 years.29Sum-of-Years-Digits MethodSum of theyears of theassets lifeSum-of-the-Years-Digits(Cost Salvage Value)Current Year / (4+3+2+1)Year 1($12,000 $2,000) 4/(4+3+2+1) =$4,000Year 2($12,000 $2,000) 3/(4+3+2+1
39、)=$3,000Dahl & Sons purchased a truck for $12,000. The truck has a salvage value of $2,000 and a useful life of 4 years. Compute depreciation using the SYD depreciation method for the first 2 years.30Change in Depreciation Estimates and MethodsDepreciation is only an estimate.Changes in estimates of
40、 useful life and salvage value may occur.Changes in method can also occur.When there is a change in estimate, past periods depreciation amounts remain the same.31Change in EstimatesDahl & Sons purchased a truck for $24,000 with a $2,000 salvage value and a 4-year useful life. After 3 years, better information reveals the truck has a 6-year useful life and a $3,000 salvage value. Calculate a new depreciation expense for the next three years.32
