Assets (also called property, plant, and equipment) are resources that have physical substance (a definite size and shape), are in the operations of a business, and are not intended for sale to customers. Determining The Cost of Plant Assts---The cost principle requires that companies record plant assets at cost. Cost consists of all expenditures necessary to acquire an asset and make it ready for its use. . If a cost is not included in a plant asset account, then it must be expensed immediately. Such costs are referred to as expenditures . Costs that are not expensed immediately, but are instead included in a plant asset account are referred to as expenditures Cost is measured by the cash paid in a cash transaction. Once cost is established, it becomes the basis of accounting for the plant asset over its life. . Land - Land is often used as a building site for a manufacturing plant or office. The cost of land includes: The cash purchase price. Closing costs such as title and attorney's . Real brokers' commissions. Accrued property taxes and other liens on the land assumed by the purchaser. . All necessary costs incurred in making land ready for its intended use increase (debit) the Land account Land improvements - Land improvements are structural additions made to land such as driveways, parking lots, fences, landscaping, and underground sprinklers. The cost of land improvements includes all expenditures necessary to make the improvements ready for their intended use. he of a new company parking lot includes the amount paid for paving. fencing, and lighting The total of all these costs would be to Land Improvements Because land improvements have limited useful lives, companies expense (depreciate) their costs over their lives Buildings Buildings are facilities in operations, such as stores, offices, factories, warehouses, and airplane hangars. All necessary expenditures relating to the purchase or construction of a building are charged to the Buildings account. When a building is such costs include the purchase . . Two criteria apply in determining the cost of equipment: (1) The of the cost - one time or recurring (2) The benefit period - the of the asset or one year. Expenditures During Useful Life-During the useful life of a plant asset, a company may incur costs for ordinary repairs, additions, and improvements. Ordinary repairs are expenditures to the operating efficiency and expected productive life of the asset. o Ordinary repairs are usually fairly small amounts that occur throughout the service life. Examples of ordinary repairs include motor tune-ups and oil changes, the painting of buildings, and the replacing of worn-out gears on factory machinery o Ordinary repairs are debited to Repair (or Maintenance) incurred Additions and improvements are costs incurred to the operating efficiency, productive capacity, or expected useful life of the plant asset They are usually material in amount. Occur during the period of ownership. Additions and improvements are debited to the plant asset affected and generally increase the company's investment in productive facilities. Additions and improvements are expenditures. as . To Buy or Lease - An alternative to purchasing an asset is leasing. In a lease, the owner of an asset (the lessor) allows another party (the lessee) to use the asset for period of time at an agreed price, Some advantages of leasing an asset versus purchasing it are: o reduced risk of o little or no down payment o shared advantages o assets and liabilities are not reported in operating leases. Learning Objective 2 - Apply Depreciation Methods to Plant Assets Accounting for Plant Assets--- is the process of allocating to BE View tido con S 1 3 expenses with Such cost allocation is designed to properly revenues. Depreciation affects the balance sheet through which is reported as a deduction from plant assets. It affects the income statement through depreciation expense. depreciation . . . . Depreciation is a allocation process, NOT an asset valuation process. The value-cost less accumulated depreciation of a plant asset may differ significantly from its fair . Depreciation applies to three classes of plant assets: o Land improvements o Buildings o Equipment is not a depreciable asset. The revenue-producing ability of a depreciable asset declines during its useful life because of wear and tear. A decline in revenue-producing ability may also occur because of -the process by which an asset becomes out of date before it physically wears out. Recognizing depreciation for an asset does not result in the accumulation of cash for replacement of the asset. The balance in the Accumulated Depreciation account represents the total amount of the asset's cost that the company has charged to to date; it is not a cash fund. . Factors in Computing Depreciation: Cost-Plant assets are recorded at cost, in accordance with the historical cost principle Useful an estimate of the expected productive life, also called service life, of the asset. value an estimate of the asset's value at the end of its useful . . . Each of these depreciation methods is under generally accepted accounting principles. Once a method is chosen, it should be applied consistently over the useful life of the asset. selects the method it believes best measures an asset's contribution to revenue over its useful life. Straight-line depreciation is the most widely used method. It is used for some or all of the depreciation by more than 95% of U.S. companies. Straight-Line--- Under the straight-line method, an amount of depreciation expense is recorded each year of the asset's useful life. To compute the annual depreciation expense under the straight-line method, divide the cost (the cost of the asset less its salvage value) by the asset's estimated useful life. If an asset is purchased during the year rather than on January 1, the annual depreciation is for the proportion of a year it is used. . . . Declining-Balance---This method is called an depreciation method because it results in more depreciation in the early years of an asset's life and depreciation in the later years of an asset's life than does the straight-line approach A common declining-balance rate is double the straight-line rate. This method is referred to as the _-declining-balance method. - . Units-Of-Activity ---The units-of-activity method is suited to factory machinery and such items as delivery equipment and airplanes This method is generally suitable for such assets as buildings or furniture because activity levels are difficult to measure. Under units-of-activity depreciation, the amount of depreciation is proportional to the that took place during that period. The IRS does not require the taxpayer to use the depreciation method on the tax return that is used in preparing financial statements. At the same time, they use a special accelerated-depreciation method on their tax returns in order to minimize their income taxes. For tax purposes, taxpayers must use on their tax returns either the straight-line method or a special accelerated-depreciation method called the Modified Accelerated Cost Recovery System Depreciation Disclosure in the Notes---The choice of depreciation method must be disclosed in a company's financial statements or in related that accompany the statements. Revising Periodic Depreciation---Management should periodically review annual depreciation expense. When a change in an estimate is required, the change is made in and future years but to prior periods. Thus, when a change is made (1) there is no correction of previously recorded depreciation expense, and (2) depreciation expense for current and future years is revised. _--is a permanent decline in the fair value of an asset. In order that the asset is not overstated on the books, it is written down to its new fair value during the year in which the in value occurs. Learning Objective 3 - Explain How to Account for the Disposal of Plant Assets . Plant Asset Disposals---Companies dispose of plant assets that are no longer useful to them. There are three ways in which companies make plant asset disposals: 1. Sale 2. Retirement 3. Exchange . . Whether a plant asset is sold, retired or exchanged, the company must determine the value of the plant asset at the time of to determine the gain or loss. Recall that book value is the difference between the cost of the plant asset and the accumulated depreciation to date. If disposal occurs at any time during the year, the depreciation for the fraction of the year to the date of disposal must be recorded. o Book value is eliminated by reducing _) Accumulated Depreciation for the total depreciation associated with that asset to the date of disposal and reducing ) the asset account for the cost of the asset Sale of Plant Assets---In the sale of an asset, the book value of the asset is compared with the received from the sale. . If the proceeds are GREATER than the book value a on disposal occurs Conversely, if proceeds from the sale are LESS than the book value a on disposal occurs Retirement of Plant Assets--Sometimes some assets at the end of their useful life they have no ready market. In that case the asset is retired. The retirement of an asset is recorded by decreasing Accumulated Depreciation for the full amount of depreciation taken over the life of the asset. The asset account is reduced (credited) for the original cost of the asset. The LOSS is to the asset's book value on the date of retirement Learning Objective 4 Identify the Basic Issues Related to Reporting Intangible Assets Intangible Assets--are rights, privileges, and competitive that result from ownership of long-lived assets that do not possess physical substance. Well known intangibles are the patents of Microsoft, the franchises of McDonald's, the trade name iPod and Nike's trademark "swoosh." - Intangibles may be evidenced by contracts, licenses, and other documents. Accounting For Intangible Assets-- Intangible assets are recorded at cost. Intangibles are categorized as having either a limited life or an indefinite life. The cost of intangible assets with lives should not be amortized . - an exclusive right issued by the U.S. Patent Office that enables the recipient to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant. Research and costs are expenditures that may lead to patents, copyrights, new processes, and new products. o There are uncertainties in identifying the extent and timing of the future benefits of these expenditures. o As a result, research and development costs are usually recorded as an expense when incurred. are granted by the federal government and give the owner the exclusive right to reproduce and sell an artistic or published work. A trademark or name is a word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product. Trade names like Wheaties, Monopoly, Sunkist, Kleenex, Coca-Cola, Big Mac, and Jeep create immediate product identification and generally enhance the sale of the product. . Franchises - A is a contractual agreement under which the franchiser grants the franchisee the right to sell certain products, to provide specific services, or to use certain trademarks or trade names, usually within a designated geographic area.. Goodwill represents the value of all favorable attributes that relate to a company including exceptional management, desirable good customer relations, skilled employees, etc. o Goodwill is unique. Unlike other assets such as investments, plant assets