Chapter 16-1Learning ObjectivesWhat is the Cost of Property, Plant, and Equipment?Accounting for Asset AcquisitionsRevenue vs. Capital ExpendituresSlide 6Revenue vs. Capital ExpendituresCost Basis of PPE (Basket Purchases)Cost Basis of PPE (Basket Purchases)PowerPoint PresentationWhat is Depreciation?What are the Factors Affecting Depreciation Calculations?Methods of DepreciationSlide 14Methods of DepreciationExerciseExercise Depreciatiob rate=57,000-5000/6,500,000=0.008Slide 18Slide 19Slide 20Slide 21Depreciation Methods UsedHandling Changes in EstimatesSlide 24Slide 25What are Depletion and Amortization?AmortizationAnnouncementsChapter 16-2Slide 30Asset DisposalsSlide 32Asset Disposals Outright SaleOutright Sale: Example AOutright Sale: Example BOutright Sale: Example CSlide 37Slide 38Slide 39Example (cash disposal)Example (dissimilar exchange)Dissimilar Exchange With CashAsset Disposals Exchanges of Similar AssetsSlide 44Example: Similar AssetsSlide 46Slide 47McGraw-Hill/IrwinCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter 16-1Chapter 16-1Recording and Evaluating Capital Resource Activities: Investing16-2Learning ObjectivesLearning Objectives•LO1 Explain, record and report long-term asset purchases.•LO2 Describe, record and report depreciation, depletion and amortization of long-term assets•LO3 Discuss, record and report long-term asset sales, disposals and trade-ins.16-3What is the Cost of Property, Plant, and Equipment?What is the Cost of Property, Plant, and Equipment?•PPE, plant assets, is recorded as the total amount required to obtain and get the asset ready for its intended use. This category includes land, building and equipment.•Purchase price•Costs incurred to obtain (freight, etc.)•Cost incurred to setup (installation, etc.)16-4•When an asset is initially acquired, we When an asset is initially acquired, we capitalizecapitalize it (record it as as asset it (record it as as asset on the books). For example, if a building were acquired with cash, our on the books). For example, if a building were acquired with cash, our entry would be:entry would be:•We capitalize the acquisition because it is expected to benefit more than We capitalize the acquisition because it is expected to benefit more than just the current period.just the current period.•The alternative for items that don’t benefit future periods is to The alternative for items that don’t benefit future periods is to expenseexpense the item (record it as an expense on the income statement).the item (record it as an expense on the income statement).Dr Building Dr Building XX XXCr CashCr CashXXXXAccounting for Asset AcquisitionsAccounting for Asset Acquisitions16-5The proper treatment of expenditures (capitalize or expense) made after an asset’s initial purchase hinges on the question of future benefits. Example:Example: Harpo Foods owns a delivery van that they drive approximately 20,000 miles per year. They change the oilchange the oil (at a cost of $50) every 3,000 miles. Which of the following is the correct treatment of the $50?DrDrExpense Expense 5050 CrCrCash Cash 5050An oil change does not benefit future periods.CORRECTRevenue vs. Capital ExpendituresRevenue vs. Capital ExpendituresRevenue vs. Capital ExpendituresRevenue vs. Capital ExpendituresDrDrDelivery Van Delivery Van 5050 CrCrCash Cash 505016-6The proper treatment of expenditures (capitalize or expense) made after an asset’s initial purchase hinges on the question of future benefits. Example:Example: Harpo Foods owns a delivery van that they drive approximately 20,000 miles per year. They spent $10,000 to add a refrigeration unit to add a refrigeration unit to the vanthe van which will allow them to delver a broader range of foods from their inventory. Which of the following is the correct treatment of the $10,000?DrDrExpense Expense 10,00010,000 CrCrCash Cash 10,00010,000The refrigeration unit should benefit future periods for as The refrigeration unit should benefit future periods for as long as the van does. long as the van does. CORRECTRevenue vs. Capital ExpendituresRevenue vs. Capital ExpendituresRevenue vs. Capital ExpendituresRevenue vs. Capital ExpendituresDrDrDelivery Van Delivery Van 10,00010,000 CrCrCash Cash 10,00010,00016-7The costs to maintainmaintain an asset are revenue expenditures and are deducted as such on the income statement. For example, maintenance costs on a delivery truck might include tune ups and oil changes.Extraordinary repairs and Extraordinary repairs and bettermentsbetterments are capitalized (debited to an asset account and expensed over the asset’s useful life).Extraordinary repairs extend an asset’s life (for example, rebuilding the engine in a delivery truck)Betterments change an asset’s productivity or performance capabilities. For example, adding a wing onto an existing building. E16.4 Revenue vs. Capital ExpendituresRevenue vs. Capital Expenditures Revenue vs. Capital ExpendituresRevenue vs. Capital Expenditures16-8When more than one asset is purchased in When more than one asset is purchased in a single transaction, it is necessary to a single transaction, it is necessary to allocate the cost between the various allocate the cost between the various assets.assets.The total cost is allocated between the The total cost is allocated between the assets based on each asset’s assets based on each asset’s relative fair relative fair market valuemarket value..A company purchases an office building and the accompanying land for $450,000. Separate real estate appraisals show these assets to be worth $380,000 and $120,000, respectively.Cost Basis of PPE (Basket Cost Basis of PPE (Basket Purchases)Purchases)Cost Basis of PPE (Basket Cost Basis of PPE (Basket Purchases)Purchases)16-9 Cost Basis of PPE (Basket Cost Basis of PPE (Basket Purchases)Purchases) Cost Basis of PPE (Basket Cost Basis of PPE (Basket Purchases)Purchases)LandLand$120,000$120,000$500,000$500,00024%24%Office Office buildingbuilding$380,000$380,000$500,000$500,00076%76%Total market Total market valuevalue$500,000$500,000X 450,000X 450,000$ 342,000$ 342,000X 450,000X 450,000$ 108,000$ 108,000A company purchases an office building and the accompanying land for $450,000. Separate real estate appraisals show these assets to be worth $380,000 and $120,000, respectively.16-10In the last example, land and building were purchased for a