Long-Term--Assets

Chapter10CalledProperty,Plant,&Equipmentproperty,plantandequipmentExpectedtoBenefitFuturePeriodsActivelyUsedinOperationsTangibleinNatureC1property,plantandequipmentC1AcquisitionCostAcquisitioncostexcludesfinancingchargesandcashdiscountsAllexpendituresneededtopreparetheassetforitsintendedusePurchasepriceCostDeterminationC1Landisnotdepreciable.PurchasepriceRealestatecommissionsTitleinsurancepremiumsDelinquenttaxesSurveyingfeesTitlesearchandtransferfeesLandC1LandImprovementsParkinglots,driveways,fences,walks,shrubs,andlightingsystems.Depreciateoverusefullifeofimprovements.C1CostofpurchaseorconstructionBrokeragefeesTaxesTitlefeesAttorneyfeesBuildingsC1PurchasepriceInstalling,assembling,andtestingInsurancewhileintransitTaxesTransportationchargesMachineryandEquipmentC1Lump-SumAssetPurchaseCarMaxpaid$90,000cashtoacquireagroupofitemsconsistingoflandappraisedat$30,000,landimprovementsappraisedat$10,000,andabuildingappraisedat$60,000.The$90,000costwillbeallocatedonthebasisofappraisedvaluesasshown:Thetotalcostofacombinedpurchaseoflandandbuildingisseparatedonthebasisoftheirrelativefairmarketvalues.P1Depreciationistheprocessofallocatingthecostofanitemofproperty,plantandequipmenttoexpenseintheaccountingperiodsbenefitingfromitsuse.CostAllocationAcquisitionCost(Unused)BalanceSheet(Used)IncomeStatementExpenseDepreciationP1FactorsinComputingDepreciationThecalculationofdepreciationrequiresthreeamountsforeachasset:1.Cost2.ResidualValue3.UsefulLifeP1DepreciationMethods1.Straight-line2.Units-of-production3.Declining-balanceAssetwewilldepreciateinfuturescreensP1Straight-LineMethodP1BalanceSheetPresentationMachinery$10,000Less:accumulateddepreciation3,600$6,400P1ForyearendedDecember31AsofDecember31Straight-LineMethodStraight-LineDepreciationScheduleP1Units-of-ProductionMethodStep2:DepreciationExpense=DepreciationPerUnit×NumberofUnitsProducedinthePeriodDepreciationPerUnit=Cost-ResidualValueTotalUnitsofProductionStep1:P1Units-of-ProductionMethodDepreciationPerUnit=Cost-ResidualValueTotalUnitsofProductionStep1:=$9,00036,000=$0.25/unitStep2:DepreciationExpense=DepreciationPerUnit×NumberofUnitsProducedinthePeriod=$0.25×7,000=$1,750Assumethat7,000unitswereinspectedduring2011.Depreciationwouldbecalculatedasfollows:P1Units-of-ProductionDepreciationScheduleP1Unitsproducedandsoldduringtheperiod.Double-Declining-BalanceMethodP1Double-Declining-BalanceMethodP1ComparingDepreciationMethodsDouble-Straight-UnitsofDeclining-PeriodLineProductionBalance20111,800$1,750$4,000$20121,8002,0002,40020131,8002,2501,44020141,8001,75086420151,8001,250296Totals9,000$9,000$9,000$$-$500$1,000$1,500$2,000$2,500$3,000$3,500$4,00020112012201320142015Straight-LineUnits-of-ProductionDouble-Declining-BalanceP1Partial-YearDepreciationWhenanitemofproperty,plantandequipmentisacquiredduringtheyear,depreciationiscalculatedforthefractionoftheyeartheassetisowned.Cost$10,000Residualvalue1,000Depreciablecost$9,000UsefullifeAccountingperiods5yearsUnitsinspected36,000unitsAssumeourmachinerywaspurchasedonOctober8,2010.Let’scalculatedepreciationexpensefor2010,assumingweusestraight-linedepreciation.C2DepreciationisanestimatePredictedresidualvaluePredictedusefullifeChangeinEstimatesforDepreciationOverthelifeofanasset,newinformationmaycometolightthatindicatestheoriginalestimateswereinaccurate.C2ChangeinEstimatesforDepreciationLet’slookatourmachineryfromthepreviousexamplesandassumethatatthebeginningoftheasset’sthirdyear,itscarryingamountis$6,400($10,000costless$3,600accumulateddepreciationusingstraight-linedepreciation).Atthattime,itisdeterminedthatthemachinerywillhavearemainingusefullifeof4years,andtheestimatedresidualvaluewillbereviseddownwardfrom$1,000to$400.C2ReportingDepreciationDaleJarrettRacingAdventureOfficefurnitureandequipment$54,593Shopandtrackequipment202,973Racevehiclesandother975,084Propertyandequipment,gross1,232,650Less:accumulateddepreciation628,355Propertyandequipment,net$604,295C2AdditionalExpendituresIftheamountsinvolvedarenotmaterial,mostcompaniesexpensetheitem.FinancialStatementEffectCurrentCurrentTreatmentStatementExpenseIncomeTaxesCapitalBalancesheetExpenditureaccountdebitedRevenueIncomestatementCurrentlyExpenditureaccountdebitedrecognizedDeferredHigherHigherLowerLowerC3RevenueandCapitalExpendituresCapitalorRevenueIdentifyingCharacteristics1.Maintainsnormaloperatingcondition.2.Doesnotincreaseproductivity.3.Doesnotextendlifebeyondoriginalestimate.1.Majoroverhaulsorpartialreplacements.2.Extendslifebeyondoriginalestimate.RevenueCapitalC3Recordingcashreceived(debit)orpaid(credit).Removingaccumulateddepreciation(debit).Updatedepreciationtothedateofdisposal.Journalizedisposalby:Removingtheassetcost(credit).Recordingagain(credit)orloss(debit).Disposalsofproperty,plantandequipmentP2Updatedepreciationtothedateofdisposal.Journalizedisposalby:IfCashCA,recordagain(credit).IfCashCA,recordaloss(debit).IfCash=CA,nogainorloss.Discardingproperty,plantandequipmentRecordingcashreceived(debit)orpaid(credit).Removingaccumulateddepreciation(debit).Removingtheassetcost(credit).Rec