Accounting 2001Chapter 9 Notes1. Describe how the cost principle applies to plant assets.2. Explain the concept of depreciation.3. Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods. 4. Describe the procedure for revising periodic depreciation.5. Explain how to account for the disposal of plant assets.6. Describe methods for evaluating the use of plant assets.7. Identify the basic issues related to reporting intangible assets.8. Indicate how long-lived assets are reported in the financial statements.Determining the Cost of Plant AssetsPlant assets are resources that have  physical substance (a definite size and shape),  are used in the operations of a business,  are not intended for sale to customers,  are expected to provide service to the company for a number of years, except for land.Cost Principle - requires that companies record plant assets at cost.  Cost consists of all expenditures necessary to acquire an asset and make itready for its intended use.  Revenue expenditure – costs incurred to acquire a plant asset that are expensed immediately. Ex. repairs  Capital expenditures - costs included in a plant asset account. 1Accounting 2001Chapter 9 NotesCost - cash paid in a cash transaction or the cash equivalent price paid. Cash equivalent price is the fair value of the asset given up or fair value of the asset received, whichever is more clearly determinable.LandAll necessary costs incurred in making land ready for its intended use increase the Land account with a debit.Costs typically include:1) Cash purchase price, 2) Closing costs such as title and attorney’s fees, 3) real estate brokers’ commission, and 4) accrued property taxes and other liens on the land assumed by the purchaser.5) Costs for getting land ready for use (clearing, removing old building).Illustration: Assume that Hayes Manufacturing Company acquires real estate at a cash cost of $100,000. The property contains an old warehouse that is razed at a net cost of $6,000 ($7,500 in costs less $1,500 proceeds from salvaged materials). Additional expenditures are the attorney’s fee, $1,000, and the real estate broker’s commission, $8,000. Required: Determine the amount to be reported as the cost of the land.Land1) Price of Property 100,0002) Net Cost Removal 6,0003) Attorney Fee 1,0004) R/E commission 8,000Cost of land $115,000Land ImprovementsIncludes all expenditures necessary to make the improvements ready for their intended use. Limited useful lives. (driveways, parking lots, fences, landscaping, etc.) Expensing, or depreciating, the cost of land improvements over their useful lives 2Accounting 2001Chapter 9 NotesBuildingsIncludes all costs related directly to purchase or construction.Purchase costs: Purchase price, closing costs (attorney’s fees, title insurance, etc.) and real estate broker’s commission. Remodeling and replacing or repairing the roof, floors, electrical wiring, and plumbing.Construction costs: Contract price plus payments for architects’ fees, building permits, and excavation costs.EquipmentInclude all costs incurred in acquiring equipment and preparing it for use.Costs typically include: Cash purchase price. Sales tax. Freight charges.  Insurance during transit paid by the purchaser. Expenditures required in assembling, installing, and testing.Illustration: Lenard Company purchases a delivery truck at a cash price of $22,000. Related expenditures are sales taxes $1,320, painting and lettering $500, motor vehicle license $80, and a three-year accident insurance policy $1,600. Compute the cost of the delivery truck.Truck1) Cash Price 22,0002) Sales Taxes 1,3203) Painting and Lettering 500Cost of delivery truck $23,820Prepare the journal entry:Equipment 23,820 License Expense 80Prepaid Insurance 1600 Cash $25,5003Accounting 2001Chapter 9 NotesDepreciationProcess of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. Process of Cost Allocation, not asset valuation. Applies to land improvements, buildings, and equipment, not land. Depreciable, because the revenue-producing ability of asset will decline over the asset’s useful life.4Accounting 2001Chapter 9 NotesStraight-Line Method Expense is the same amount for each year. Depreciable cost = Cost minus salvage.YearDepreciableCostRateAnnualExpenseAccum.DepreciationBook Value2012 12000 20% 2400 2400 $10,600(13000-2400)2013 12000 20% 2400 4800 $82002014 12000 20% 2400 7200 $58002015 12000 20% 2400 9600 $34002016 12000 20% 2400 12000 $1000What is the journal entry for 2012? 12/31/12 Depreciation Expense 24001/1/12 Equipment 13000 Accumulated Depreciation 2400Cash 13000Partial-Year DepreciationAssume the delivery truck was purchased on April 1, 2012.YearDepreciableCostRateAnnualExpensePartialYearCurrent YearExpenseAccum.Depreciation2012 12000 20% 2400 9/12 1800 18002013 12000 20% 2400 12/12 2400 42002014 12000 20% 2400 12/12 2400 66002015 12000 20% 2400 12/12 2400 90002016 12000 20% 2400 12/12 2400 114002017 12000 20% 2400 3/12 600 120005Accounting 2001Chapter 9 Notes(13000-1000)/5 x 9/12= 1800Declining Balance Method Accelerated method. Decreasing Annual depreciation expense over the asset’s useful life. Double declining-balance rate is double the straight-line rate. Rate applied to Book Value.YearBeginningBook ValueDecliningRateAnnualExpenseAccum.DepreciationBook Value2012 13000 40% 5200 5200 78002013 7800 40% 3120 8320 46802014 4680 40% 1872 10192 28082015 2808 40% 1123 11315 16852016 1685 685 12000 1000What is the journal entry for 2012?Depreciation Expense 5200 Accum. Depreciation 5200Partial-Year DepreciationAssume the delivery truck was purchased on April 1, 2012.YearBeginningBook ValueDecliningRateAnnualExpensePartialYearCurrent YearExpenseAccum.Depreciation2012 13000 40% 5200 9/12 3900 39002013 9100 40% 3640 3640 75402014201520162017What is the journal entry for 2012?12/31/12 Depreciation Expense 3900Accum. Depreciation 39006Accounting 2001Chapter 9 NotesUnits of Activity Method Suited to equipment whose activity can be measured in units of output, miles driven, or hours in use. Calculate depreciation cost per unit. ______________ varies based on units of activity. Depreciable cost is cost less ________________ value.YearHoursUsedRate