Plant Assets and Intangibles doc

Plant Assets and Intangibles Chapter 10 Asset Account on Related Expense Account the Balance Sheet on the Income Statement Plant Assets Land……………………………… none Buildings, Machinery and Equipment, Furniture and Fixtures, and Land Improvements………….… Depreciation Natural Resources……… …… Depletion Intangibles………………………. Amortization Plant Assets Measure the cost of a plant asset. Objective 1 An asset must be carried on the balance sheet at the amount paid for it. The cost of an asset equals the sum of all of the costs incurred to bring the asset to its intended purpose, net of discounts Cost Principle Land and Land Improvements Purchase price of land $500,000 Add related costs: Back property taxes $40,000 Transfer taxes 8,000 Removal of buildings 5,000 Survey fees 1,000 54,000 Total cost of land $554,000 Paving Fences Sprinkler systems Lights in parking lot Land Improvements • All improvements located on the land but subject to decay: Buildings – Construction Architectural fees Building permits Contractor’s charges Materials Labor Overhead Buildings – Purchasing Purchase price Brokerage commissions Sales and other taxes Repairing or renovating building for its intended purpose Machinery and Equipment Purchase price less discounts Transportation charges Insurance in transit Sales and other taxes Purchase commissions Installation cost Expenditures to test asset before it is placed in service Lump-Sum Purchases Example • Andrea Ortiz paid $110,000 for a combined purchase of land and a building. • The land is appraised at $90,000 and the building at $60,000. • How much of the purchase price is allocated to land and how much to the building? [...]... Example Land: $90,000 ÷ $150,000 = 60% $110,000 × 60% = $66,000 Building: $60,000 ÷ $150,000 = 40% $110,000 × 40% = $44,000 Distinction Between Capital and Revenue Expenditures Does the expenditure increase capacity or efficiency or extend useful life? YES NO Capital Expenditure Debit Plant Assets accounts Revenue Expenditure Debit Repairs and Maintenance account Measuring the Depreciation of Plant Assets. .. residual value ÷ Remaining useful life Objective 4 Account for the disposal of a plant asset Disposing of Plant Assets – – – • selling exchanging discarding (scrapping it) Gain/loss is reported on the income statement – and closed to Income Summary Disposing by Discarding Example • On September 1, Joe, manager of Joe’s Landscaping, is contemplating the disposal of an old piece of equipment: • Equipment... 36,000 To record sale of equipment for $20,000 Exchanging Plant Assets • Assume equipment with a cost of $36,000 and a book value of $15,250 is exchanged for new, similar equipment having a cost of $42,000 with a trade-in of $18,000 allowed • Cash payment is $24,000 • What is the cost of the new asset? • $24,000 + $15,250 = $39,250 Exchanging Plant Assets Equipment (new) $39,250 Accumulated Depreciation... disposal 15,250 Equipment 36,000 To record discarding of equipment Selling a Plant Asset Example • Assume the equipment is sold for $10,000 • What is the gain or loss on disposal? Cash 10,000 Accumulated Depreciation 20,750 Loss on Sale of Equipment 5,250 Equipment To record sale of equipment for $10,000 36,000 Selling a Plant Asset Example • Equipment is sold for $20,000 • What is the gain or loss... Decliningbalance Other Objective 3 Select the best depreciation method for tax purposes Relationship Between Depreciation and Taxes • MACRS was created by the Tax Reform Act of 1986 • It is an accelerated method used for depreciating equipment Depreciation for Partial Years • Assume that Donishia and Richard Catering, Inc., owned the van for 3 months • How much is the van’s depreciation? Straight-line method:... value Estimated useful life Objective 2 Account for depreciation Depreciation Methods Straight-Line (SL) Units-of-Production (UOP) Double-Declining-Balance (DDB) Depreciation Methods Example • Donishia and Richard Catering, Inc., purchased a delivery van on January 1, 200x, for $22,000 • The company expects the van to have a trade-in value of $2,000 at the end of its useful life • The van has an estimated . Plant Assets and Intangibles Chapter 10 Asset Account on Related Expense Account the Balance Sheet on the Income Statement Plant Assets Land……………………………… none Buildings, Machinery and . Equipment, Furniture and Fixtures, and Land Improvements………….… Depreciation Natural Resources……… …… Depletion Intangibles ……………………. Amortization Plant Assets Measure the cost of a plant asset. Objective. in service Lump-Sum Purchases Example • Andrea Ortiz paid $110,000 for a combined purchase of land and a building. • The land is appraised at $90,000 and the building at $60,000. • How much