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Chapter 9 Investments in Property, Plant, and Equipment and in Intangible Assets

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Chapter 9Long-Term AssetsCapital BudgetingAsset AcquisitionLeasesMatch Lease TermsClassifying LeasesOperating LeaseCapital LeaseAssets Acquired by Self ConstructionBasket PurchasesDepreciationStraight-Line DepreciationUnits-of-Production DepreciationPartial-Year DepreciationRepairing and Improving AssetsImpairmentsSlide 18Discarding and Selling Long-Term AssetsSlide 20Slide 21Accounting for IntangiblesTypes of IntangiblesRecognizing Intangible AssetsGoodwillAccounting for GoodwillMeasuring the Management of Long-Term AssetsAccelerated Depreciation MethodsDouble-Declining-BalanceSum-of-Years’-Digits MethodChange in Depreciation Estimates and MethodsChange in EstimatesCOPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.1Chapter 9Investments in Property, Plant, and Equipment and in Intangible AssetsAlbrecht, Stice, Stice, Swain2Long-Term Assets•Property, plant, and equipment–Tangible assets acquired for the use in business operations.–Land, buildings, and equipment.•Intangible Assets–Assets without physical substance that are used in business.–Licenses, patents, franchises, and goodwill.3Capital Budgeting•Capital budgeting–Planning for investment in long-term assets.–Long-term assets have value because they help companies generate future cash flows.–Involves comparing the cost of the asset to the value of the expected cash flows, after adjusting for the time value of money.•Time value of money–The concept that a dollar today is worth more than a dollar received in the future.4Asset Acquisition•Include purchase price.•Include costs incurred to acquire the asset and getting it ready for its intended use.–Sales tax, shipping, installation, and other costs.Fork Lift. . . . . . . . . . . . . . . . . . . . . . . . 12,500Cash. . . . . . . . . . . . . . . . . . . . . . . . 3,500Notes Payable. . . . . . . . . . . . . . . . 9,000Purchased a fork lift for $12,000 and paid $500 for shipping; paid $3,500 cash and issued a note for $9,000 to the bank.5Leases•Lease–A contract that specifies the terms under which the owner of an asset (the lessor) agrees to transfer the right to use the asset to another party (the lessee). –What terms should be included in a lease?•Term•Payment amount•Due dates6Match Lease Terms•The party that is granted the right to use the property under the terms of a lease.LesseeLessorOperating LeaseCapital Lease•The owner of property that is leased (rented) to another party.•A simple rental agreement.•A leasing transaction that is recorded as a purchase by the lessee.7Classifying Leases•A lease is classified as a capital lease if it is non-cancelable and meets one of the following criteria:1. Lease transfers ownership of the asset.2. Lease contains a bargain purchase option.3. Lease term is equal to 75% or more of the estimated life of the asset.4. Present value of the lease payments is equal to 90% or more of the fair market value of the asset.8Operating LeaseDahl & Sons, Attorneys at Law, leases a building with monthly rental payments of $1,000. Make the appropriate entry if rent is paid in cash the first month.Rent (or Lease) Expense . . . . . . . . . .1,000 Cash. . . . . . . . . . . . . . . . . . . . . . . . 1,000To record monthly rent of storage building.9Capital LeaseDahl & Sons enters into a non-cancelable lease agreement that requires lease payments of $100,000 a year for 20 years. At the end of 20 years, Dahl & Sons will own the property. The present value of the lease payments at a 10% discount rate is $851,360. Make the appropriate entries.Leased Property. . . . . . . . . . . . . . . . 851,360Lease Liability. . . . . . . . . . . . . . . . 851,360To record commercial building acquired under a 20-year non-cancelable lease.Lease Liability. . . . . . . . . . . . . . . . . . 14,864 Interest Expense. . . . . . . . . . . . . . . . 85,136 Cash. . . . . . . . . . . . . . . . . . . . . . . . 100,000To record annual payment under capital lease.10Assets Acquired bySelf Construction•Self-constructed assets–Recorded at cost. –Include all expenditures incurred to build the asset and make it ready for its intended use. •Costs include:–Materials used to build the asset.–The construction labor. –Capitalized interest.–Some reasonable share of the general company overhead.11Basket Purchases %When two or more assets are acquired at a single price, the prices are allocated on the “relative fair market value” method. In this example, Dahl and Sons purchased land and a building at a total cost of $3,600,000. Prepare the entry to record the purchase.Land. . . . . . . . . . . . . . . . . . . . . . . . . . . 900,000 Building. . . . . . . . . . . . . . . . . . . . . . . .2,700,000Cash. . . . . . . . . . . . . . . . . . . . . . . . 3,600,000To record building and land acquired for $3,600,000. 3,000,000100 $3,600,000Asset FMV% of TotalValueCostLand $1,000,000 25% 0.25 x $3,600,000 = $ 900,000Building 75 0.75 x $3,600,000 = 2,700,000Total $4,000,00012Depreciation•Depreciation–The process of cost allocation that assigns the original cost of plant and equipment to the periods benefited.•Book value–The assets original cost less any accumulated depreciation.•Salvage value–The amount expected to be received when the asset is sold at the end of its useful life.13Straight-Line Depreciation•Costs assigned equally to all periods benefited.Annual DepreciationExpense=Cost - Salvage valueEstimated usefullife (years)=$24,000 - $2,0004 years$5,500Depreciation Expense. . . . . . . . . . . . . . . . . 5,500Accumulated Depreciation. . . . . . . . . . . 5,500To record annual depreciation for truck.14Units-of-Production Depreciation•Assigning depreciation according to what has been used during the year.Per UnitDepreciation=Cost - Salvage valueEstimated life in unitsDepreciationExpense=Per unitdepreciationxUnitsproducedDepreciation Expense. . . . . . . . . . . . . . . . . 4,400Accumulated Depreciation. . . . . . . . . . . 4,400To record annual depreciation for truck.($24,000 - $2,000)60,000 milesx12,000miles=$4,40015Partial-Year Depreciation•Straight-line method–Calculate depreciation expense for the year.–Distribute it evenly over the number of months the asset is held during the year.•Units-of-production method–The same as normal because it is based off of the actual


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