Accounting Module 5Chapter 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○ Use and time typically reduces value of land improvements, buildings, and equipment● 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○ Purchase cost + Delivery cost and Installation cost● Capital expenditures○ Expenditures for the purchase or expansion of plant assets ○ Recorded in asset accounts● Capitalize○ charging an expenditure to an asset account rather than to an expense account● Revenue expenditures○ Expenditures for ordinary repairs, maintenance, fuel, and other items necessary to the ownership and use of plant and equipment○ Recorded in expense accounts● Depreciation○ The allocation of the cost of a tangible plant asset to expense in the periods in which services are received from the asset.○ The basic purpose of depreciation is to offset the revenue of an accounting period with the costs ofthe goods and services being consumed that are required to generate that revenue.○ Causes of depreciation■ Physical deterioration● 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:○ The systematic write-off to expense of the cost of an intangible asset over its useful life.● Goodwill○ The amount of expected future earnings of a business in excess of the earnings normally realized in the industry. ○ Goodwill is measured as the price paid for a company in excess of the fair market value of its net assets.○ Goodwill may result from a favorable reputation, positive market share, and other favorable 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 overthe 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 ?■ Depreciation○ 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.■ False○ The cost of a natural resource is gradually transferred to the asset ? as the resource is extracted.■ Inventory○ 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 asset accounts.■ Capital○ The difference between the cost of an asset and its accumulated depreciation is referred to as the ? value.■ Book Value○ Allocating the cost of a plant asset to expense over its useful life is referred to as ?■ Depreciation○ 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