Reporting and Analyzing Long-Term Assets
Reporting and Analyzing Long-Term Assets 201
Popular in Financial Accounting
Popular in Accounting
This 0 page Class Notes was uploaded by Ebony Notetaker on Monday December 7, 2015. The Class Notes belongs to 201 at Ball State University taught by Jason Owens in Fall 2015. Since its upload, it has received 22 views. For similar materials see Financial Accounting in Accounting at Ball State University.
Reviews for Reporting and Analyzing Long-Term Assets
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 12/07/15
Plant Assets Plant assets are tangible assets used in a company39s operations that have a useful life of more than one accounting period Plant assets are called plant and equipment property plant and equipment or xed assets Cost Determination Plant assets are recorded at cost when acquired This is consistent with the cost principle Cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use The cost of a factory machine for instance includes its invoice cost less any cash discount for early payment plus any necessary freight unpacking assembling installing and testing costs Examples are the costs of building a base or foundation for a machine providing electrical hookups and testing the asset before using it in operations Machinery and Equipment The costs of machinery and equipment consist of all costs normal and necessary to purchase them and prepare them for their intended use These include the purchase price taxes transportation charges insurance while in transit and the installing assembling and testing of the machinery and equipment Buildings A building account is charged for the costs of purchasing or constructing a building that is used in operations When purchased a building39s costs usually include its purchase price brokerage fees taxes title fees and attorney fees lts costs also include all expenditures to ready it for its intended use including any necessary repairs or renovation such as wiring lighting ooring and wall coverings When a company constructs a building or any plant asset for its own use its costs include materials and labor plus a reasonable amount of indirect overhead cost Overhead includes the costs of items such as heat lighting power and depreciation on machinery used to construct the asset Costs of construction also include design fees building permits and insurance during construction However costs such as insurance to cover the asset after it is placed in use are operating expenses Land Improvements Land Land improvements are additions to land and have limited useful lives 0 Costs of land include expenditures necessary to make that property ready for its intended use LumpSum Purchase 0 Plant assets sometimes are purchased as group in a single transaction for a lumpsum price This transaction is called a lumpsum purchase or group bulk or basket purchase When this occurs we allocate the cost of the purchase among the different types of assets acquired based on their relative market values which can be estimated by appraisal or by using the tax assessed valuations of the assets 0 Depreciation is the process of allocating the cost of a plant asset to expense in the accounting periods bene ting from its use Depreciation does not measure the decline in the asset s market value each period nor does it measure the asset s physical deterioration Since depreciation re ects the cost of using a plant asset depreciation charges are only recorded when the asset is actually in service Factors in Computing Depreciation O 0 Cost 0 Factors that determine depreciation are cost salvage value and useful life The cost of a plant asset consists of all necessary and reasonable expenditures to acquire it and to prepare it for its intended use Salvage Value 0 The total amount of depreciation to be charged off over an asset s bene t period equals the asset s cost minus its salvage value Salvage value also called residual value or scrap value is an estimate of the asset s value at the end of its bene t period This is the amount the owner expects to receive from disposing of the asset at the end of its bene t period If the asset is expected to be traded in on a new asset its salvage value is the expected tradein value 0 Useful Life 0 The useful life of a plant asset is the length of time it is productively used in a company39s operations Useful life also called service life might not be as long as the asset39s total productive life For example the productive life of a computer can be eight years or more Some companies however trade in old computers for new ones every two years In this case these computers have a twoyear useful life meaning the cost of these computers less their expected tradein value is charged to depreciation expense over a twoyear period StraightLine Method 0 We rst compute the depreciable cost of the asset also called the cost to be depreciated It is computed by subtracting the asset s salvage value from its total cost Second depreciable cost is divided by the number of accounting periods in the asset39s useful life UnitsofProduction Method 0 0 When equipment use varies from period to period the unitsof production depreciation method can better match expenses with revenues Unitsof production depreciation charges a varying amount to expense for each period of an asset s useful life depending on its usage A twostep process is used to compute unitsofproduction depreciation We rst compute depreciation per unit by subtracting the asset s salvage value from its total cost and then dividing by the total number of units expected to be produced during its useful life DecliningBalance Method 0 An accelerated depreciation method yields larger depreciation expenses in the early years of an asset39s life and less depreciation in later years The most common accelerated method is the declining balance method of depreciation which uses a depreciation rate that is a multiple of the straightline rate and applies it to the asset s beginningofperiod book value The amount of depreciation declines each period because book value declines each period 0 This method is applied in three steps 1 Compute the asset39s straightline depreciation rate 2 Double the straightline rate 3 Compute depreciation expense by multiplying this rate by the asset s beginningof period book value Disposal of Plant Assets Plant assets are disposed of for several reasons Some are discarded because they wear out or become obsolete Others are sold because of changing business plans Regardless of the reason disposals of plant assets occur in one of three basic ways disregarding sale or exchange Disregarding Plant Assets Assume that a machine costing 9000 with accumulated depreciation of 9000 is discarded June 5 Accumulated Depreciation Machinery 9000 Machinery 9000 To discard fully depreciated machinery Selling Plant Assets Consider BTO39s March 31 sale of equipment that cost 16000 and has accumulated depreciation of 12000 at December 31 of the prior calendar yearend Annual depreciation on this equipment is 4000 computed using straightline method depreciation March 31 Depreciation Expense 1000 Accumulated Depreciation Equipment 1000 To record 3 months depreciation 4 000 312 Sale at Book Value If BTO receives 3000 cash an amount equal to the equipment39s book value as of March 31 book value 16000 12000 1000 no gain or loss occurs on disposal March 31 Cash 3000 Accumulated Depreciation Equipment 13000 Equipment 16000 To record sale of equipment for no gain or loss Sale above Book Value If BTO receives 7000 an amount that is 4000 above the equipment39s 3000 book value as of March 31 a gain on disposal occurs March 31 Cash 7000 Loss on Disposal of Equipment 13000 Gain on Disposal Equipment 4000 Equipment 16000 To record sale of equipment for a 4 000 gain Sale below Book Value If BTO receives 2500 an amount that is 500 below the equipment39s 3000 book value as of March 31 a loss on disposal occurs March Cash 2500 31 Loss on Disposal of Equipment 500 Accumulated Depreciation Equipment 13000 Equipment 16000 To record sale of equipment for a 5 00 loss Natural Resources Natural resources are assets that are physically consumed when used Examples are standing timber mineral deposits and oil gas elds Since they are consumed when used they are often called wasting assets These assets represent soontobe inventories of raw materials that will be converted into one or more products by cutting mining or pumping Until that conversion takes place they are noncurrent assets and are shown in a balance sheet using titles such as timberlands mineral deposits or oil reserves Natural resources are reported under either plant assets or their own separate category Cost Determination and Depletion Depletion is the process of allocating the cost of a natural resource to the period when it is consumed Natural resources are reported on the balance sheet at cost less accumulated depletion The depletion expense per period is usually based on units extracted from cutting mining or pumping 0 Step 1 Depletion per unit Cost Salvage valueTota units of capacity 5000000 250000 tons 2 per ton 0 Step 2 Depletion expense Depletion per unit Units extracted and sold in period 2 85000 170000 Dec31 Depletion Expense Mineral Deposit 170000 Accumulated Depletion Mineral Deposit 170000 To record depletion of the mineral deposit Intangible Assets Intangible assets are nonphysical assets used in operations that confer on their owners longterm rights privileges or competitive advantages Examples are patents copyrights licenses leaseholds franchises goodwill and trademarks Lack of physical substance does not necessarily imply an intangible asset Notes and accounts receivable for instance lack physical substance but they are not intangibles This section identi es the more common types of intangible assets and explains the accounting for them Cost Determination and Amortization Intangibles are then separated into those with limited lives or inde nite lives If an intangible has a limited life its cost is systematically allocated to expense over its estimated useful life through the process of amortization If an intangible asset has an inde nite life meaning that no legal regulatory contractual competitive economic or other factors limit its useful life it should not be amortized
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'