Accounting Module 5 Chapter 9 Plant Assets Long lived assets that are acquired for use in business operations rather than for resale to customers Categories of plant assets Tangible plant assets Plant assets that have physical substance but that are not natural resources Examples include land land improvements buildings and all types of equipment and equipment Use and time typically reduces value of land improvements buildings Material costs of acquiring and readying items for service may be capitalized and subsequently expensed over time After these items begin to serve the company expenditures must improve i e increase function of the item to be capitalized and depreciated over time If these expenditures do not improve the asset they are expensed in the current period 2 classifications of tangible assets Property subject to depreciation Included are plant assets of limited useful life such as buildings vehicles and office equipment Land Has unlimited term of existence Intangible assets assets that are used in the operation of the business but have no physical qualities and are noncurrent Examples Include patents copyrights trademarks franchises and goodwill Generally these will only show up as assets if they are PURCHASED as Research and Development Costs must be expensed as incurred Natural resources A site acquired for the purpose of extracting or removing some valuable resource such as oil minerals or timber converted into inventory as the natural resource is extracted from the site Cost of a plant asset Capital expenditures Purchase cost Delivery cost and Installation cost Expenditures for the purchase or expansion of plant assets Recorded in asset accounts Capitalize Revenue expenditures charging an expenditure to an asset account rather than to an expense account Expenditures for ordinary repairs maintenance fuel and other items necessary to the ownership and use of plant and equipment Recorded in expense accounts Depreciation received from the asset Causes of depreciation Physical deterioration The allocation of the cost of a tangible plant asset to expense in the periods in which services are The basic purpose of depreciation is to offset the revenue of an accounting period with the costs of the goods and services being consumed that are required to generate that revenue Physical deterioration of a plant asset results from use as well as from exposure to sun wind and other climatic factors Obsolescence the process of an asset becoming out of date as a result of improved more efficient assets becoming available Book Value Plant asset cost minus the accumulated depreciation Straight Line Depreciation Method Cost of asset residual value years of useful life depreciation for one year Residual salvage Value The portion of an asset s cost expected to be recovered through sale or trade in of the asset at the end of its useful life There are ACCELERATED methods which many companies use for tax returns Half year Convention Depreciation Cost of asset residual value years of useful life 2 depreciation for the year Gain Loss Questions Cost of asset accumulated depreciation value book value Sale value book value amount gained or lost Units of Output Depreciation Method Cost of asset residual value estimated units of output cost per unit of output Amortization Goodwill The systematic write off to expense of the cost of an intangible asset over its useful life The amount of expected future earnings of a business in excess of the earnings normally realized Goodwill is measured as the price paid for a company in excess of the fair market value of its net Goodwill may result from a favorable reputation positive market share and other favorable in the industry assets operating characteristics Intangible asset Results from Favorable reputation Positive market share Positive advertising image Reputation for high quality and loyal employees Superior management Manufacturing and other operating efficiency Questions Long lived assets that are expected to provide service over several years are referred to as assets Plant Examples of plant assets are buildings equipment A company purchased equipment for 10 000 and in addition incurred the following a delivery cost of 400 an installation cost of 500 a cost to repair damage during shipment of 700 and a first year maintenance cost of 600 What is the cost of the asset for purposes of depreciation over the equipment s estimated useful life 10 900 Reason 10 000 400 500 10 900 Small expenditures related to plant assets the benefits from whom will be used up in the current period should be recorded in accounts Expense A company purchases a truck and records the cost in an asset account That cost is gradually moved into an expense account as the truck benefits the company over several accounting periods This process is referred to as True or false The cost of a plant asset is initially recorded in the income statement and over the asset s life is gradually transferred to the balance sheet The cost of a natural resource is gradually transferred to the asset as the resource is extracted Which of the following is included in the cost of a plant asset delivery and installation costs The distinction between capital and revenue expenditures is that expenditures are recorded in The difference between the cost of an asset and its accumulated depreciation is referred to as the Depreciation False Inventory asset accounts Capital value Book Value Depreciation Allocating the cost of a plant asset to expense over its useful life is referred to as Which of the following cause s depreciation physical deterioration obsolescence A company purchases equipment for 100 000 and expects to use it for 5 years The expected salvage value at the end of that period is 20 000 What is the annual depreciation under the straight line method 16 000 Reason 100 000 20 000 5 16 000 A company that reports on the calendar year acquires a major piece of equipment at 75 000 It is expected to be used for 5 years with a salvage value of 15 000 The purchase was made on May 1 If partial year depreciation is calculated to the nearest month how much is depreciation for the year of acquisition 8 000 Reason 75 000 15 000 5 12 000 or 1 000 per month 1 000 8 months 8 000 A company acquired a warehouse for 500 000 which it expects to use for 25 years with an estimated residual value of 100 000 at the end of that time If the company employs the half year convention how much is depreciation expense for