Kế toán, kiểm toán - Chapter 11: Property, plant, and equipment and intangible assets: Utilization and impairment

Property, Plant, and Equipmentand Intangible Assets:Utilization and ImpairmentChapter 11Some of the cost is allocated to each period.Expense*AcquisitionCost(Balance Sheet)(Income Statement)The matching principle requires that part of the acquisition cost of property, plant, and equipment and intangible assets be expensed in periods when the future revenues are earned.Depreciation, depletion, and amortization are cost allocation processes used to help meet the matching principle requirements.Cost Allocation – An Overview*Depreciation of an asset used to produce a product is a product cost that does not become an expense until the product is sold. Caution! Depreciation, depletion, and amortizationare processes of cost allocation, not valuation!Depreciation on the Balance SheetCost Allocation – An OverviewCost allocation requires three piecesof information for each asset:The estimated expected use from an asset. Total amount of cost to be allocated.Cost – Residual Value (at end of useful life)The systematic approach used for allocation. Allocation BaseService LifeAllocation MethodMeasuring Cost AllocationTime-based MethodsStraight-line (SL)Accelerated Methods Sum-of-the-years'-digits (SYD)Declining Balance (DB)Activity-based methodsUnits-of-production method (UOP).Group andcomposite methodsTaxdepreciationDepreciationStraight-LineThe most widely used and most easily understood method.Results in the same amount of depreciation in each year of the asset’s service life.On January 1, we purchase equipment for $50,000 cash. The equipment has an estimated service life of 5 years and estimated residual value of $5,000. What is the annual straight-line depreciation?Accelerated MethodsNote that total depreciation over the asset’s usefullife is the same as the straight-line method.Accelerated methods result in more depreciation in the early years of an asset’s useful life and less depreciation in later years of an asset’s useful life.Sum-of-the-years’-digits (SYD) depreciationDeclining-Balance (DB) MethodsDB depreciationBased on the straight-line rate multiplied by an acceleration factor. Computations initially ignore residual value.Stop depreciating when:BV = Residual ValueDouble-Declining-Balance (DDB) depreciationis computed as follows:Note that the book value declines each year.Units-of-ProductionThe approach is based on the units-of-production method.Depletion of Natural ResourcesAs natural resources are “used up,” or depleted, the cost of the natural resources must be allocated to the units extracted.Amortization of Intangible AssetsFor an intangible asset with a finite useful life, we allocate capitalized costs over the asset’s useful life using the straight-line method, normally with a zero residual value.An intangible asset’s useful life may be limited by legal, regulatory, or contractual provisions. In other cases, the useful life may be less than the legal or contractual life.The amortization entry is:A contra-asset account is generally not used when recording the amortization of intangible assets.Amortization expense .................................. $$$ Intangible asset ........ $$$To record amortization expense.Not amortized.Subject to assessment for impairment ofvalue and may bewritten down.Goodwill and TrademarksIntangible Assets not Subject to AmortizationError CorrectionErrors found in a subsequent accounting period are corrected by . . . Entries that restate the incorrect account balances to the correct amount. Restating the prior period’s financial statements. Reporting the correction as a prior period adjustment to Beginning R/E.In addition, a disclosure note is needed to describe the nature of the error and the impact of its correction on net income, income before extraordinary items, and earnings per share.Impairment of ValueLong-term assetsto be held and usedLong-term assetsheld for saleTangible andintangible  with finiteuseful livesIntangibleswithindefiniteuseful livesGoodwillTest for impairment of value at least annually.Test for impairment of valuewhen it is suspected that book value may not be recoverable.Test for impairment of value when it is likely that the fair value of a reporting unit is less than its book value.Accounting treatment differs.Finite-Life Assets to be Held and Used An asset is impaired when . . .The undiscounted sum of its estimated future cash flows Recoverability– Step 1Itsbookvalue FV, impairment indicated. Other Indefinite-life intangibles One-Step ProcessIf BV of asset > FV, recognize impairment loss.Indefinite-Life IntangiblesType of ExpenditureDefinitionUsual Accounting TreatmentRepairs and MaintenanceExpenditures to maintaina given level of benefits Expense in the period incurredAdditionsThe addition of a new major component to an existing assetCapitalize and depreciate over the remaining useful life of the original asset, or over the useful life of the addition, whichever is shorterImprovementsThe replacement ofa major componentCapitalize and depreciate over the useful life of the improved assetRearrangementsExpenditures to restructure an asset without addition, replacement, or improvementIf expenditures are material and clearly increase future benefits, capitalize and depreciate overthe future periods benefitedExpenditures Subsequentto AcquisitionEnd of Chapter 11