Slide

9-1

Chapter

McGraw-Hill/Irwin

PLANT AND INTANGIBLE

ASSETS

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Slide
9-2

Plant
Plant Assets
Assets
Long-lived
Long-lived assets
assets acquired
acquired for
for use
use in
in
business
business operations.
operations.
Similar to long-term prepaid expenses

The cost of plant assets

is the advance purchase
of services.
McGraw-Hill/Irwin

As years pass, and the

services are used, the
cost is transferred to
depreciation expense.

The McGraw-Hill Companies, Inc.

Slide
9-3

Major
Major Categories
Categories of
of Plant
Plant Assets
Assets
T a n g ib le P la n t
A s s e ts

In ta n g ib le
A s s e ts

N a tu ra l
R e s o u rc e s

L o n g -te rm
a s s e t s h a v in g
p h y s ic a l s u b s t a n c e .

N o n c u rre n t a s s e ts
w it h n o p h y s ic a l
s u b s ta n c e .

S it e s a c q u ir e d fo r
e x t r a c t in g v a lu a b le
re s o u rc e s .

L a n d , b u ild in g s ,
e q u ip m e n t ,
fu r n it u r e , fix t u r e s .

P a t e n t s , c o p y r ig h t s ,
tra d e m a rk s ,
fr a n c h is e s , g o o d w ill.

O il r e s e r v e s ,
t im b e r , o t h e r
m in e r a ls .

McGraw-Hill/Irwin

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Slide
9-4

Accountable
Accountable Events
Events

Acquisition.
Acquisition.

Allocation of
of the
the
Allocation

acquisition
acquisition cost
cost to
to
expense
expense over
over the
the
assets
assets useful
useful life
life
(depreciation).
(depreciation).

Sale or
or disposal.
disposal.
Sale

McGraw-Hill/Irwin

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Slide
9-5

Acquisition
Acquisition of
of Plant
Plant Assets
Assets
Asset
Asset
price
price

Cost
Cost

Reasonable
Reasonableand
and
necessary
necessarycosts
costs......

......for
forgetting
getting
the
theasset
assetto
tothe
the
desired
desiredlocation.
location.
McGraw-Hill/Irwin

......for
forgetting
getting
the
theasset
assetready
ready
for
foruse.
use.

The McGraw-Hill Companies, Inc.

Slide
9-6

Determining
Determining Cost
Cost
On
On May
May 4,
4, Heat
Heat Co.,
Co., an
an Ohio
Ohio maker
maker of
of stoves,
stoves,
buys
buys aa new
new machine
machine from
from aa Texas
Texas company.
company.
The
The new
new machine
machine has
has aa price
price of
of $52,000.
$52,000.
Sales
Sales tax
tax was
was computed
computed at
at 8%.
8%.
Heat
Heat Co.
Co. pays
pays $500
$500 shipping
shipping cost
cost to
to get
get the
the
machine
machine to
to Ohio.
Ohio. After
After the
the machine
machine arrives,
arrives,
set-up
set-up costs
costs of
of $1,300
$1,300 are
are incurred,
incurred, along
along with
with
$4,000
$4,000 in
in testing
testing costs.
costs.
Compute
Compute the
the cost
cost of
of Heat
Heat Co.s
Co.s new
new machine.
machine.
McGraw-Hill/Irwin

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Slide
9-7

Determining
Determining Cost
Cost

Prepare the journal entry.

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Slide
9-8

Special
Special Considerations
Considerations
Land
Land

Cost
Cost includes
includesreal
realestate
estate
commissions,
commissions,escrow
escrow
fees,
fees,legal
legalfees,
fees,clearing
clearing
and
and grading
grading the
theproperty.
property.

Land
Land
Improvements
Improvements

Improvements
Improvementsto
toland
land
such
suchas
asdriveways,
driveways,
fences,
fences, and
and landscaping
landscaping
are
are recorded
recordedseparately.
separately.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Slide
9-9

Special
Special Considerations
Considerations
Buildings
Buildings

Repairs
Repairsmade
madeprior
prior to
tothe
the
building
building being
beingput
put in
in use
use
are
areconsidered
consideredpart
part of
ofthe
the
buildings
buildingscost.
cost.

Equipment
Equipment

Related
Relatedinterest,
interest,
insurance,
insurance,and
andproperty
property
taxes
taxesare
are treated
treatedas
as
expenses
expensesof
of the
thecurrent
current
period.
period.

McGraw-Hill/Irwin

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Slide
9-10

Special
Special Considerations
Considerations
Allocation
Allocation of
of aa Lump-Sum
Lump-Sum Purchase
Purchase

I think Ill buy the

whole thing; barn,
land, and animals.

McGraw-Hill/Irwin

The
Thetotal
totalcost
cost
must
mustbe
be
allocated
allocatedto
to
separate
separate
accounts
accountsfor
for
each
each asset.
asset.

The
Theallocation
allocation
is
isbased
based on
on
the
therelative
relative
Fair
Fair Market
Market
Value
Valueof
of each
each
asset
asset
purchased.
purchased.

The McGraw-Hill Companies, Inc.

Slide
9-11

Capital
Capital Expenditures
Expenditures and
and Revenue
Revenue
Expenditures
Expenditures
Capital
Capital
Expenditure
Expenditure

Revenue
Revenue
Expenditure
Expenditure

Any
Anymaterial
materialexpenditure
expenditure
that
that will
willbenefit
benefitseveral
several
accounting
accountingperiods.
periods.

Expenditure
Expenditurefor
for
ordinary
ordinaryrepairs
repairs
and
and maintenance.
maintenance.

To
Tocapitalize
capitalize an
anexpenditure
expenditure
means
meansto
tocharge
chargeitit to
toan
an
asset
asset account.
account.

To
Toexpense
expensean
an expenditure
expenditure
means
meansto
tocharge
chargeititto
toan
an
expense
expenseaccount.
account.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Slide
9-12

Depreciation
Depreciation
The
Theallocation
allocationof
of the
thecost
cost of
of aaplant
plant asset
assetto
toexpense
expensein
inthe
the
periods
periodsin
inwhich
whichservices
servicesare
arereceived
receivedfrom
fromthe
theasset.
asset.

Cost of
plant
assets

Balance
BalanceSheet
Sheet
Assets:
Assets:
Plant
Plant and
and
equipment
equipment
Income
IncomeStatement
Statement

McGraw-Hill/Irwin

Revenues:
Revenues:
Expenses:
Expenses:
Depreciation
Depreciation

as the services
are received

The McGraw-Hill Companies, Inc.

Slide
9-13

Depreciation
Depreciation
Book
Book Value
Value

Cost
Cost Accumulated
Accumulated Depreciation
Depreciation

Accumulated
Accumulated Depreciation
Depreciation

Contra-asset
Contra-asset

Represents the

Represents the portion

portion of
of an
an assets
assets
cost
cost that
that has
has already
already
been
been allocated
allocated to
to expense.
expense.

Causes
Causes of
of Depreciation
Depreciation

Physical
Physical deterioration
deterioration

Obsolescence
Obsolescence
McGraw-Hill/Irwin

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Slide
9-14

Straight-Line
Straight-Line Depreciation
Depreciation
Depreciation
Expense per Year

McGraw-Hill/Irwin

Cost - Residual Value

Years of Useful Life

The McGraw-Hill Companies, Inc.

Slide
9-15

Straight-Line
Straight-Line Depreciation
Depreciation
On
OnJanuary
January1,
1,2003,
2003, Bass
BassCo.
Co. buys
buysaanew
new boat.
boat. Bass
Bass
Co.
Co.pays
pays$24,000
$24,000 for
forthe
theboat.
boat. The
Theboat
boat has
has an
an
estimated
estimatedresidual
residualvalue
valueof
of $3,000
$3,000and
andan
an estimated
estimated
useful
useful life
life of
of 55years.
years.

Compute
Compute depreciation
depreciation for
for 2003
2003 using
using the
the
straight-line
straight-line method.
method.

McGraw-Hill/Irwin

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Slide
9-16

Straight-Line
Straight-Line Depreciation
Depreciation
Bass
BassCo.
Co. will
willrecord
record$4,200
$4,200depreciation
depreciationeach
eachyear
yearfor
for
five
fiveyears.
years. Total
Totaldepreciation
depreciationover
overthe
theestimated
estimated useful
useful
life
lifeof
ofthe
the boat
boatis:
is:

Salvage Value
McGraw-Hill/Irwin

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Slide
9-17

Depreciation
Depreciation for
for Fractional
Fractional Periods
Periods
When
Whenan
anasset
asset is
isacquired
acquired during
duringthe
the year,
year,
depreciation
depreciation in
inthe
theyear
year of
ofacquisition
acquisitionmust
must be
be
prorated.
prorated.

Half-Year
Half-Year Convention
Convention
In
In the
the year
year of
of
acquisition,
acquisition, record
record six
six
months
months of
of
depreciation.
depreciation.
McGraw-Hill/Irwin

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Slide
9-18

Half-Year
Half-Year Convention
Convention
Using the half-year convention, calculate the
straight-line depreciation on December 31,
2001, for equipment purchased in 2003. The
equipment cost $75,000, has a useful life of 10
years and an estimated salvage value of
$5,000.

Depreciation
Depreciation ==
==
Depreciation
Depreciation ==
McGraw-Hill/Irwin

($75,000
($75,000 -- $5,000)
$5,000) 10
10
$7,000
$7,000 for
for aa full
full year
year
$7,000
$7,000

11

//22 == $3,500
$3,500

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Slide
9-19

Declining-Balance
Declining-Balance Method
Method
Depreciation
Depreciationin
inthe
theearly
earlyyears
yearsof
ofan
anassets
assetsestimated
estimated
useful
useful life
lifeis
ishigher
higherthan
thanin
inlater
lateryears.
years.

The
Thedouble-declining
double-decliningbalance
balancedepreciation
depreciation
rate
rateis
is200%
200%of
ofthe
thestraight-line
straight-line
depreciation
depreciationrate
rateof
of1/Useful
1/UsefulLife.
Life.
McGraw-Hill/Irwin

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Slide
9-20

Declining-Balance
Declining-Balance Method
Method
On
OnJanuary
January1,
1,2003,
2003, Bass
BassCo.
Co. buys
buysaanew
new boat.
boat. Bass
Bass
Co.
Co.pays
pays$24,000
$24,000 for
forthe
theboat.
boat. The
Theboat
boat has
has an
an
estimated
estimatedresidual
residualvalue
valueof
of $3,000
$3,000and
andan
an estimated
estimated
useful
useful life
life of
of 55years.
years.

Compute
Compute depreciation
depreciation for
for 2003
2003 using
using the
the
double-declining
double-declining balance
balance method.
method.

McGraw-Hill/Irwin

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Slide
9-21

Declining-Balance
Declining-Balance Method
Method
Total
over
useful
life
of
an
Totaldepreciation
depreciation
over the
theestimated
estimated
useful
life
of
an
Compute
depreciation
for
the
rest
of
the
Compute
depreciation
for
the
rest
of
the
asset
same
using
either
the
straight-line
method
or
asset is
isthe
the
same
using
either
the
straight-line
method
or
boats
estimated
useful
life.
boats
estimated useful
life.
the
the declining-balance
declining-balance method.
method.

McGraw-Hill/Irwin

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Slide
9-22

Financial
Financial Statement
Statement Disclosures
Disclosures

Estimates
Estimates of
of Useful
Useful Life
Life and
and
Residual
Residual Value
Value

May
Maydiffer
differfrom
fromcompany
companyto
to

company.
company.

The
Thereasonableness
reasonablenessof
of
managements
managementsestimates
estimatesis
is
evaluated
evaluatedby
byexternal
externalauditors.
auditors.

Principle
Principle of
of Consistency
Consistency

Companies
Companiesshould
shouldavoid
avoidswitching
switching

depreciation
depreciationmethods
methodsfrom
fromperiod
periodto
to
period.
period.

McGraw-Hill/Irwin

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Slide
9-23

Revising
Revising Depreciation
Depreciation Rates
Rates
Predicted
Predicted
salvage
salvage value
value

Predicted
Predicted
useful
usefullife
life

So
So depreciation
depreciation
is
is an
an estimate.
estimate.

Over
Over the
the life
life of
of an
an asset,
asset, new
new information
information
may
may come
come to
to light
light that
that indicates
indicates the
the
original
original estimates
estimates need
need to
to be
be revised.
revised.
McGraw-Hill/Irwin

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Slide
9-24

Revising
Revising Depreciation
Depreciation Rates
Rates
On
On January
January 1,
1, 2003,
2003, equipment
equipment was
was
purchased
purchased that
that cost
cost $30,000,
$30,000, has
has aa useful
useful
life
life of
of 10
10 years
years and
and no
no salvage
salvage value.
value.
During
During 2006,
2006, the
the useful
useful life
life was
was revised
revised to
to 88
years
years total
total (5
(5 years
years remaining).
remaining).
Calculate
Calculate depreciation
depreciation expense
expense for
for the
the year
year
ended
ended December
December 31,
31, 2006,
2006, using
using the
the
straight-line
straight-line method.
method.
McGraw-Hill/Irwin

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Slide
9-25

Revising
Revising Depreciation
Depreciation Rates
Rates
When
Whenour
ourestimates
estimateschange,
change,
depreciation
depreciation is:
is:
Book value at
date of change

Salvage value at
date of change

Remaining useful life at date of change

Asset
Assetcost
cost
Accumulated
Accumulated depreciation,
depreciation, 12/31/2005
12/31/2005
($3,000
($3,000per
per year
year 33years)
years)
Remaining
Remaining book
bookvalue
value
Divide
Divide by
byremaining
remaining life
life
Revised
Revised annual
annual depreciation
depreciation
McGraw-Hill/Irwin

$$ 30,000
30,000

$$
$$

9,000
9,000
21,000
21,000
55
4,200
4,200

The McGraw-Hill Companies, Inc.

Slide
9-26

Impairment
Impairment of
of Assets
Assets

IfIf the
the cost
cost of
of an
an asset
asset
cannot
cannot be
be recovered
recovered
through
through future
future use
use or
or
sale,
sale, the
the asset
asset should
should
be
be written
written down
down to
to its
its
net
net realizable
realizable value.
value.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Slide
9-27

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
Update
Update depreciation
depreciation
to
to the
the date
date of
of disposal.
disposal.
Journalize
Journalize disposal
disposal by:
by:
Recording
Recordingcash
cash
received
received(debit)
(debit)
or
orpaid
paid(credit).
(credit).
Removing
Removingaccumulated
accumulated
depreciation
depreciation(debit).
(debit).
McGraw-Hill/Irwin

Recording
Recording aa
gain
gain (credit)
(credit)
or
or loss
loss(debit).
(debit).
Removing
Removing the
the
asset
assetcost
cost(credit).
(credit).

The McGraw-Hill Companies, Inc.

Slide
9-28

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
IfIf Cash
Cash >> BV,
BV, record
record aa gain
gain (credit).
(credit).
IfIf Cash
Cash << BV,
BV, record
record aa loss
loss (debit).
(debit).
IfIf Cash
Cash == BV,
BV, no
no gain
gain or
or loss.
loss.
Recording
Recordingcash
cash
received
received(debit)
(debit)
or
orpaid
paid(credit).
(credit).
Removing
Removingaccumulated
accumulated
depreciation
depreciation(debit).
(debit).
McGraw-Hill/Irwin

Recording
Recording aa
gain
gain (credit)
(credit)
or
or loss
loss(debit).
(debit).
Removing
Removing the
the
asset
assetcost
cost(credit).
(credit).

The McGraw-Hill Companies, Inc.

Slide
9-29

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
On
On September
September 30,
30, 2003,
2003, Evans
Evans Map
Map Company
Company
sells
sells aa machine
machine that
that originally
originally cost
cost $100,000
$100,000 for
for
$60,000
$60,000 cash.
cash. The
The machine
machine was
was placed
placed in
in
service
service on
on January
January 1,
1, 1998.
1998. ItIt has
has been
been
depreciated
depreciated using
using the
the straight-line
straight-line method
method with
with
an
an estimated
estimated salvage
salvage value
value of
of $20,000
$20,000 and
and an
an
estimated
estimated useful
useful life
life of
of 10
10 years.
years.
Lets
Lets answer
answer the
the following
following questions.
questions.
McGraw-Hill/Irwin

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Slide
9-30

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
The
The amount
amount of
of depreciation
depreciation
recorded
recorded on
on September
September 30,
30, 2003,
2003,
to
to bring
bring depreciation
depreciation up
up to
to date
date is:
is:
a.
a.
b.
b.
c.
c.
d.
d.

$8,000.
$8,000.
$6,000.
$6,000.
$4,000.
$4,000.
$2,000.
$2,000.

McGraw-Hill/Irwin

Annual Depreciation:
($100,000 - $20,000) 10 Yrs. = $8,000
Depreciation to Sept. 30:
9/12 $8,000 = $6,000

The McGraw-Hill Companies, Inc.

Slide
9-31

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
After
After updating
updating the
the depreciation,
depreciation, the
the
machines
machines book
book value
value on
on
September
September 30,
30, 2003,
2003, is:
is:
a.
a.
b.
b.
c.
c.
d.
d.

$54,000.
$54,000.
$46,000.
$46,000.
$40,000.
$40,000.
$60,000.
$60,000.

McGraw-Hill/Irwin

Cost
Cost
Accumulated
AccumulatedDepreciation:
Depreciation:
(5
(5yrs.
yrs. $8,000)
$8,000)++$6,000
$6,000==
Book
BookValue
Value

$$100,000
100,000
46,000
46,000
$$ 54,000
54,000

The McGraw-Hill Companies, Inc.

Slide
9-32

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
The
The machines
machines sale
sale resulted
resulted in:
in:
a.
a.
b.
b.
c.
c.
d.
d.

aa gain
gain of
of $6,000.
$6,000.
aa gain
gain of
of $4,000.
$4,000.
aa loss
loss of
of $6,000.
$6,000.
aa loss
loss of
of $4,000.
$4,000.

McGraw-Hill/Irwin

Cost
Accum. Depr.
Book value
Cash received
Gain

$
$
$

100,000
46,000
54,000
60,000
6,000

The McGraw-Hill Companies, Inc.

Slide
9-33

Trading
Trading in
in Used
Used Assets
Assets
for
for New
New Ones
Ones
Accounting
Accounting depends
depends on
on whether
whether
assets
assets are
are similar
similar or
or dissimilar.
dissimilar.
Airplane
Airplane
for
for
Airplane
Airplane

Truck
Truck
for
for
Airplane
Airplane

Only
Only situations
situations where
where cash
cash
is
is paid
paid will
will be
be demonstrated.
demonstrated.
McGraw-Hill/Irwin

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Slide
9-34

Trading
Trading in
in Used
Used Assets
Assets
for
for New
New Ones
Ones

Recognize
Gains?
Recognize
Losses?

McGraw-Hill/Irwin

Dissimilar
Assets

Similar Assets
and Cash Paid

Yes

No

Yes

Yes

The McGraw-Hill Companies, Inc.

Slide
9-35

Trading
Trading in
in Used
Used Assets
Assets
for
for New
New Ones
Ones Similar
Similar Assets
Assets
On
On May
May 30,
30, 2003,
2003, Essex
Essex Company
Company
exchanged
exchanged aa used
used airplane
airplane and
and $35,000
$35,000
cash
cash for
for aa new
new airplane.
airplane. The
The old
old airplane
airplane
originally
originally cost
cost $40,000,
$40,000, had
had up-to-date
up-to-date
accumulated
accumulated depreciation
depreciation of
of $30,000,
$30,000, and
and
aa fair
fair value
value of
of $4,000.
$4,000.
SIMILAR

McGraw-Hill/Irwin

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Slide
9-36

Trading
Trading in
in Used
Used Assets
Assets
for
for New
New Ones
Ones Similar
Similar Assets
Assets
The
The exchange
exchange resulted
resulted in
in a:
a:
a.
a.
b.
b.
c.
c.
d.
d.

gain
gain of
of $6,000.
$6,000.
loss
loss of
of $6,000.
$6,000.
loss
loss of
of $4,000.
$4,000.
gain
gain of
of $4,000.
$4,000.

Cost
Accum. Depr.

$ 40,000
30,000

Book Value
Fair Value
Loss

$ 10,000
4,000
$ 6,000

Prepare a journal entry

to record the exchange.
McGraw-Hill/Irwin

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Slide
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Trading
Trading in
in Used
Used Assets
Assets
for
for New
New Ones
Ones Similar
Similar Assets
Assets
Prepare
Prepare the
the journal
journal entry
entry to
to record
record
the
the trade.
trade.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Slide
9-38

Intangible
Intangible Assets
Assets
Noncurrent
Noncurrent assets
assets
without
withoutphysical
physical
substance.
substance.

Often
Oftenprovide
provide
exclusive
exclusiverights
rights
or
orprivileges.
privileges.

Characteristics
Characteristics
Useful
Usefullife
lifeis
is
often
oftendifficult
difficult
to
todetermine.
determine.
McGraw-Hill/Irwin

Usually
Usuallyacquired
acquired
for
foroperational
operational
use.
use.

The McGraw-Hill Companies, Inc.

Slide
9-39

Intangible
Intangible Assets
Assets
Record at
current cash
equivalent cost,
including
purchase price,
legal fees, and
filing fees.

McGraw-Hill/Irwin

Patents
Copyrights
Leaseholds
Leasehold
Improvements
Goodwill
Trademarks and
Trade Names

The McGraw-Hill Companies, Inc.

Slide
9-40

Intangible
Intangible Assets
Assets

Amortize
Amortize over
over shorter
shorter of
of economic
economic

life
life or
or legal
legal life,
life, subject
subject to
to aa maximum
maximum
of
of 40
40 years.
years.

Use
Use straight-line
straight-line method.
method.

Research
Research and
and development
development costs
costs are
are
normally
normally expensed
expensed as
as incurred.
incurred.

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Slide
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Intangible
Intangible Assets
Assets Goodwill
Goodwill

Goodwill
Goodwill
Occurs
Occurs when
when one
one
company
company buys
buys
another
another company.
company.

Only
Only purchased
purchased
goodwill
goodwill is
is an
an
intangible
intangible asset.
asset.

The
The amount
amount by
by which
which the
the
purchase
purchase price
price exceeds
exceeds the
the fair
fair
market
market value
value of
of net
net assets
assets acquired.
acquired.
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Slide
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Intangible
Intangible Assets
Assets Goodwill
Goodwill
Eddy
Eddy Company
Company paid
paid $1,000,000
$1,000,000 to
to
purchase
purchase all
all of
of James
James Companys
Companys assets
assets
and
and assumed
assumed liabilities
liabilities of
of $200,000.
$200,000. The
The
acquired
acquired assets
assets were
were appraised
appraised at
at aa fair
fair
value
value of
of $900,000
$900,000..

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Slide
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Intangible
Intangible Assets
Assets Goodwill
Goodwill
Intangible
Assets
Goodwill
What
What amount
amount of
of goodwill
goodwill should
should be
be
recorded
recorded on
on Eddy
Eddy Company
Company books?
books?
a.
a.
b.
b.
c.
c.
d.
d.

$100,000.
$100,000.
$200,000.
$200,000.
$300,000.
$300,000.
$400,000.
$400,000.

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Slide
9-44

Intangible
Intangible Assets
Assets Patents
Patents
Exclusive
Exclusive right
right granted
granted
by
by federal
federal government
government to
to sell
sell or
or
manufacture
manufacture an
an invention.
invention.
Cost
Cost is
is purchase
purchase
price
price plus
plus legal
legal
cost
cost to
to defend.
defend.

McGraw-Hill/Irwin

Amortize
Amortize cost
cost
over
over the
the shorter
shorter of
of
useful
useful life
life or
or 17
17 years.
years.

The McGraw-Hill Companies, Inc.

Slide
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Intangible
Intangible Assets
Assets

Trademarks
Trademarks and
and Trade
Trade Names
Names
A
A symbol,
symbol, design,
design, or
or logo
logo
associated
associated with
with aa business.
business.
Internally
developed
trademarks
have no
recorded
asset cost.
McGraw-Hill/Irwin

Purchased
trademarks
are recorded
at cost, and
amortized over
shorter of legal
or economic life,
or 40 years.

The McGraw-Hill Companies, Inc.

Slide
9-46

Intangible
Intangible Assets
Assets Franchises
Franchises
Legally
Legally protected
protected right
right to
to sell
sell products
products or
or
provide
provide services
services purchased
purchased by
by franchisee
franchisee
from
from franchisor.
franchisor.

Purchase
Purchase price
price is
is intangible
intangible asset
asset
which
which is
is amortized
amortized over
over the
the shorter
shorter of
of
the
the protected
protected right
right or
or 40
40 years.
years.
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Slide
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Intangible
Intangible Assets
Assets Copyrights
Copyrights
Exclusive
Exclusive right
right granted
granted by
by the
the
federal
federal government
government to
to protect
protect
artistic
artistic or
or intellectual
intellectual properties.
properties.
Legal
Legal life
life is
is
life
life of
of creator
creator
plus
plus 50
50 years.
years.

McGraw-Hill/Irwin

Amortize
Amortize cost
cost
over
over aa period
period not
not
to
to exceed
exceed 40
40 years.
years.

The McGraw-Hill Companies, Inc.

Slide
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Natural
Natural Resources
Resources
Total
Total cost,
cost,
including
including
exploration
exploration and
and
development,
development,
is
is charged
charged to
to
depletion
depletion expense
expense
over
over periods
periods
benefited.
benefited.

Extracted
Extracted from
from
the
the natural
natural
environment
environment
and
and reported
reported
at
at cost
cost less
less
accumulated
accumulated
depletion.
depletion.

Examples:
Examples: oil,
oil, coal,
coal, gold
gold
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Slide
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Depletion
Depletion of
of Natural
Natural Resources
Resources
Depletion is calculated using the
units-of-production method.
Unit depletion rate is calculated as follows:

Cost Salvage Value

Total Units of Capacity

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Slide
9-50

Depletion
Depletion of
of Natural
Natural Resources
Resources
Total depletion cost for a period is:
Unit Depletion
Rate

Total
Total
depletion
depletion
cost
cost

McGraw-Hill/Irwin

Inventory
Inventory
for
for sale
sale

Number of Units
Extracted in Period
Cost
Costof
of
goods
goodssold
sold
Unsold
Unsold
Inventory
Inventory

The McGraw-Hill Companies, Inc.

Slide
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Depletion
Depletion of
of Natural
Natural Resources
Resources

Specialized plant assets may be required

to extract the natural resource.
These assets are recorded in a separate
account and depreciated.
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Slide
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The
The Units-of-Output
Units-of-Output Method
Method
Cost per Unit
of Output

Depreciation
Expense

McGraw-Hill/Irwin

Cost - Residual Value

Estimated Units of Output

Cost per Unit

Number of
Units Produced
of Output

The McGraw-Hill Companies, Inc.

Slide
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MACRS:
MACRS: The
The Tax
Tax Method
Method
MACRS
MACRS == M
Modified
odified A
Accelerated
ccelerated C
Cost
ost R
Recovery
ecovery S
System
ystem
Based
Basedon
on
Declining-Balance
Declining-Balance
Methods
Methods

The
Theonly
onlyaccelerated
acceleratedmethod
method
allowed
allowed by
bythe
theIRS
IRSwhen
when
computing
computingdepreciation
depreciationfor
fortax
tax
return
returnpurposes.
purposes.

Asset
AssetCost
Cost MACRS
MACRSrate
rate
Rates
Ratesare
areavailable
available from
from tables
tables
provided
provided by
bythe
theIRS.
IRS.
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Slide
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Which
Which Depreciation
Depreciation Methods
Methods
Do
Do Most
Most Businesses
Businesses Use?
Use?
AAsurvey
surveyof
of600
600Publicly
PubliclyOwned
Owned Corporations
Corporations
563
563

Straight-line
Straight-line

44
44

Declining-balance
Declining-balance
Sum-of-the-years'-digits
Sum-of-the-years'-digits

11
11

Accelerated
Acceleratedmethods
methods(not
(notspecified)
specified)
Units-of-output
Units-of-output

70
70
53
53

Other
Other 99

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Slide
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End
End of
of Chapter
Chapter 99

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