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1、Chapter3 Accounting for Assets(),Feature Topic: The characteristics of Property, Plant and Equipment,To be included in this category, an asset must have 3 characteristics: 1. The asset must be held for use and not for investment. 2. The asset must have an expected life of more than on year. 3. The a
2、sset must be tangible in nature.,Chapter Skeleton,P 66-67,3.1 Plant and Equipment,The term plant and equipment is used to describe long-lived assets acquired for use in the operations of the business and not intended for resale to customers.,Determining the cost of plant and equipment,The cost of pl
3、ant an equipment includes all expenditures reasonable and necessary in acquiring an asset and placing it in a position and condition for use in the operation of the business. Only reasonable and necessary expenditures should be included Example,Land,When land is purchased, various incidental costs a
4、re incurred, in addition to the purchase price.,Apportionment of a lump-Sum purchase,When land and buildings are purchased for a lump sum, the purchase price must be apportioned between land and buildings. Illustration 3-1: p68,Land Improvements: Improvements to real estate such as driveways, fences
5、, parking lots, and sprinkler systems, have a limited life and are therefore subject to depreciation. Buildings,Depreciation Allocating the cost of plant and equipment over the years of usage,Tangible plant assets, with the exception of land, are of use to a company for only a limited number of year
6、s. Depreciation, as the term is used in accounting, is the allocation of cost of a tangible plant asset to expense in the periods in which services are received from the asset. The journal entry to record depreciation expense consists of a debit to Depreciation expense and a credit to Accumulated De
7、preciation.,Allocating the cost of plant and equipment over the years of usage,Depreciation is a process of cost allocation, not a process of valuation. There are two major causes of depreciation: physical deterioration and obsolescence.,Methods of computing depreciation,Straight-Line Method: the si
8、mplest and most widely used method. 1.Annual Deprecation=Cost or Residual Value/Years of Useful Life Units-of-Output method: for certain kinds of assets, more equitable allocation of the cost can be obtained by dividing the cost by the estimated units of output rather than by the estimated years of
9、useful life. 1.This method is suitable only when the total units of the asset over its entire life can be estimated with reasonable accuracy.,Accelerated Depreciation methods. 1.The term accelerated means recognition of relatively large amounts of depreciation in the early years of use and reduced a
10、mounts in the later years. Fixed-Percentage-of-Declining-Balance Method 1.The most widely used form of accelerated depreciation is the fixed-percentage-of-declining-balance method. 2.Depreciation expense=Remaining Book Value* Accelerated Depreciation Rate. 3. Illustration 3-2,Sum-of-the-Years- Digit
11、s Method 1.The depreciation rate is stated as a fraction, which gets smaller each year. These “shrinking fractions ” determine the percentage of the assets depreciable amount charged to depreciation expense ear year. 2.Example Depreciation for Fractional Periods 1.Round the calculation to the neares
12、t whole month. 2.Or half-year convention, is to record six months depreciation on all assets acquired during the year.,Disposal of Plant and Equipment,When depreciable assets are disposed of at any date other than the end of the year, an entry should be made to record depreciation fob the fraction o
13、f the year ending with the date of disposal. As units of plant and equipment wear out or become obsolete, they must be scrapped, sold, or traded in on new equipment. Entry Example: p73,Gains and Losses on disposal of plant and equipment,Disposal at a Price above the book value Disposal at a Price be
14、low the book value Disposal at a price equal to book value,Cost of Intangibles,Illustration 3-3. Cost of Intangibles,Amortization or Impairment of intangible assets,Intangible assets are separated into three categories to determine whether or not they are amortized, and how they are reviewed for imp
15、airment: 1. Intangible assets with a finite(limited) life 2. Intangible assets with an indefinite life 3. goodwill,Intangible assets with a finite life are amortized,Factors should consider in estimating the useful life of the an intangible asset. The calculation of the amortization of intangible as
16、sets follows the same principles as the depreciation of tangible assets. Entry Example: p76,Intangible assets with an indefinite life are reviewed for impairment,Some indefinite intangible assets, such as a trademark have a potentially indefinite life. Example: p 76 An intangible asset is impaired w
17、hen its fair value is less than its carrying value.,Research and development Costs,Cost associated with activities excluded from R&D are either expensed or capitalized according to the normal capitalization criteria. Expenditures for the following elements of R&D activities are included in R&D costs
18、 and thus expensed as incurred: 1. Materials, equipment , and facilities 2.Personnel 3.Intangibles purchased from others 4.Contract services 5.Indirect Cost,Identifiable intangible assets,Identifiable intangible assets are those intangibles that can be purchased or sold separately from the other ass
19、ets of the company. A company capitalizes the costs of identifiable intangibles.,Patent,A patent is an exclusive right granted by the state government giving the owner control of the manufacturing ,sale, or other use of an invention for a period of years from the date of filing. A patent has value i
20、f it enables the company to obtain higher income by selling products at a higher price, producing products at a lower cost, or producing a product for which there is less competition.,Copyrights,A copyright is a grant by the state government covering the right to publish, sell, or otherwise control
21、literary or artistic products for the life of the author plus 50 years. Copyrights cover such items as books, music ,and films.,Franchises,Franchises are agreements entered into by two parties in which, for a fee, one party(franchisor) gives the other party(franchisee) rights to perform certain func
22、tions or sell certain products or services. A franchise capitalizes the initial cost it pays to acquire the franchise, where it expenses the continuing franchise fees that it pays for services provided by the franchisor in subsequent years according to the normal matching criteria.,Lease and leaseho
23、ld improvement,Lease are intangible assets because a right to use the property is held by the lessee, but the property itself is still owned by the lessor.,Unidentifiable intangibles,Accounting for such goodwill depends on whether it is internally developed or purchased through a transaction.,Intern
24、ally developed goodwill,All companies develop unidentifiable intangibles. For example: p79 Two characteristics distinguish intangibles of this type.,Acquired goodwill,Acquired goodwill arises when a company is acquired. Goodwill is recorded only when a transaction occurs.,Recording goodwill,Example:
25、 p80,Impairment of goodwill,For fiscal years beginning after December 31,2006, a company must review its goodwill for impairment at least annually at the reporting level. A company reviews the purchased goodwill for impairment using a two-step approach. If the fair value of the reporting unit is gre
26、ater than the book value, goodwill is not considered to be impaired, and the second step is not necessary. Entry Example: p82,3.3 Investments,Corporations purchase investments in debt or stock securities generally for one of three reasons.,Accounting for debit investment,Debit investments are invest
27、ments in government and corporation bonds. In accounting for debit investment, entries are required to record 1. the acquisition 2. the interest revenue 3. the sale Entry Example: p82,Accounting for stock investments,Stock investments are investments in the capital stock of corporations. The account
28、ing for investments in common stock is based on the extent of the investors influence over the operation and financial affairs of the issuing corporation.,Holding less than 20% Recording acquisition of stock investments Recording dividends Recording sale of stock,Accounting for stock investments,Hol
29、ding between 20%and 50% If investor owns between 20% and 50% of the common stock of a corporation, it is presumed that the investor has significant influence over the financial and operating activities of the investee. Companies with stock holding between 20% and 50% in an investee use an approach c
30、alled the equity method. Example: p 86,Holding of more than 50% parent company and subsidiary(affiliated) company When a company owns more than 50% of the common stock of another company, consolidated financial statements are usually prepared.,Valuing and reporting investments,Categories of securiti
31、es 1. Trading securities: are securities bought and held primarily for sale in the near term to generate income on short-term price differences. 2.Available-for-sale securities : are securities that may be sold in the future. 3. Hold-to-maturity securities: are debt securities that the investor has
32、the intent and ability to hold to maturity.,Balance sheet presentation,In the balance sheet, investments are classified as either short-term or long-term. Short-term investments are securities held by a company that are(1) readily marketable; (2) intended to be converted into cash within the next year or operating cycle, whichever is longer.,