Kế toán, kiểm toán - Chapter 8: Plant assets and intangible

IFA Chapter 8: Plant Assets and Intangible MA.NguyenQuocNhat 1 LOGO International Accounting of Financial MA. Nguyen Quoc Nhat Nguyen Quoc Nhat – nhatnq.faa@gmail.com Company Logo Plant Assets and Intangible Nguyen Quoc Nhat – nhatnq.faa@gmail.com Company Logo Learning Objectives Learning Objectives Measure the cost of a plant asset Account for depreciation Record the disposal of an asset by sale or trade Account for natural resources Account for intangible assets Describe ethical issues related to plant assets www.themegallery.com Company Logo Chapter’s content 8.1 Mesuring a the cost of a plant Asset 8.2 Depreciation 8.3 Displosing the plant Asset 8.4 Accounting for natural Resources 8.5 Accounting for Intangible Assets 8.6 Ethical Issue www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset The cost principle says to carry an asset at its historical cost—the amount paid for the asset. The rule for measuring cost is as follows: Cost of an asset = Sum of all the costs incurred to bring the asset to its intended purpose, net of all discounts www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset Land and land Improvements The cost of land is not depreciated. It includes the following costs paid by the purchaser: ● Purchase price ● Brokerage commission ● Survey and legal fees ● Property taxes in arrears ● Taxes assessed to transfer the ownership (title) on the land ● Cost of clearing the land and removing unwanted buildings IFA Chapter 8: Plant Assets and Intangible MA.NguyenQuocNhat 2 www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset The cost of land does not include the following costs: ● Fencing ● Paving ● Sprinkler systems ● Lighting ● Signs www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset Suppose Smart Touch needs property and purchases land for $50,000 with a note payable for the same amount. Smart Touch also pays cash as follows: $4,000 in property taxes in arrears, $2,000 in transfer taxes, $5,000 to remove an old building, and a $1,000 survey fee. What is the company’s cost of this land? This Exhibit shows all the costs incurred to bring the land to its intended use: www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset Measuring the Cost of Land Purchase price of land $50,000 Add related costs Property taxes in arrears $4,000 Transfer taxes 2,000 Removal of building 5,000 Survey fee 1,000 12,000 Total cost of land $62,000 www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset The entry to record the purchase of the land on August 1, 2013, follows: 2013 Aug 1 Land (A+) 62,000 Note payable (L+) 50,000 Cash (A–) 12,000 www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset Suppose Smart Touch then pays $20,000 for fences, paving, lighting, landscaping, and signs on August 15, 2013. The following entry records the cost of these land 2013 Aug 15 Land improvements (A+) 20,000 Cash (A–) 20,000 www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset 8.1.2 Buildings The cost of a building depends on whether the company is constructing the building itself or is buying an existing one. These costs include the following: Constructing a Building Architectural fees Building permits Contractor charges Payments for material, labor, and overhead Capitalized interest cost, if self-constructed IFA Chapter 8: Plant Assets and Intangible MA.NguyenQuocNhat 3 www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset Purchasing an Existing Building Purchase price Costs to renovate the building to ready the building for use, which may include any of the charges listed under “Constructing a Building” www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset 8.1.3 Machinery and Equipment The cost of machinery and equipment includes its ● purchase price (less any discounts), ● transportation charges, ● insurance while in transit, ● sales tax and other taxes, ● purchase commission, ● installation costs, and ● the cost of testing the asset before it is used. www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset 8.1.4 Furniture and Fixtures Furniture and fixtures include desks, chairs, file cabinets, display racks, shelving, and so forth. The cost of furniture and fixtures includes the basic cost of each asset (less any discounts), plus all other costs to ready the asset for its intended use. www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset 8.1.5 A Lump-Sum (Basket) Purchase of Assets A company may pay a single price for several assets as a group—a “basket purchase.” For example, Smart Touch may pay a single price for land and a building For accounting, the company must identify the cost of each asset, as shown in the following diagram. The total cost paid (100%) is divided among the assets according to their relative sales or market values This is called the relative-salesvalue method. www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset 8.1.5 A Lump-Sum (Basket) Purchase of Assets Suppose Smart Touch paid a combined purchase price of $100,000 on August 1, 2013, for the land and building An appraisal performed a month before the purchase indicates that the land’s market (sales) value is $30,000 and the building’s market (sales) value is $90,000; But how will Smart Touch allocate the $100,000 paid for both assets www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset 8.1.5 A Lump-Sum (Basket) Purchase of Assets The land makes up 25% of the total market value, and the building 75%, as follows: Asset Market (Sales) Value Percentage of Total Value Total Purchase X Price Cost of Each Asset Land $30,000 $30,000/120,000 = 25% $100,000 = $25,000 Building 90,000 $90,000/120,000 = 75% 100,000 75,000 Total 120,000 100% $100,000 IFA Chapter 8: Plant Assets and Intangible MA.NguyenQuocNhat 4 www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset 8.1.5 A Lump-Sum (Basket) Purchase of Assets Suppose Smart Touch paid by signing a note payable. The entry to record the purchase of the land and building is as follows: 2013 Aug 1 Land (A+) 25,000 Building (A+) 75,000 Notes payable (L+) 100,000 www.themegallery.com Company Logo 8.1 Mesuring a the cost of a plant Asset 8.1.6 Capital Expenditures Accountants divide spending made on plant assets into two categories: ● Capital expenditures ● Expenses Capital expenditures are debited to an asset account because they ● increase the asset’s capacity or efficiency, or ● extend the asset’s useful life. www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.1 Causes of Depreciation 8.2.2 Measuring Depreciation 8.2.3 Depreciation Methods www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.1 Causes of Depreciation All assets, except land, wear out as they are used. Greg’s delivery truck can only go so many miles before it is worn out. As the truck is driven, this use is part of what causes depreciation Additionally, physical factors, like age and weather, can cause depreciation of assets. www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.1 Causes of Depreciation Now that we have discussed causes of depreciation, let’s itemize what depreciation is not Depreciation is not a process of valuation. Businesses do not record depreciation based on changes in the asset’s market (sales) value. Depreciation is recapturing the cost invested in the asset. 2. Depreciation does not mean that the business sets aside cash to replace an asset when it is used up. Depreciation has nothing to do with cash. www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.2 Measuring Depreciation Depreciation of a plant asset is based on three main factors:  Capitalized cost  Estimated useful life  Estimated residual value Estimated useful life is the length of the service period expected from the asset. The estimated useful life is how long the company expects it can use the asset. Useful life may be expressed in years, units, output, or miles IFA Chapter 8: Plant Assets and Intangible MA.NguyenQuocNhat 5 www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.2 Measuring Depreciation Estimated residual value also called salvage value—is the asset’s expected cash value at the end of its useful life. A delivery truck’s useful life may be 100,000 miles. When the truck has been driven that distance, the company will sell or scrap it www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.3 Depreciation Methods There are many depreciation methods for plant assets, but three are used most commonly: ● Straight-line ● Units-of-production ● Declining-balance www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.3 Depreciation Methods These methods work differently in how they derive the yearly depreciation amount, but they all result in the same total depreciation over the total life of the asset. we will use the following data of Greg’s Tunes Data Item Amount Cost of truck $41,000 Estimated residual value (1,000) Depreciable cost $40,000 Estimated useful life—Years 5 years Estimated useful life—Units 100,000 mi. www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.3 Depreciation Methods  Straight-Line Method The straight-line (SL) method allocates an equal amount of depreciation to each year The equation for SL depreciation, applied to the Greg’s Tunes’ truck, is as follows: Straight-line depreciation = (Cost – Residual value)÷ life = (41,000 – 1,000) ÷ 5 = $8,000 per year www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.3 Depreciation Methods  Straight-Line Method Since the asset was placed in service on the first day of the year, the entry to record each year’s depreciation is as follows: Dec 31 Depreciation expense—truck (E+) 8,000 Accumulated depreciation—truck (CA+) 8,000 www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.3 Depreciation Methods Units-of-Production (UOP) Method The units-of-production (UOP) method allocates a fixed amount of depreciation to each unit of output. UOP depreciates by units rather than by years. A unit of output can be miles, units, hours, or output, depending on which unit type best defines the asset’s use. IFA Chapter 8: Plant Assets and Intangible MA.NguyenQuocNhat 6 www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.3 Depreciation Methods Units-of-production Depreciation Per unit of output = (Cost – Residual value) ÷ life in units = (41,000 – 1,000) ÷ 100,000 = $0.4 per mile www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.3 Depreciation Methods Units-of-production Double-Declining-Balance Method An accelerated depreciation method writes off more depreciation near the start of an asset’s life than straight-line does. The main accelerated method of depreciation is the double-declining- balance (DDB) method DDB amounts can be computed using the following formula: www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.3 Depreciation Methods Double-Declining-Balance Method (DDB) amounts can be computed using the following formula: Double-declining balance depreciation = (Cost – Accumulated depreciation) × 2 ÷ life For the first year of the truck, the calculation would be as shown: DDB, year 1 = (41,000 – 0) × 2 ÷ 5 = $16,400 www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.3 Depreciation Methods Double-Declining-Balance Method (DDB) amounts can be computed using the following formula: Double-declining balance depreciation = (Cost – Accumulated depreciation) × 2 ÷ life For the first year of the truck, the calculation would be as shown: DDB, year 1 = (41,000 – 0) × 2 ÷ 5 = $16,400 DDB, year 2 = (41,000 – 16,400) × 2 ÷ 5 = $9,840 www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.3 Depreciation Methods Double-Declining-Balance Method (DDB) amounts can be computed using the following formula: Double-declining balance depreciation = (Cost – Accumulated depreciation) × 2 ÷ life For the first year of the truck, the calculation would be as shown: DDB, year 1 = (41,000 – 0) × 2 ÷ 5 = $16,400 DDB, year 2 = (41,000 – 16,400) × 2 ÷ 5 = $9,840 www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.3 Other Issues in Accounting for Plant Assets Changing the Useful Life of a Depreciable Asset Asset Impairments Using Fully Depreciated Assets IFA Chapter 8: Plant Assets and Intangible MA.NguyenQuocNhat 7 www.themegallery.com Company Logo 8.2 DEPRECIATION 8.2.3 Other Issues in Accounting for Plant Assets Changing the Useful Life of a Depreciable Asset Asset Impairments Using Fully Depreciated Assets www.themegallery.com Company Logo 8.3 DISPOSING OF A PLANT ASSET Eventually, an asset wears out or becomes obsolete. The owner then has two choices: Trade the asset for non-like property. This choice includes selling or scrapping the asset, or trading for an asset that is not similar in functionality Trade the asset for another asset that has similar functionality. This is called a nonmonetary or like-kind exchange www.themegallery.com Company Logo 8.4 ACCOUNTING FOR INTANGIBLE ASSETS As we saw earlier, intangible assets have no physical form. Instead, these assets convey special rights from patents, copyrights, trademarks, and other creative works. In our technology-driven economy, intangibles are very important. The intellectual capital of Microsoft or Intel is difficult to measure. www.themegallery.com Company Logo 8.4 ACCOUNTING FOR INTANGIBLE ASSETS Specific Intangibles Accounting for their purchase and their decline in value for each is the same. We will illustrate the accounting by using a patent. Patents Suppose Greg’s Tunes pays $200,000 to acquire a patent on January 1, 2011. Greg’s Tunes believes this patent’s useful life is only five years because it is likely that a new, more efficient process will be developed within that time. Amortization expense is therefore $40,000 per year ($200,000/5 years). www.themegallery.com Company Logo 8.4 ACCOUNTING FOR INTANGIBLE ASSETS Specific Intangibles Acquisition and amortization entries for this patent are as follows: 2011 Jan 1 Patents (A+) 200,000 Cash (A–) 200,000 To acquire a patent. Dec 31 Amortization expense—patents ($200,000/5) (E+) 40,000 Patents (A–) 40,000 To amortize the cost of a patent www.themegallery.com Company Logo 8.4 ACCOUNTING FOR INTANGIBLE ASSETS Specific Intangibles Copyrights A copyright is the exclusive right to reproduce and sell a book, musical composition, film, or other work of art or intellectual property Trademarks and Brand Names Trademarks and brand names (also known as trade names) are assets that represent distinctive products or services, such as the Nike “swoosh” or the NASCAR number 3 for Dale Earnhardt IFA Chapter 8: Plant Assets and Intangible MA.NguyenQuocNhat 8 www.themegallery.com Company Logo 8.4 ACCOUNTING FOR INTANGIBLE ASSETS Specific Intangibles (Cont) Copyrights A copyright is the exclusive right to reproduce and sell a book, musical composition, film, or other work of art or intellectual property Trademarks and Brand Names Trademarks and brand names (also known as trade names) are assets that represent distinctive products or services, such as the Nike “swoosh” or the NASCAR number 3 for Dale Earnhardt www.themegallery.com Company Logo 8.4 ACCOUNTING FOR INTANGIBLE ASSETS Specific Intangibles (Cont) Franchises and Licenses Franchises and licenses are privileges granted by a private business or a government to sell goods or services under specified conditions Goodwill Goodwill in accounting has a different meaning from the everyday phrase “goodwill among men.” In accounting, goodwill is the excess of the cost to purchase another company over the market value of its net assets (assets minus liabilities). 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