Financial_Accounting_chapter_09 Accounting
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About This Presentation
financial Accounting
Slide Content
Slide
9-1
Lecturer : Muhammad Alif Nur Irvan S.Ak., M.Acc., Akt., CPA
Class : International Program
9-1
Lecturer : Muhammad Alif Nur Irvan S.Ak., M.Acc., Akt., CPA
Class : International Program
Slide
9-2
Chapter 9
Plant Assets, Plant Assets,
Natural Resources, andNatural Resources, and
Intangible AssetsIntangible Assets
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
9-2
Chapter 9
Plant Assets, Plant Assets,
Natural Resources, andNatural Resources, and
Intangible AssetsIntangible Assets
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
9-3
1.Describe how the cost principle applies to plant assets.
2.Explain the concept of depreciation.
3.Compute periodic depreciation using different methods.
4.Describe the procedure for revising periodic depreciation.
5.Distinguish between revenue and capital expenditures, and
explain the entries for each.
6.Explain how to account for the disposal of a plant asset.
7.Compute periodic depletion of extractable natural resources.
8.Explain the basic issues related to accounting for intangible
assets.
9.Indicate how plant assets, natural resources, and intangible
assets are reported.
Study ObjectivesStudy Objectives
9-3
1.Describe how the cost principle applies to plant assets.
2.Explain the concept of depreciation.
3.Compute periodic depreciation using different methods.
4.Describe the procedure for revising periodic depreciation.
5.Distinguish between revenue and capital expenditures, and
explain the entries for each.
6.Explain how to account for the disposal of a plant asset.
7.Compute periodic depletion of extractable natural resources.
8.Explain the basic issues related to accounting for intangible
assets.
9.Indicate how plant assets, natural resources, and intangible
assets are reported.
Study ObjectivesStudy Objectives
Slide
9-4
Plant AssetsPlant Assets
Determining the Determining the
cost of plant cost of plant
assetsassets
DepreciationDepreciation
Revaluation of Revaluation of
plant assets plant assets
Expenditures Expenditures
during useful lifeduring useful life
Plant asset Plant asset
disposalsdisposals
Natural Natural
ResourcesResources
Intangible Intangible
AssetsAssets
Statement Statement
Presentation and Presentation and
AnalysisAnalysis
PresentationPresentation
AnalysisAnalysis
Accounting for Accounting for
intangiblesintangibles
Types of Types of
intangiblesintangibles
Research and Research and
development development
costscosts
Plant Assets, Natural Resources, and Intangible Plant Assets, Natural Resources, and Intangible
AssetsAssets
Accounting for Accounting for
extractable extractable
natural resourcesnatural resources
Financial Financial
statement statement
presentationpresentation
9-4
Plant AssetsPlant Assets
Determining the Determining the
cost of plant cost of plant
assetsassets
DepreciationDepreciation
Revaluation of Revaluation of
plant assets plant assets
Expenditures Expenditures
during useful lifeduring useful life
Plant asset Plant asset
disposalsdisposals
Natural Natural
ResourcesResources
Intangible Intangible
AssetsAssets
Statement Statement
Presentation and Presentation and
AnalysisAnalysis
PresentationPresentation
AnalysisAnalysis
Accounting for Accounting for
intangiblesintangibles
Types of Types of
intangiblesintangibles
Research and Research and
development development
costscosts
Plant Assets, Natural Resources, and Intangible Plant Assets, Natural Resources, and Intangible
AssetsAssets
Accounting for Accounting for
extractable extractable
natural resourcesnatural resources
Financial Financial
statement statement
presentationpresentation
Slide
9-5
“Used in operations” and not for resale.
Long-term in nature and usually depreciated.
Possess physical substance.
Plant assets include land, land improvements, buildings,
and equipment (machinery, furniture, tools).
Major characteristics include:
Section 1Section 1 – Plant Assets – Plant Assets
Referred to as property, plant, and equipment; plant and
equipment; and fixed assets.
9-5
“Used in operations” and not for resale.
Long-term in nature and usually depreciated.
Possess physical substance.
Plant assets include land, land improvements, buildings,
and equipment (machinery, furniture, tools).
Major characteristics include:
Section 1Section 1 – Plant Assets – Plant Assets
Referred to as property, plant, and equipment; plant and
equipment; and fixed assets.
Slide
9-6
Includes all costs to acquire land and ready it for use.
Costs typically include:
Land
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
(1)purchase price;
(2)closing costs, such as title and attorney’s fees;
(3)real estate brokers’ commissions;
(4)costs of grading, filling, draining, and clearing;
(5)assumption of any liens, mortgages, or encumbrances on
the property.
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
9-6
Includes all costs to acquire land and ready it for use.
Costs typically include:
Land
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
(1)purchase price;
(2)closing costs, such as title and attorney’s fees;
(3)real estate brokers’ commissions;
(4)costs of grading, filling, draining, and clearing;
(5)assumption of any liens, mortgages, or encumbrances on
the property.
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Slide
9-7
Illustration: Illustration: Assume that Hayes Manufacturing Company
acquires real estate at a cash cost of $100,000. The property
contains an old warehouse that is razed at a net cost of $6,000
($7,500 in costs less $1,500 proceeds from salvaged materials).
Additional expenditures are the attorney’s fee, $1,000, and the
real estate broker’s commission, $8,000. The cost of the land is
$115,000, computed as follows.
Required: Required: Determine amount to be reported as the cost of the
land.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
9-7
Illustration: Illustration: Assume that Hayes Manufacturing Company
acquires real estate at a cash cost of $100,000. The property
contains an old warehouse that is razed at a net cost of $6,000
($7,500 in costs less $1,500 proceeds from salvaged materials).
Additional expenditures are the attorney’s fee, $1,000, and the
real estate broker’s commission, $8,000. The cost of the land is
$115,000, computed as follows.
Required: Required: Determine amount to be reported as the cost of the
land.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Slide
9-8
LandLand
Required: Required: Determine amount to be reported as the cost of the
land.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Cash price of property of $100,000
Net removal cost of warehouse of $6,000
Attorney's fees of $1,000 1,000
6,000
$100,000
$115,000Cost of Land
Real estate broker’s commission of $8,000 8,000
Land 115,000
Cash 115,000
Journal Entry
9-8
LandLand
Required: Required: Determine amount to be reported as the cost of the
land.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Cash price of property of $100,000
Net removal cost of warehouse of $6,000
Attorney's fees of $1,000 1,000
6,000
$100,000
$115,000Cost of Land
Real estate broker’s commission of $8,000 8,000
Land 115,000
Cash 115,000
Journal Entry
Slide
9-9
All expenditures necessary to make the improvements
ready for their intended use.
Land Improvements
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
Driveways, parking lots, fences, landscaping, and
underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of land improvements
over their useful lives.
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
9-9
All expenditures necessary to make the improvements
ready for their intended use.
Land Improvements
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
Driveways, parking lots, fences, landscaping, and
underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of land improvements
over their useful lives.
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Slide
9-10
All costs related directly to purchase or construction.
Buildings
Purchase costs:
Purchase price, closing costs and real estate broker’s
commission.
Remodeling and replacing or repairing the roof, floors,
electrical wiring, and plumbing.
Construction costs:
Contract price plus payments for architects’ fees, building
permits, and excavation costs.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
9-10
All costs related directly to purchase or construction.
Buildings
Purchase costs:
Purchase price, closing costs and real estate broker’s
commission.
Remodeling and replacing or repairing the roof, floors,
electrical wiring, and plumbing.
Construction costs:
Contract price plus payments for architects’ fees, building
permits, and excavation costs.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Slide
9-11
All costs incurred in acquiring the equipment and
preparing it for use.
Costs typically include:
Equipment
purchase price,
sales taxes,
freight and handling charges,
insurance on the equipment while in transit,
assembling and installation costs, and
costs of conducting trial runs.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
9-11
All costs incurred in acquiring the equipment and
preparing it for use.
Costs typically include:
Equipment
purchase price,
sales taxes,
freight and handling charges,
insurance on the equipment while in transit,
assembling and installation costs, and
costs of conducting trial runs.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Slide
9-12
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and
equipment, not land.
Depreciable, because the revenue-producing ability of
asset will decline over the asset’s useful life.
Depreciation is the process of allocating the cost of
tangible assets to expense in a systematic and rational
manner to those periods expected to benefit from the use
of the asset.
DepreciationDepreciation
SO 2 Explain the concept of depreciation.SO 2 Explain the concept of depreciation.
9-12
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and
equipment, not land.
Depreciable, because the revenue-producing ability of
asset will decline over the asset’s useful life.
Depreciation is the process of allocating the cost of
tangible assets to expense in a systematic and rational
manner to those periods expected to benefit from the use
of the asset.
DepreciationDepreciation
SO 2 Explain the concept of depreciation.SO 2 Explain the concept of depreciation.
Slide
9-13
Factors in Computing Depreciation
Cost
DepreciationDepreciation
SO 2 Explain the concept of depreciation.SO 2 Explain the concept of depreciation.
Useful Life Residual Value
Illustration 9-6
9-13
Factors in Computing Depreciation
Cost
DepreciationDepreciation
SO 2 Explain the concept of depreciation.SO 2 Explain the concept of depreciation.
Useful Life Residual Value
Illustration 9-6
Slide
9-14
Objective is to select the method that best measures an
asset’s contribution to revenue over its useful life.
Examples include:
Depreciation Methods
(1)Straight-line method.
(2)Units-of-Activity method.
(3)Declining-balance method.
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
9-14
Objective is to select the method that best measures an
asset’s contribution to revenue over its useful life.
Examples include:
Depreciation Methods
(1)Straight-line method.
(2)Units-of-Activity method.
(3)Declining-balance method.
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Slide
9-15
Illustration: Barb’s Florists purchased a small delivery truck on
January 1, 2011.
Required: Compute depreciation using the following.
(a) Straight-Line (b) Units-of-Activity (c) Declining Balance.
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Illustration 9-7
9-15
Illustration: Barb’s Florists purchased a small delivery truck on
January 1, 2011.
Required: Compute depreciation using the following.
(a) Straight-Line (b) Units-of-Activity (c) Declining Balance.
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Illustration 9-7
Slide
9-16
Straight-Line
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Expense is same amount for each year.
Depreciable cost - cost of the asset less its residual
value. Illustration 9-8
9-16
Straight-Line
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Expense is same amount for each year.
Depreciable cost - cost of the asset less its residual
value. Illustration 9-8
Slide
9-17
Depreciable Annual Accum. Book
Year Cost xRate=Expense Deprec. Value
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Illustration: (Straight-Line Method)
2011 $ 12,000 20% $ 2,400 $ 2,400$ 10,600
2012 12,000 20 2,400 4,800 8,200
2013 12,000 20 2,400 7,200 5,800
2014 12,000 20 2,400 9,600 3,400
2015 12,000 20 2,400 12,000 1,000
2011
Journal
Entry
Depreciation expense 2,400
Accumulated depreciation
2,400
Illustration 9-9
9-17
Depreciable Annual Accum. Book
Year Cost xRate=Expense Deprec. Value
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Illustration: (Straight-Line Method)
2011 $ 12,000 20% $ 2,400 $ 2,400$ 10,600
2012 12,000 20 2,400 4,800 8,200
2013 12,000 20 2,400 7,200 5,800
2014 12,000 20 2,400 9,600 3,400
2015 12,000 20 2,400 12,000 1,000
2011
Journal
Entry
Depreciation expense 2,400
Accumulated depreciation
2,400
Illustration 9-9
Slide
9-18
Companies estimate total units of activity to calculate
depreciation cost per unit.
Expense varies based on units of activity.
Depreciable cost is
cost less residual
value.
Units-of-Activity
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Illustration 9-10
9-18
Companies estimate total units of activity to calculate
depreciation cost per unit.
Expense varies based on units of activity.
Depreciable cost is
cost less residual
value.
Units-of-Activity
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Illustration 9-10
Slide
9-19
Units Annual
of Cost / DepreciationAccumulated Book
Year ActivityxUnit=ExpenseDepreciationValue
DepreciationDepreciation
Illustration: (Units-of-Activity Method)
2011 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200
2012 30,000 0.12 3,600 5,400 7,600
2013 20,000 0.12 2,400 7,800 5,200
2014 25,000 0.12 3,000 10,800 2,200
2015 10,000 0.12 1,200 12,000 1,000
Depreciation expense 1,800
Accumulated depreciation
1,800
2011
Journal
Entry
Illustration 9-11
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
9-19
Units Annual
of Cost / DepreciationAccumulated Book
Year ActivityxUnit=ExpenseDepreciationValue
DepreciationDepreciation
Illustration: (Units-of-Activity Method)
2011 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200
2012 30,000 0.12 3,600 5,400 7,600
2013 20,000 0.12 2,400 7,800 5,200
2014 25,000 0.12 3,000 10,800 2,200
2015 10,000 0.12 1,200 12,000 1,000
Depreciation expense 1,800
Accumulated depreciation
1,800
2011
Journal
Entry
Illustration 9-11
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Slide
9-20
Decreasing annual depreciation expense over the asset’s
useful life.
Declining-balance rate is double the straight-line rate.
Rate applied to book value.
Declining-Balance
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Illustration 9-12
9-20
Decreasing annual depreciation expense over the asset’s
useful life.
Declining-balance rate is double the straight-line rate.
Rate applied to book value.
Declining-Balance
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Illustration 9-12
Slide
9-21
Declining Annual
Beginning Balance Deprec. Accum. Book
YearBook valuexRate=Expense Deprec. Value
DepreciationDepreciation
Illustration: (Declining-Balance Method)
2011 13,000 40% $ 5,200 $ 5,200 $ 7,800
2012 7,800 40 3,120 8,320 4,680
2013 4,680 40 1,872 10,192 2,808
2014 2,808 40 1,123 11,315 1,685
2015 1,685 40 685* 12,000 1,000
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
Depreciation expense 5,200
Accumulated depreciation
5,200
2011
Journal
Entry
Illustration 9-13
9-21
Declining Annual
Beginning Balance Deprec. Accum. Book
YearBook valuexRate=Expense Deprec. Value
DepreciationDepreciation
Illustration: (Declining-Balance Method)
2011 13,000 40% $ 5,200 $ 5,200 $ 7,800
2012 7,800 40 3,120 8,320 4,680
2013 4,680 40 1,872 10,192 2,808
2014 2,808 40 1,123 11,315 1,685
2015 1,685 40 685* 12,000 1,000
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
Depreciation expense 5,200
Accumulated depreciation
5,200
2011
Journal
Entry
Illustration 9-13
Slide
9-22
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Comparison of Methods
DepreciationDepreciation
Illustration 9-14
Illustration 9-15
9-22
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Comparison of Methods
DepreciationDepreciation
Illustration 9-14
Illustration 9-15
Slide
9-23
Tax laws often do not require the taxpayer to use the
same depreciation method on the tax return that is used
in preparing financial statements.
Many corporations use straight-line in their financial
statements to maximize net income. At the same time,
they use an accelerated-depreciation method on their
tax returns to minimize their income taxes.
Depreciation and Income Taxes
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
9-23
Tax laws often do not require the taxpayer to use the
same depreciation method on the tax return that is used
in preparing financial statements.
Many corporations use straight-line in their financial
statements to maximize net income. At the same time,
they use an accelerated-depreciation method on their
tax returns to minimize their income taxes.
Depreciation and Income Taxes
DepreciationDepreciation
SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.
Slide
9-24
Revising Periodic Depreciation
Accounted for in the period of change and future
periods (Change in Estimate).
Not handled retrospectively.
Not considered error.
DepreciationDepreciation
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
9-24
Revising Periodic Depreciation
Accounted for in the period of change and future
periods (Change in Estimate).
Not handled retrospectively.
Not considered error.
DepreciationDepreciation
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Slide
9-25
Illustration:Illustration: Assume that Barb’s Florists decides on January 1, Assume that Barb’s Florists decides on January 1,
2014, to extend the useful life of the truck one year because of 2014, to extend the useful life of the truck one year because of
its excellent condition. The company has used the straight-line its excellent condition. The company has used the straight-line
method to depreciate the asset to date, and book value is method to depreciate the asset to date, and book value is
$5,800 ($13,000 - $7,200).$5,800 ($13,000 - $7,200).
Questions:Questions:
1.1.What is the journal entry to correct What is the journal entry to correct
the prior years’ depreciation?the prior years’ depreciation?
2.2.Calculate the depreciation expense Calculate the depreciation expense
for 2014.for 2014.
No Entry No Entry
RequiredRequired
DepreciationDepreciation
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
9-25
Illustration:Illustration: Assume that Barb’s Florists decides on January 1, Assume that Barb’s Florists decides on January 1,
2014, to extend the useful life of the truck one year because of 2014, to extend the useful life of the truck one year because of
its excellent condition. The company has used the straight-line its excellent condition. The company has used the straight-line
method to depreciate the asset to date, and book value is method to depreciate the asset to date, and book value is
$5,800 ($13,000 - $7,200).$5,800 ($13,000 - $7,200).
Questions:Questions:
1.1.What is the journal entry to correct What is the journal entry to correct
the prior years’ depreciation?the prior years’ depreciation?
2.2.Calculate the depreciation expense Calculate the depreciation expense
for 2014.for 2014.
No Entry No Entry
RequiredRequired
DepreciationDepreciation
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Slide
9-26
DepreciationDepreciation
Depreciation expense 1,600
Accumulated depreciation
1,600
Journal entry for 2014
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Book value, 1/1/14 Book value, 1/1/14 $5,800$5,800
Residual valueResidual value
Depreciable costDepreciable cost
Useful life (revised) /Useful life (revised) /
Annual depreciationAnnual depreciation
First, First,
establish establish
Book Value Book Value
at the date of at the date of
change in change in
estimate.estimate.
- 1,000- 1,000
4,8004,800
3 years3 years
$ 1,600$ 1,600
Illustration 9-17
9-26
DepreciationDepreciation
Depreciation expense 1,600
Accumulated depreciation
1,600
Journal entry for 2014
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Book value, 1/1/14 Book value, 1/1/14 $5,800$5,800
Residual valueResidual value
Depreciable costDepreciable cost
Useful life (revised) /Useful life (revised) /
Annual depreciationAnnual depreciation
First, First,
establish establish
Book Value Book Value
at the date of at the date of
change in change in
estimate.estimate.
- 1,000- 1,000
4,8004,800
3 years3 years
$ 1,600$ 1,600
Illustration 9-17
Slide
9-27
IFRS allows revaluation of plant assets to fair value
If revaluation is used, it must be applied to all assets in
a class of assets.
Assets that are experiencing rapid price changes must
be revalued on an annual basis, otherwise less
frequent revaluation is acceptable.
Revaluation of Plant AssetsRevaluation of Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
9-27
IFRS allows revaluation of plant assets to fair value
If revaluation is used, it must be applied to all assets in
a class of assets.
Assets that are experiencing rapid price changes must
be revalued on an annual basis, otherwise less
frequent revaluation is acceptable.
Revaluation of Plant AssetsRevaluation of Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Slide
9-28
Illustration: Illustration: Pernice Company applies revaluation to plant
assets with a carrying value of $1,000,000, a useful life of 5
years, and no residual value. Pernice makes the following
journal entries in year 1, assuming straight-line depreciation.
Depreciation expense 200,000
Accumulated depreciation
200,000
Revaluation of Plant AssetsRevaluation of Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
After this entry, Pernice’s plant assets have a carrying amount
of $800,000 ($1,000,000 - $200,000).
9-28
Illustration: Illustration: Pernice Company applies revaluation to plant
assets with a carrying value of $1,000,000, a useful life of 5
years, and no residual value. Pernice makes the following
journal entries in year 1, assuming straight-line depreciation.
Depreciation expense 200,000
Accumulated depreciation
200,000
Revaluation of Plant AssetsRevaluation of Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
After this entry, Pernice’s plant assets have a carrying amount
of $800,000 ($1,000,000 - $200,000).
Slide
9-29
Illustration: Illustration: At the end of year 1, independent appraisers
determine that the asset has a fair value of $850,000. To report
the plant assets at fair value, Pernice makes the following entry.
Accumulated depreciation 200,000
Plant assets
150,000
Revaluation of Plant AssetsRevaluation of Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Revaluation surplus is an example of an item reported as other
comprehensive income, as discussed in Chapter 5.
Revaluation surplus
50,000
9-29
Illustration: Illustration: At the end of year 1, independent appraisers
determine that the asset has a fair value of $850,000. To report
the plant assets at fair value, Pernice makes the following entry.
Accumulated depreciation 200,000
Plant assets
150,000
Revaluation of Plant AssetsRevaluation of Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Revaluation surplus is an example of an item reported as other
comprehensive income, as discussed in Chapter 5.
Revaluation surplus
50,000
Slide
9-30
Pernice now reports the following information in its statement of
financial position at the end of year 1.
Revaluation of Plant AssetsRevaluation of Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
$850,000 is the new basis of the asset. Pernice reports depreciation
expense of $200,000 in the income statement and $50,000 in other
comprehensive income. Depreciation in year 2 will be $212,500
($850,000 / 4).
Illustration 9-18
9-30
Pernice now reports the following information in its statement of
financial position at the end of year 1.
Revaluation of Plant AssetsRevaluation of Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
$850,000 is the new basis of the asset. Pernice reports depreciation
expense of $200,000 in the income statement and $50,000 in other
comprehensive income. Depreciation in year 2 will be $212,500
($850,000 / 4).
Illustration 9-18
Slide
9-31
Ordinary Repairs - expenditures to maintain the operating
efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.
Expenditures During Useful LifeExpenditures During Useful Life
SO 5 Distinguish between revenue and capital expenditures, SO 5 Distinguish between revenue and capital expenditures,
and explain the entries for each.and explain the entries for each.
Additions and Improvements - costs incurred to increase
the operating efficiency, productive capacity, or useful life of a
plant asset.
Debit - the plant asset affected.
Referred to as capital expenditures.
9-31
Ordinary Repairs - expenditures to maintain the operating
efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.
Expenditures During Useful LifeExpenditures During Useful Life
SO 5 Distinguish between revenue and capital expenditures, SO 5 Distinguish between revenue and capital expenditures,
and explain the entries for each.and explain the entries for each.
Additions and Improvements - costs incurred to increase
the operating efficiency, productive capacity, or useful life of a
plant asset.
Debit - the plant asset affected.
Referred to as capital expenditures.
Slide
9-32
Companies dispose of plant assets in three ways —
Retirement, Sale, or Exchange (appendix).
Plant Asset DisposalsPlant Asset Disposals
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Illustration 9-19
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.
9-32
Companies dispose of plant assets in three ways —
Retirement, Sale, or Exchange (appendix).
Plant Asset DisposalsPlant Asset Disposals
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Illustration 9-19
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.
Slide
9-33
Illustration: Illustration: Assume that Hobart Enterprises retires
its computer printers, which cost $32,000. The accumulated
depreciation on these printers is $32,000. The journal entry to
record this retirement is:
Plant Asset Disposals - RetirementPlant Asset Disposals - Retirement
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Accumulated depreciation 32,000
Printing equipment
32,000
Question: What happens if a fully depreciated plant asset is still useful
to the company?
Retirement of Plant Assets
9-33
Illustration: Illustration: Assume that Hobart Enterprises retires
its computer printers, which cost $32,000. The accumulated
depreciation on these printers is $32,000. The journal entry to
record this retirement is:
Plant Asset Disposals - RetirementPlant Asset Disposals - Retirement
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Accumulated depreciation 32,000
Printing equipment
32,000
Question: What happens if a fully depreciated plant asset is still useful
to the company?
Retirement of Plant Assets
Slide
9-34
Illustration: Illustration: Assume that Sunset Company discards delivery
equipment that cost $18,000 and has accumulated
depreciation of $14,000. The journal entry is:
Plant Asset Disposals - RetirementPlant Asset Disposals - Retirement
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Accumulated depreciation 14,000
Loss on disposal 4,000
Companies report a loss on disposal in the “Other income and
expense” section of the income statement.
Delivery equipment
18,000
9-34
Illustration: Illustration: Assume that Sunset Company discards delivery
equipment that cost $18,000 and has accumulated
depreciation of $14,000. The journal entry is:
Plant Asset Disposals - RetirementPlant Asset Disposals - Retirement
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Accumulated depreciation 14,000
Loss on disposal 4,000
Companies report a loss on disposal in the “Other income and
expense” section of the income statement.
Delivery equipment
18,000
Slide
9-35
Sale of Plant Assets
Compare the book value of the asset with the proceeds
received from the sale.
If proceeds exceed the book value, a gain on disposal
occurs.
If proceeds are less than the book value, a loss on
disposal occurs.
Plant Asset DisposalsPlant Asset Disposals
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
9-35
Sale of Plant Assets
Compare the book value of the asset with the proceeds
received from the sale.
If proceeds exceed the book value, a gain on disposal
occurs.
If proceeds are less than the book value, a loss on
disposal occurs.
Plant Asset DisposalsPlant Asset Disposals
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Slide
9-36
Illustration: Assume that on July 1, 2011, Wright Company
sells office furniture for $16,000 cash. The office furniture
originally cost $60,000. As of January 1, 2011, it had
accumulated depreciation of $41,000. Depreciation for the first
six months of 2011 is $8,000. Prepare the journal entry to record
depreciation expense up to the date of sale.
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - SalePlant Asset Disposals - Sale
Depreciation expense 8,000
Accumulated depreciation
8,000
Gain on Disposal
9-36
Illustration: Assume that on July 1, 2011, Wright Company
sells office furniture for $16,000 cash. The office furniture
originally cost $60,000. As of January 1, 2011, it had
accumulated depreciation of $41,000. Depreciation for the first
six months of 2011 is $8,000. Prepare the journal entry to record
depreciation expense up to the date of sale.
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - SalePlant Asset Disposals - Sale
Depreciation expense 8,000
Accumulated depreciation
8,000
Gain on Disposal
Slide
9-37
Illustration: Wright records the sale as follows.
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - SalePlant Asset Disposals - Sale
Cash 16,000
Accumulated depreciation 49,000
Illustration 9-20
Computation of gain on
disposal
Office equipment
60,000
Gain on disposal
5,000
July 1
9-37
Illustration: Wright records the sale as follows.
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - SalePlant Asset Disposals - Sale
Cash 16,000
Accumulated depreciation 49,000
Illustration 9-20
Computation of gain on
disposal
Office equipment
60,000
Gain on disposal
5,000
July 1
Slide
9-38
Illustration: Assume
that instead of selling
the office furniture for
$16,000, Wright sells it
for $9,000.
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - SalePlant Asset Disposals - Sale
Loss on Disposal
Cash 9,000
Accumulated depreciation 49,000
Office equipment
60,000
Loss on disposal 5,000
July 1
Illustration 9-21
Computation of loss on disposal
9-38
Illustration: Assume
that instead of selling
the office furniture for
$16,000, Wright sells it
for $9,000.
SO 6 Explain how to account for the disposal of a plant asset.SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - SalePlant Asset Disposals - Sale
Loss on Disposal
Cash 9,000
Accumulated depreciation 49,000
Office equipment
60,000
Loss on disposal 5,000
July 1
Illustration 9-21
Computation of loss on disposal
Slide
9-39
Natural resources consist of standing timber and
resources extracted from the ground, such as oil, gas,
and minerals.
Standing timber is considered a biological asset under
IFRS.
In the years before they are harvested, the recorded
value of biological assets is adjusted to fair value each
period.
Section 2Section 2 – Natural Resources – Natural Resources
SO 7 Compute periodic depletion of extractable natural resources.SO 7 Compute periodic depletion of extractable natural resources.
9-39
Natural resources consist of standing timber and
resources extracted from the ground, such as oil, gas,
and minerals.
Standing timber is considered a biological asset under
IFRS.
In the years before they are harvested, the recorded
value of biological assets is adjusted to fair value each
period.
Section 2Section 2 – Natural Resources – Natural Resources
SO 7 Compute periodic depletion of extractable natural resources.SO 7 Compute periodic depletion of extractable natural resources.
Slide
9-40
Depletion is to natural resources as depreciation is to plant
assets.
Companies generally use units-of-activity method.
Depletion generally is a function of the units extracted.
IFRS defines extractive industries as those businesses
involved in finding and removing natural resources located in
or near the earth’s crust.
Cost - price needed to acquire the resource and prepare it for
its intended use.
Depletion - allocation of the cost to expense in a rational and
systematic manner over the resource’s useful life.
Section 2Section 2 – Natural Resources – Natural Resources
SO 7 Compute periodic depletion of extractable natural resources.SO 7 Compute periodic depletion of extractable natural resources.
9-40
Depletion is to natural resources as depreciation is to plant
assets.
Companies generally use units-of-activity method.
Depletion generally is a function of the units extracted.
IFRS defines extractive industries as those businesses
involved in finding and removing natural resources located in
or near the earth’s crust.
Cost - price needed to acquire the resource and prepare it for
its intended use.
Depletion - allocation of the cost to expense in a rational and
systematic manner over the resource’s useful life.
Section 2Section 2 – Natural Resources – Natural Resources
SO 7 Compute periodic depletion of extractable natural resources.SO 7 Compute periodic depletion of extractable natural resources.
Slide
9-41
Illustration: Assume that Lane Coal Company invests $5
million in a mine estimated to have 10 million tons of coal and no
salvage value. In the first year, Lane extracts and sells 800,000
tons of coal. Lane computes the depletion expense as follows:
Section 2Section 2 – Natural Resources – Natural Resources
$5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton
$.50 x 800,000 = $400,000 depletion expense
Depletion expense 400,000
Accumulated depletion
400,000
Journal entry:
SO 7 Compute periodic depletion of extractable natural resources.SO 7 Compute periodic depletion of extractable natural resources.
9-41
Illustration: Assume that Lane Coal Company invests $5
million in a mine estimated to have 10 million tons of coal and no
salvage value. In the first year, Lane extracts and sells 800,000
tons of coal. Lane computes the depletion expense as follows:
Section 2Section 2 – Natural Resources – Natural Resources
$5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton
$.50 x 800,000 = $400,000 depletion expense
Depletion expense 400,000
Accumulated depletion
400,000
Journal entry:
SO 7 Compute periodic depletion of extractable natural resources.SO 7 Compute periodic depletion of extractable natural resources.
Slide
9-42
Financial Statement PresentationFinancial Statement Presentation
Illustration 9-23
Statement presentation of accumulated depletion
Extracted resources that have not been sold are reported as
inventory in the current assets section.
SO 7 Compute periodic depletion of extractable natural resources.SO 7 Compute periodic depletion of extractable natural resources.
9-42
Financial Statement PresentationFinancial Statement Presentation
Illustration 9-23
Statement presentation of accumulated depletion
Extracted resources that have not been sold are reported as
inventory in the current assets section.
SO 7 Compute periodic depletion of extractable natural resources.SO 7 Compute periodic depletion of extractable natural resources.
Slide
9-43
Intangible assets are rights, privileges, and competitive
advantages that do not possess physical substance.
Section 3Section 3 – Intangible Assets – Intangible Assets
Patents
Copyrights
Franchises or licenses
Intangible assets are categorized as having either a
limited life or an indefinite life.
Common types of intangibles:
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Trademarks and trade
names
Goodwill
IFRS permits revaluation of intangible assets to fair value, except for goodwill.
9-43
Intangible assets are rights, privileges, and competitive
advantages that do not possess physical substance.
Section 3Section 3 – Intangible Assets – Intangible Assets
Patents
Copyrights
Franchises or licenses
Intangible assets are categorized as having either a
limited life or an indefinite life.
Common types of intangibles:
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Trademarks and trade
names
Goodwill
IFRS permits revaluation of intangible assets to fair value, except for goodwill.
Slide
9-44
Patents
Exclusive right to manufacture, sell, or otherwise control
an invention for a specified number of years from the
date of the grant.
Legal life in many countries is 20 years.
Capitalize costs of purchasing a patent and amortize
over its legal life or its useful life, whichever is shorter.
Legal fees incurred successfully defending a patent are
capitalized to Patent account.
Types of Intangible AssetsTypes of Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
9-44
Patents
Exclusive right to manufacture, sell, or otherwise control
an invention for a specified number of years from the
date of the grant.
Legal life in many countries is 20 years.
Capitalize costs of purchasing a patent and amortize
over its legal life or its useful life, whichever is shorter.
Legal fees incurred successfully defending a patent are
capitalized to Patent account.
Types of Intangible AssetsTypes of Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Slide
9-45
Intangible assets are typically amortized on a straight-line
basis.
Illustration: Assume that National Labs purchases a patent at
a cost of $60,000. National estimates the useful life of the
patent to be eight years. National records the annual
amortization as follows.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Amortization expense 7,500
Patent
7,500
9-45
Intangible assets are typically amortized on a straight-line
basis.
Illustration: Assume that National Labs purchases a patent at
a cost of $60,000. National estimates the useful life of the
patent to be eight years. National records the annual
amortization as follows.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Amortization expense 7,500
Patent
7,500
Slide
9-46
Copyrights
Give the owner the exclusive right to reproduce and sell
an artistic or published work.
plays, literary works, musical works, pictures,
photographs, and video and audiovisual material.
Granted for the life of the creator plus a specified number
of years, which can vary by country but is commonly 70
years.
Capitalize costs of acquiring and defending it.
Amortized to expense over useful life.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
9-46
Copyrights
Give the owner the exclusive right to reproduce and sell
an artistic or published work.
plays, literary works, musical works, pictures,
photographs, and video and audiovisual material.
Granted for the life of the creator plus a specified number
of years, which can vary by country but is commonly 70
years.
Capitalize costs of acquiring and defending it.
Amortized to expense over useful life.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Slide
9-47
Trademarks and Trade Names
Word, phrase, jingle, or symbol that identifies a particular
enterprise or product.
Wheaties, Game Boy, Frappuccino, Kleenex,
Windows, Coca-Cola, and Jetta.
Registration provides a specified number of years of
protection, which can vary by country, but is commonly 20
years.
Capitalize acquisition costs.
Renewed indefinitely, no amortization.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
9-47
Trademarks and Trade Names
Word, phrase, jingle, or symbol that identifies a particular
enterprise or product.
Wheaties, Game Boy, Frappuccino, Kleenex,
Windows, Coca-Cola, and Jetta.
Registration provides a specified number of years of
protection, which can vary by country, but is commonly 20
years.
Capitalize acquisition costs.
Renewed indefinitely, no amortization.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Slide
9-48
Franchises and Licenses
Contractual arrangement between a franchisor and a
franchisee.
BP (GBR), Taco Bell (USA), or Rent-A-Wreck (USA)
are franchises.
Franchise (or license) with a limited life should be
amortized to expense over the life of the franchise.
Franchise with an indefinite life should be carried at cost
and not amortized.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
9-48
Franchises and Licenses
Contractual arrangement between a franchisor and a
franchisee.
BP (GBR), Taco Bell (USA), or Rent-A-Wreck (USA)
are franchises.
Franchise (or license) with a limited life should be
amortized to expense over the life of the franchise.
Franchise with an indefinite life should be carried at cost
and not amortized.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Slide
9-49
Goodwill
Includes exceptional management, desirable location, good
customer relations, skilled employees, high-quality products,
etc.
Only recorded when an entire business is purchased.
Goodwill is recorded as the excess of ...
purchase price overover the fair value of the identifiable net
assets acquired.
Internally created goodwill should not be capitalized.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
9-49
Goodwill
Includes exceptional management, desirable location, good
customer relations, skilled employees, high-quality products,
etc.
Only recorded when an entire business is purchased.
Goodwill is recorded as the excess of ...
purchase price overover the fair value of the identifiable net
assets acquired.
Internally created goodwill should not be capitalized.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Slide
9-50
Research and Development CostsResearch and Development Costs
Frequently results in something that a company patents
or copyrights such as:
new product,
process,
idea,
formula,
composition, or
literary work.
Costs in the research phase are always expensed as
incurred.
Costs in the development phase are expensed until
specific criteria are met, primarily that technological
feasibility is achieved.
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
9-50
Research and Development CostsResearch and Development Costs
Frequently results in something that a company patents
or copyrights such as:
new product,
process,
idea,
formula,
composition, or
literary work.
Costs in the research phase are always expensed as
incurred.
Costs in the development phase are expensed until
specific criteria are met, primarily that technological
feasibility is achieved.
SO 8 Explain the basic issues related to accounting for intangible assets.SO 8 Explain the basic issues related to accounting for intangible assets.
Slide
9-51
Presentation
Statement Presentation and AnalysisStatement Presentation and Analysis
SO 9 Indicate how plant assets, natural resources, SO 9 Indicate how plant assets, natural resources,
and intangible assets are reported.and intangible assets are reported.
Illustration 9-24
9-51
Presentation
Statement Presentation and AnalysisStatement Presentation and Analysis
SO 9 Indicate how plant assets, natural resources, SO 9 Indicate how plant assets, natural resources,
and intangible assets are reported.and intangible assets are reported.
Illustration 9-24
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