Kế toán, kiểm toán - Chapter 10: Long - Term assets

Chapter 10Long-term AssetsCalled Property, Plant, & Equipment property, plant and equipmentExpected to Benefit Future PeriodsActively Used in OperationsTangible in NatureC 1 property, plant and equipmentC 1AcquisitionCostAcquisition cost excludes financing charges andcash discounts All expenditures needed to prepare the asset for its intended usePurchasepriceCost DeterminationC 1Land is not depreciable.PurchasepriceReal estatecommissionsTitle insurance premiumsDelinquenttaxesSurveyingfeesTitle search and transfer feesLandC 1Land ImprovementsParking lots, driveways, fences, walks, shrubs, and lighting systems.Depreciateover useful life of improvements.C 1Cost of purchase or constructionBrokeragefeesTaxesTitle feesAttorney feesBuildingsC 1PurchasepriceInstalling,assembling, andtestingInsurance whilein transitTaxesTransportationchargesMachinery and EquipmentC 1Lump-Sum Asset PurchaseCarMax paid $90,000 cash to acquire a group of items consisting of land appraised at $30,000, land improvements appraised at $10,000, and a building appraised at $60,000. The $90,000 cost will be allocated on the basis of appraised values as shown:The total cost of a combined purchase of land and building is separated on the basis of their relative fair market values.P 1Depreciation is the process of allocating the cost of an item of property, plant and equipment to expense in the accounting periods benefiting from its use. CostAllocationAcquisitionCost(Unused)Statement of Financial Position (Used)Income StatementExpenseDepreciationP 1Factors in Computing Depreciation The calculation of depreciation requires three amounts for each asset: 1. Cost 2. Residual Value 3. Useful LifeP 1Depreciation Methods Straight-line Units-of-production Declining-balanceAsset we will depreciate in future screensP 1Straight-Line MethodP 1Statement of Financial Position PresentationMachinery $ 10,000  Accumulated depreciation (3,600)   $ 6,400     P 1Straight-Line MethodAt the end of year 2: Straight-Line Depreciation ScheduleP 1Units-of-Production MethodStep 2:Depreciation Expense=DepreciationPer Unit×Number of Units Producedin the PeriodDepreciationPer Unit= Cost - Residual Value Total Units of ProductionStep 1:P 1Units-of-Production MethodDepreciationPer Unit= Cost - Residual Value Total Units of ProductionStep 1:=$9,00036,000= $0.25/unitStep 2:Depreciation Expense=DepreciationPer Unit×Number of Units Producedin the Period= $0.25 × 7,000 = $1,750Assume that 7,000 units were inspected during 2011. Depreciation would be calculated as follows:P 1Units-of-ProductionDepreciation ScheduleP 1Double-Declining-Balance MethodP 1Double-Declining-Balance MethodP 1Comparing Depreciation MethodsP 1Partial-Year Depreciation When an item of property, plant and equipment is acquired during the year, depreciation is calculated for the fraction of the year the asset is owned.Cost $ 10,000 Residual value 1,000 Depreciable cost $ 9,000 Useful life  Accounting periods 5 years Units inspected 36,000 units Assume our machinery was purchased on October 8, 2010. Let’s calculate depreciation expense for 2010, assuming we use straight-line depreciation.C 2Depreciationis an estimatePredicted residual valuePredicteduseful lifeChange in Estimates for Depreciation Over the life of an asset, new information may come to light that indicates the original estimates were inaccurate.C 2Change in Estimates for Depreciation Let’s look at our machinery from the previous examples and assume that at the beginning of the asset’s third year, its carrying amount is $6,400 ($10,000 cost less $3,600 accumulated depreciation using straight-line depreciation). At that time, it is determined that the machinery will have a remaining useful life of 4 years, and the estimated residual value will be revised downward from $1,000 to $400.C 2Reporting DepreciationC 2Nestlé 2013Additional Expenditures If the amounts involved are not material, most companies expense the item. C 3Revenue and Capital ExpendituresC 3Measurement ModelsC 4The Cost Model states that after recognition as an asset, an item of PPE shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.The Revaluation Model states that after recognition as an asset, an item of PPE whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The fair value of PPE is usually determined from market-based evidence by professional appraisal or valuation.Revaluation ModelC 4If land which was bought for $1 million in 2013 is revalued to $1.5 million on June 30, 2015 (no depreciation for land), the journal entry for the revaluation on that date is:Revaluation surplus is part of other comprehensive incomeKC Corp has an equipment bought on July 1, 2013 with a cost of $200,000, no residual value and estimated useful life of five years. After two years on June 30, 2015, KC obtains market information for revaluation suggesting that the fair value of the equipment is $300,000.Method (a): Restated accumulated depreciation proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount.Revaluation ModelC 4KC Corp has an equipment bought on July 1, 2013 with a cost of $200,000, no residual value and estimated useful life of five years. After two years on June 30, 2015, KC obtains market information for revaluation suggesting that the fair value of the equipment is $300,000.Method (b): Eliminate accumulated depreciation against the gross carrying amount of the asset and the net amount restated to the revalued amount of the assetRevaluation ModelC 4ImpairmentC 4An impairment is the amount by which the carrying amount of an asset exceeds its recoverable amount.For example, an equipment bought before 2015 has a carrying amount of $8,000 ($9,000 cost less $1,000 accumulated depreciation) and a recoverable amount of $7,500.Recording cashreceived (debit)or paid (credit).Removing accumulateddepreciation (debit). Update depreciation to the date of disposal. Journalize disposal by:Removing the asset cost (credit).Recording again (credit)or loss (debit).Disposals of property, plant and equipmentP 2 Update depreciation to the date of disposal. Journalize disposal by:If Cash > CA, record a gain (credit).If Cash < CA, record a loss (debit).If Cash = CA, no gain or loss.Discarding property, plant and equipmentRecording cashreceived (debit)or paid (credit).Removing accumulateddepreciation (debit).Removing the asset cost (credit).Recording again (credit)or loss (debit).P 2 A machine costing $9,000, with accumulated depreciation of $9,000 on December 31st of the previous year was discarded on June 5th of the current year. The company is depreciating the equipment using the straight-line method over eight years with zero residual value.Discarding property, plant and equipmentP 2 Equipment costing $8,000, with accumulated depreciation of $6,000 on December 31st of the previous year was discarded on July 1st of the current year. The company is depreciating the equipment using the straight-line method over eight years with zero residual value.Discarding property, plant and equipmentStep 1: Bring the depreciation up-to-date.Step 2: Record discarding of asset.P 2Selling property, plant and equipmentStep 1: Update depreciation to March 31st.Step 2: Record sale of asset at carrying amount ($16,000 - $13,000 = $3,000).On March 31st, BTO sells equipment that originally cost $16,000 and has accumulated depreciation of $12,000 at December 31st of the prior calendar year-end. Annual depreciation on this equipment is $4,000 using straight-line depreciation. The equipment is sold for $3,000 cash.P 2Selling property, plant and equipmentP 2On March 31st, BTO sells equipment that originally cost $16,000 and has accumulated depreciation of $12,000 at December 31st of the prior calendar year-end. Annual depreciation on this equipment is $4,000 using straight-line depreciation. The equipment is sold for $2,500 cash.Step 1: Update depreciation to March 31st.Step 2: Record sale of asset at a loss (Carrying amount $3,000 - $2,500 cash received).Total cost,including exploration anddevelopment,is charged todepletion expenseover periodsbenefited.Extracted fromthe naturalenvironmentand reportedat cost lessaccumulateddepletion.Natural ResourcesExamples: oil, coal, goldP 3Cost Determination and DepletionP 3Let’s consider a mineral deposit with an estimated 250,000 tons of available ore. It is purchased for $500,000, and we expect zero residual value. Depletion of Natural ResourcesP 3Depletion expense in the first year would be:Statement of Financial Position presentation of natural resources: property, plant and equipment Used in ExtractingSpecialized property, plant and equipment may be required to extract the natural resource.These assets are recorded in a separate account and depreciated.P 3Noncurrent assetswithout physicalsubstance.Useful life isoften difficultto determine.Usually acquired for operational use. IntangibleAssetsOften provideexclusive rightsor privileges.Intangible AssetsP 4Cost Determination and AmortizationPatentsCopyrightsFranchises and LicensesGoodwillTrademarks and Trade NamesOther Intangibles Record at current cash equivalent cost, including purchase price, legal fees, and filing fees.P 4Provides information about a company’s efficiency in using its assets.Total AssetTurnover=Net SalesAverage Total AssetsTotal Asset TurnoverA110A – EXCHANGING PROPERTY, PLANT AND EQUIPMENTP5Many property, plant and equipment such as machinery, automobiles, and office equipment are disposed of by exchanging them for newer assets. In a typical exchange of property, plant and equipment, a trade-in allowance is received on the old asset and the balance is paid in cash. Accounting for the exchange of assets depends on whether the transaction has commercial substance.Commercial substance implies the company’s future cash flows will be altered.Exchange with CommercialSubstance: A LossP5A company acquires $42,000 in new equipment. In exchange, the company pays $33,000 cash and trades in old equipment. The old equipment originally cost $36,000 and has accumulated depreciation of $20,000 (carrying amount is $16,000). This exchange has commercial substance. The old equipment has a trade-in allowance of $9,000.End of Chapter 10