Lecture Accounting: What the numbers mean (5/e) - Chapter 6: Accounting for and presentation of property, plant, and equipment, and other noncurrent assets

After reading this chapter, you should be able to answer the following questions: How are the costs of land, buildings, and equipment reported on the balance sheet? How are the terms capitalize and expense used with respect to property, plant, and equipment? What are the alternative methods of calculating depreciation for financial accounting purposes, and what are the relative effects of each on the income statement (depreciation expense) and the balance sheet (accumulated depreciation)?...

CHAPTER ACCOUNTING FOR AND PRESENTATION OF PROPERTY, PLANT, AND EQUIPMENT, AND OTHER NONCURRENT ASSETS McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objectives How are the costs of land, buildings, and equipment reported on the balance sheet? How are the terms capitalize and expense used with respect to property, plant, and equipment? What are the alternative methods of calculating depreciation for financial accounting purposes, and what are the relative effects of each on the income statement (depreciation expense) and the balance sheet (accumulated depreciation)? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objectives Why is depreciation for income tax purposes an important concern of taxpayers, and how does tax depreciation differ from financial accounting depreciation? What is the accounting treatment of maintenance and repair expenditures? What is the effect on the financial statements of the disposition of noncurrent assets either by abandonment or sale? What is the difference between and operating lease and a capital lease? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objectives What are the similarities in the financial statement effects of buying an asset compared to using a capital lease to acquire the rights to an asset? What are the meanings of various intangible assets, how are their values measured, and how are their costs reflected in the income statement? 10 What is the role of present value concepts in financial reporting, and what is their usefulness in decision making? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objective • How are the costs of land, buildings, and equipment reported on the balance sheet? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Land • Shown on the balance sheet at its original cost • Cost includes all ordinary and necessary items to get the land ready for its intended use • Land acquired for investment or potential future use is classified as a noncurrent, nonoperating asset • Land is not depreciated • Gains and losses on the sale of land are recognized as the difference between the cost of the land and the amount received McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Learning Objective ã How are the terms capitalize and expense used with respect to property, plant, and equipment? McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Capitalization ã Expenditures should be capitalized if the item acquired will have an economic benefit beyond the current fiscal year • Capitalized assets – except land – are depreciated • Depreciation expense is recognized over the useful life of the asset • Materiality concept is applied to capitalization • Accounting judgment plays a role in determination of capitalization McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Expense ã Expenditures should be expensed if the item acquired will not have an economic benefit beyond the current fiscal year • Expenditures for preventive maintenance are expensed • Items are expensed if their costs are not material, even if they have a useful life of several years McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objective • How are the costs of land, buildings, and equipment reported on the balance sheet? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objective • What is the difference between and operating lease and a capital lease? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Assets Acquired by Capital Lease • Operating lease – just the use of the asset; does not involve any attributes of ownership • Capital lease (financing lease) – lessee (renter) assumes all of the risks and benefits of ownership McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Capital Lease Criteria ã A lease is categorized as a capital lease if any of the following apply: – The lease transfers ownership of the asset to the lessee – The lease permits the lessee to purchase the asset at a nominal price at the end of the lease – The lease term is at least 75% of the asset’s economic life – The present value of the lease payments is at least 90% of the fair value of the asset McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objective • What are the similarities in the financial statement effects of buying an asset compared to using a capital lease to acquire the rights to an asset? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Similarities of Buying and Leasing • Before the FASB lease standard was issued in 1976, many capital leases were not reported in the financial statements • Leases not appearing on financial statements is called off-balance-sheet financing • Now both the asset and the related liability are reported on the balance sheet McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Lease Transactions ã A lease payment reduces cash, reduces the lease liability, and increases interest expense: • Interest expense Capital lease liability Cash • The leased asset is depreciated: XX XX Depreciation expense XX Accumulated depreciation McGrawưHill/Irwin XX XX âTheMcGrawưHillCompanies,Inc.,2002 Learning Objective ã What are the meanings of various intangible assets, how are their values measured, and how are their costs reflected in the income statement? McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Intangible Assets ã Long-lived assets that are represented by a contractual right or result from a purchase transaction • Is not physically identifiable • Are amortized – the process of allocating the cost of the intangible asset to expense over time McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Examples of Intangible Assets • Leasehold improvements – modification expenses for leased spaces • Patents – licenses granted by the government giving the control of the use or sale of an invention for a period of 17 years • Trademarks – registered with the Federal Trade Commission for an unlimited life McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 More Examples of Intangible Assets • Copyrights – protections granted to writers and artists to prevent unauthorized copying of a work The protection is granted for the life of the artist or writer plus 50 years • Goodwill – the result of a purchase of one firm by another for a price greater than the fair value of the net assets acquired McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Natural Resources ã Consist of coal deposits, crude oil reserves, timber, mineral deposits , etc • The using up of the natural resource is called depletion – The concept of depletion is similar to depreciation, only more complicated – Usually computed on a straight-line basis McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Other Noncurrent Assets • Long-term investments • Notes receivable that are due more than one year in the future • Are reclassified as they become current (receivable within a year) McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Learning Objective 10 ã What is the role of present value concepts in financial reporting, and what is their usefulness in decision making? McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Present Value ã An application of compound interest – the process of earning interest on interest • Involves determining the present amount that is equivalent to an amount to be paid or received in the future • Recognizes that money does have value over time • The interest rate is called the discount rate McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Present Value Calculations ã Can use for events that consist of a single payment or a series of payments (called an annuity) • Formulas and computer programs and calculators can calculate present value • The appendix demonstrates how to calculate present value using tables containing present value factors McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 ... depreciation? What is the accounting treatment of maintenance and repair expenditures? What is the effect on the financial statements of the disposition of noncurrent assets either by abandonment... copying of a work The protection is granted for the life of the artist or writer plus 50 years • Goodwill – the result of a purchase of one firm by another for a price greater than the fair value of. .. – The lease transfers ownership of the asset to the lessee – The lease permits the lessee to purchase the asset at a nominal price at the end of the lease – The lease term is at least 75% of the