Lecture International accounting: Chapter 8 - Nguyễn Quốc Nhất

IFA<br /> <br /> Chapter 8: Plant Assets and Intangible<br /> Plant Assets and Intangible<br /> <br /> LOGO<br /> <br /> International Accounting of Financial<br /> MA. Nguyen Quoc Nhat<br /> <br /> Nguyen Quoc Nhat – nhatnq.faa@gmail.com<br /> <br /> Learning Objectives<br /> <br /> Chapter’s content<br /> <br /> Learning Objectives<br /> Measure the cost of a plant asset<br /> Account for depreciation<br /> Record the disposal of an asset by sale or trade<br /> Account for natural resources<br /> Account for intangible assets<br /> Describe ethical issues related to plant assets<br /> <br /> Nguyen Quoc Nhat – nhatnq.faa@gmail.com<br /> <br /> Company Logo<br /> <br /> Company Logo<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> 8.2 Depreciation<br /> 8.3 Displosing the plant Asset<br /> 8.4 Accounting for natural Resources<br /> 8.5 Accounting for Intangible Assets<br /> 8.6 Ethical Issue<br /> <br /> www.themegallery.com<br /> <br /> Company Logo<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> <br /> The cost principle says to carry an asset at<br /> its historical cost—the amount paid for the<br /> asset. The rule for measuring cost is as<br /> follows:<br /> Cost of an asset = Sum of all the costs<br /> incurred to bring the asset to its intended<br /> purpose, net of all discounts<br /> <br /> Land and land Improvements<br /> <br /> www.themegallery.com<br /> <br /> www.themegallery.com<br /> <br /> MA.NguyenQuocNhat<br /> <br /> Company Logo<br /> <br /> The cost of land is not depreciated. It includes the<br /> following costs paid by the purchaser:<br /> ● Purchase price<br /> ● Brokerage commission<br /> ● Survey and legal fees<br /> ● Property taxes in arrears<br /> ● Taxes assessed to transfer the ownership (title)<br /> on the land<br /> ● Cost of clearing the land and removing unwanted<br /> buildings<br /> Company Logo<br /> <br /> 1<br /> <br /> IFA<br /> <br /> Chapter 8: Plant Assets and Intangible<br /> 8.1 Mesuring a the cost of a plant Asset<br /> The cost of land does not include the<br /> following costs:<br /> ● Fencing<br /> ● Paving<br /> ● Sprinkler systems<br /> ● Lighting<br /> ● Signs<br /> <br /> www.themegallery.com<br /> <br /> Suppose Smart Touch needs property and<br /> purchases land for $50,000 with a note<br /> payable for the same amount. Smart Touch<br /> also pays cash as follows: $4,000 in property<br /> taxes in arrears, $2,000 in transfer taxes,<br /> $5,000 to remove an old building, and a<br /> $1,000 survey fee. What is the company’s<br /> cost of this land? This Exhibit shows all the<br /> costs incurred to bring the land to its<br /> intended use:<br /> Company Logo<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> <br /> www.themegallery.com<br /> <br /> Company Logo<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> The entry to record the purchase of the land<br /> on August 1, 2013, follows:<br /> <br /> Measuring the Cost of Land<br /> Purchase price of land<br /> <br /> $50,000<br /> 2013<br /> <br /> Add related costs<br /> Property taxes in arrears<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> <br /> Aug 1<br /> <br /> $4,000<br /> <br /> Land (A+)<br /> <br /> 62,000<br /> <br /> Transfer taxes<br /> <br /> 2,000<br /> <br /> Note payable (L+)<br /> <br /> 50,000<br /> <br /> Removal of building<br /> <br /> 5,000<br /> <br /> Cash (A–)<br /> <br /> 12,000<br /> <br /> Survey fee<br /> <br /> 1,000<br /> <br /> Total cost of land<br /> <br /> 12,000<br /> $62,000<br /> <br /> www.themegallery.com<br /> <br /> Company Logo<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> Suppose Smart Touch then pays $20,000<br /> for fences, paving, lighting, landscaping,<br /> and signs on August 15, 2013. The following<br /> entry records the cost of these land<br /> 2013<br /> Aug 15 Land improvements (A+)<br /> Cash (A–)<br /> <br /> www.themegallery.com<br /> <br /> MA.NguyenQuocNhat<br /> <br /> 20,000<br /> 20,000<br /> <br /> Company Logo<br /> <br /> www.themegallery.com<br /> <br /> Company Logo<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> 8.1.2 Buildings<br /> The cost of a building depends on whether the<br /> company is constructing the building itself or is<br /> buying an existing one. These costs include the<br /> following:<br /> Constructing a Building<br /> Architectural fees<br /> Building permits<br /> Contractor charges<br /> Payments for material, labor, and overhead<br /> Capitalized interest cost, if self-constructed<br /> www.themegallery.com<br /> <br /> Company Logo<br /> <br /> 2<br /> <br /> IFA<br /> <br /> Chapter 8: Plant Assets and Intangible<br /> 8.1 Mesuring a the cost of a plant Asset<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> <br /> Purchasing an Existing Building<br /> Purchase price<br /> Costs to renovate the building to ready<br /> the building for use, which may include<br /> any of the charges listed under<br /> “Constructing a Building”<br /> <br /> 8.1.3 Machinery and Equipment<br /> <br /> www.themegallery.com<br /> <br /> www.themegallery.com<br /> <br /> Company Logo<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> <br /> The cost of machinery and equipment includes<br /> its<br /> ● purchase price (less any discounts),<br /> ● transportation charges,<br /> ● insurance while in transit,<br /> ● sales tax and other taxes,<br /> ● purchase commission,<br /> ● installation costs, and<br /> ● the cost of testing the asset before it is used.<br /> Company Logo<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> <br /> 8.1.4 Furniture and Fixtures<br /> Furniture and fixtures include desks, chairs,<br /> file cabinets, display racks, shelving, and so<br /> forth. The cost of furniture and fixtures<br /> includes the basic cost of each asset (less<br /> any discounts), plus all other costs to ready<br /> the asset for its intended use.<br /> <br /> 8.1.5 A Lump-Sum (Basket) Purchase of Assets<br /> <br /> www.themegallery.com<br /> <br /> www.themegallery.com<br /> <br /> Company Logo<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> <br /> A company may pay a single price for several<br /> assets as a group—a “basket purchase.”<br /> For example, Smart Touch may pay a single price<br /> for land and a building<br /> For accounting, the company must identify the<br /> cost of each asset, as shown in the following<br /> diagram. The total cost paid (100%) is divided<br /> among the assets according to their relative sales or<br /> market values<br /> This is called the relative-salesvalue method.<br /> Company Logo<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> <br /> 8.1.5 A Lump-Sum (Basket) Purchase of Assets<br /> <br /> 8.1.5 A Lump-Sum (Basket) Purchase of Assets<br /> <br /> Suppose Smart Touch paid a<br /> combined purchase price of $100,000 on<br /> August 1, 2013, for the land and building<br /> An appraisal performed a month before the<br /> purchase indicates that the land’s market<br /> (sales) value is $30,000 and the building’s<br /> market (sales) value is $90,000; But how<br /> will Smart Touch allocate the $100,000<br /> paid for both assets<br /> <br /> The land makes up 25% of the total market<br /> value, and the building 75%, as follows:<br /> Asset<br /> <br /> Market<br /> <br /> Percentage of Total<br /> <br /> (Sales)<br /> <br /> Value<br /> <br /> Land<br /> <br /> MA.NguyenQuocNhat<br /> <br /> Company Logo<br /> <br /> $30,000/120,000 =<br /> <br /> Each<br /> Asset<br /> <br /> $100,000<br /> <br /> = $25,000<br /> <br /> 100,000<br /> <br /> 75,000<br /> <br /> 25%<br /> Building<br /> <br /> 90,000<br /> <br /> $90,000/120,000 =<br /> 75%<br /> <br /> Total<br /> www.themegallery.com<br /> <br /> $30,000<br /> <br /> Cost of<br /> <br /> Purchase<br /> X Price<br /> <br /> Value<br /> <br /> Total<br /> <br /> www.themegallery.com<br /> <br /> 120,000<br /> <br /> 100%<br /> <br /> $100,000<br /> Company Logo<br /> <br /> 3<br /> <br /> IFA<br /> <br /> Chapter 8: Plant Assets and Intangible<br /> 8.1 Mesuring a the cost of a plant Asset<br /> 8.1.5 A Lump-Sum (Basket) Purchase of Assets<br /> <br /> Suppose Smart Touch paid by signing<br /> a note payable. The entry to record the<br /> purchase of the land and building is as<br /> follows:<br /> 2013<br /> Aug 1<br /> <br /> Land (A+)<br /> <br /> 25,000<br /> <br /> Building (A+)<br /> <br /> 75,000<br /> <br /> Notes payable (L+)<br /> www.themegallery.com<br /> <br /> 8.1 Mesuring a the cost of a plant Asset<br /> 8.1.6 Capital Expenditures<br /> Accountants divide spending made on plant<br /> assets into two categories:<br /> ● Capital expenditures<br /> ● Expenses<br /> Capital expenditures are debited to an asset<br /> account because they<br /> ● increase the asset’s capacity or efficiency, or<br /> ● extend the asset’s useful life.<br /> <br /> 100,000<br /> Company Logo<br /> <br /> www.themegallery.com<br /> <br /> 8.2 DEPRECIATION<br /> <br /> 8.2 DEPRECIATION<br /> <br /> 8.2.1 Causes of Depreciation<br /> 8.2.2 Measuring Depreciation<br /> 8.2.3 Depreciation Methods<br /> <br /> www.themegallery.com<br /> <br /> Company Logo<br /> <br /> 8.2.1 Causes of Depreciation<br /> All assets, except land, wear out as they<br /> are used. Greg’s delivery truck can only go<br /> so many miles before it is worn out. As the<br /> truck is driven, this use is part of what<br /> causes depreciation<br /> Additionally, physical factors, like age and<br /> weather, can cause depreciation of assets.<br /> <br /> Company Logo<br /> <br /> www.themegallery.com<br /> <br /> 8.2 DEPRECIATION<br /> <br /> Company Logo<br /> <br /> 8.2 DEPRECIATION<br /> <br /> 8.2.1 Causes of Depreciation<br /> <br /> 8.2.2 Measuring Depreciation<br /> <br /> Now that we have discussed causes of depreciation,<br /> let’s itemize what depreciation is not<br /> Depreciation is not a process of valuation.<br /> Businesses do not record depreciation based on<br /> changes in the asset’s market (sales) value.<br /> Depreciation is recapturing the cost invested in<br /> the asset.<br /> 2. Depreciation does not mean that the business<br /> sets aside cash to replace an asset when it is used<br /> up. Depreciation has nothing to do with cash.<br /> <br /> Depreciation of a plant asset is based on three<br /> main factors:<br />  Capitalized cost<br />  Estimated useful life<br />  Estimated residual value<br /> Estimated useful life is the length of the service<br /> period expected from the asset. The estimated<br /> useful life is how long the company expects it<br /> can use the asset. Useful life may be expressed<br /> in years, units, output, or miles<br /> <br /> www.themegallery.com<br /> <br /> www.themegallery.com<br /> <br /> MA.NguyenQuocNhat<br /> <br /> Company Logo<br /> <br /> Company Logo<br /> <br /> 4<br /> <br /> IFA<br /> <br /> Chapter 8: Plant Assets and Intangible<br /> 8.2 DEPRECIATION<br /> <br /> 8.2 DEPRECIATION<br /> <br /> 8.2.2 Measuring Depreciation<br /> Estimated residual value also called<br /> salvage value—is the asset’s expected cash<br /> value at the end of its useful life. A delivery<br /> truck’s useful life may be 100,000 miles. When<br /> the truck has been driven that distance, the<br /> company will sell or scrap it<br /> <br /> www.themegallery.com<br /> <br /> Company Logo<br /> <br /> 8.2.3 Depreciation Methods<br /> There are many depreciation methods for<br /> plant assets, but three are used most<br /> commonly:<br /> ● Straight-line<br /> ● Units-of-production<br /> ● Declining-balance<br /> <br /> www.themegallery.com<br /> <br /> 8.2 DEPRECIATION<br /> <br /> Company Logo<br /> <br /> 8.2 DEPRECIATION<br /> <br /> 8.2.3 Depreciation Methods<br /> <br /> 8.2.3 Depreciation Methods<br /> <br /> These methods work differently in how<br /> they derive the yearly depreciation amount, but<br /> they all result in the same total depreciation over<br /> the total life of the asset. we will use the<br /> following data of Greg’s Tunes<br /> <br /> <br /> Straight-Line Method<br /> The straight-line (SL) method allocates an equal<br /> amount of depreciation to each year<br /> The equation for SL depreciation, applied to<br /> the Greg’s Tunes’ truck, is as follows:<br /> Straight-line depreciation = (Cost – Residual<br /> value)÷ life<br /> = (41,000 – 1,000) ÷ 5<br /> = $8,000 per year<br /> <br /> Data Item<br /> <br /> Amount<br /> <br /> Cost of truck<br /> <br /> $41,000<br /> <br /> Estimated residual value<br /> <br /> (1,000)<br /> <br /> Depreciable cost<br /> <br /> $40,000<br /> <br /> Estimated useful life—Years<br /> <br /> 5 years<br /> <br /> Estimated useful life—Units<br /> <br /> 100,000 mi.<br /> <br /> www.themegallery.com<br /> <br /> Company Logo<br /> <br /> www.themegallery.com<br /> <br /> 8.2 DEPRECIATION<br /> <br /> Company Logo<br /> <br /> 8.2 DEPRECIATION<br /> <br /> 8.2.3 Depreciation Methods<br /> <br /> 8.2.3 Depreciation Methods<br /> <br /> <br /> Straight-Line Method<br /> Since the asset was placed in service on the<br /> first day of the year, the entry to record each<br /> year’s depreciation is as follows:<br /> <br /> Units-of-Production (UOP) Method<br /> The units-of-production (UOP) method<br /> allocates a fixed amount of depreciation to each<br /> unit of output. UOP depreciates by units rather<br /> than by years.<br /> A unit of output can be miles, units, hours, or<br /> output, depending on which unit type best defines<br /> the asset’s use.<br /> <br /> Dec 31<br /> <br /> Depreciation expense—truck (E+)<br /> Accumulated<br /> <br /> depreciation—truck<br /> <br /> 8,000<br /> 8,000<br /> <br /> (CA+)<br /> <br /> www.themegallery.com<br /> <br /> MA.NguyenQuocNhat<br /> <br /> Company Logo<br /> <br /> www.themegallery.com<br /> <br /> Company Logo<br /> <br /> 5<br /> <br />