Financial accounting in an economic context 8e chapter 09

32 14 0
  • Loading ...
1/32 trang

Thông tin tài liệu

Ngày đăng: 24/11/2016, 11:12

1 Chapter 9: Long-Lived Assets and Cost Allocation Capitalize vs Expense  Revenue Expenditures – Merely maintain a given level of services – Should be Expensed  Debit Expense Capital Expenditures – Provide future benefits (useful life > year) – Should be Capitalized Debit Asset Overview of Accounting for Property, Plant, and Equipment Acquisition - What Costs to Capitalize?  General Rule: – Capitalize (add to an asset account) the costs to acquire the asset and to prepare it for its intended use Dr Asset (purchase price, sales tax, delivery, installation, etc) Cr Cash, Notes Payable, etc  Land – Has indefinite life and therefore is not depreciated – Historical Cost includes:  Purchase price, Closing costs, Cost to get ready for intended use (Note: Sale of salvaged materials reduces cost)  Land Improvements – Have definite life and therefore are depreciated – Fences, walls, parking lots, driveways  Buildings – Have definite life and therefore are depreciated – Proportionate share of purchase price, or construction cost, Closing Cost, Architect & Attorney fees  Machinery, Equipment, Furniture & Fixtures – Purchase price (net of cash discounts), Freight & handling, Insurance while in transit, Installation Self Constructed Assets What to Capitalize? Direct Materials & Labor Variable Overhead Apply Fixed Overhead Interest During Construction, if constructed –for company’s own use –by someone else and progress payments &/or deposit are required Depreciation (Cost Allocation)  Depreciation is a method of cost allocation – it is used to allocate the capitalized cost of PP&E over the years benefited (matching) – Note: depreciation will decrease the carrying value of the asset, but it is not a valuation technique (i.e., book value is not market value) Depreciation (Cost Allocation)  Useful Life  Salvage Value  Depreciation methods – (1) Activity (units-of-production) – (2) Straight-line – (3) Double-declining balance – (4) 150 percent declining balance – (5) Sum-of-the-years digits – (6) MACRS (income tax depreciation) – Under IFRS, depreciation accounting is very similar to US GAAP Class Example Given the following information regarding an automobile purchased by the company on January 2, 2008: Cost to acquire = $10,000 Estimated life = years Estimated miles = 100,000 miles Salvage value = $2,000 Calculate depreciation expense for the first two years under each of the following methods 10 Class Problem: Problem 9-7 (a)Book Value at 1/1/06: First: annual depr expense = (180-30)/10 = 15/yr Then Accumulated Depr to 1/1/11: 15 x yrs = $75,000 So BV = 180,000 - 75,000 = 105,000 18 Class Problem: Problem 9-7 (b) Estimate for 2011, assuming revised useful life: BV - SV = 105,000 - 30,000 = $9,375 per yr Remaining life 10 - +3 Journal entry: Depreciation Expense 9,375 Accum Depreciation 9,375 19 Postacquisition Expenditures: Betterments or Maintenance?  Betterments: – Increase asset’s useful life – Improve quality of asset’s output – Increase quantity of asset’s output – Reduce asset’s operating costs  Maintenance – maintain existing productivity or useful life  Accounting treatment – Betterments are capitalized – Maintenance expenditures are expensed 20 Disposal: Retirement, Sale or Trade-In   Retirement : Dr Loss (if not fully depreciated) Dr Acc Dep Cr Asset Sale: Dr Cash Dr Acc Dep Cr Asset – Dr Loss if BV > Cash or Cr Gain if BV < Cash  Trade-ins (for dissimilar assets): asset received should be valued at – the fair market value of assets given up, or – the fair market value of the asset received,  whichever is more evident and objectively determined 21 Disposal - continued Using earlier example (cost = $10,000, salvage = $2,000) After years straight-line, $8,000 would be in A/D Assume the asset is retired (no cash received) Loss on retirement 2,000 Accumulated Depr 8,000 Automobiles 10,000 Assume the asset is sold for $3,000: Cash 3,000 Accumulated Depr 8,000 Automobiles 10,000 Gain on sale 1,000 22 Class Exercise: Exercise 9-15 First calculate depreciation: DDB % = 1/5 x = 2/5 = 40% Depr Book Date % Cost - A/D Expense Value 1/1/09 25,000 12/31/09 40% (25,000 - 0) = 10,000 15,000 12/31/10 40% (25,000-10,000) = 6,000 9,000 12/31/11 40% (25,000-16,000) = 3,600 5,400 12/31/12 400* 5,000=SV 12/31/13 -05,000 *formula will exceed salvage value limit in 2012; just depreciate $400, to salvage of $5,000 23 Exercise 9-15, continued (a) JE to scrap after years, at 12/31/11, assumes that no cash is received: Dr Loss on Disposal Dr Acc Dep Cr Equipment 5,400 19,600 25,000 (b) JE to scrap after years, assumes that no cash is received: Dr Loss on Disposal Dr Acc Dep Cr Equipment 5,000 20,000 25,000 24 Exercise 9-15, continued (c) JE to sell for $8,000 after years: Dr Cash 8,000 Dr Acc Dep 19,600 Cr Equipment 25,000 Cr Gain 2,600 (d) JE if, after years, the equipment and $28,000 traded for a dissimilar asset with a fair market value of $30,000: Dr Asset (new) 30,000 Dr Acc Dep 20,000 Dr Loss 3,000 Cr Equipment (old) 25,000 Cr Cash 28,000 25 B Intangible Assets    Intangible assets are characterized by (1) lack of physical evidence, and (2) high uncertainty about future benefits Cost is amortized over useful life (or legal life, if less), but not to exceed 40 years – Exception is Goodwill, which is no longer amortized Under IFRS, revaluing intangibles is an option, but not a requirement Under US GAAP, revaluation is not an option 26 (1) Patents (20 year legal life)  A company may capitalize the following – the cost of acquiring an externally developed patent – filing fees for internally or externally developed patents – the legal fees for acquiring and successfully defending a  patent (internal or external) A company cannot capitalize the following: – legal fees for unsuccessfully defending a patent – Most research and development costs for an internally developed patent 27 Research and Development Costs (for internally developed    patents) Prior to 1974, most companies capitalized research and development costs, then amortized the cost to future periods The FASB stated in SFAS that, because “future benefits” were uncertain, companies should expense all R&D costs, unless they were related to tangible assets (like buildings and equipment) that had multi-year lives Companies complied with the standard, but for several years many companies actually reduced their R&D activities, because of concern for excess expense on the income statement 28 Other Intangible Assets  (2) Copyrights – granted for the life of the creator plus 70 years – capitalization rules similar to patents: costs of internally developed copyright material cannot be capitalized  (3) Trademarks and Trade Names – granted for 10 year periods, but indefinite renewals – some of design costs may be capitalized  (4) Organization Costs – costs related to the creation of a company including underwriting fees, legal and accounting, licenses, titles, etc – treatment similar to R&D costs; even though there may be some future benefit, costs are expensed in the period incurred 29  Other Intangible Assets continued (5) Software Development Costs (SFAS 86) – Capitalize the costs of developing software for sale or lease – Expense software development costs if for internal use  (6) Goodwill (also discussed in Chapter 8) – Recognized when one company purchases another company – Causes include reputation, good customer relations, superior product development, etc – To calculate: Purchase price paid for the company versus the fair market value of the net assets acquired = Goodwill (the excess amount paid) – No longer amortized, instead subjected to an impairment test 30 IFRS vs US GAAP: Revaluations to Fair Market Value   One very important way in which IFRS differs from US GAAP involves the use of fair market value as a basis for valuation on the balance sheet – Under US GAAP, long-lived assets must be accounted for at original cost less accumulated depreciation – Under IFRS, companies can either follow the US GAAP method or they can periodically revalue their long-lived assets to fair market value In essence, US GAAP tends to follow a conservative “lower-of-cost-or-market” valuation principle, whereas IFRS allows managers the option to more closely follow a pure market valuation principle 31 Copyright Copyright © 2011 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein 32 [...]... revaluing intangibles is an option, but not a requirement Under US GAAP, revaluation is not an option 26 (1) Patents (20 year legal life)  A company may capitalize the following – the cost of acquiring an externally developed patent – filing fees for internally or externally developed patents – the legal fees for acquiring and successfully defending a  patent (internal or external) A company cannot... Expenditures: Betterments or Maintenance?  Betterments: – Increase asset’s useful life – Improve quality of asset’s output – Increase quantity of asset’s output – Reduce asset’s operating costs  Maintenance – maintain existing productivity or useful life  Accounting treatment – Betterments are capitalized – Maintenance expenditures are expensed 20 4 Disposal: Retirement, Sale or Trade -In   Retirement : Dr... material cannot be capitalized  (3) Trademarks and Trade Names – granted for 10 year periods, but indefinite renewals – some of design costs may be capitalized  (4) Organization Costs – costs related to the creation of a company including underwriting fees, legal and accounting, licenses, titles, etc – treatment similar to R&D costs; even though there may be some future benefit, costs are expensed in the... purchases) 16 Change in Estimate    The change in estimate affects only the current and future years; we do not go back and change the previous years that have already been posted To calculate the new depreciation expense, first find out how much depreciation has been posted (the Accumulated Depreciation to date) Then use the following formula (to modify the straight-line depreciation rate): Remaining Book... following: – legal fees for unsuccessfully defending a patent – Most research and development costs for an internally developed patent 27 Research and Development Costs (for internally developed    patents) Prior to 1974, most companies capitalized research and development costs, then amortized the cost to future periods The FASB stated in SFAS 2 that, because “future benefits” were uncertain, companies... to tangible assets (like buildings and equipment) that had multi-year lives Companies complied with the standard, but for several years many companies actually reduced their R&D activities, because of concern for excess expense on the income statement 28 Other Intangible Assets  (2) Copyrights – granted for the life of the creator plus 70 years – capitalization rules similar to patents: costs of internally... = $5,000 13 2 009 = 50% x(10,000-5,000) = $2,500 (4) 150% Declining Balance 150%DB is another accelerated depreciation technique It also generates more expense in the early years and less in the later years Annual depreciation = % (Cost - A/D) where A/D is the accumulated depreciation for all prior years, and the percentage is 1.5 times the straight line rate, or 1.5 x 1/Estimate life In the example,... benefit, costs are expensed in the period incurred 29  Other Intangible Assets continued (5) Software Development Costs (SFAS 86) – Capitalize the costs of developing software for sale or lease – Expense software development costs if for internal use  (6) Goodwill (also discussed in Chapter 8) – Recognized when one company purchases another company – Causes include reputation, good customer relations,... = $3,750 2 009 = 37.5% x(10,000-3,750) = $2,344 14 (5) Sum-of-the-years Digits SYD is another accelerated technique that calculates more expense in early years and less in later years Annual depreciation = Fraction x (Cost-Salvage) where the fraction is calculated as follows: Numerator = declining years (highest first) Denominator = sum of the years digits In the class example, the denominator is 4+3+2+1... miles in the year 2008, and 30,000 miles in 2 009 Annual depreciation = Cost - Salvage Value x Current Activity Total expected activity For 2008= 10,000 - 2,000 x 20,000 = $1,600 100,000 miles For 2 009 = 10,000 - 2,000 x 30,000 = $2,400 100,000 miles 11 (2) Straight-Line Annual depreciation = = Cost - Salvage Estimated Life $10,000 - $2,000 = $2,000 per year 4 years 12 (3) Double-Declining Balance DDB
- Xem thêm -

Xem thêm: Financial accounting in an economic context 8e chapter 09 , Financial accounting in an economic context 8e chapter 09 , Financial accounting in an economic context 8e chapter 09

Gợi ý tài liệu liên quan cho bạn

Từ khóa liên quan

Nạp tiền Tải lên
Đăng ký
Đăng nhập