9-1

Chapter

9 PLANT AND
INTANGIBLE ASSETS

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-2

Plant
Plant Assets
Assets

Long-lived
Long-lived assets
assets acquired
acquired for
for use
use in
in
business
business operations.
operations.
Similar to long-term prepaid expenses

As years pass, and the

The cost of plant assets services are used, the
is the advance purchase cost is transferred to
of services. depreciation expense.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-3

Major
Major Categories
Categories of
of Plant
Plant Assets
Assets

T a n g ib le P la n t In ta n g ib le N a tu ra l
A s s e ts A s s e ts R e s o u rc e s

L o n g -te rm N o n c u rre n t a s s e ts S it e s a c q u ir e d fo r
a s s e t s h a v in g w it h n o p h y s ic a l e x t r a c t in g v a lu a b le
p h y s ic a l s u b s t a n c e . s u b s ta n c e . re s o u rc e s .

L a n d , b u ild in g s , P a t e n t s , c o p y r ig h t s , O il r e s e r v e s ,
e q u ip m e n t , tra d e m a rk s , t im b e r , o t h e r
fu r n it u r e , fix t u r e s . fr a n c h is e s , g o o d w ill. m in e r a ls .

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-4

Accountable
Accountable Events
Events

Acquisition.
Acquisition.

Allocation
Allocation of
of the
the
acquisition
acquisition cost
cost to to
expense
expense over
over the
the
asset’s
asset’s useful
useful life
life
(depreciation).
(depreciation).

Sale
Sale or
or disposal.
disposal.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-5

Acquisition
Acquisition of
of Plant
Plant Assets
Assets

Asset
Asset
price
price
Cost
Cost = +
Reasonable
Reasonableand
and
necessary
necessarycosts
costs.. ....

......for
forgetting
getting ......for
forgetting
getting
the
theasset
assetto
tothe
the the
theasset
assetready
ready
desired
desiredlocation.
location. for
foruse.
use.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-6

Determining
Determining Cost
Cost
On
On May
May 4,4, Heat
Heat Co.,
Co., an
an Ohio
Ohio maker
maker of of stoves,
stoves,
buys
buys aa new
new machine
machine fromfrom aa Texas
Texas
company.
company. TheThe newnew machine
machine has has aa price
price of
of
$52,000.
$52,000. Sales
Sales tax
tax was
was computed
computed at at 8%.
8%.
Heat
Heat Co.
Co. pays
pays $500
$500 shipping
shipping costcost to
to get
get the
the
machine
machine to to Ohio.
Ohio. After
After the
the machine
machine
arrives,
arrives, set-up
set-up costs
costs of
of $1,300
$1,300 are
are incurred,
incurred,
along
along with
with $4,000
$4,000 in
in testing
testing costs.
costs.
Compute
Compute the
the cost
cost of
of Heat
Heat Co.’s
Co.’s new
new machine.
machine.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-7

Determining
Determining Cost
Cost

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-8

Special
Special Considerations
Considerations

Cost
Cost includes
includesreal
realestate
estate
commissions,
commissions,legal
legal fees,
fees,
Land
Land clearing
clearingand
andgrading
gradingthethe
property.
property.

Improvements
Improvementstotoland
land
Land
Land such
suchasasdriveways,
driveways,
Improvements fences,
fences, and
andlandscaping
landscaping
Improvements are
arerecorded
recordedseparately.
separately.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-9

Special
Special Considerations
Considerations

Repairs
Repairsmade
madeprior
prior to
tothe
the
building
building being
beingput
put in
in use
use
Buildings
Buildings are
areconsidered
consideredpart
part of
ofthe
the
building’s
building’scost.
cost.

Related
Relatedinterest,
interest,insurance,
insurance,
and
andproperty
propertytaxes
taxesare
are
Equipment
Equipment treated
treatedas
asexpenses
expensesof ofthe
the
current
currentperiod.
period.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-10

Special
Special Considerations
Considerations

Allocation
Allocation of
of aa Lump-Sum
Lump-Sum Purchase
Purchase

The
Thetotal
totalcost
cost The
Theallocation
allocation
must
mustbebe is
isbased
basedon on
allocated
allocatedto to the
the relative
relative
I think I’ll buy the separate
separate Fair
FairMarket
Market
accounts
accountsfor Value
whole thing; barn, for Valueofofeach
each
land, and animals. each
eachasset.
asset. asset
asset
purchased.
purchased.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Capital
Capital Expenditures
Expenditures and
and Revenue
Revenue
9-11

Expenditures
Expenditures

Capital
Capital Revenue
Revenue
Expenditure
Expenditure Expenditure
Expenditure

Any
Anymaterial
materialexpenditure
expenditure Expenditure
Expenditurefor
for
that
thatwill
willbenefit
benefit several
several ordinary
ordinaryrepairs
repairs
accounting
accountingperiods.
periods. and
and maintenance.
maintenance.

To
To capitalize
capitalize an
anexpenditure
expenditure To
Toexpense
expensean
anexpenditure
expenditure
means
meansto tocharge
chargeitit to
toan
an means
meansto
tocharge
chargeititto
toan
an
asset
assetaccount.
account. expense
expenseaccount.
account.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-12

Depreciation
Depreciation
The
The allocation
allocation of
of the
thecost
costof
ofaa plant
plantasset
asset to
toexpense
expensein
inthe
the
periods
periodsininwhich
whichservices
servicesare
arereceived
receivedfrom
fromthe
theasset.
asset.

Balance
BalanceSheet
Sheet
Cost of Assets:
Assets:
plant Plant
Plantand
and
assets equipment
equipment

as the services
Income
IncomeStatement
Statement are received
Revenues:
Revenues:
Expenses:
Expenses:
Depreciation
Depreciation
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-13

Depreciation
Depreciation
Book
BookValue
Value
 Cost – Accumulated Depreciation
Cost – Accumulated Depreciation
Accumulated
AccumulatedDepreciation
Depreciation
 Represents the portion of an asset’s
Represents the portion of an asset’s
cost
costthat
thathas
hasalready
already
been
beenallocated
allocatedto
toexpense.
expense.
Causes
Causesof
ofDepreciation
Depreciation
 Physical deterioration
Physical deterioration
 Obsolescence
Obsolescence

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-14

Straight-Line
Straight-Line Depreciation
Depreciation

Depreciation Cost - Residual Value

=
Expense per Year Years of Useful Life

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-15

Straight-Line
Straight-Line Depreciation
Depreciation
On
OnJanuary
January1,1, 2005,
2005, Bass
BassCo.Co.buys
buysaanewnew boat.
boat. Bass
Bass
Co.
Co.pays
pays$24,000
$24,000for
forthe
theboat.
boat.The
Theboat
boat has
hasanan
estimated
estimated residual
residualvalue
valueof of $3,000
$3,000and
andanan estimated
estimated
useful
useful life
life of
of55years.
years.
Compute
Compute depreciation
depreciation for
for 2005
2005 using
using the
the
straight-line
straight-line method.
method.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-16

Straight-Line
Straight-Line Depreciation
Depreciation
Bass
BassCo.
Co. will
willrecord
record$4,200
$4,200 depreciation
depreciation each
each year
yearfor
for
five
fiveyears.
years. Total
Totaldepreciation
depreciationover
overthe
theestimated
estimateduseful
useful
life
lifeof
of the
theboat
boat is:
is:

Salvage Value
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-17

Depreciation
Depreciation for
for Fractional
Fractional Periods
Periods
When
Whenananasset
asset isisacquired
acquiredduring
duringthe
theyear,
year,
depreciation
depreciationin
in the
theyear
yearof
ofacquisition
acquisition must
must be
be
prorated.
prorated.

½
Half-Year
Half-Year Convention
Convention
In
In the
the year
year of
of
acquisition,
acquisition, record
record six
six
months
months of of depreciation.
depreciation.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-18

Half-Year
Half-Year Convention
Convention
Using
Using the
the half-year
half-year convention,
convention, calculate
calculate the
the
straight-line
straight-line depreciation
depreciation onon December
December 31,31,
2005,
2005, for
for equipment
equipment purchased
purchased inin 2005.
2005.
The
The equipment
equipment cost
cost $75,000,
$75,000, has
has aa useful
useful
life
life of
of 10
10 years
years and
and an
an estimated
estimated salvage
salvage
value
value of
of $5,000.
$5,000.

Depreciation
Depreciation == ($75,000
($75,000 -- $5,000)
$5,000) ÷÷ 1010
== $7,000
$7,000 for
for aa full
full year
year
Depreciation
Depreciation == $7,000
$7,000 ×× // == $3,500
11
22 $3,500
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-19

Declining-Balance
Declining-Balance Method
Method

Depreciation
Depreciation in
inthe
theearly
earlyyears
years of
of an
an asset’s
asset’sestimated
estimated
useful
usefullife
lifeis
ishigher
higherthan
thanininlater
lateryears.
years.

The
Thedouble-declining
double-decliningbalance
balancedepreciation
depreciation
rate
rateis
is200%
200%ofofthe
thestraight-line
straight-line
depreciation
depreciationrate
rateof
of1/Useful
1/UsefulLife.
Life.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-20

Declining-Balance
Declining-Balance Method
Method
On
OnJanuary
January1,1, 2005,
2005, Bass
BassCo.Co.buys
buysaanewnew boat.
boat. Bass
Bass
Co.
Co.pays
pays$24,000
$24,000for
forthe
theboat.
boat.The
Theboat
boat has
hasanan
estimated
estimated residual
residualvalue
valueof of $3,000
$3,000and
andanan estimated
estimated
useful
useful life
life of
of55years.
years.
Compute
Compute depreciation
depreciation for
for 2005
2005 using
using the
the
double-declining
double-declining balance
balance method.
method.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-21

Declining-Balance
Declining-Balance Method
Method

Compute
Total
Compute depreciation
Total depreciation over
over the
depreciation
depreciation for
for the
theestimated
estimated the rest
useful of
restlife
useful the
ofof
life an
the
of an
asset
asset is
isthe
the same
same using
using either
either the
the straight-line
straight-line method
method or
or
boat’s
boat’s
the
estimated
estimated usefuluseful life.
life.
the declining-balance
declining-balance method.
method.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-22

Financial
Financial Statement
Statement Disclosures
Disclosures

Estimates
Estimates of
of Useful
Useful Life
Life and
and
Residual
Residual Value
Value
 May differ from company to
May differ from company to
company.
company.
 The reasonableness of
The reasonableness of
management’s
management’s estimates
estimates is
is
evaluated
evaluated by
by external
external auditors.
auditors.

Principle
Principle of
of Consistency
Consistency
 Companies should avoid
Companies should avoid
switching
switching depreciation
depreciation methods
methods
from
from period
period to
to period.
period.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-23

Revising
Revising Depreciation
Depreciation Rates
Rates

Predicted
Predicted Predicted
Predicted
salvage
salvagevalue
value useful
usefullife
life

So
So depreciation
depreciation
is
is an
an estimate.
estimate.

Over
Over the
the life
life of
of an
an asset,
asset, new
new information
information
may
may come
come to to light
light that
that indicates
indicates the
the
original
original estimates
estimates need
need to to be
be revised.
revised.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-24

Revising
Revising Depreciation
Depreciation Rates
Rates
On
On January
January 1, 1, 2002,
2002, equipment
equipment was was purchased
purchased
that
that cost
cost $30,000,
$30,000, has
has aa useful
useful life
life of
of 10
10 years
years
and
and no no salvage
salvage value.
value. During
During 2005,
2005, thethe useful
useful
life
life was
was revised
revised toto 88 years
years total
total (5
(5 years
years
remaining).
remaining).

Calculate
Calculate depreciation
depreciation expense
expense for
for the
the year
year
ended
ended December
December 31,31, 2005,
2005, using
using the
the straight-
straight-
line
line method.
method.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-25

Revising
Revising Depreciation
Depreciation Rates
Rates
When
Whenour
ourestimates
estimateschange,
change,depreciation
depreciation
is:
is:

Book value at Salvage value at

date of change – date of change

Remaining useful life at date of change

Asset
Assetcost
cost $$ 30,000
30,000
Accumulated
Accumulated depreciation,
depreciation, 12/31/2004
12/31/2004
($3,000
($3,000per
per year
year×× 33years)
years) 9,000
9,000
Remaining
Remaining bookbookvalue
value $$ 21,000
21,000
Divide
Divide by
byremaining
remaining life
life ÷÷55
Revised
Revised annual
annual depreciation
depreciation $$ 4,200
4,200
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-26

Impairment
Impairment of
of Plant
Plant Assets
Assets

IfIf the
the cost
cost of
of an
an asset
asset
cannot
cannot be be recovered
recovered
through
through future
future use
use oror
sale,
sale, thethe asset
asset should
should
be
be written
written down
down toto its
its
net
net realizable
realizable value.
value.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-27

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment
Update
Update depreciation
depreciation
to
to the
the date
date of
of disposal.
disposal.

Journalize
Journalize disposal
disposal by:
by:

Recording
Recordingcash
cash Recording
Recordingaa
received
received(debit).
(debit). gain
gain(credit)
(credit)
or
or loss
loss(debit).
(debit).

Removing
Removingaccumulated
accumulated Removing
Removingthethe
depreciation
depreciation(debit).
(debit). asset
assetcost
cost(credit).
(credit).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-28

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment

IfIf Cash
Cash >> BV,
BV, record
record aa gain
gain (credit).
(credit).
IfIf Cash
Cash << BV,
BV, record
record aa loss
loss (debit).
(debit).
IfIf Cash
Cash == BV,
BV, no
no gain
gain or
or loss.
loss.

Recording
Recordingcash
cash Recording
Recordingaa
received
received(debit).
(debit). gain
gain(credit)
(credit)
or
or loss
loss(debit).
(debit).

Removing
Removingaccumulated
accumulated Removing
Removingthethe
depreciation
depreciation(debit).
(debit). asset
assetcost
cost(credit).
(credit).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-29

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment

On
On September
September 30, 30, 2005,
2005, Evans
Evans Map Map Company
Company
sells
sells aa machine
machine that
that originally
originally cost
cost $100,000
$100,000 for
for
$60,000
$60,000 cash.
cash. The
The machine
machine was was placed
placed in
in
service
service onon January
January 1, 1, 2000.
2000. ItIt has
has been
been
depreciated
depreciated using
using the
the straight-line
straight-line method
method with
with
an
an estimated
estimated salvage
salvage value
value ofof $20,000
$20,000 and
and an
an
estimated
estimated useful
useful life
life of
of 10
10 years.
years.

Let’s
Let’s answer
answer the
the following
following questions.
questions.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-30

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment

The
The amount
amount of
of depreciation
depreciation
recorded
recorded onon September
September 30,30, 2005,
2005,
to
to bring
bring depreciation
depreciation up
up to
to date
date is:
is:

a.
a. $8,000.
$8,000. Annual Depreciation:
($100,000 - $20,000) ÷ 10 Yrs. = $8,000
b.
b. $6,000.
$6,000.
c.
c. $4,000.
$4,000. Depreciation to Sept. 30:
d. $2,000. 9/12 × $8,000 = $6,000
d. $2,000.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-31

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment

After
After updating
updating the
the depreciation,
depreciation, the
the
machine’s
machine’s book
book value
value on
on
September
September 30,
30, 2005,
2005, is:
is:

a.
a. $54,000.
$54,000. Cost
Cost $$100,000
100,000
Accumulated
AccumulatedDepreciation:
Depreciation:
b.
b. $46,000.
$46,000. (5
(5yrs.
yrs. ××$8,000)
$8,000)++$6,000
$6,000== 46,000
46,000
c.
c. $40,000.
$40,000. Book
BookValue
Value $$ 54,000
54,000
d.
d. $60,000.
$60,000.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-32

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment

The
The machine’s
machine’s sale
sale resulted
resulted in:
in:

a.
a. aa gain
gain of
of $6,000.
$6,000.
b.
b. aa gain
gain of
of $4,000.
$4,000.
c.
c. aa loss
loss of
of $6,000.
$6,000.
d.
d. aa loss
loss of
of $4,000.
$4,000. Cost $ 100,000
Accum. Depr. 46,000
Book value $ 54,000
Cash received 60,000
Gain $ 6,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-33

Disposal
Disposal of
of Plant
Plant and
and Equipment
Equipment

Prepare
Prepare the
the journal
journal entry
entry to
to record
record
the
the sale.
sale.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Trading
Trading in
in Used
Used Assets
Assets
9-34

for
for New
New Ones
Ones

Accounting
Accounting depends
depends onon whether
whether
assets
assets are
are similar
similar or
or dissimilar.
dissimilar.

Airplane
Airplane Truck
Truck
for
for for
for
Airplane
Airplane Airplane
Airplane

Only
Only situations
situations where
where cash
cash
is
is paid
paid will
will be
be demonstrated.
demonstrated.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Trading
Trading in
in Used
Used Assets
Assets
9-35

for
for New
New Ones
Ones
Dissimilar Similar Assets
Assets and Cash Paid
Recognize
Yes No
Gains?
Recognize
Yes Yes
Losses?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Trading
Trading in
in Used
Used Assets
Assets
9-36

for
for New
New Ones
Ones –– Similar
Similar Assets
Assets

On
On May
May 30,
30, 2005,
2005, Essex
Essex Company
Company
exchanged
exchanged aa usedused airplane
airplane and
and $35,000
$35,000
cash
cash for
for aa new
new airplane.
airplane. The
The old
old airplane
airplane
originally
originally cost
cost $40,000,
$40,000, had
had up-to-date
up-to-date
accumulated
accumulated depreciation
depreciation of
of $30,000,
$30,000, and
and
aa fair
fair value
value of
of $4,000.
$4,000.

SIMILAR

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Trading
Trading in
in Used
Used Assets
Assets
9-37

for
for New
New Ones
Ones –– Similar
Similar Assets
Assets

The
The exchange
exchange resulted
resulted in
in a:
a:

Cost $ 40,000
a.
a. gain
gain of
of $6,000.
$6,000. Accum. Depr. 30,000
Book Value $ 10,000
b.
b. loss
loss of
of $6,000.
$6,000. Fair Value 4,000
c.
c. loss
loss of
of $4,000.
$4,000. Loss $ 6,000

d.
d. gain
gain of
of $4,000.
$4,000.
Prepare a journal entry
to record the exchange.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Trading
Trading in
in Used
Used Assets
Assets
9-38

for
for New
New Ones
Ones –– Similar
Similar Assets
Assets

Prepare
Prepare the
the journal
journal entry
entry to
to record
record
the
the trade.
trade.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-39

Intangible
Intangible Assets
Assets

Noncurrent
Noncurrent assets
assets Often
Oftenprovide
provide
without
withoutphysical
physical exclusive
exclusiverights
rights
substance.
substance. or
or privileges.
privileges.

Characteristics
Characteristics

Useful
Usefullife
lifeis
is Usually
Usuallyacquired
acquired
often
oftendifficult
difficult for
foroperational
operational
to
todetermine.
determine. use.
use.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-40

Intangible
Intangible Assets
Assets

Record at current
cash equivalent  Patents
cost, including  Copyrights
purchase price,  Leaseholds
legal fees, and  Leasehold
filing fees. Improvements
 Goodwill
 Trademarks and
Trade Names

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-41

Amortization
Amortization

Amortization
Amortization is
is the
the systematic
systematic write-off
write-off to
to
expense
expense of
of the
the cost
cost of
of intangible
intangible assets
assets
over
over Their
Their useful
useful life
life or
or legal
legal life,
life,
whichever
whichever is
is shorter.
shorter.

Use
Use the
the straight-line
straight-line method
method to
to amortize
amortize
most
most intangible
intangible assets.
assets.

Date Description Debit Credit

Amortization Expense ####
Intangible Asset ####

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-42

Goodwill
Goodwill

Occurs
Occurs when
when one
one Only
Only purchased
purchased
company
company buys
buys goodwill
goodwill is
is an
an
another
another company.
company. intangible
intangible asset.
asset.

The
The amount
amount by
by which
which the
the
purchase
purchase price
price exceeds
exceeds the
the fair
fair
market
market value
value of
of net
net assets
assets acquired.
acquired.

Goodwill
Goodwill isis NOT
NOT amortized.
amortized. ItIt isis tested
tested
annually
annually to
to determine
determine ifif there
there has
has been
been
an
an impairment
impairment loss.loss.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-43

Patents
Patents
Exclusive
Exclusive right
right granted
granted
by
by federal
federal government
government to to sell
sell or
or
manufacture
manufacture an an invention.
invention.

Cost
Cost is
is purchase
purchase Amortize
Amortize costcost
price
price plus
plus legal
legal over
over the
the shorter
shorter of
of
cost
cost to
to defend.
defend. useful
useful life
life or
or 20
20 years.
years.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-44

Trademarks
Trademarks and
and Trade
Trade Names
Names
A
A symbol,
symbol, design,
design, oror logo
logo
associated
associated with
with aa business.
business.

Purchased
Internally trademarks
developed are recorded
trademarks at cost, and
have no amortized over
recorded shorter of legal
asset cost. or economic life,
or 40 years.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-45

Franchises
Franchises
Legally
Legally protected
protected right
right to
to sell
sell products
products or
or
provide
provide services
services purchased
purchased by by franchisee
franchisee from
from
franchisor.
franchisor.

Purchase
Purchase price
price is
is intangible
intangible asset
asset
which
which is
is amortized
amortized over
over the
the shorter
shorter ofof
the
the protected
protected right
right oror useful
useful life.
life.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-46

Copyrights
Copyrights

Exclusive
Exclusive right
right granted
granted by
by the
the
federal
federal government
government to to protect
protect
artistic
artistic or
or intellectual
intellectual properties.
properties.

Legal
Legal life
life is
is Amortize
Amortize cost
cost
life
life of
of creator
creator over
over period
period
plus
plus 7070 years.
years. benefited.
benefited.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-47

Research
Research and
and Development
Development Costs
Costs

All
All R&D
R&D expenditures
expenditures should
should be
be
charged
charged to
to expense
expense when
when incurred.
incurred.

All of these R&D costs

will really reduce our
net income this year!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-48

Natural
Natural Resources
Resources

Total
Total cost,
cost, Extracted
Extracted from
from
including
including the
the natural
natural
exploration
exploration and
and environment
environment
development,
development, and
and reported
reported
is
is charged
charged to
to at
at cost
cost less
less
depletion
depletion expense
expense accumulated
accumulated
over
over periods
periods depletion.
depletion.
benefited.
benefited.

Examples:
Examples: oil,
oil, coal,
coal, gold
gold
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-49

Depletion
Depletion of
of Natural
Natural Resources
Resources

Depletion is calculated using the

units-of-production method.

Unit depletion rate is calculated as follows:

Cost – Residual Value

Total Units of Natural
Resource

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-50

Depletion
Depletion of
of Natural
Natural Resources
Resources

Total depletion cost for a period is:

Unit Depletion Number of Units
Rate × Extracted in Period

Cost
Costof
of
Total goods
goodssold
sold
Total Inventory
depletion Inventory
depletion for
cost forsale
sale
cost Unsold
Unsold
Inventory
Inventory
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 9-51

Depletion
Depletion of
of Natural
Natural Resources
Resources

Specialized plant assets may be required to

extract the natural resource.

These assets should be depreciated over

their normal useful lives or over the life of
the natural resource, whichever is shorter.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Comparative
Comparative Use
Use of
of Depreciation
Depreciation
9-52

Methods
Methods

AAsurvey
surveyof
of600
600Publicly
PubliclyOwned
Owned Corporations
Corporations

Straight-line
Straight-line 579
579

Declining-balance
Declining-balance 22
22

Sum-of-the-years'-digits
Sum-of-the-years'-digits 66

Accelerated
Acceleratedmethods
methods(not
(notspecified)
specified) 49
49

Units-of-output
Units-of-output 32
32

Other 99
Other

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-53

Exercise
Exercise 9.2
9.2

Identify the following expenditures as capital expenditures or revenue

expenditures:

a)Immediately after acquiring a new delivery truck, paid $195 to have the name
of the store and other advertising material painted on the vehicle.
b)Painted delivery truck at a cost of $450 after two years of use.
c)Purchased new battery at a cost of $40 for two-year-old delivery truck.
d)Installed an escalator at a cost of $17,500 in a three-story building that had
been used for some years without elevators or escalators.
e)Purchased a pencil sharpener at a cost of $15.00.
f)Original life of the delivery truck had been estimated at four years, and straight-
line depreciation of 25 percent yearly had been recognized. After three years’
use, however, it was decided to recondition the truck thoroughly, including
adding a new engine.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-54

Exercise
Exercise 9.3
9.3
On August 3, Srini Construction purchased special-purpose equipment at a cost of
$1,000,000. The useful life of the equipment was estimated to be eight years, with
a residual value of $50,000.

a)Compute the depreciation expense to be recognized each calendar year for

financial reporting purposes under the straight-line depreciation method (half-year
convention).
b)Compute the depreciation expense to be recognized each calendar year for
financial reporting purposes under the 200 percent declining-balance method
(half-year convention) with a switch to straight-line when it will maximize
depreciation expense.
c)Which of these two depreciation methods (straight-line or double-declining-
balance) results in the highest net income for financial reporting purposes during
the first two years of the equipment’s use? Explain.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-55

Exercise
Exercise 9.4
9.4
On January 2, 2011, Jansing Corporation acquired a new machine with an estimated
useful life of five years. The cost of the equipment was $40,000 with a residual value
of $5,000.

a)Prepare a complete depreciation table under the three depreciation methods listed
below. In each case, assume that a full year of depreciation was taken in 2011.

1. Straight-line.
2. 200 percent declining-balance.
3. 150 percent declining-balance with a switch to straight-line when it will
maximize depreciation expense.

a)Comment on significant differences or similarities that you observe among the

patterns of depreciation expense recognized under each of these methods.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-56

Exercise
Exercise 9.6
9.6
Swindall Industries uses straight-line depreciation on all of its depreciable assets.
The company records annual depreciation expense at the end of each calendar
year. On January 11, 2007, the company purchased a machine costing $90,000.
The machine’s useful life was estimated to be 12 years with a residual value of
$18,000. Depreciation for partial years is recorded to the nearest full month.

In 2011, after almost five years of experience with the machine, management
decided to revise its estimated life from 12 years to 20 years. No change was
made in the estimated residual value. The revised estimate of the useful life was
decided prior to recording annual depreciation expense for the year ended
December 31, 2011.

a)Prepare journal entries in chronological order for the above events, beginning
with the purchase of the machinery on January 11, 2007. Show separately the
recording of depreciation expense in 2007 through 2011.
b)What factors may have caused the company to revise its estimate of the
machine’s useful life?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Exercise
Exercise 9.11
9.11
9-57

Salter Mining Company purchased the Northern Tier Mine for $21 million cash.
The mine was estimated to contain 2.5 million tons of ore and to have a residual
value of $1 million.

During the first year of mining operations at the Northern Tier Mine, 50,000 tons
of ore were mined, of which 40,000 tons were sold.

a)Prepare a journal entry to record depletion during the year.

b)Show how the Northern Tier Mine, and its accumulated depletion, would appear
in Salter Mining Company’s balance sheet after the first year of operations.
c)Will the entire amount of depletion computed in part a be deducted from
revenue in the determination of income for the year? Explain.
d)Indicate how the journal entry in part a affects the company’s current ratio (its
current assets divided by its current liabilities). Do you believe that the activities
summarized in this entry do, in fact, make the company any more or less liquid?
Explain.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-58

Exercise
Exercise 9.13
9.13

During the current year, Airport Auto Rentals purchased 60 new automobiles at a
cost of $14,000 per car. The cars will be sold to a wholesaler at an estimated
$5,000 each as soon as they have been driven 50,000 miles. Airport Auto Rentals
computes depreciation expense on its automobiles by the units-of-output method,
based on mileage.

a)Compute the amount of depreciation to be recognized for each mile that a

rental automobile is driven.
b)Assuming that the 60 rental cars are driven a total of 1,770,000 miles during
the current year, compute the total amount of depreciation expense that Airport
Auto Rentals should recognize on this fleet of cars for the year.
c)In this particular situation, do you believe the units-of-output depreciation
method achieves a better matching of expenses with revenue than would the
straight-line method? Explain.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-59

Problem
Problem 9.2
9.2

Swanson & Hiller, Inc., purchased a new machine on September 1, 2008 at a cost of
$108,000. The machine’s estimated useful life at the time of the purchase was five years,
and its residual value was $8,000.
Instructions
1.a. Prepare a complete depreciation schedule, beginning with calendar year 2008, under
each of the methods listed below (assume that the half-year convention is used):
a) Straight-line.
b) 200 percent declining-balance.
c) 150 percent declining-balance, switching to straight-line when that maximizes
the expense.
2.Which of the three methods computed in part a is most common for financial reporting
purposes? Explain.
3.Assume that Swanson & Hiller sells the machine on December 31, 2011, for $28,000
cash. Compute the resulting gain or loss from this sale under each of the depreciation
methods used in part a. Does the gain or loss reported in the company’s income
statement have any direct cash effects? Explain.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 9-60

End
End of
of Chapter
Chapter 99

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005