9-1

FINANCIAL ACCOUNTING
Fourth Canadian Edition
LIBBY, LIBBY, SHORT, KANAAN, GOWING

Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles Chapter 9
PowerPoint Author:

Robert G. Ducharme, MAcc, CA University of Waterloo, School of Accounting and Finance
Copyright © 2011 McGraw-Hill Ryerson Limited

9-2

Understanding The Business

Insufficient capacity results in lost sales.
How much is enough?

Costly excess capacity reduces profits.

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LO 1

9-3

Classifying Long-Lived Assets
Actively Used in Operations

Expected to Benefit Future Periods

Tangible Physical Substance
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Intangible No Physical Substance
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9-4 Classifying Long-Lived Assets   Land Assets subject to depreciation  Buildings and equipment  Furniture and fixtures Natural resource assets subject to depletion   Definite life Patents  Copyrights  Franchises  Indefinite life  Trademarks  Goodwill   Mineral deposits and timber Tangible Physical Substance Copyright © 2011 McGraw-Hill Ryerson Limited Intangible No Physical Substance LO 1 .

93 1.281.120 of revenue.790 + $2.269. During 2009.566) ÷ 2 Turnover = 1.23 Copyright © 2011 McGraw-Hill Ryerson Limited LO 1 .9-5 Fixed Asset Turnover Fixed = Asset Turnover Net Sales Revenue Average Net Fixed Assets This ratio measures a company’s ability to generate sales given an investment in fixed assets. WestJet Airlines had $2. (All numbers in thousands.566 and beginning-of-year fixed assets were $2.790.307.120 = Asset ($2.) Fixed $2.269.00 2009 Fixed Asset Turnover Comparisons WestJet Southwest Ryanair 1. Endof-year fixed assets were $2.281.00 0.307.

Acquisition cost does not include financing charges and cash discounts.9-6 Measuring and Recording Acquisition Cost Acquisition cost includes the purchase price and all expenditures needed to prepare the asset for its intended use. Buildings • Purchase price • Renovation and repair costs • Legal and realty fees • Title fees LO 2 Copyright © 2011 McGraw-Hill Ryerson Limited .

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 9-7 Copyright © 2011 McGraw-Hill Ryerson Limited Land is not depreciated LO 2 .

Description 1 Flight equipment (+A) Cash (-A) Debit 75. GENERAL JOURNAL Page 9 Credit 1.000.000.000.9-8 Measuring and Recording Acquisition Cost Acquisition On January 1. WestJet Airlines purchased aircraft for $1.000 75.000 cash and a $74. GENERAL JOURNAL Date Jan.000 note payable.000 cash.000.000 LO 2 Date Jan. Description 14 Flight equipment (+A) Cash (-A) Note payable (+L) Debit 75. WestJet Airlines for Cash purchased aircraft for $75.000.000.000 Copyright © 2011 McGraw-Hill Ryerson Limited .000 Page 8 Credit Acquisition for Debt On January 14.000.000 74.000.

000.000 .9-9 Acquisition for Non-cash Consideration Record at the current market value of the consideration given. GENERAL JOURNAL Date July Description 7 Flight Equipment (+A) Common Shares (+SE) Cash (-A) Copyright © 2011 McGraw-Hill Ryerson Limited Page 10 Debit Credit 50. whichever is more clearly evident.000.000.000. or the current market value of the asset acquired.000 in cash for aircraft.00 par value common shares with a market value of $50 per share plus $25.000 LO 2 75. On July 7.000 25. WestJet gave Boeing 1.000.000 shares of $1.

9-10 Acquisition by Construction Asset cost includes: All materials and labour traceable to the construction. A reasonable amount of overhead. Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 . Interest on debt incurred during the construction.

Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 .9-11 Acquisitions as a Basket Purchase of Assets The total cost of a combined purchase of land and building is separated on the basis of their relative market values.

000 purchase price will be charged to the building and land accounts? Continue Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 .000. The appraised values are building.000 cash.000.9-12 Acquisitions as a Basket Purchase of Assets On January 1. How much of the $300. and land. $126. WestJet purchased land and building for $300. $189.

000 % of Value b* 40% 60% 100% Purchase Price c Assigned Cost b × c * $126.9-13 Acquisitions as a Basket Purchase of Assets Asset Land Building Total Appraised Value a $ 126.000 189.000 $ 315.000 = 40% Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 .000 ÷ $315.

000 = 40% Prepare the journal entry to record the purchase of land and building. Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 .000 $ 315.000 ÷ $315.000 * $126.000 189.000 60% × 300.000 = $ 120.000 = 180.000 100% $ 300.9-14 Acquisitions as a Basket Purchase of Assets Asset Land Building Total Appraised Value a $ 126.000 % of Value b* Purchase Price Assigned Cost c b × c 40% × $ 300.

000 180.9-15 Acquisitions as a Basket Purchase of Assets GENERAL JOURNAL Date Jan.000 Page 11 Credit 300.000 Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 . 1 Land (+A) Building (+A) Cash (-A) Description Debit 120.

and Additions Type of Capital or Expenditure Revenue Identifying Characteristics Ordinary Revenue 1. Usually occur infrequently repairs and 3. Does not extend life beyond original estimate 4. Maintains normal operating condition repairs and 2. Maintenance. May extend useful life 5.9-16 Repairs. Does not increase productivity maintenance 3. Recurring in nature and involve small amounts of money at each occurence Additions and Capital 1. Involve large amounts of money Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 . Major overhauls or partial Improvements replacements (Extraordinary 2. Increases efficiency Betterments) 4.

Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 . and Additions Financial Statement Effect Treatment Statement Expense Current Current Profit Taxes Capital Statement of Expenditure financial position account debited Deferred Higher Higher Lower Revenue Income statement Currently Expenditure account debited recognized Lower To solve this classification problem. many companies have policies regarding the expensing of all expenditures below a certain amount according to the materiality constraint.9-17 Repairs. Maintenance.

Statement of Income Statement Financial Position Acquisition Cost Expense Cost Allocation (Unused) (Used) Depreciation Expense Accumulated Depreciation Copyright © 2011 McGraw-Hill Ryerson Limited Depreciation for the current year Total of depreciation to date on an asset Income Statement Statement of Financial Position LO 3 .9-18 Depreciation Concepts Depreciation is a cost allocation process that systematically and rationally matches acquisition costs of operational assets with periods benefited by their use.

901 133.210 $ 2.Selected Items from WestJet’s 2009 Notes to the Consolidated Financial Statements Property and Equipment: Aircraft Less: Accumulated depreciation Buildings and leasehold improvements Less: Accumulated depreciation Other assets under capital leases Less: Accumulated depreciation 9-19 $ 2.086.418 3.677.685 146.882 2.720 5.138 12.672 Carrying Amount (= Book Values) Carrying amount = / Market value Copyright © 2011 McGraw-Hill Ryerson Limited LO 3 .586 590.

Alternative depreciation methods:  Straight-line  Units-of-production  Accelerated Method: Declining balance Copyright © 2011 McGraw-Hill Ryerson Limited LO 3 .9-20 Depreciation Concepts The calculation of depreciation requires three amounts for each asset:  Acquisition cost.  Estimated useful life.  Estimated residual value.

9-21 Depreciation Concepts Useful Life is the expected service life of an asset to the present owner. less disposal costs at the end of estimated useful life of an asset. Residual (or Salvage) Value is the estimated amount to be recovered. LO 3 Copyright © 2011 McGraw-Hill Ryerson Limited .

9-22

Straight-Line Method
Depreciation Expense per Year = Cost – Residual Value Useful Life in Years

At the beginning of the year, WestJet purchased ground equipment for $62,500 cash. The equipment has an estimated useful life of 3 years and an estimated residual value of $2,500. Depreciation Expense per Year Depreciation Expense per Year
Copyright © 2011 McGraw-Hill Ryerson Limited

=

$62,500 – $2,500 3 years $20,000 SL
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=

9-23

Straight-Line Method
Depreciation Accumulated Expense Depreciation Year (debit) (credit) 1 2 3 $ 20,000 20,000 20,000 $ 60,000 $ 20,000 20,000 20,000 60,000 Accumulated Depreciation Balance $ 20,000 40,000 60,000 Undepreciated Balance (book value) $ 62,500 42,500 22,500 2,500

$

Residual Value More companies use the straight-line method of depreciation in their financial reports than all other methods combined.
LO 3

SL
Copyright © 2011 McGraw-Hill Ryerson Limited

9-24

Units-of-Production Method
Step 1:

Depreciation = Rate
Step 2:

Cost – Residual Value Life in Units of Production

Number of Depreciation Depreciation × Units Produced = Expense Rate for the Year
At the beginning of the year, WestJet purchased ground equipment for $62,500 cash. The equipment has a 100,000 kilometre useful life and an estimated residual value of $2,500. If the equipment is used 30,000 kilometres in the first year, what is the amount of depreciation expense?
Copyright © 2011 McGraw-Hill Ryerson Limited LO 3

000 30.60 per km 100.000 km = $18.500 LO 3 $ Residual Value Copyright © 2011 McGraw-Hill Ryerson Limited .000 Undepreciated Balance (book value) $ 62.000 60.500 14.500 = $0.60 per km × 30.000 60.000 Expense Year 1 2 3 Depreciation Kilometres Expense 30.000 km Rate Step 2: Depreciation = $0.500 – $2.9-25 Units-of-Production Method Step 1: Depreciation = $62.500 2.000 $ 18.000 48.500 44.000 Accumulated Depreciation Balance $ 18.000 100.000 50.000 20.000 12.

9-26 Accelerated Depreciation Accelerated depreciation matches higher depreciation expense with higher revenues in the early years of an asset’s useful life when the asset is more efficient. Depreciation Expense Early Years High Later Years Low Repair Expense Low High LO 3 Copyright © 2011 McGraw-Hill Ryerson Limited .

The equipment has an estimated useful life of 3 years and an estimated residual value of $2. At the beginning of the year.9-27 Declining-Balance Method Declining balance rate of 2 is double-decliningbalance (DDB) rate. WestJet purchased equipment for $62. Copyright © 2011 McGraw-Hill Ryerson Limited LO 3 .500. Calculate the depreciation expense for the first two years. Cost – Accumulated Depreciation Annual Depreciation = expense Net Book Value × ( 2 Useful Life in Years ) Annual computation ignores residual value.500 cash.

500 × ( 2 3 years ) = $41.667) × Copyright © 2011 McGraw-Hill Ryerson Limited ) = $13.889 LO 3 .500 – $41.667 ( 2 3 years Year 2 Depreciation: ($62.9-28 Declining-Balance Method Annual Depreciation expense Net Book Value = × ( 2 Useful Life in Years ) Year 1 Depreciation: $62.

889 4.556 60.9-29 Declining-Balance Method Depreciation Expense (debit) $ 41.833 6.315 Year 1 2 3 $ Below residual value ($62.500 20.556) × Copyright © 2011 McGraw-Hill Ryerson Limited ( 2 3 years ) = $4.185 Undepreciated Balance (book value) $ 62.629 LO 3 .944 2.500 – $55.185 Accumulated Depreciation Balance $ 41.667 55.629 60.667 13.

833 6. Copyright © 2011 McGraw-Hill Ryerson Limited LO 3 .667 55.000 Undepreciated Balance (book value) $ 62.500 20.9-30 Declining-Balance Method Depreciation Expense (debit) $ 41.000 Accumulated Depreciation Balance $ 41.889 4.944 2.667 13.556 60.500 Year 1 2 3 $ Depreciation expense is limited to the amount that reduces book value to the estimated residual value.444 60.

the book value less any residual value at the date of change is depreciated over the remaining useful life. If the estimates change. Over the life of an asset. .9-31 Changes in Depreciation Estimates Depreciation Expense is based on . new information may come to light indicating that the original estimates were inaccurate. Copyright © 2011 McGraw-Hill Ryerson Limited LO 3 . ESTIMATED useful ESTIMATED life residual value So depreciation is an estimate. .

9-32 Changes in Depreciation Estimates If our estimates change. depreciation for the straight-line method is: Book value at date of change Residual value at date of change – Remaining useful life at date of change Copyright © 2011 McGraw-Hill Ryerson Limited LO 3 .

LO 3 Copyright © 2011 McGraw-Hill Ryerson Limited .000. The aircraft is depreciated using the straight-line method with a useful life of 20 years and an estimated residual value of $3.000. In year 5. Calculate depreciation expense for the fifth year using the straight-line method.000.400.000. WestJet changed the estimated useful life to 25 years and lowered the residual value to $2.9-33 Changes in Depreciation Estimates WestJet purchased an aircraft for $60.000.

400.000 Copyright © 2011 McGraw-Hill Ryerson Limited LO 3 .000 2.000 48.000 46.9-34 Changes in Depreciation Estimates Acquisition cost Accumulated depreciation (years 1-4) ($2.200.000 per year × 4 years) Remaining book value Less: New residual value New depreciable amount Divide by remaining life Revised annual depreciation $ 60.000.000 11.200.600.850.000 ÷ 21 $ 2.400.

 Copyright © 2011 McGraw-Hill Ryerson Limited LO 3 . most corporations use the Capital Cost Allowance (CCA).9-35 Depreciation and Federal Income Tax  For tax purposes. CCA provides for rapid write-off of an asset’s cost in order to stimulate new investments.

England. including Australia. use other methods such as depreciation based on the current fair value of assets.9-36 Depreciation Methods in Other Countries Many countries. Brazil. Copyright © 2011 McGraw-Hill Ryerson Limited LO 3 . and Mexico.

Plant and Equipment US GAAP and IFRS differ with respect to the measurement basis for property. LO 3 Under US GAAP and Canadian ASPE. plant and equipment on the statement of financial position. IFRS permit companies to value property. and equipment at historical cost or to revalue them to their fair value as of the statement of financial position date. and equipment to fair value is prohibited. revaluation of property. plant.9-37 International Perspective—IFRS Measurement Basis for Property. plant. Copyright © 2011 McGraw-Hill Ryerson Limited .

If Carrying amount > Recoverable amount. . . Impairment occurs when events or changed circumstances cause the carrying amount of these assets to exceed their recoverable amount. then the asset is impaired impairment loss = carrying amount – recoverable amount LO 4 Copyright © 2011 McGraw-Hill Ryerson Limited . • Casualty. which is the higher of its value in use or its fair value less costs to sell. • Obsolescence. • Lack of demand for the asset’s services.9-38 Measuring Asset Impairment Impairment is the loss of a significant portion of the utility of an asset through .  Recognize a loss when an asset suffers a permanent impairment.

Plant.9-39 Disposal of Property. and Equipment Voluntary disposals: • Sale • Trade-in • Retirement Involuntary disposals: • Fire • Accident Copyright © 2011 McGraw-Hill Ryerson Limited LO 5 .

and Equipment  Update depreciation to the date of disposal.9-40 Disposal of Property.  Journalize disposal by: Recording cash received (debit) or paid (credit). Writing off accumulated depreciation (debit). Writing off the asset cost (credit). Copyright © 2011 McGraw-Hill Ryerson Limited Recording a gain (credit) or loss (debit). Plant. LO 5 .

record a loss (debit). no gain or loss. WestJet Airlines sold flight equipment for $11.000 cash at the end of its 17th year of use. Let’s answer the following questions. record a gain (credit). Plant. The flight equipment originally cost $30.000. If Cash = BV. If Cash < BV.9-41 Disposal of Property. and was depreciated using the straight-line method with zero residual value and a useful life of 25 years.000. Copyright © 2011 McGraw-Hill Ryerson Limited LO 5 . and Equipment If Cash > BV.000.

000. $2.Disposal of Property. Annual Depreciation: ($30. $1. $0.000.000. c.000. = $1.000.000 – $0) ÷ 25 Years.500.200. $1. Plant and Equipment 9-42 The amount of depreciation expense recorded at the end of the 17th year to bring depreciation up to date is: a.000 Copyright © 2011 McGraw-Hill Ryerson Limited LO 5 .200. d. b.

Plant and Equipment Accumulated Depreciation = (17yrs.400. the equipment’s book value at the end of BV = Cost – Accumulated Depreciation the 17th year is: BV = $30.000.000) = $20.000.600.000.000 – $20. b. LO 5 Copyright © 2011 McGraw-Hill Ryerson Limited .600.400. $20.600.Disposal of Property. $6. $9. c.200.000 9-43 a.800. × the $1.400.000 = $9. $12.000.000.000 After updating depreciation. d.

000. a gain of $3.700.Disposal of Property. a loss of $1.000.000. a gain of $1.400. c.000 – $9. d.800. Gain = Cash Received – Book Value Gain = $11.600. b. a gain of $6. Plant and Equipment 9-44 The equipment’s sale resulted in: a.200.000 = $1.000.000.000 Copyright © 2011 McGraw-Hill Ryerson Limited LO 5 .400.

000 LO 5 .000 1.000.000 Debit 1. .400.000 30.400. GENERAL JOURNAL Date 1 2 Description Depreciation expense (+E) Acc.Flight Equip. and (2) WestJet’s sale of the equipment at the end of the 17th year.200.000 11. Plant and Equipment 9-45 Prepare the journal entry to record (1) the update the depreciation expense and accumulated depreciation.200.000 20. +SE) Flight Equipment (-A) Copyright © 2011 McGraw-Hill Ryerson Limited Page 8 Credit 1. (+XA) Cash (+A) Accumulated Depreciation (-XA) Gain on Sale (+Gain.Disposal of Property. Depr.000.

Examples: oil.9-46 Acquisition and Depletion of Natural Resources A non-current asset presented at cost less accumulated depletion. exploration. Copyright © 2011 McGraw-Hill Ryerson Limited LO 6 . Total cost of asset is the cost of acquisition. and development. coal. gold Depletion is like units-of-production depreciation. Total cost is allocated over periods benefited by means of depletion. Extracted from the natural environment.

9-47 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 sales Depletion cost Copyright © 2011 McGraw-Hill Ryerson Limited Inventory for sale Unsold Inventory LO 6 .

LO 6 Copyright © 2011 McGraw-Hill Ryerson Limited . These assets are recorded in a separate account and depreciated.9-48 Acquisition and Depletion of Natural Resources   Specialized plant assets may be required to extract the natural resource.

including purchase price. Usually acquired for operational use. and filing fees. Often provide exclusive rights or privileges.Acquisition and Amortization of Intangible Assets Non-current assets without physical substance. legal fees. Copyright © 2011 McGraw-Hill Ryerson Limited LO 6 . 9-49 Intangible Assets Record at current cash equivalent cost. Useful life is often difficult to determine.

• Tested at least annually for possible impairment. subject to rules specified by IFRS (GAAP).Acquisition and Amortization of Intangible Assets Definite Life  9-50 Indefinite Life • Not amortized. Use straight-line method.  Amortization is a cost allocation process similar to depreciation and depletion. Amortize over shorter of economic life or legal life. and book value is reduced to fair value if impaired. Copyright © 2011 McGraw-Hill Ryerson Limited LO 6 .

Goodwill is not amortized. and the book value is reduced to fair value if impaired. Copyright © 2011 McGraw-Hill Ryerson Limited LO 6 . Its value must be reviewed at least annually for possible impairment.Acquisition and Amortization of Intangible Assets Goodwill Occurs when one company buys another company. Only purchased goodwill is an intangible asset. 9-51 The amount by which the purchase price exceeds the fair market value of net assets acquired.

b.000 to purchase all of Utek Company’s assets and assumed liabilities of $400.800.Acquisition and Amortization of Intangible Assets Arpec Company paid $2. d. c. $200.000.000. 9-52 What amount of goodwill should be recorded on Arpec Company books? a.000 $400.000 $600. The acquired assets were appraised at a fair value of $1.000 LO 6 Copyright © 2011 McGraw-Hill Ryerson Limited .000 $800.000.

800. $200.000.000 1.000 $800. d.000.400. The acquired assets were appraised at a fair value of $1. c. 9-53 What amount of goodwill should be recorded on Arpec Company books? a.000 2.000 400.000 to purchase all of Utek Company’s assets and assumed liabilities of $400.000 $400. b.Acquisition and Amortization of Intangible Assets Arpec Company paid $2.800.000 FMV of Assets Debt Assumed FMV of Net Assets Purchase Price Goodwill $ 1.000.000 LO 6 Copyright © 2011 McGraw-Hill Ryerson Limited .000 $600.000 $ 600.000.

image or slogan. Purchased trademarks are recorded at cost. or artistic work. • Amortize cost over the period benefited. use. or logo associated with a business. design. and sell a literary. • Legal life is life of creator plus 50 years.Acquisition and Amortization of Intangible Assets Trademarks  9-54 Copyrights • The exclusive right to publish. musical.   Copyright © 2011 McGraw-Hill Ryerson Limited LO 6 . A symbol. An exclusive legal right to use a name.

• Cost is purchase price plus legal cost to defend. Technology • A category of intangible assets that includes a company’s website and any computer programs written by its employees. • Amortize cost over the shorter of useful life or 20 years. • Research and development costs that might result in a patent are normally expensed as incurred. Copyright © 2011 McGraw-Hill Ryerson Limited 9-55 LO 6 .Acquisition and Amortization of Intangible Assets Patents • Exclusive right granted by the federal government to sell or manufacture an invention.

Licenses and Operating Rights • Limited permissions to use a product or service according to specific terms and conditions.Acquisition and Amortization of Intangible Assets Franchises • Legally protected right purchased by a franchisee to sell products or provide services for a specified period and purpose. • You may be using computer software that is made available to you through a campus licensing agreement. • Purchase price is an intangible asset that is amortized. 9-56 Copyright © 2011 McGraw-Hill Ryerson Limited LO 6 .

Otherwise periodic payments are treated as rent expense.  A leasehold is recorded only if advance payment is involved.  Leasehold improvements are long-term alterations made by lessee to leased property and are recorded at cost and amortized over their useful life. Rights granted under the lease are called a leasehold. Copyright © 2011 McGraw-Hill Ryerson Limited LO 6 .Acquisition and Amortization of Intangible Assets 9-57 Leaseholds  A lease is a contract to use property granted by a lessor (owner) to a lessee (another party).

if the company can meet specific criteria for deferral. recorded as assets.Research and Development Expense – Not an Intangible Asset  9-58 If an intangible asset is developed internally.  Copyright © 2011 McGraw-Hill Ryerson Limited LO 6 . and then amortized over time. Under specific circumstances. the cost of development normally is recorded as research and development expense. development costs can be deferred to future accounting periods.

IFRS require that research expenditures be reported as an expense.9-59 International Perspective—IFRS Research and Development Costs US GAAP and IFRS differ with respect to the treatment of development costs. Copyright © 2011 McGraw-Hill Ryerson Limited . LO 6 Under US GAAP. all research and development costs must be reported as an expense. but development costs be capitalized as an asset after technical and commercial feasibility of the resulting product or service have been established.

Because depreciation (CCA) is tax deductible. it reduces the cash outflow related to taxes (often called a tax shield).9-60 Focus on Cash Flows   Depreciation expense does not require a cash outflow. LO 6 Copyright © 2011 McGraw-Hill Ryerson Limited .

9-61 Focus on Cash Flows Copyright © 2011 McGraw-Hill Ryerson Limited LO 6 .

9-62 End of Chapter 9 Copyright © 2011 McGraw-Hill Ryerson Limited .