Ch11 Operational.Assets.Utilization.and.Impairment 2015

11-1 WELCOME TO MY CLASS 11-2 Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment 11-3 Cost Allocation – An Overview The The matching matching principle principle requires requires that that part part of of the the acquisition acquisition cost cost of of property, property, plant, plant, and and equipment equipment and and intangible intangible assets assets be be expensed expensed in in periods periods when when the the future future revenues revenues are are earned earned Depreciation, Depreciation, depletion, depletion, and and amortization amortization are are cost cost allocation allocation processes processes used used to to help help meet meet the the matching matching principle principle requirements requirements Some Some of of the the cost cost is is expensed expensed each each period period Acquisition Acquisition Cost Cost (Balance Sheet) Expense Expense (Income Statement) *Depreciation *Depreciation of of an an asset asset used used to to produce produce aa product product is is aa product product cost cost that that does does not not become become an an expense expense until until the the product product is is sold sold 11-4 Cost Allocation – An Overview Type of Operational Asset Debit Property, Plant, & Equipment Depreciation Natural Resource Depletion Intangible Amortization Account Credited Accumulated Depreciation Natural Resource Asset Intangible Asset Caution! Depreciation, depletion, and amortization are processes of cost allocation, not valuation! 11-5 Cost Allocation – An Overview Depreciation on the Balance Sheet 11-6 Learning Objectives Determine periodic depreciation using both time-based and activity-based methods 11-7 Measuring Cost Allocation Cost allocation requires three pieces of information for each asset: Service Service Life Life Allocation Allocation Base Base The The estimated estimated expected expected use use from from an an asset asset Allocation Allocation Method Method The The systematic systematic approach approach used used for for allocation allocation Total Total amount amount of of cost cost to to be be allocated allocated Cost Cost –– Residual Residual Value Value (at (at end end of of useful useful life) life) 11-8 Depreciation of Operational Assets Time-based Time-based Methods Methods  Straight-line Straight-line (SL) (SL)  Accelerated Accelerated Methods Methods  Sum-of-the-years’ Sum-of-the-years’ digits digits (SYD) (SYD)  Declining Declining Balance Balance (DB) (DB) Activity-based Activity-based methods methods Units-of-production Units-of-production method method (UOP) (UOP) Group Group and and composite composite methods methods 11-9 Straight-Line The The most most widely widely used used and and most most easily easily understood understood method method Results Results in in the the same same amount amount of of depreciation depreciation in in each each year year of of the the asset’s asset’s service service life life 11-10 Straight-Line On On January January 1, 1, Dell Dell Corp Corp purchase purchase equipment equipment for for $50,000 $50,000 cash cash The The equipment equipment has has an an estimated estimated service service life life of of 55 years years and and estimated estimated residual residual value value of of $5,000 $5,000 What What is is the the annual annual straight-line straight-line depreciation? depreciation? 11-46 Amortization of Intangible Assets The The amortization amortization entry entry is: is: Note that the amortization process does not use a contra-asset account 11-47 Amortization of Intangible Assets Torch, Torch, Inc Inc has has developed developed aa new new device device Patent Patent registration registration costs costs consisted consisted of of $2,000 $2,000 in in attorney attorney fees fees and and $1,000 $1,000 in in federal federal registration registration fees fees The The device device has has aa useful useful life life of of 55 years years The The legal legal life life is is 20 20 years years At At the the end end of of year year 1, 1, what what is is Torch’s Torch’s amortization amortization expense? expense? 11-48 Amortization of Intangible Assets Record the amortization entry 11-49 Amortization of Intangible Assets Note that the patent will have a book value of $2,400 after this amortization entry is posted 11-50 Intangible Assets not Subject to Amortization Goodwill and Trademarks Not amortized Subject to assessment for impairment of value and may be written down 11-51 Impairment of Value Occasionally, Occasionally, asset asset value value must must be be written written down down due due to to permanent permanent loss loss of of benefits benefits of of the the asset asset through through    Casualty Casualty Obsolescence Obsolescence Lack Lack of of demand demand for for the the asset’s asset’s services services 11-52 Impairment of Value – Goodwill Parent Parent Company Company purchased purchased Sub Sub Company Company for for $500 $500 million million at at aa time time when when the the fair fair value value of of Sub’s Sub’s net net identifiable identifiable assets assets were were $400 $400 million million Sub Sub continued continued to to operate operate as as aa separate separate company company At At the the end end of of the the next next year, year, Parent Parent did did aa goodwill goodwill impairment impairment test test revealing revealing the the following: following: Book value of Sub's assets, including $100 million of goodwill $ 440 Sub's fair value $ 350 Fair value of Sub's identifiable assets excluding goodwill $ 325 Goodwill impaired? 11-53 Impairment of Value – Goodwill Original Goodwill Purchase price FV of net identifiable assets Goodwill Step Fair value of Sub Book value of Sub, including goodwill Impairment indicated Step - Determination of Implied Goodwill Fair value of Sub FV of Sub's net identifiable assets, excluding goodwill Implied value of goodwill Step - Measurement of Impairment Loss Implied value of goodwill Book value of goodwill Impairment loss recognized $ $ $ $ $ $ $ $ 500 400 100 350 440 (90) 350 325 25 25 100 (75) 11-54 Learning Objectives Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to operational assets 11-55 Expenditures Subsequent to Acquisition Maintenance Maintenance and and ordinary ordinary repairs repairs Rearrangements Rearrangements and and other other adjustments adjustments Improvements Improvements (betterments), (betterments), replacements, replacements,and and extraordinary extraordinary repairs repairs Additions Additions 11-56 Expenditures Subsequent to Acquisition Normally we debit an expense account for amounts spent on: 11-57 Expenditures Subsequent to Acquisition Normally we debit the asset account for amounts spent on: 11-58 Expenditures Subsequent to Acquisition Normally we debit the asset account for amounts spent on: 11-59 Expenditures Subsequent to Acquisition Normally, we debit an asset account for amounts spent on: 11-60 End of Chapter 11 Homework  Read the textbook  Do all examples in text book  Do homework