ACCT Chapter 9 Plant and Intangible Assets

2 Main types of computing depreciation

1. straight-line depreciation - most common 2. accelerated depreciation - fixed percentage of declining balance depreciation (most widely used of acc. dep)

capital expenditures

costs incurred to acquire a long lived asset. Expenditures that will benefit several accounting periods.

Plant assets

long lived assets that are acquired for use in business operations rather than for resale to customers

Accelerated depreciation

methods of depreciation that call for recognition of relatively large amounts of depreciation in the early years of an asset's useful life and relatively small amounts in the later years

tangible plant assets

plant assets that have physical substance but that are not natural resources. Examples include land, buildings and equipment

goodwill

the amount of expected future earnings of a business in excess of the earnings normally realized in the industry. Recorded when a business entity is purchased at a price in excess of the fair value of its net identifiable assets less liabilities

Formula for depreciation rate

1 divided by the life in years of an asset ie truck est. life 5 yrs = depreciation rate is 1/5 of the depreciable amount

3 Types of Plant Assets

1. Tangible plant assets 2. Intangible assets 3. Natural resources

Formula for book value

Cost - Accumulated Depreciation = Book Value

revenue expenditures

expenditures that will benefit only the current accounting period ie repairs, maintenance, fuel

allocation of a lump sum purchase

several different types of plant assets purchased at one time separate asset accounts are maintained for each type of plant asset - appraisal may be necessary and cost calculated based on percentage of the asset in the appraisal p 394

amortization

The systematic write-off to expense of the cost of an intangible asset over the periods of its economic usefulness.

intangible assets

are only listed on the balance sheet if significant costs are incurred in their acquisition or development

Formula for 150% of straight line rate

depreciation = 1 yr/useful life x 150% 1yr/5yrs = 20% x 150% = 30% depreciation each yr

Revised estimate of useful lives

undepreciated cost / remaining useful yrs = revised amt. of annual depreciation * prior statements are not revised

Depreciation for Fractional Periods

1. round calculation to the nearest whole month ie. Jan. 2 = full year or Oct. 1 = 3/12 2. half year convention - record one half yr depreciation on all assets acquired during the year

straight line depreciation

* allocates an equal portion of deprecation expense to each period of its useful life * most common

3 Events in the lives of plant assets

1. acquisition 2. allocation of the acquisition cost to expense over the asset's useful life (except for land) 3. sale or disposal

Principle of consistency applied to depreciation

1. can use different methods for fin. statements and income tax 2. can use different methods for different assets ie building straightline and vehicle accelerated 3. can not switch method for given asset yr to yr

2 Causes of Depreciation

1. physical deterioration 2. Obsolescence

2 types of tangible plant assets

1. property subject to depreciation - assets of limited useful life ie building and equipment 2. Land - not subject to depreciation, has an unlimited term of existence

net assets

= assets - liability

2 Types of Expenditures

Capital expenditure - benefits more than one period Revenue expenditure - only benefits current period

Formula - straight-line method

Cost - Residual Value / Years of Useful Life

Formula declining balance method

Depreciation Expense = Remaining Book Value X Accelerated Depreciation Rate

book value (carrying value)

The cost of a plant asset minus the total recorded depreciation as shown by the accumulated depreciation account. The remaining underpreciated cost is also known as carrying value * formula = cost - accumulated depreciation

natural resources

Mines, oil fields, standing timber, and similar assets that are physically consumed and converted into inventory It is not classified as land - because it is gradually converted into inventory as the natural resource is extracted from the site

Disposal of plant equipment

Property is removed from asset account, accumulated depreciation is removed from the related contra-asset account. When sold - a gain or loss is computed comparing book value with sale price

MACRS Modified Accelerated Cost Recovery System

The accelerated depreciation method permitted in federal income tax returns for assets acquired after 12/31/86. Depreciation is based on prescribed recovery periods and depreciation rates. *Not considered in conformity with GAAP.

residual (salvage) value

The portion of an asset's cost expected to be recovered through sale or trade-in of the asset at the end of its useful life

half-year convention

The practice of taking six months depreciation in the year of acquisition and in the year of disposition rather than computing depreciation for partial periods to the nearest month. Widely used and acceptable for both income tax reporting and financial reports as long as it is applied to all assets of a particular type acquired during the year (ignore the date of actual purchase) recognize the 1/2 yr depreciation in the first and last year of the depreciation schedule - extends the schedule into one additional year

noncash charge or expense

a charge against earnings - either an expense or a loss- that does not require a cash expenditure at or near the time of recognition. The charge reduces net income but does not affect cash flows. Examples are depreciation and the write-off of asset values because an asset has become impaired.

units of output

a depreciation method in which cost minus residual value is divided by the estimated units of life time output. The unit depreciation cost is multiplied by the actual units of output each year to compute the annual depreciation expense. COST-RESIDUAL VALUE/EST. UNITS OF VALUE (miles) = COST PER UNIT OF OUTPUT (depreciation per mile)

sum of the years digits (SYD) depreciation

a seldom used method of accelerated depreciation. Usually produces results that lie in between the 200 percent and 150 percent declining balance methods

Plant and intangible assets make up

a significant portion of the balance sheet

capitalize

a verb with two different meanings in accounting 1. to debit an expenditure to an asset account, rather than directly to expense 2. estimate the value of an investment by dividing the annual return by the investor's required rate of return

Double declining balance

accelerated depreciation method where the rate is twice the straight-line method rate (200%) in some instances a lower percentage is used 150% - 150% declining balance

fixed-percentage of declining balance depreciation (declining balance)

accelerated method of depreciation in which the rate is a multiple of the straight-line rate and is applied each year to the undepreciated cost of the asset. The most commonly used rate is double the straight-line rate primarily used in tax returns rather than financial statements

depletion

allocating the cost of a natural resource to the units removed as the resource is mined, pumped, cut or otherwise consumed

intangible assets

assets that are used in the operation of a business but that have no physical substance and are noncurrent ie patents, trademarks, goodwill (does not include prepaid rent or accts receivable)

Journal entry to record depreciation

debit to Depreciation Expense and credit to Accumulated Depreciation

land improvements

improvements to real estate have limited lives separate from the land and are subject to depreciation

Buildings costs

include remodeling costs but not future maintenance and repair

acculmulated depreciation

is a contra asset account, representing that portion of the asset's cost that has already been allocated to expense

Depreciation Methods Use

straight line used for financial statements - less depreciation expense = higher net income/profits accelerated used for income tax returns (increase depreciation expense = lower net income = lower taxes) * Tax laws allow companies to use different depreciation methods ** Neither one makes a company better off, it is an estimate, it has no effect on the actual financial strength of co. * disclose policy in notes

present value

the amount that a knowledgeable investor would pay today for the right to receive future cash flows. The present value is always less than the sum of the future cash flows because the investor requires a return on the investment

depreciation

the systematic allocation of the cost of an asset to expense over the years of its estimated useful life depreciation is a process of cost allocation not a process of asset valuation considered a non cash expense but often require large cash payments at the time they are purchased depreciation methods should be disclosed in the notes

net identifiable assets

the total of all assets except goodwill minus liabilities

impairment loss

the write down of a long lived asset for the difference between its carrying amount less its fair value