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1、Chapter 7PPE and IntangiblesTypes of Non-current Assets2Copyright 2014 Pearson Education. Plant, Property and Equipment (PPE)Construction in ProgressIntangiblesInvestment PropertiesPPE & Intangibles TerminologyAsset Account (Balance Sheet)Related Expense Account(Income Statement)Property, Plant and
2、EquipmentFreehold LandNoneLeasehold landDepreciationBuildings, Machinery & EquipmentDepreciationFurniture & FixturesDepreciationLand ImprovementsDepreciationNatural ResourcesDepletionIntangiblesIntangibles with finite useful livesAmortizationIntangibles with indefinite useful livesNone3Copyright 201
3、4 Pearson Education. Learning Objective 1Learning Objective 1Determine the cost of a PPE and account for depreciation4Copyright 2014 Pearson Education. Measuring the Cost of a PPE5Copyright 2014 Pearson Education. 6Copyright 2014 Pearson Education. AssetCosts includedLandPurchase price, commissions,
4、 survey & legal fees, and back property taxes paid; grading and removing unwanted buildingsLand ImprovementsFencing, paving, security systems & lightingBuilding ConstructedArchitectural fees, contractors charges, materials, labor, and overhead; interest on funds borrowedBuilding PurchasedPurchase pr
5、ice, brokers commission, taxes paid and all costs to repair and renovate buildingEquipmentPurchase price, transportation, insurance in transit, sale tax, installation and testingLump-Sum (Basket) PurchasesSeveral assets purchased in a group at one priceTotal cost is allocated based on their market v
6、alues7Copyright 2014 Pearson Education. AssetMarket valueTotal market value% of total market valueTotal costCost of each assetLand$300,000$3,000,00010%$2,800,000$280,000Building$2,700,000$3,000,00090%$2,800,000$2,520,000Total$3,000,000100%$2,800,000=CAPITAL EXPENDITURESEXPENSESIncrease capacity or e
7、xtend useful lifeCost is added to an asset accountDo not extend capacity or useful lifeMaintain or restore working orderCost is recorded as an expense8Copyright 2014 Pearson Education. Distinction between the two requires judgmentSubsequent CostsDepreciationSystematic allocation of cost of an asset
8、over its lifeCharged to Income StatementCumulative amount charged is called Accumulated DepreciationSupports matching principle9Copyright 2014 Pearson Education. Depreciation is NOT:10Copyright 2014 Pearson Education. A fund to replace assetsValuation processAmounts Needed for DepreciationCostUseful
9、 lifeResidual value11Copyright 2014 Pearson Education. 12Copyright 2014 Pearson Education. Asset costResidual valueDepreciable amountDepreciation MethodsCopyright 2014 Pearson Education. 13Straight-lineUnits-of-productionDouble-declining-balanceStraight-Line (SL)Copyright 2014 Pearson Education. 14D
10、epreciable costUseful life, in yearsResults in equal amount of expense each yearCopyright 2014 Pearson Education. 15Accumulated depreciation increasesBook value decreasesAssets final book value = Residual valueUnits-of-Production (UOP)Copyright 2014 Pearson Education. 16Depreciable costUseful life i
11、n unitsDepreciation per unitDepreciation per unitActivity for period (units, miles)Double-Declining-Balance (DDB)Copyright 2014 Pearson Education. 17DDB rateBook valueStraight-line rate x 2 (or2/life in years)Cost minus accumulated depreciationResidual Value: DDB18Copyright 2014 Pearson Education. I
12、gnored until final yearFinal year depreciationBook value at the beginning final yearResidual valueDDB differencesFirst-year depreciation is based on assets full costFinal year depreciation is a “plug” amount needed to reduce book value to residual value19Copyright 2014 Pearson Education. Copyright 2
13、014 Pearson Education. 20Comparing Depreciation MethodsChoosing Depreciation MethodsStraight-lineBest for assets that generate revenue evenlyBest meets matching principleUnits-of-productionBest for assets that wear out because of useDouble-declining-balanceBest for assets that generate revenue early
14、 in useful life21Copyright 2014 Pearson Education. Depreciation Methods Used by 170 IFRS Companies22Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. Exercise 7-19ACopyright 2014 Pearson Education. 23Straight-lineDepreciable costUseful life, in years$19,000 - $2,8004 years$4,050 dep
15、reciation expense per yearExercise 7-19ACopyright 2014 Pearson Education. 24Depreciable costUseful life in unitsDepreciation per unitUnits-of-production$19,000 - $2,80036,000 miles$0.45 per mileCopyright 2014 Pearson Education. 25Depreciation per unitActivity for period (units, miles)Exercise 7-19AU
16、nits-of-production$0.45 per mileMilesDepreciation expense11,000 $4,95013,000$5,8505,000$2,2507,000$3,150Exercise 7-19ACopyright 2014 Pearson Education. 26DDB rate2/Life in years2/4 years50%YearBook valueDepr. Exp.Accum. Depr.Book value119,0009,5009,5009,50029,5004,75014,2504,75034,7502,37516,6252,37
17、5Less than residual value2,8001,95016,200Double-declining-balanceLearning Objective TwoLearning Objective TwoUnderstand additional issues related to accounting for PPE27Copyright 2014 Pearson Education. Issues in Accounting for PPE Copyright 2014 Pearson Education. 28Income taxes affected by depreci
18、ationLong livesAlternative subsequent measurement modelsGain and losses on disposal of PPEDepreciation for Tax PurposesCopyright 2014 Pearson Education. 29Tax savings can be reinvested in businessTax deductions decrease tax paymentsAccelerated deprecation provides fastest tax deductionsPartial Year
19、DepreciationCopyright 2014 Pearson Education. 30Annual depreciation Months from date of purchase to end of year12Changing Useful LifeCopyright 2014 Pearson Education. 31Remaining depreciable book value(New) Estimated remaining useful lifeImpairment of PPECopyright 2014 Pearson Education. 32An asset
20、is impaired when its carrying value is higher than its recoverable amountRecoverable amount is the higher of fair value less cost to sell and value in use.Measurement Subsequent to Initial RecognitionCopyright 2014 Pearson Education. 33An entity elects one out of two measurement models for each clas
21、s of propertyCost model:carried at cost less any accumulated depreciation and any accumulated impairment losses.Revaluation modelcarried at a revalued amount, less any subsequent accumulated depreciation and subsequent accumulated impairment lossesfair value of asset must be able to be measured reli
22、ablyUsing Fully Depreciated AssetsCopyright 2014 Pearson Education. 34A fully depreciated asset is one that has reached the end of its estimated useful life.Book value is zeroDoes not mean the equipment is worthlessAsset may be used for a few more years, but depreciation will not be recordedWhen the
23、 company disposes of the equipment, it will remove both the assets cost and its accumulated depreciation from the books.Learning Objective ThreeLearning Objective ThreeAnalyze the effects of a PPE disposal35Copyright 2014 Pearson Education. Disposal of PPEBring depreciation up-to-date to:Measure ass
24、ets final book valueRecord expense up to date of disposalRemove asset and related accumulated depreciation account from booksIf asset is junked:Fully-depreciated and no residual valueNo gain or lossIf not full-depreciated and/or has a residual valueLoss equals ending book value36Copyright 2014 Pears
25、on Education. Selling a Plant AssetCopyright 2014 Pearson Education. 37If cash received is greater than book valueGAINIf cash received is less than book valueLOSSExercise 7-23ACopyright 2014 Pearson Education. 38YearBook valueDepr. Exp.Accum. Depr.Book value20108,8003,5203,5205,28020115,2801,4084,92
26、83,8722/5-year life = 40% DDB Rate$5,280 x 40% x 8/12Cash received: $2,900Book value: $3,872Loss = $972Exercise 7-23ACopyright 2014 Pearson Education. 39JOURNALDateAccounts and explanationDebitCreditAug 31Depreciation expense1,408 Accumulated depreciation1,408Aug 31Cash2,900Accumulated depreciation4
27、,928Loss on sale of PPE972 Fixtures8,800Exchanging PPEOld assets traded in for new assetsNonmonetary exchangeCost of plant asset received is equal the fair values of assets given upOld asset and any cash paidDifference between fair value of old asset and its book value is a gain or loss40Copyright 2
28、014 Pearson Education. Learning Objective FourLearning Objective FourAccount for natural resources and depletion41Copyright 2014 Pearson Education. Natural ResourcesInclude iron ore, oil and timberExpensed through depletionSimilar to depreciationComputed like units-of-production42Copyright 2014 Pear
29、son Education. JOURNALDateAccounts and explanationDebitCreditDepletion expense Accumulated depletionLearning Objective FiveLearning Objective FiveAccount for intangible assets and amortization43Copyright 2014 Pearson Education. Intangible AssetsNo physical formCarry special rightsInclude patents, co
30、pyrights and franchisesTwo categoriesFinite livesAmortization recordedStraight-line methodIntangible asset reduced directlyIndefinite livesTested for loss in value (impairment) 44Copyright 2014 Pearson Education. Accounting for Specific Intangibles45Copyright 2014 Pearson Education. PatentsCopyright
31、sTrademarks and trade namesFranchises & licensesGoodwillPatentsGranted by governmentGive holder exclusive right to produce and sell an invention46Copyright 2014 Pearson Education. CopyrightsGranted by the governmentGive holder exclusive rights to reproduce and sell a book, musical composition, film
32、or other work of artExtend up to 70 years beyond authors life47Copyright 2014 Pearson Education. Trademarks and Trade NamesDistinctive identification of a product or serviceAlso include advertising slogansUseful life may be set by contractOr indefinite lifeIndicated by TM or 48Copyright 2014 Pearson
33、 Education. Franchises and LicensesGranted by private business or governmentGive purchase right to sell a product or service with specified conditionsInclude restaurant chains and sports organizationsHave indefinite life49Copyright 2014 Pearson Education. GoodwillDefined as the excess of the purchas
34、e price of the company over the market value of its net assetsRepresents earning power of company purchasedNot amortized, but subjected strict impairment testsRecorded only during the acquisition of another company50Copyright 2014 Pearson Education. Impairment of Intangible AssetDecline in asset val
35、ueWrite-down required if value of intangible decreases below costReversal of goodwill impairment is not allowedApplies to all intangibles both those with finite lives and indefinite lives51Copyright 2014 Pearson Education. JOURNALDateAccounts and explanationDebitCreditImpairment loss on intangible I
36、ntangible assetResearch and Development CostsCosts associated with creation of intangible assets are classified into research phase and development phase.Research phaseAlways expensedDevelopment phaseCapitalized if criteria are met52Copyright 2014 Pearson Education. Learning Objective SixLearning Ob
37、jective SixReport PPE transactions on the statement of cash flows53Copyright 2014 Pearson Education. Plant Asset Transactions on the Cash Flow StatementItemSectionDescriptionDepreciationOperatingAdded to net income as a reconciling itemSales of PPEInvesting Cash proceeds from sales of PPE - inflowPurchase of PPEInvestingCash purchases - outflow54Copyright 2014 Pearson Education. End of Chapter SevenEnd of Chapter Seven55Copyright 2014 Pearson Education.
