Chapter 8 Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources 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 McGraw­Hill/Irwin Copyright © 2014 by The McGraw­Hill Companies, Inc. All rights reserved. Classifying Long-Lived Assets Land Assets subject to depreciation Buildings and equipment Furniture and fixtures Natural resource assets subject to depletion Mineral deposits and timber Definite life Patents Copyrights Franchises Indefinite life Trademark s Goodwill Tangible Physical Substance Intangible No Physical Substance 8-2 Measuring and Recording Acquisition Cost Acquisition cost includes the purchase price and all expenditures needed to prepare the asset for its intended use. Acquisition cost does not include financing charges and cash discounts. Buildings • Purchase price • Renovation and repair costs • Legal and realty fees • Title fees 8-3 Measuring and Recording Acquisition Cost Equipment Land • Purchase price • Installation costs • Modification to building necessary to install equipment • Transportation costs • Purchase price • Real estate commissions • Title insurance premiums • Delinquent taxes • Surveying fees • Title search and transfer fees Land is not depreciated 8-4 Acquisition by Construction Asset cost includes: All materials and labor traceable to the construction. A reasonable amount of overhead. Interest on debt incurred during the construction. 8-5 Repairs, Maintenance, and improvements Type of Expenditure Accounting Identifying Characteristics Treatment Ordinary 1. repairs and 2. maintenance 3. 4. Additions and 1. Improvements 2. 3. 4. 5. Maintains normal operating condition Does not increase productivity Does not extend life beyond original estimate Recurring in nature and involve small amounts of money at each occurence Major overhauls or partial replacements Usually occur infrequently Increases efficiency May extend useful life Involve large amounts of money Expense in period incurred Add to asset account (Capitalize) 8-6 Repairs, Maintenance, and improvements Financial Statement Effect Current Treatment Statement Expense Income Current Taxes Capitalize Balance sheet account debited Deferred Higher Higher Expense Income statement Currently account debited recognized Lower Lower To aid with the capitalize/expense decision, many companies record all expenditures below a certain dollar amount as expenses. 8-7 Depreciation Concepts Depreciation is the process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method. Balance Sheet Acquisition Cost (Unused) Depreciation Expense Cost Allocation Depreciation for the current year Income Statement Expense (Used) Income Statement Accumulated Depreciation Total depreciation to date on an asset Balance Sheet 8-8 Depreciation Concepts The calculation of depreciation requires three amounts for each asset: Acquisition cost. Estimated useful life. Estimated residual value. Alternative depreciation methods: Straight-line Units-of-production Accelerated Method: Declining balance 8-9 Measuring Asset Impairment Impairment is the loss of a significant portion of the utility of an asset through . . . Recognize a loss when • Casualty. • Obsolescence. • Lack of demand for the asset’s services. an asset suffers a permanent impairment.