Handout AKT 102 Pertemuan 2

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Slide

Chapter

9

Plant Assets,

Natural Resources, and

Intangible Assets

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Slide 9-3

IFRS

allows revaluation of plant assets to fair value

If revaluation is used, it must be applied to all assets in

a class of assets.

Assets that are experiencing rapid price changes must

be revalued on an annual basis, otherwise less

frequent revaluation is acceptable.

Revaluation of Plant Assets

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Illustration: Pernice Company applies revaluation to plant assets with a carrying value of $1,000,000, a useful life of 5 years, and no residual value. Pernice makes the following journal entries in year 1, assuming straight-line depreciation.

Depreciation expense 200,000

Accumulated depreciation 200,000

Revaluation of Plant Assets

SO 4 Describe the procedure for revising periodic depreciation.

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Slide 9-5

Illustration: At the end of year 1, independent appraisers

determine that the asset has a fair value of $850,000. To report the plant assets at fair value, Pernice makes the following entry.

Plant assets 150,000

Revaluation of Plant Assets

SO 4 Describe the procedure for revising periodic depreciation.

Revaluation surplus is an example of an item reported as other comprehensive income, as discussed in Chapter 5.

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Pernice now reports the following information in its statement of financial position at the end of year 1.

Revaluation of Plant Assets

SO 4 Describe the procedure for revising periodic depreciation.

$850,000 is the new basis of the asset. Pernice reports depreciation expense of $200,000 in the income statement and $50,000 in other comprehensive income. Depreciation in year 2 will be $212,500 ($850,000 / 4).

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Slide 9-7

Ordinary Repairs

- expenditures to maintain the operating efficiency and productive life of the unit.

Debit - Repair (or Maintenance) Expense.

Referred to as revenue expenditures.

Expenditures During Useful Life

SO 5 Distinguish between revenue and capital expenditures, and explain the entries for each.

Additions and Improvements

- costs incurred to increase

the operating efficiency, productive capacity, or useful life of a plant asset.

Debit - the plant asset affected.

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Companies dispose of plant assets in three ways

—

Retirement, Sale, or Exchange (appendix).

Plant Asset Disposals

SO 6 Explain how to account for the disposal of a plant asset.

Illustration 9-19

Record depreciation up to the date of disposal.

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Slide 9-9

Illustration: Assume that Hobart Enterprises retires

its computer printers, which cost $32,000. The accumulated depreciation on these printers is $32,000. The journal entry to record this retirement is:

Plant Asset Disposals - Retirement

SO 6 Explain how to account for the disposal of a plant asset.

Printing equipment 32,000

Question: What happens if a fully depreciated plant asset is still useful to the company?

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Illustration: Assume that Sunset Company discards delivery equipment that cost $18,000 and has accumulated

depreciation of $14,000. The journal entry is:

Plant Asset Disposals - Retirement

SO 6 Explain how to account for the disposal of a plant asset.

Loss on disposal 4,000

Companies report a loss on disposal in the “Other income and expense” section of the income statement.

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Slide 9-11

Sale of Plant Assets

Compare the book value of the asset with the proceeds

received from the sale.

If proceeds exceed the book value, a gain on disposal occurs.

If proceeds are less than the book value, a loss on disposal occurs.

Plant Asset Disposals

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Illustration: Assume that on July 1, 2011, Wright Company sells office furniture for $16,000 cash. The office furniture originally

cost $60,000. As of January 1, 2011, it had accumulated

depreciation of $41,000. Depreciation for the first six months of 2011 is $8,000. Prepare the journal entry to record depreciation expense up to the date of sale.

SO 6 Explain how to account for the disposal of a plant asset.

Plant Asset Disposals - Sale

Depreciation expense 8,000

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Slide 9-13

Illustration: Wright records the sale as follows.

Plant Asset Disposals - Sale

Cash 16,000

Illustration 9-20

Computation of gain on disposal

Office equipment 60,000

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Illustration: Assume that instead of selling the office furniture for $16,000, Wright sells it for $9,000.

Plant Asset Disposals - Sale

Loss on Disposal

Cash 9,000

Office equipment 60,000

Loss on disposal 5,000 July 1

Illustration 9-21

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Slide 9-15

Natural resources

consist of standing timber and

resources extracted from the ground, such as oil, gas,

and minerals.

Standing timber is considered a biological asset under

IFRS.

In the years before they are harvested, the recorded

value of biological assets is adjusted to fair value each

period.

Section 2

–

Natural Resources

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Depletion is to natural resources as depreciation is to plant assets.

Companies generally use units-of-activity method.

Depletion generally is a function of the units extracted.

IFRS

defines extractive industries as those businesses

involved in finding and removing natural resources located in

or near the earth’s crust.

Cost

-

price needed to acquire the resource

and

prepare it for

its intended use.

Depletion

- allocation of the cost to expense in a rational and

systematic manner over the resource’s useful life.

Section 2

–

Natural Resources

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Slide 9-17

Illustration: Assume that Lane Coal Company invests $5

million in a mine estimated to have 10 million tons of coal and no salvage value. In the first year, Lane extracts and sells 800,000 tons of coal. Lane computes the depletion expense as follows:

Section 2

–

Natural Resources

$5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton

$.50 x 800,000 = $400,000 depletion expense

Depletion expense 400,000

Accumulated depletion 400,000

Journal entry:

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Financial Statement Presentation

Illustration 9-23

Statement presentation of accumulated depletion

Extracted resources that have not been sold are reported as inventory in the current assets section.

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Slide 9-19

Intangible assets

are rights, privileges, and competitive

advantages that do not possess physical substance.

Section 3

–

Intangible Assets

Patents

Copyrights

Franchises or licenses

Intangible assets are categorized as having either a

limited life or an indefinite life.

Common types of intangibles:

SO 8 Explain the basic issues related to accounting for intangible assets.

Trademarks and trade names

Goodwill

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Patents

Exclusive right to manufacture, sell, or otherwise control an invention for a specified number of years from the date of the grant.

Legal life in many countries is 20 years.

Capitalize costs of purchasing a patent and amortize over its legal life or its useful life, whichever is shorter.

Legal fees incurred successfully defending a patent are capitalized to Patent account.

Types of Intangible Assets

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Slide 9-21

Intangible assets are typically amortized on a straight-line

basis.

Illustration: Assume that National Labs purchases a patent at a cost of $60,000. National estimates the useful life of the

patent to be eight years. National records the annual amortization as follows.

Accounting for Intangible Assets

SO 8 Explain the basic issues related to accounting for intangible assets.

Amortization expense 7,500

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Copyrights

Give the owner the exclusive right to reproduce and sell an artistic or published work.

 plays, literary works, musical works, pictures,

photographs, and video and audiovisual material.

Granted for the life of the creator plus a specified number of years, which can vary by country but is commonly 70 years.

Capitalize costs of acquiring and defending it.

Amortized to expense over useful life.

Accounting for Intangible Assets

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Slide 9-23

Trademarks and Trade Names

Word, phrase, jingle, or symbol that identifies a particular enterprise or product.

 Wheaties, Game Boy, Frappuccino, Kleenex, Windows, Coca-Cola, and Jetta.

Registration provides a specified number of years of

protection, which can vary by country, but is commonly 20 years.

Capitalize acquisition costs.

Renewed indefinitely, no amortization.

Accounting for Intangible Assets

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Franchises and Licenses

Contractual arrangement between a franchisor and a franchisee.

 BP (GBR), Taco Bell (USA), or Rent-A-Wreck (USA) are franchises.

Franchise (or license) with a limited life should be amortized to expense over the life of the franchise.

Franchise with an indefinite life should be carried at cost and not amortized.

Accounting for Intangible Assets

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Slide 9-25

Goodwill

Includes exceptional management, desirable location, good customer relations, skilled employees, high-quality products, etc.

Only recorded when an entire business is purchased.

Goodwill is recorded as the excess of ...

purchase price over the fair value of the identifiable net assets acquired.

Internally created goodwill should not be capitalized.

Accounting for Intangible Assets

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