Chapter 10

LONG-TERM ASSETS

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
Winston Kwok, Ph.D., CA
Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved
 10 - 2

C1

PROPERTY, PLANT AND EQUIPMENT

Tangible in Nature

Actively Used in Operations

Expected to Benefit Future Periods

Called Property, Plant, & Equipment

 10 - 3

C1

PROPERTY, PLANT AND EQUIPMENT

 10 - 4

C1

COST DETERMINATION
Purchase All expenditures
price needed to
Acquisition prepare the
Cost asset for its
intended use
Acquisition cost excludes
financing charges and
cash discounts
The cost of an item of property, plant and equipment includes the purchase price as
well as all costs necessary to get the asset in place and ready for its intended use.
We record the purchase price net of any cash discounts available. We will add
freight, unpacking, assembling, installing, and testing costs to the net invoice price to
arrive at the final cost.
Finance charges are not included in the cost of an asset. If we elect to finance the
purchase over a period of time, the interest cost is charged as an expense when
incurred.
 10 - 5

C1

LAND
Title insurance premiums
Purchase Delinquent
price taxes

Real estate Surveying

commissions fees

Title search and transfer fees

Land is not depreciable.

Many of these costs are related to obtaining legal title to the land.
 10 - 6

C1

LAND IMPROVEMENTS

Parking lots, driveways, fences, walks, shrubs,

and lighting systems.

Depreciate
over useful life of
improvements.

While the costs of these improvements increase the usefulness of the land, they
are charged to a separate Land Improvement account so that their costs can be
allocated to the periods they benefit.
 10 - 7

C1

BUILDINGS
Cost of purchase or Title fees
construction

Brokerage Attorney fees

fees

Taxes
 10 - 8

C1

MACHINERY AND EQUIPMENT

Purchase
price Taxes

Transportation
charges

Installing,
assembling, and Insurance while
testing in transit
 10 - 9

P1

LUMP-SUM ASSET PURCHASE

The total cost of a combined purchase of land and building is
separated on the basis of their relative fair market values.

CarMax paid $90,000 cash to acquire a group of items

consisting of land appraised at $30,000, land improvements
appraised at $10,000, and a building appraised at $60,000.
The $90,000 cost will be allocated on the basis of appraised
values as shown:
 10 - 10

P1

DEPRECIATION

Depreciation is the process of allocating the

cost of an item of property, plant and
equipment to expense in the accounting
periods benefiting from its use.
Statement of Financial Position Income Statement
Acquisition Cost
Expense
Cost Allocation
(Unused) (Used)
 10 - 11

P1 FACTORS IN COMPUTING
DEPRECIATION

The calculation of depreciation requires

three amounts for each asset:
1. Cost
2. Residual Value
3. Useful Life
The residual value of a asset is an estimate of the asset’s value at the end of its
benefit period. This is the amount the owner expects to receive when disposing
of the asset. The useful life of an item of property, plant and equipment is the
length of time it is productively used in a company’s operations.
 10 - 12

P1

DEPRECIATION METHODS
1. Straight-line
2. Units-of-production
3. Declining-balance
Asset we will depreciate in future screens
 10 - 13

P1

Straight-Line Method
 10 - 14

P1

Straight-Line Method

At the end of year 2:

Statement of Financial Position Presentation
Machinery $ 10,000    
(3,600)
Accumulated depreciation   $ 6,400
       
 10 - 15

P1 STRAIGHT-LINE DEPRECIATION
SCHEDULE

Note three points in this exhibit.

(1) depreciation expense is the same each period.
(2) accumulated depreciation is the sum of current and prior periods’ depreciation
expense.
(3) carrying amount declines each period until it equals residual value at the end of
the machine’s useful life.
 10 - 16

P1

UNITS-OF-PRODUCTION METHOD

Step 1:
Depreciation = Cost - Residual Value
Per Unit Total Units of Production

Step 2:
Number of Units
Depreciation Depreciation × Produced
=
Expense Per Unit in the Period
 10 - 17

P1

UNITS-OF-PRODUCTION METHOD
Assume that 7,000 units were inspected
during 2011. Depreciation would be
calculated as follows:

Step 1:
Depreciation = Cost - Residual Value $9,000
= = $0.25/unit
Per Unit Total Units of Production 36,000

Step 2:
Number of Units
Depreciation Depreciation = $0.25 × 7,000 = $1,750
× Produced
Expense = Per Unit
in the Period
 10 - 18

P1 UNITS-OF-PRODUCTION
DEPRECIATION SCHEDULE

Our schedule shows that

(1) depreciation expense depends on unit output,
(2) accumulated depreciation is the sum of current and prior periods’ depreciation
expense, and
(3) carrying amount declines each period until it equals residual value at the end of
the asset’s useful life.
 10 - 19

P1 DOUBLE-DECLINING-BALANCE
METHOD

Declining-balance methods yield larger depreciation expense in the early years of an

asset’s life and less depreciation in later years. The most popular declining-balance
method is called double-declining balance (DDB) method.

Residual value is not used in the double-declining-balance method. We base

depreciation expense on the carrying amount of the asset at the beginning of the
year.
 10 - 20

P1 DOUBLE-DECLINING-BALANCE
METHOD

We always want the carrying amount to be equal to estimated residual value at the
end of the asset’s useful life, but it just will not work properly using the double-
declining-balance method. So in the last year of the asset’s useful life, we must
determine the depreciation expense necessary to make the carrying amount equal
to residual value.
 10 - 21

P1 COMPARING DEPRECIATION
METHODS
Double-
Straight- Units of Declining-
Period Line Production Balance
2011 $ 1,800 $ 1,750 $ 4,000
2012 1,800 2,000 2,400
2013 1,800 2,250 1,440
2014 1,800 1,750 864
2015 1,800 1,250 296
Totals $ 9,000 $ 9,000 $ 9,000

$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$-
2011 2012 2013 2014 2015

Straight-Line Units-of-Production
Double-Declining-Balance
 10 - 22

C2

PARTIAL-YEAR DEPRECIATION
When
When anan item
item of
of property,
property, plant
plant and
and equipment
equipment is is
acquired
acquired during
during the
the year,
year, depreciation
depreciation is
is calculated
calculated
for
for the
the fraction
fraction of
of the
the year
year the
the asset
asset is
is owned.
owned.

Cost $ 10,000
Assume our machinery was purchased
Residual value 1,000
on October 8, 2010. Let’s calculate
Depreciable cost $ 9,000
Useful life   depreciation expense for 2010,
Accounting periods 5 years assuming we use straight-line
Units inspected 36,000 units depreciation.
 10 - 23

C2 CHANGE IN ESTIMATES FOR

DEPRECIATION

Predicted Predicted
residual value useful life

Depreciation
is an estimate

Over the life of an asset, new information may

come to light that indicates the original estimates
were inaccurate.
 10 - 24

C2 CHANGE IN ESTIMATES FOR

DEPRECIATION
Let’s look at our machinery from the previous examples and
assume that at the beginning of the asset’s third year, its
carrying amount is $6,400 ($10,000 cost less $3,600
accumulated depreciation using straight-line depreciation).
At that time, it is determined that the machinery will have a
remaining useful life of 4 years, and the estimated residual
value will be revised downward from $1,000 to $400.

A change in accounting estimate is reflected in current and future financial

statements, not in prior statements.
 10 - 25

C2

REPORTING DEPRECIATION
Nestlé 2013

Both the cost and accumulated depreciation of property, plant and

equipment are reported on the statement of financial position or in its notes.
For most companies, total accumulated depreciation is subtracted for the
total cost of property, plant, and equipment.
 10 - 26

C3

ADDITIONAL EXPENDITURES
Financial Statement Effect
Current Current
Treatment Statement Expense Profit Taxes
Statement of
Capital financial position Deferred Higher Higher
Expenditure account debited
Revenue Income statement Currently
Lower Lower
Expenditure account debited recognized

IfIf the
the amounts
amounts involved
involved are
are not
not material,
material,
most
most companies
companies expense
expense the
the item.
item.
 10 - 27

C3
REVENUE AND CAPITAL
EXPENDITURES

Capital or
Revenue Identifying Characteristics
1. Maintains normal operating condition.
2. Does not increase productivity.
Revenue
3. Does not extend life beyond original
estimate.
1. Major overhauls or partial
replacements.
Capital 2. Extends life beyond original estimate.
 10 - 28

C4

MEASUREMENT MODELS
The Cost Model states that after recognition as an asset, an
item of PPE shall be carried at its cost less any accumulated
depreciation and any accumulated impairment losses.

The Revaluation Model states that after recognition as an

asset, an item of PPE whose fair value can be measured
reliably shall be carried at a revalued amount, being its fair
value at the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated
impairment losses. The fair value of PPE is usually
determined from market-based evidence by professional
appraisal or valuation.
 10 - 29

C4

REVALUATION MODEL
If land which was bought for $1 million in 2013 is revalued to
$1.5 million on June 30, 2015 (no depreciation for land), the
journal entry for the revaluation on that date is:

Revaluation surplus is part of other comprehensive income

 10 - 30

C4

REVALUATION MODEL
KC Corp has an equipment bought on July 1, 2013 with a cost of
$200,000, no residual value and estimated useful life of five years. After
two years on June 30, 2015, KC obtains market information for
revaluation suggesting that the fair value of the equipment is $300,000.
Method (a):
Restated accumulated depreciation proportionately with the change in
the gross carrying amount of the asset so that the carrying amount of the
asset after revaluation equals its revalued amount.
 10 - 31

C4

REVALUATION MODEL
KC Corp has an equipment bought on July 1, 2013 with a cost of
$200,000, no residual value and estimated useful life of five years. After
two years on June 30, 2015, KC obtains market information for
revaluation suggesting that the fair value of the equipment is $300,000.
Method (b):
Eliminate accumulated depreciation against the gross carrying amount
of the asset and the net amount restated to the revalued amount of the
asset
 10 - 32

C4

IMPAIRMENT
An impairment is the amount by which the carrying amount
of an asset exceeds its recoverable amount.
For example, an equipment bought before 2015 has a
carrying amount of $8,000 ($9,000 cost less $1,000
accumulated depreciation) and a recoverable amount of
$7,500.
 10 - 33

P2 DISPOSALS OF PROPERTY, PLANT

AND EQUIPMENT
Update depreciation
to the date of disposal.

Journalize disposal by:

Recording cash Recording a

received (debit) gain (credit)
or paid (credit). or loss (debit).

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
 10 - 34

DISCARDING PROPERTY, PLANT AND

P2

EQUIPMENT
Update depreciation
If Cash > CA, record a gain (credit).
to the date of disposal.
If Cash < CA, record a loss (debit).
If CashJournalize
= CA, nodisposal
gain orby:
loss.

Recording cash Recording a

received (debit) gain (credit)
or paid (credit). or loss (debit).

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
 10 - 35

DISCARDING PROPERTY, PLANT AND

P2

EQUIPMENT
A machine costing $9,000, with accumulated depreciation of
$9,000 on December 31st of the previous year was
discarded on June 5th of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero residual value.
 10 - 36

DISCARDING PROPERTY, PLANT AND

P2

EQUIPMENT
Equipment costing $8,000, with accumulated depreciation of
$6,000 on December 31st of the previous year was
discarded on July 1st of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero residual value.
Step 1: Bring the depreciation up-to-date.

Step 2: Record discarding of asset.

 10 - 37

P2 SELLING PROPERTY, PLANT AND

EQUIPMENT
On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $3,000 cash.
Step 1: Update depreciation to March 31st.

Step 2: Record sale of asset at carrying amount ($16,000 - $13,000 = $3,000).

 10 - 38

P2 SELLING PROPERTY, PLANT AND

EQUIPMENT
On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $2,500 cash.
Step 1: Update depreciation to March 31st.

Step 2: Record sale of asset at a loss (Carrying amount $3,000 - $2,500 cash
received).
 10 - 39

P3

NATURAL RESOURCES

Total cost,
Extracted from
including
the natural
exploration and
environment
development,
and reported
is charged to
at cost less
depletion expense
accumulated
over periods
depletion.
benefited.

Examples: oil, coal, gold

 10 - 40

P3
COST DETERMINATION AND
DEPLETION
Let’s consider a mineral deposit with an estimated 250,000
tons of available ore. It is purchased for $500,000, and we
expect zero residual value.
 10 - 41

P3
DEPLETION OF NATURAL
RESOURCES
Depletion expense in the first year would be:

Statement of Financial Position presentation of natural resources:

 10 - 42

P3 PROPERTY, PLANT AND EQUIPMENT

USED IN EXTRACTING
 Specialized property, plant
and equipment may be
required to extract the
natural resource.
 These assets are recorded
in a separate account and
depreciated.
If a machine is permanently installed in a mine and 10% of the ore is mined and
sold in the period, then 10% of the machine’s cost (less any residual value) is
allocated to depreciation expense. The same procedure is used when a machine is
abandoned once resources have been extracted. If, however, a machine will be
moved to and used at another site when extraction is complete, the machine is
depreciated over its own useful life.
 10 - 43

P4

INTANGIBLE ASSETS
Noncurrent assets Often provide
without physical exclusive rights
substance. or privileges.

Intangible
Assets

Useful life is Usually acquired

often difficult for operational
to determine. use.
 10 - 44

P4 COST DETERMINATION AND

AMORTIZATION
Record at current
cash equivalent  Patents

cost, including  Copyrights

purchase price,  Franchises and Licenses
legal fees, and  Goodwill
filing fees.  Trademarks and Trade Names
 Other Intangibles
 10 - 45

A1

TOTAL ASSET TURNOVER

Total Asset = Net Sales
Turnover Average Total Assets

Provides information about a company’s

efficiency in using its assets.
 10 - 46

P5
10A – EXCHANGING PROPERTY, PLANT
AND EQUIPMENT
Many property, plant and equipment such as machinery,
automobiles, and office equipment are disposed of by
exchanging them for newer assets. In a typical exchange
of property, plant and equipment, a trade-in allowance is
received on the old asset and the balance is paid in cash.
Accounting for the exchange of assets depends on
whether the transaction has commercial substance.

Commercial substance implies the company’s

future cash flows will be altered.
 10 - 47

P5 EXCHANGE WITH COMMERCIAL

SUBSTANCE: A LOSS
A
A company
company acquires
acquires $42,000
$42,000 inin new
new equipment.
equipment. In
In exchange,
exchange, the
the company
company
pays
pays $33,000
$33,000 cash
cash and
and trades
trades inin old
old equipment.
equipment. The
The old
old equipment
equipment
originally
originally cost
cost $36,000
$36,000 and
and has
has accumulated
accumulated depreciation
depreciation of
of $20,000
$20,000
(carrying
(carrying amount
amount is
is $16,000).
$16,000). This
This exchange
exchange has
has commercial
commercial substance.
substance.
The
The old
old equipment
equipment has
has aa trade-in
trade-in allowance
allowance of
of $9,000.
$9,000.
 10 - 48

END OF CHAPTER 10