Kế toán tài chính 2 - Chapter 11: Long - Term assets

Long-Term AssetsMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 11Learning ObjectivesIdentify the types of long-term assets and explain the management issues related to accounting for them.Distinguish between capital and revenue expenditures, and account for the cost of property, plant, and equipment.Define depreciation and compute depreciation under the straight-line, production, and declining-balance methods.2Copyright © Houghton Mifflin Company. All rights reserved.Learning Objectives (cont’d)Account for the disposal of depreciable assets.Identify the issues related to accounting for natural resources and compute depletion.Identify the issues related to accounting for intangible assets, including research and development costs and goodwill.3Copyright © Houghton Mifflin Company. All rights reserved.Supplemental ObjectiveApply depreciation methods to problems of partial years, revised rates, groups of similar items, special types of capital expenditures, and cost recovery.4Copyright © Houghton Mifflin Company. All rights reserved.Management Issues Related to Accounting for Long-Term AssetsObjective 1Identify the types of long-term assets and explain the management issues related to accounting for them5Copyright © Houghton Mifflin Company. All rights reserved.Long-Term Assets are assets thathave a useful life greater than one year,are acquired for use in the operation of a business, andare not intended for resale to customersAre reported at carrying valueInformation about long-term acquisitions can be found under investing activities in the statement of cash flows6Copyright © Houghton Mifflin Company. All rights reserved.Carrying Value is the unexpired cost of an assetUnexpired Cost = Cost – Accumulated DepreciationAlso called book valueCarrying value is reduced if a long-term asset loses some or all of its revenue generating potential before the end of its useful lifeCalled asset impairmentSum of expected cash flows from asset carrying value, gain is recorded58Copyright © Houghton Mifflin Company. All rights reserved. 4504,650MachineryAccum. Depreciation, Machinery6,5004,200Notice that the entry to record depreciation is the same whether a plant asset is discarded, sold, or exchangedPlant Assets Sold for CashRecord depreciation expense for the partial year up to the date of disposal59Copyright © Houghton Mifflin Company. All rights reserved. MachineryAccum. Depreciation, Machinery6,5004,2004504,6504,6506,500Bal. -0-Bal. -0-Received $1,850 cash for sale of machinery Remove the carrying value of the assetCash Received = Carrying ValuePlant Assets Sold for Cash60Copyright © Houghton Mifflin Company. All rights reserved. MachineryAccum. Depreciation, Machinery6,5004,2004504,6504,6506,500Bal. -0-Bal. -0-Received $1,000 cash for sale of machinery Cash Received Carrying ValueNotice that when cash received is greater than the carrying value, a gain is recorded62Copyright © Houghton Mifflin Company. All rights reserved.Exchanges of Plant AssetsExchanges may involve Similar assetsExchanging an older model for a newer modelDissimilar assetsExchanging one type of asset for another typeAccounting for exchanges of plant assets is similar to accounting for sales of plant assets for cash If trade-in allowance = carrying value of asset surrendered, no gain or loss is recordedIf trade-in allowance carrying value of asset surrendered, gain is recorded63Copyright © Houghton Mifflin Company. All rights reserved.Rules for Recognizing Gains and LossesFor financial accounting purposesMost exchanges are considered exchanges of dissimilar assetsGains not recognizedTrade-in treated as an extension of the life and usefulness of original assetNew machine recorded at sum of carrying value of older machine plus any cash paidFor income tax purposesSimilar assets are those performing the same functionNo gains or losses recognized on exchange when computing income tax liability64Copyright © Houghton Mifflin Company. All rights reserved. 4504,650Example of Exchanges of Plant AssetsRecord depreciation expense for the partial year up to the date of disposalMachineryAccum. Depreciation, Machinery6,5004,200Again, notice that the entry to record depreciation is the same whether a plant asset is discarded, sold, or exchangedMGC Company exchanged an old machine for a newer, more modern machine with a list price of $12,000. Trade-in allowance for the old machine is $1,00065Copyright © Houghton Mifflin Company. All rights reserved.The cash payment required is $11,000 List price of $12,000 less trade-in allowance of $1,000The loss on exchange is $850Carrying value of $1,850 less trade-in allowance of $1,0004504,650MachineryAccum. Depreciation, Machinery6,5004,2006,5004,65012,000Bal. 12,000Bal. -0-MGC Company exchanged an old machine for a newer, more modern machine with a list price of $12,000. Trade-in allowance for the old machine is $1,000Loss on the Exchange Recognized The cash payment required is $11,000 List price of $12,000 less trade-in allowance of $1,000The cost basis of the new machine is $12,850Carrying value of old machine, $1,850, plus cash paid for new machine, $11,0004504,650MachineryAccum. Depreciation, Machinery6,5004,2006,5004,65012,850Bal. 12,850Bal. -0-The old machine is exchanged for a similar machine with a list price of $12,000. Trade-in allowance for the old machine is $1,000Loss on the Exchange Not Recognized67Copyright © Houghton Mifflin Company. All rights reserved.The cash payment required is $9,000 List price of $12,000 less trade-in allowance of $3,000The gain on exchange is $1,150Trade-in allowance of $3,000 less carrying value of $1,850 4504,650MachineryAccum. Depreciation, Machinery6,5004,2006,5004,65012,000Bal. 12,000Bal. -0-The old machine is exchanged for a newer, more modern machine with a list price of $12,000. Trade-in allowance for the old machine is $3,000Gain on the Exchange Recognized 68Copyright © Houghton Mifflin Company. All rights reserved.Gain on the Exchange Not RecognizedThe cash payment required is $9,000 List price of $12,000 less trade-in allowance of $3,000The cash basis of the new machine is $10,850Carrying value of old machine, $1,850, plus cash paid for new machine, $9,0004504,650MachineryAccum. Depreciation, Machinery6,5004,2006,5004,65010,850Bal. 10,850Bal. -0-The old machine is exchanged for a similar machine with a list price of $12,000. Trade-in allowance for the old machine is $3,000When similar assets are exchanged, gains are not recognized for either accounting or income tax purposes 69Copyright © Houghton Mifflin Company. All rights reserved.DiscussionIf a plant asset is discarded before the end of its useful life, how is the amount of loss measured?The amount of loss is equal to the asset’s carrying value (cost less accumulated depreciation)70Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Natural ResourcesObjective 5Identify the issues related to accounting for natural resources and compute depletion71Copyright © Houghton Mifflin Company. All rights reserved.Natural Resources are converted to inventory by cutting, pumping, mining, or other extraction methodsShown on the balance sheet as long-term assetsAre recorded at acquisition costAs the asset is converted to inventory, the asset account must be proportionally reduced72Copyright © Houghton Mifflin Company. All rights reserved.Depletion is (1) the exhaustion of a natural resource and (2) the proportional allocation of the cost of a natural resource to the units extractedCosts are allocated much like the production method of depreciation73Copyright © Houghton Mifflin Company. All rights reserved. Recording Depletion ExpenseA mine that cost $1,800,000 has an estimated 1,500,000 tons of coal. The estimated residual value of the coal is $300,000. During the first year, 115,000 tons of coal are mined and soldNatural resources that have been extracted but not sold are considered inventory and are not recorded as an expense until the year sold74Copyright © Houghton Mifflin Company. All rights reserved.Depreciation of Closely Related Plant AssetsClosely related long-term assets are those assets necessary to extract the resourceConveyors and drilling and pumping devicesIf the life of the asset is longer than the life of the resourceDepreciate on the same basis as the depletion is computedIf the life of the asset is shorter than the life of the resourceDepreciate over the shorter life of the asset75Copyright © Houghton Mifflin Company. All rights reserved.Development and Exploration Costs in the Oil and Gas IndustryCan be accounted for under one of two methodsSuccessful efforts methodCost recorded as an asset and depleted over the estimated life of the resourceFor an unsuccessful exploration, written off immediately as a lossMore conservative methodFull-costing methodAll costs, including costs of dry wells, are recorded as assets and depleted over the estimated life of the producing resourcesImproves earnings performance in the early yearsEither method is allowed under GAAP76Copyright © Houghton Mifflin Company. All rights reserved.DiscussionUnder what circumstances can a mining company depreciate its long-term assets over a period of time that is less than their useful lives?When (1) the long-term assets are so closely associated with the natural resource that they cannot be used after the resource is depleted and (2) the depletion period is shorter than the useful lives of the assets77Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Intangible AssetsObjective 6Identify the issues related to accounting for intangible assets, including research and development costs and goodwill78Copyright © Houghton Mifflin Company. All rights reserved.Intangible Assets are long-term assetswith no physical substancethat have a value based on rights, privileges, or advantages that are offered to the ownerAre accounted for at acquisition cost79Copyright © Houghton Mifflin Company. All rights reserved.Intangible Assets (cont’d)IncludePatentsCopyrightsLeaseholds and leasehold improvementsFranchisesLicenses Trademarks and brand names and goodwillGoodwill and trademarks should not appear on the balance sheet unless they have been purchased from another party at a price established in the marketplace80Copyright © Houghton Mifflin Company. All rights reserved.Accounting Issues forIntangible AssetsAccounting issues are similar to other long-term assetsAPB Opinion 17 lists them as followsDetermining an initial carrying amountAccounting for periodic write-off or amortizationAccounting for that amount if the value declines substantially and permanentlyBecause of its intangibility, an intangible asset’s value and useful life may be difficult to estimate81Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Intangible AssetsRecord as expensesIntangible assets developed by a company for its own benefit Record as assetsIntangible assets acquired from othersAmortize over the shorter of their useful life or their legal life (not to exceed 40 years)If an intangible asset become worthless before it is fully amortized, the remaining carrying value should be written off as a loss82Copyright © Houghton Mifflin Company. All rights reserved. Example of Intangible Assets Soda Bottling Company purchases a patent on a unique bottle cap for $18,000. The patent will last for 20 years, but the product using the cap will be sold only for the next six yearsRecord the purchase of the patentRecord the annual amortization expenseNotice that the Patents account is directly reduced by the amount of amortization expense, whereas depreciation or depletion is accumulated in separate contra accounts for other long-term assets 83Copyright © Houghton Mifflin Company. All rights reserved. Example of Intangible Assets Soda Bottling Company purchases a patent on a unique bottle cap for $18,000. The patent will last for 20 years, but the product using the cap will be sold only for the next six yearsThe patent becomes worthlessRecord the write-off of the patentIf the patent becomes worthless before it is fully amortized, the remaining carrying value is written off as a loss by removing it from the Patents account84Copyright © Houghton Mifflin Company. All rights reserved.Research and Development Costs include the expenses of funding development of new products, testing of existing and proposed products, and pure researchShould be treated as revenue expenditures and charged to expense in the period when incurredAre continuous and necessary for the success of a business and should be treated as current expensesDo not necessarily result in future benefits (assets)85Copyright © Houghton Mifflin Company. All rights reserved.Computer Software Costs are costs incurred in creating computer software for sale or lease to others or for internal useAre considered R&D costs until the product has been proved to be technologically feasibleCosts incurred up to this point are expensed as incurredAfter the working program has been developed, all software production costs are recorded as assetsAmortize over the estimated economic life of the product using the straight-line method86Copyright © Houghton Mifflin Company. All rights reserved.Leasehold Improvements are improvements to leased property that become the property of the lessor (the owner of the property) at the end of the leaseImprovement costs are amortized over the remaining term of the lease or the useful life of the improvement, whichever is shorterAre classified as an intangible asset because improvements revert to the lessor at the end of the leaseAre more of a right than a tangible asset87Copyright © Houghton Mifflin Company. All rights reserved.Goodwill exists when a purchaser pays more for a business than the fair market value (FMV) of the net assets if purchased separatelyShould be amortized over a reasonable number of future time periods, but not longer than 40 yearsShould not be recorded unless it is paid for in connection with the purchase of a whole businessGoodwill = Purchase price - FMV of identifiable assets88Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhy would a company spend thousands of dollars on goodwill?The company is paying for anticipated superior earnings and probably feels it will more than recoup the goodwill purchased89Copyright © Houghton Mifflin Company. All rights reserved.Special Problems of Depreciating Plant AssetsSupplemental Objective 7Apply depreciation methods to problems of partial years, revised rates, groups of similar items, special types of capital expenditures, and cost recovery90Copyright © Houghton Mifflin Company. All rights reserved.Special Problems of Depreciating Plant AssetsIn practice there is often a need toCalculate depreciation for partial yearsRevise depreciation rates based on new estimates of useful life or residual valueGroup like items when calculating depreciationAccount for special types of capital expendituresUse the accelerated cost recovery method for tax purposes91Copyright © Houghton Mifflin Company. All rights reserved.Depreciation for Partial YearsOn September 5, a piece of equipment is purchased for $3,600 that has an estimated useful life of six years and a residual value of $600. The yearly accounting period ends on December 31Calculate depreciation to be recorded on December 31Double-declining-balance methodStraight-line methodRound off to whole months for partial year calculationsThe remaining 8/12 of the first year’s depreciation is recorded in the next annual recording period together with 4/12 of the second year’s depreciation92Copyright © Houghton Mifflin Company. All rights reserved.Revision of Depreciation Rates is necessary when it is determined that an asset will last for a longer or shorter period than originally thought The remaining depreciable cost of the asset is spread over the remaining years of useful lifeDepreciation expense is increased or decreased to reflect the asset’s changed life93Copyright © Houghton Mifflin Company. All rights reserved.Example of Revising Depreciation RatesA delivery truck was purchased for $7,000 and has a residual value of $1,000. At the time of purchase it was expected to last 6 years and was depreciated on a straight-line basis. After two years, it is determined that the truck will only last two more years and its residual value will still be $1,000 at that timeDelivery TruckAccum. Depreciation, TruckCost 7,000Depr. Yr 1 1,000Depr. Yr 2 1,0002,00094Copyright © Houghton Mifflin Company. All rights reserved. Example of Revising Depreciation RatesA delivery truck was purchased for $7,000 and has a residual value of $1,000. At the time of purchase it was expected to last 6 years and was depreciated on a straight-line basis. After two years, it is determined that the truck will only last two more years and its residual value will still be $1,000 at that time95Copyright © Houghton Mifflin Company. All rights reserved.Group Depreciation is widely used when like assets are grouped and depreciated togetherThis approach is convenient and includes assets such as trucks and office equipment96Copyright © Houghton Mifflin Company. All rights reserved.Recall that a capital expenditure is an expenditure for the purchase or expansion of a long-term asset and is recorded as an assetSpecial Types of Capital ExpendituresAdditionEnlargement to the physical layout of a plant assetNew wing to a buildingBettermentImprovement that does not add to the physical layout of a plant assetInstallation of air conditioning systemIn both cases, the cost is charged to the asset account97Copyright © Houghton Mifflin Company. All rights reserved.Extraordinary repairs are revenue expenditures that are treated as capital expenditures because they are more significant in nature than ordinary repairsSpecial Types of Capital Expenditures (cont’d)Revenue expenditures include repairs necessary to keep a long-term asset in good working conditionOrdinary repairsNecessary to maintain an asset in good operating conditionAre current expensesExtraordinary repairsSignificant repairs that affect the estimated residual value or estimated useful life of an assetReduce the related Accumulated Depreciation account A machine that cost $10,000 has no residual value and a useful life of ten years. After 8 years, accumulated depreciation is $8,000 and the carrying value is $2,000. At that point the machine is given a major overhaul, which cost $1,500 and extended the machine’s useful life 3 years beyond the original 10 yearsExtraordinary repairs reduce an asset’s accumulated depreciation, which increases its carrying valueRecord the extraordinary repairExample of Extraordinary Repairs99Copyright © Houghton Mifflin Company. All rights reserved.Cost Recovery for Federal Income Tax PurposesTax Reform Act of 1986Allows the first $25,000 (as of 2003) of equipment expenditures to be expensed rather than capitalized each yearAllows the Modified Accelerated Cost Recovery System (MACRS) for writing off expenditures recorded as assetsDiscards the concepts of estimated useful life and residual valueRequires that a cost recovery allowance be computedOn the unadjusted cost of property being recoveredOver a period of years prescribed by the law for all property of similar types100Copyright © Houghton Mifflin Company. All rights reserved.Cost Recovery for Federal Income Tax Purposes (cont’d)Congress hoped MACRS would encourage businesses to invest in new plant and equipment by allowing them to write off assets rapidlyShort recovery periodsHigher acceleration rateTax methods of depreciation are not usually acceptable for financial reporting under GAAPRecovery periods are shorter than asset’s useful lifeMACRS used for tax purposes only101Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat will be the effect on future years’ income of charging an addition to a building to repair expense?If an addition to a building is charged to repair expense, future years’ income will be overstated and the current year’s income will be understated102Copyright © Houghton Mifflin Company. All rights reserved.Time for ReviewIdentify the types of long-term assets and explain the management issues related to accounting for them.Distinguish between capital and revenue expenditures, and account for the cost of property, plant, and equipment.Define depreciation and compute depreciation under the straight-line, production, and declining-balance methods.103Copyright © Houghton Mifflin Company. All rights reserved.More ReviewAccount for the disposal of depreciable assets.Identify the issues related to accounting for natural resources and compute depletion.Identify the issues related to accounting for intangible assets, including research and development costs and goodwill.104Copyright © Houghton Mifflin Company. All rights reserved. And FinallyApply depreciation methods to problems of partial years, revised rates, groups of similar items, special types of capital expenditures, and cost recovery.105Copyright © Houghton Mifflin Company. All rights reserved.