Financial accounting 9th jamie pratt chapter 09

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Chapter 9: Long-Lived Assets Long – Lived Assets  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 Long – Lived Assets  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  Intangible assets  Rights, privileges, and benefits of possession  No physical existence  Includes cost and the cost to defend them  Amortized over useful life (if indefinite life, no amortization) The Relative Size of Long-Lived Assets Figure 9-1 Property, plant, and equipment plus Intangible as a percentage of total assets 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)  Matching principle Should be Capitalized  Debit Asset Financial Statement Effects Figure 9-2 (Partial) The effects of depreciation period on the financial statements: Rudman Manufacturing Overview of Accounting for Property, Plant, and Equipment Figure 9-4 Accounting for long-lived assets Acquisition: What Costs to Capitalize?  General Rule:  Capitalize (add to an asset account) the costs to acquire the asset and bring it to its serviceable or usable condition and location  Dr Asset (purchase price, sales tax, delivery, installation, etc)  Cr Cash, Notes Payable, etc Construction of Long - Lived Assets What to Capitalize? • • • • Direct Materials Labor Overhead Interest During Construction Double-Declining Balance DDB is an accelerated depreciation technique It generates more expense in the early years and less in the later years Annual depreciation = (2 X Book Value)/ Useful Life Depreciation expense (D.E.)for: 2013 = (2 x 10,000)/4 = $5,000 2014 = {2 x(10,000-5,000)}/4 = $2,500 How does Management Choose and Acceptable Cost Allocation Method  Effect on the Financial Statements  Effect on Income Taxes  Management may use a different depreciation method for financial statements and income taxes  IRS tax rules effect allowable depreciation methodologies Class Problem: Problem 9-7 (a) Book Value at 1/1/14: First: annual depr expense = (180,000-30,000)/10 = 15,000/yr Then Accumulated Depr to 1/1/14: 15,000 x yrs = $75,000 So BV = 180,000 - 75,000 = 105,000 Class Problem: Problem 9-7 (b) Estimate for 2014, assuming revised useful life: BV - SV = 105,000 - 30,000 = $9,375 per yr Remaining life (10 – 5) +3 Journal entry: Depreciation Expense Accum Depreciation 9,375 9,375 Disposal: Retirement, Sale and Trade-Ins  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 Disposals (cont’d) 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 Class Exercise: Exercise 9-15 First calculate depreciation: DDB % = (2xBV)/Useful Life Depr Book Date Calculation Expense Value 1/1/12 25,000 12/31/12 (2x25,000)/5 = 10,000 15,000 12/31/13 (2x15,000)/5 = 6,000 9,000 12/31/14 (2x9,000) / = 3,600 12/31/15 400* 12/31/16 -0- 5,000 5,400 5,000=SV *formula will exceed salvage value limit in 2015; just depreciate $400, to salvage of $5,000 Exercise 9-15 (cont’d) (a) JE to scrap after years, at 12/31/14, assumes that no cash is received: Dr Loss on Disposal 5,400 Dr Acc Dep 19,600 Cr Equipment 25,000 (b) JE to scrap after years, assumes that no cash is received: Dr Loss on Disposal 5,000 Dr Acc Dep 20,000 Cr Equipment 25,000 Exercise 9-15 (cont’d) (c) JE to sell for $8,000 after years: Dr Cash 8,000 Dr Acc Dep 19,600 Cr Equipment Cr Gain 25,000 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) Cr Cash 28,000 25,000 Intangible Assets  Intangible assets are characterized by  Lack of physical substance, and  Higher uncertainty about future benefits  Cost is amortized over useful life (or legal life, if less) Straight line amortization is common  Goodwill is not amortized – indefinite life  Some other assets have an indefinite life and are not amortized (permanent franchise rights)  Under IFRS, revaluing intangibles is an option, but not a requirement Under US GAAP, revaluation is not an option 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 Other Intangible Assets  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  Trademarks and Trade Names  Granted for 10 year periods, but indefinite renewals  Some of design costs may be capitalized  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 Other Intangible Assets (cont’d)  Software Development Costs (SFAS 86)  Capitalize the costs of developing software for sale or lease  Expense software development costs if for internal use  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 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 Copyright © 2014 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 ... Capitalized  Debit Asset Financial Statement Effects Figure 9-2 (Partial) The effects of depreciation period on the financial statements: Rudman Manufacturing Overview of Accounting for Property,... Acceptable Cost Allocation Method  Effect on the Financial Statements  Effect on Income Taxes  Management may use a different depreciation method for financial statements and income taxes  IRS... statements: Rudman Manufacturing Overview of Accounting for Property, Plant, and Equipment Figure 9-4 Accounting for long-lived assets Acquisition: What Costs to Capitalize?  General Rule:  Capitalize
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