Chapter 7
PPE and Intangibles
Types of Non-current Assets
Plant, Property
and Equipment
(PPE)
Construction in
Progress
Intangibles
Investment
Properties
Copyright 2014 Pearson Education.
PPE & Intangibles Terminology
Asset Account
(Balance Sheet)
Related Expense Account
(Income Statement)
Property, Plant and Equipment
Freehold Land
None
Leasehold land
Depreciation
Buildings, Machinery & Equipment
Depreciation
Furniture & Fixtures
Depreciation
Land Improvements
Depreciation
Natural Resources
Depletion
Intangibles
Intangibles with finite useful lives
2014 Pearson
Education.
Intangibles with Copyright
indefinite
useful
lives
Amortization
None
Learning Objective 1
Determine the cost of a PPE and account for
depreciation
Copyright 2014 Pearson Education.
Measuring the Cost of a PPE
Sum of all costs
incurred to ____
______________
______________
Copyright 2014 Pearson Education.
Asset
Costs included
Land
Purchase price, commissions, survey &
legal fees, and back property taxes paid;
grading and removing unwanted
buildings
Land Improvements
Fencing, paving, security systems &
lighting
Building
Constructed
Architectural fees, contractors charges,
materials, labor, and overhead; interest
on funds borrowed
Building
Purchased
Purchase price, brokers commission,
taxes paid and all costs to repair and
renovate building
Equipment
Purchase price, transportation, insurance
in transit, sale tax, installation and testing
Copyright 2014 Pearson Education.
Lump-Sum (Basket) Purchases
Several assets purchased in a group at one price
Total cost is allocated based on their market
values
For Example, a building valued at $2,700,000 and
land valued at $300,000 are purchased together
for $2,800,000.
Total
market
value
Asset
Market
value
Land
$300,000
$3,000,000
Building
$2,700,000
$3,000,000
Total
$3,000,000
% of
total
market
= value
Copyright 2014 Pearson Education.
Total cost
Cost of
each asset
10%
$2,800,000
$_______
90%
$2,800,000
$_______
100%
$_______
7
Subsequent Costs
CAPITAL
EXPENDITURES
EXPENSES
Increase capacity or
extend useful life
________
Cost is added to an
asset account
Do not extend
capacity or useful life
Maintain or restore
working order
Cost is recorded as an
expensejudgment
Distinction between the two requires
Copyright 2014 Pearson Education.
Depreciation
Systematic allocation of cost of an asset over its
life
Charged to Income Statement
DR Depreciation Expense
Cumulative amount charged is called
Accumulated Depreciation
CR Accumulated Depreciation
Supports _______________
Copyright 2014 Pearson Education.
Depreciation is NOT:
Valuation
process
A fund to
replace
assets
Copyright 2014 Pearson Education.
10
Amounts Needed for Depreciation
Cost
Useful
life
Residual
value
Copyright 2014 Pearson Education.
11
Depreciable amount
Asset cost
Copyright 2014 Pearson Education.
Residual value
12
Depreciation Methods
Straight-line
Units-of-production
Double-decliningbalance
Copyright 2014 Pearson Education.
13
Straight-Line (SL)
Depreciable cost
Useful life, ______
Results in equal
amount of expense
________
Copyright 2014 Pearson Education.
14
Accumulated
depreciation
increases
Book value
decreases
Assets final book value = Residual value
Estimated by manager
Copyright 2014 Pearson Education.
15
Units-of-Production (UOP)
Depreciable cost
Depreciation
per unit
Useful life ______
Depreciation
per unit
Activity for period
Copyright 2014 Pearson Education.
(units, miles)
16
Double-Declining-Balance (DDB)
Note: residual value is not subtracted here!
DDB rate
Book value
Straight-line rate
x 2 (or
2/life in years)
Cost minus
accumulated
depreciation
Copyright 2014 Pearson Education.
17
Residual Value: DDB
Ignored until final year
Final year
depreciation
Book value at the
beginning final year
Copyright 2014 Pearson Education.
Residual
value
18
DDB differences
First-year depreciation is based on assets full
cost
Final year depreciation is a plug amount
needed to reduce book value to residual value
Copyright 2014 Pearson Education.
19
Comparing Depreciation Methods
Depreciation Methods
$18,000
$16,000
$14,000
$12,000
S/L
UOP
DDB
$10,000
$8,000
$6,000
$4,000
$2,000
$-
Copyright 2014 Pearson Education.
20
21
Doubledecliningbalance
Best for assets
that _______
__________ in
useful life
Copyright 2014 Pearson Education.
Units-ofproduction
Best for assets
that _______
__________
Straight-line
Best for assets
that _______
__________
Best meets
matching
principle
Choosing Depreciation Methods
Depreciation Methods Used by 170 IFRS
Companies
Others; 5% Declining Balance; 2%
Units of Production; 9%
Straight Line; 84%
Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.
22
E7-19A
West Sides Pizza bought a used Nissan delivery van
on January 2, 2010, for $19,000. The van was expected
to remain in service for four years (36,000 miles). At
the end of its useful life, West Sides officials estimated
that the vans residual value would be $2,800. The van
traveled 11,000 miles the first year, 13,000 miles the
second year, 5,000 miles the third year, and 7,000
miles in the fourth year.
What is the annual depreciation using the straight-line,
units-of-production, or double-declining method?
Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.
23
Exercise 7-19A
Straight-line
Depreciable cost
Useful life, in years
____________
__________
Copyright 2014 Pearson Education.
____________
depreciation
expense per year
24
Exercise 7-19A
Depreciable cost
Useful life in units
____________
____________
Copyright 2014 Pearson Education.
Units-of-production
Depreciation
per unit
_______
per mile
25
Exercise 7-19A
Units-of-production
Activity for period
Depreciation
per unit
$_____
per mile
(units, miles)
Depreciation
Miles
expense
11,000
$4,950
13,000
$5,850
5,000
$2,250
7,000
$3,150
Copyright 2014 Pearson Education.
26
Exercise 7-19A
Year
Double-declining-balance
DDB rate
2/Life in years
50%
2/4 years
Book value
Depr. Exp.
Accum.
Depr.
19,000
9,500
9,500
9,500
4,750
14,250
4,750
2,375
1,950
16,625
16,200
Copyright 2014 Pearson Education.
Book value
9,500 Less
4,750 than
residual
2,375 value
2,800
27
Learning Objective Two
Understand additional issues related to
accounting for PPE
Copyright 2014 Pearson Education.
28
Issues in Accounting for PPE
Income taxes
affected by
depreciation
Long lives
Alternative
subsequent
measurement
models
Gain and losses
on disposal of
PPE
Copyright 2014 Pearson Education.
29
Depreciation for Tax Purposes
Accelerated deprecation provides fastest tax deductions
Tax deductions decrease tax payments
Tax savings can be reinvested in business
The government might not give companies discretion over which rates to use
for depreciation. For example, Hong Kong and U.S.
Copyright 2014 Pearson Education.
30
Partial Year Depreciation
Annual
depreciation
Months from date of
purchase to end of year
12
We normally do not have to go further than 1 month.
Copyright 2014 Pearson Education.
31
Changing Useful Life
_________ depreciable book value
______Estimated remaining useful life
Copyright 2014 Pearson Education.
32
Impairment of PPE
An asset is impaired when its carrying value is
higher than its recoverable amount
Recoverable amount is the higher of fair value less
cost to sell and value in use.
DR _________________ & CR _________________
__________________________________________
Copyright 2014 Pearson Education.
33
Measurement Subsequent to Initial
Recognition
An entity elects one out of two measurement models for
each class of property
Cost model:
carried ______ less any accumulated depreciation and any
accumulated impairment losses.
Revaluation model:
carried at a ____________, less any subsequent accumulated
depreciation and subsequent accumulated impairment losses
fair value of asset must be able to be measured reliably
Copyright 2014 Pearson Education.
34
Using Fully Depreciated Assets
A fully depreciated asset is one that has reached the end
of its estimated useful life.
Book value is zero (or residual value)
Does not mean the equipment is worthless
Asset may be used for a few more years, but
depreciation __________________
When the company disposes of the equipment, it will
remove both the assets cost and its accumulated
depreciation from the books.
Copyright 2014 Pearson Education.
35
Learning Objective Three
Analyze the effects of a PPE disposal
Copyright 2014 Pearson Education.
36
Disposal of PPE
First Bring depreciation up-to-date to:
Measure assets final book value
Record expense up to date of disposal
Then Remove asset and related accumulated
depreciation account from books
If asset is junked (0 sale value):
Fully-depreciated and no residual value
No gain or loss
If not full-depreciated and/or has a residual value
Loss equals ending book value
Copyright 2014 Pearson Education.
37
Selling a Plant Asset
If cash received
is greater than
book value
GAIN
If cash received
is less than
book value
LOSS
Copyright 2014 Pearson Education.
38
Exercise 7-23A
Assume that on January 2, 2010, Maxwell of
Michigan purchased fixtures for $8,800 cash,
expecting the fixtures to remain in service five years.
Maxwell has depreciated the fixtures on a doubledeclining-balance basis, with $1,300 estimated
residual value. On August 31, 2011, Maxwell sold the
fixtures for $2,900 cash.
Record both the depreciation expense on the fixtures
for 2011 and then the sale of the fixtures.
Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.
39
Exercise 7-23A
2/5-year life =
40% DDB Rate
Year
2010
Beg. Book
value
Depr. Exp.
Accum.
Depr.
End Book
value
8,800
2011
$5,280 x 40% x 8/12
Cash received:
$2,900
Book value:
$_______
Copyright 2014 Pearson Education.
___ =
$___
40
Exercise 7-23A
JOURNAL
Date
Accounts and explanation
Debit
Credit
Aug 31
Aug 31
Copyright 2014 Pearson Education.
41
Exchanging PPE
Old assets traded in for new assets
Nonmonetary exchange
Cost of plant asset received is equal the fair
values of assets given up
Old asset and any cash paid
Difference between fair value of old asset and its
book value is a gain or loss
Example: exchange old van with $5,000 book
value ($8,000 cost and $3,000 accumulated
depreciation) for a new truck with fair value of
$10,000 and paying $3,000 cash.
What is the journal entry?
Copyright 2014 Pearson Education.
42
Learning Objective Four
Account for natural resources and depletion
Copyright 2014 Pearson Education.
43
Natural Resources
Include iron ore, oil and timber
Expensed through depletion
Similar to depreciation
Computed like _______________
Must estimate how much can be produced
JOURNAL
Date
Accounts and explanation
Debit
Credit
Depletion expense
Accumulated depletion
Copyright 2014 Pearson Education.
44
Learning Objective Five
Account for intangible assets and amortization
Copyright 2014 Pearson Education.
45
Intangible Assets
No physical form
Carry special rights
Include patents, copyrights and franchises
Two categories
Finite lives
__________________
Straight-line method
Intangible asset reduced directly (not against
accumulated amortization)
Indefinite lives
__________________
Tested for loss in value (impairment)
Copyright 2014 Pearson Education.
46
Accounting for Specific Intangibles
Patents
Copyrights
Franchises
& licenses
Copyright 2014 Pearson Education.
Trademarks
and trade
names
Goodwill
47
Patents
Granted by government
Give holder exclusive right to produce and sell
an invention
HK 20 years or 8 years
US generally 20 years
Copyright 2014 Pearson Education.
48
Copyrights
Granted by the government
Give holder exclusive rights to reproduce and
sell a book, musical composition, film or other
work of art
HK Extend up to 50 years beyond authors life
US Extend up to 70 years beyond authors life
Copyright 2014 Pearson Education.
49
Trademarks and Trade Names
Distinctive identification of a product or service
Also include advertising slogans
Useful life may be set by contract
Or indefinite life
Indicated by TM or
HK (renewal 10 year periods)
US (20 years + renewal 10 year periods)
Copyright 2014 Pearson Education.
50
Franchises and Licenses
Granted by private business or government
Give purchase right to sell a product or service
with specified conditions
Include restaurant chains and sports
organizations
Have indefinite life (if renewable)
Copyright 2014 Pearson Education.
51
Goodwill
Defined as the excess of the purchase price of the
company over the market value of its net assets
Recorded only during the _______________
________
Represents earning power of company
purchased
__________, but subjected strict impairment
tests
Copyright 2014 Pearson Education.
52
Impairment of Intangible Asset
Decline in asset value
Write-down required if value of intangible
decreases below cost
Reversal of goodwill impairment is not allowed
Applies to all intangibles both those with finite
lives and indefinite lives
JOURNAL
Date
Accounts and explanation
Debit
Credit
Impairment loss on intangible
Intangible asset
Copyright 2014 Pearson Education.
53
Research and Development Costs
Costs associated with creation of intangible
assets are classified into research phase and
development phase.
Research phase
Always expensed
Development phase
Capitalized if criteria are met (IFRS)
Generally, based on technical feasibility
(Expensed, not capitalized, under US GAAP)
Copyright 2014 Pearson Education.
54
Learning Objective Six
Report PPE transactions on the statement of
cash flows
Copyright 2014 Pearson Education.
55
Plant Asset Transactions on the
Cash Flow Statement
Item
Section
Description
Depreciation
Operating
Added to net income
as a reconciling item
Sales of PPE
Investing
Cash proceeds from
sales of PPE - inflow
Purchase of PPE
Investing
Cash purchases outflow
Copyright 2014 Pearson Education.
56