Long-Term Assets

Chapter 10

Wild, Kwok, Shaw

Principles of Financial Accounting, 3e
(Custom Edition)

Copyright ©2023 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw
Hill.
 Chapter 10 Learning
Objectives
CONCEPTUAL
C1 Compute the cost of property, plant and equipment.
C2 Explain depreciation for partial years and changes in estimates.
C3 Distinguish between revenue and capital expenditures, and account for them.
C4 Explain the revaluation model to account for property, plant and equipment.

ANALYTICAL
A1 Compute total asset turnover and apply it to analyze a company’s use of assets.

PROCEDURAL
P1 Compute and record depreciation using the straight-line, units-of-production, and declining-
balance methods.
P2 Account for asset disposal through discarding or selling an asset.
P3 Account for natural resource assets and their depletion.
P4 Account for intangible assets.
P5 Appendix 10A—Account for asset exchanges.

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 Learning Objective C1

Compute the cost of property,

plant and equipment.

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 Property, Plant and Equipment:
Definition
Tangible in Nature

Used in Operations

Useful life of more than one accounting period

Also called Plant Assets or Fixed Assets

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Learning Objective C1: Compute the cost of property, plant and equipment.
 Property, Plant and
Equipment: Four Issues Exhibi
t 10.2

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Learning Objective C1: Compute the cost of property, plant and equipment.
 Cost Determination
All expenditures
needed to
Purchase prepare the asset
price Acquisition for its intended
Cost use

Acquisition cost includes all

normal and reasonable
expenditures necessary to get the
asset in place and ready for
intended use

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Learning Objective C1: Compute the cost of property, plant and equipment.
 Machinery and Equipment
Purchase
price Taxes

Machinery Transportation
charges
and
Equipment
Installing,
assembling, and Insurance while
testing in transit

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Learning Objective C1: Compute the cost of property, plant and equipment.
 Buildings
Purchase price Title fees

Lawyer fees Buildings Taxes

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Learning Objective C1: Compute the cost of property, plant and equipment.
 Land Improvements
Parking lots, driveways, walkways, fences, and
lighting systems.

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Learning Objective C1: Compute the cost of property, plant and equipment.
 Land
Title insurance fees
Purchase
Property
price
taxes

Land
Real estate
Surveying
commissions
fees
Title search and transfer fees

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Learning Objective C1: Compute the cost of property, plant and equipment.
 Lump-Sum Purchase Exhibi
t 10.4

The total cost of a combined purchase of land and building

is allocated based of their relative market values.

CarMax paid $90,000 cash to acquire a group of items

consisting of land appraised at $40,000 and a building
appraised at $60,000. The $90,000 cost will be allocated on
the basis of appraised values as shown:

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Learning Objective C1: Compute the cost of property, plant and equipment.
 Learning Objective P1

Compute and record

depreciation using the straight-
line, units-of-production, and
declining-balance methods.

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 Depreciation

Depreciation is the process of allocating the cost of

an item of property, plant and equipment to
expense while it is in use.

Balance Sheet Income Statement

Cost
Acquisition
Allocation Expense
Cost
(Unused) (Used)

Learning Objective P1: Compute and record depreciation using the straight-line, units-of- © McGraw Hill 14
production, and declining-balance methods.
 Factors in Computing Depreciation
The calculation of depreciation
requires three amounts for each asset:
1. Cost
2. Residual Value
3. Useful Life

Learning Objective P1: Compute and record depreciation using the straight-line, units-of-production, © McGraw Hill 15
and declining-balance methods.
 Depreciation Methods
1. Straight-line
2. Units-of-production
3. Declining-balance Exhibi
t 10.5

Learning Objective P1: Compute and record depreciation using the straight-line, units-of-production, © McGraw Hill 16
and declining-balance methods.
 Straight-Line Method:
Example

Exhibi
t 10.6

Learning Objective P1: Compute and record depreciation using the straight-line, units-of-production, © McGraw Hill 17
and declining-balance methods.
 Straight-Line Method:
Balance Sheet Exhibi
t 10.7

Learning Objective P1: Compute and record depreciation using the straight-line, units-of- © McGraw Hill 18
production, and declining-balance methods.
 Straight-Line Depreciation
Schedule Exhibi
t
10.8

Learning Objective P1: Compute and record depreciation using the straight-line, units-of-production, © McGraw Hill 19
and declining-balance methods.
 Units-of-Production Method:
Two-Step Process and Example Exhibi
t
10.9

Learning Objective P1: Compute and record depreciation using the straight-line, units-of- © McGraw Hill 20
production, and declining-balance methods.
 Units-of-Production
Depreciation Schedule Exhibi
t
10.10

Learning Objective P1: Compute and record depreciation using the straight-line, units-of- © McGraw Hill 21
production, and declining-balance methods.
 Declining-Balance Method:
Three Steps
Exhibi
t
10.11

Learning Objective P1: Compute and record depreciation using the straight-line, units-of- © McGraw Hill 22
production, and declining-balance methods.
 Double-Declining-Balance
Method: Schedule
Exhibi
t
10.12

Learning Objective P1: Compute and record depreciation using the straight-line, units-of- © McGraw Hill 23
production, and declining-balance methods.
 Comparing Depreciation Methods
Exhibi
t
10.13

Learning Objective P1: Compute and record depreciation using the straight-line, units-of- © McGraw Hill 24
production, and declining-balance methods.
 Depreciation for Tax
Reporting

Depending on the country, the records a

company keeps for financial accounting
purposes can be separate from the records
it keeps for tax accounting purposes.

Learning Objective P1: Compute and record depreciation using the straight-line, units-of- © McGraw Hill 25
production, and declining-balance methods.
 Learning Objective C2

Explain depreciation for partial

years and changes in
estimates.

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 Partial-Year Depreciation
When an asset is purchased (or sold) during the year,
depreciation is calculated for the fraction of the year
the asset is owned.
Cost $ 10,000
Assume our machinery was purchased
Residual value 1,000
on October 1, 2018. Let’s calculate
Depreciable cost $ 9,000
depreciation expense for 2018
Useful life
assuming we use straight-line
Accounting periods 5 years
Units inspected 36,000 units
depreciation.

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Learning Objective C2: Explain depreciation for partial years and changes in estimates.
 Changes in Estimates
Predicted Predicted
residual value useful life

Depreciation
is an estimate

Over the life of an asset, new information

may come to light that indicates the
original estimates were inaccurate.
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Learning Objective C2: Explain depreciation for partial years and changes in estimates.
 Changes in Estimates for
Depreciation
Let’s return to the machine in Exhibit 10.8 using straight-line
depreciation. At the beginning of this asset’s third year, its
carrying amount is $6,400. Assume that at the beginning of its
third year, the estimated number of years remaining in its
useful life changes from three to four years and its estimate of
Exhibi
residual value changes from $1,000 to $400. t
10.13

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Learning Objective C2: Explain depreciation for partial years and changes in estimates.
 Learning Objective C3

Distinguish between revenue

and capital expenditures, and
account for them.

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 Additional Expenditures
• Revenue expenditures
– Do not materially increase the property, plant and
equipment’s life or capabilities.
– Recorded as an expense in the current period.
– Reported on the income statement.
• Capital expenditures
– Provide benefits for longer than the current period.
– Recorded as an addition to the asset account.
– Reported on the balance sheet.

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Learning Objective C3: Distinguish between revenue and capital expenditures, and account for them.
 Revenue and Capital
Expenditures
Revenue expenditures

Capital expenditures

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Learning Objective C3: Distinguish between revenue and capital expenditures, and account for them.
Learning Objective C4

Explain the revaluation

model to account for
property, plant and
equipment.

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 Measurement Models
• Cost Model
– Based on cost less any accumulated depreciation
and any accumulated
• Revaluation Model
– Based on fair value at the date of the revaluation
less any subsequent accumulated depreciation
and subsequent accumulated impairment losses

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Learning Objective C4: Explain the revaluation model to account for property, plant and equipment.
 Impairment
An impairment
is the amount by which the carrying amount of an asset
exceeds its recoverable amount.

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Learning Objective C4: Explain the revaluation model to account for property, plant and equipment.
 Learning Objective P2

Account for asset disposal

through discarding or selling an
asset.

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 Disposals of Property, Plant and
Equipment
Exhibi
t
10.15

Learning Objective P2: Account for asset disposal through discarding or selling an © McGraw Hill 37
asset.
 Discarding Property, Plant and
Equipment:
Asset Fully Depreciated
• A machine costing $9,000 with accumulated depreciation of
$9,000 is discarded.
• The machine is fully depreciated (zero carrying amount).

Learning Objective P2: Account for asset disposal through discarding or selling an © McGraw Hill 38
asset.
 Discarding Property, Plant and
Equipment: Asset Not Fully Depreciated
• Equipment costing $8,000, with accumulated depreciation of
$6,000 on 12/31 of previous year, was discarded on 7/1.
• The company is using straight-line depreciation over eight years
with zero residual value.

Learning Objective P2: Account for asset disposal through discarding or selling an © McGraw Hill 39
asset.
 Selling Property, Plant and
Equipment – At Carrying Amount
• 3/31, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at 12/31 of the prior year.
• BTO uses straight-line depreciation at $4,000 per year.
• The equipment is sold for $3,000 cash.

Learning Objective P2: Account for asset disposal through discarding or selling an © McGraw Hill 40
asset.
 Selling Property, Plant and Equipment –
Above Carrying Amount
• 3/31, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at 12/31 of the prior year.
• BTO uses straight-line depreciation at $4,000 per year.
• The equipment is sold for $7,000 cash.

Learning Objective P2: Account for asset disposal through discarding or selling an © McGraw Hill 41
asset.
 Selling Property, Plant and Equipment –
Below Carrying Amount
• 3/31, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at 12/31 of the prior year.
• BTO uses straight-line depreciation at $4,000 per year.
• The equipment is sold for $2,500 cash.

Learning Objective P2: Account for asset disposal through discarding or selling an © McGraw Hill 42
asset.
 Learning Objective P3

Account for natural resource

assets and their depletion.

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 Natural Resources
Extracted from
Total cost the natural
is charged to environment
depletion expense and reported
over periods at cost less
benefited. accumulated
depletion.

Learning Objective P3: Account for natural resource assets and their © McGraw Hill 44
depletion.
 Cost Determination
and Depletion

A mineral deposit with an estimated 250,000 tons

of available ore is purchased for $500,000, and we
expect zero residual value. Exhibi
t
10.16

Learning Objective P3: Account for natural resource assets and their © McGraw Hill 45
depletion.
 Depletion of Natural Resources
Depletion expense in the first year would be:

Exhibi
Balance Sheet presentation of natural resources: t
10.17

Learning Objective P3: Account for natural resource assets and their © McGraw Hill 46
depletion.
 Depletion of Natural Resources:
Journal Entry
Depletion expense when some ore remains unsold
at year-end:

Learning Objective P3: Account for natural resource assets and their © McGraw Hill 47
depletion.
 Property, Plant and Equipment
Tied into Extracting
• Specialized property, plant and equipment may
be required to extract the natural resource.
• These assets are recorded in a separate account
and depreciated.

Learning Objective P3: Account for natural resource assets and their © McGraw Hill 48
depletion.
 Learning Objective P4

Account for intangible assets.

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 Intangible Assets
Noncurrent assets
without physical
substance.

Provide rights Usually acquired

Intangible for operational
or competitive
advantages. Assets use.

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Learning Objective P4: Account for intangible assets.
 Cost Determination and Amortization
o Patents
o Copyrights
o Franchises and Licenses
Record at cost when o Trademarks and Trade Names
purchased. o Goodwill
o Right-of-Use Asset (Lease)
o Leasehold Improvements
o Other Intangibles
o Research and Development
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Learning Objective P4: Account for intangible assets.
 Learning Objective A1

Compute total asset turnover

and apply it to analyze a
company’s use of assets.

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 Total Asset Turnover
Total asset Net sales Exhibi
turnover = t
Average total assets 10.18

Provides information about a company’s

efficiency in using its assets.

Exhibi
t
10.19

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Learning Objective A1: Compute total asset turnover and apply it to analyze a company’s use of assets.
 Learning Objective P5

Appendix 10A
Account for asset exchanges.

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 Exchanging Property, Plant and
Equipment
• Many items of property, plant and equipment such as
machinery, automobiles, and office equipment are
exchanged for newer assets.
• In an exchange, 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.

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Learning Objective P5: Account for asset exchanges.
 Exchange with Commercial
Substance: A Loss Exhibi
t
10A.1
• A 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 (book value is $16,000).
• This exchange has commercial substance. The old equipment has a trade-
in allowance of $9,000.

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Learning Objective P5: Account for asset exchanges.
 Exchange with Commercial
Substance: Journal Entry for A Loss
• A 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 (book value is $16,000).
• This exchange has commercial substance. The old equipment has a trade-
in allowance of $9,000.

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Learning Objective P5: Account for asset exchanges.
 Exchange With Commercial
Substance: Journal Entry for A Gain
Let’s assume the same facts as in the preceding asset exchange
except that the company pays $23,000 cash with the trade-in.

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Learning Objective P5: Account for asset exchanges.
End of Chapter 10

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