1、Feature Topic:The characteristics of Property,Plant and EquipmentTo 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 asset must be tangible in nature.Chapter Ske
2、letonP 66-673.1 Plant and EquipmentThe 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 equipmentThe cost of plant an equipment includes all expenditures reason
3、able 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 includedExampleLandWhen land is purchased,various incidental costs are incurred,in addition to the purchase price.Apportio
4、nment of a lump-Sum purchaseWhen land and buildings are purchased for a lump sum,the purchase price must be apportioned between land and buildings.Illustration 3-1:p68Land Improvements:Improvements to real estate such as driveways,fences,parking lots,and sprinkler systems,have a limited life and are
5、 therefore subject to depreciation.BuildingsDepreciationAllocating the cost of plant and equipment over the years of usageTangible plant assets,with the exception of land,are of use to a company for only a limited number of years.Depreciation,as the term is used in accounting,is the allocation of co
6、st 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 Depreciation.Allocating the cost of plant and equipment over the years of usag
7、eDepreciation 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 depreciationStraight-Line Method:the simplest and most widely used method.1.Annual Deprecation=Cost or Residual Value/Years
8、 of Useful LifeUnits-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 useful life.1.This method is suitable only when the total units of the asset over its en
9、tire 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 amounts in the later years.Fixed-Percentage-of-Declining-Balance Method 1.The most widely us
10、ed form of accelerated depreciation is the fixed-percentage-of-declining-balance method.2.Depreciation expense=Remaining Book Value*Accelerated Depreciation Rate.3.Illustration 3-2Sum-of-the-Years-Digits Method 1.The depreciation rate is stated as a fraction,which gets smaller each year.These“shrink
11、ing fractions”determine the percentage of the assets depreciable amount charged to depreciation expense ear year.2.ExampleDepreciation for Fractional Periods 1.Round the calculation to the nearest whole month.2.Or half-year convention,is to record six months depreciation on all assets acquired durin
12、g the year.Disposal of Plant and EquipmentWhen 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 of the year ending with the date of disposal.As units of plant and equipment wear out or become obsolete,they m
13、ust be scrapped,sold,or traded in on new equipment.Entry Example:p73Gains and Losses on disposal of plant and equipmentDisposal at a Price above the book valueDisposal at a Price below the book valueDisposal at a price equal to book valueCost of IntangiblesPurchasedIdentifiableCapitalize the cost in
14、curred to acquire an intangible asset with a finite life and amortize over its useful life.Capitalize the cost incurred to acquire an intangible asset with an indefinite life and review it for impairment at least annually.UnidentifiableCapitalize the cost incurred to acquire goodwill and review it f
15、or impairment at least annually.Internally DevelopedIdentifiableE x p e n s e r e s e a r c h a n d development costs as incurred.Capitalize certain costs incurred for an intangible asset with a finite life and amortization over its useful life.Capitalize certain costs incurred for an intangible wit
16、h an indefinite life and review it for impairment at least annually.UnidentifiableExpense costs as incurred.Illustration 3-3.Cost of IntangiblesAmortization or Impairment of intangible assetsIntangible assets are separated into three categories to determine whether or not they are amortized,and how
17、they are reviewed for impairment:1.Intangible assets with a finite(limited)life 2.Intangible assets with an indefinite life 3.goodwillIntangible assets with a finite life are amortizedFactors should consider in estimating the useful life of the an intangible asset.The calculation of the amortization
18、 of intangible assets follows the same principles as the depreciation of tangible assets.Entry Example:p76Intangible assets with an indefinite life are reviewed for impairmentSome indefinite intangible assets,such as a trademark have a potentially indefinite life.Example:p 76An intangible asset is i
19、mpaired when its fair value is less than its carrying value.Research and development CostsCost 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
20、 costs and thus expensed as incurred:1.Materials,equipment,and facilities 2.Personnel 3.Intangibles purchased from others 4.Contract services 5.Indirect CostIdentifiable intangible assetsIdentifiable intangible assets are those intangibles that can be purchased or sold separately from the other asse
21、ts of the company.A company capitalizes the costs of identifiable intangibles.PatentA 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 if it en
22、ables 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.CopyrightsA copyright is a grant by the state government covering the right to publish,sell,or otherwise control literary or a
23、rtistic products for the life of the author plus 50 years.Copyrights cover such items as books,music,and films.FranchisesFranchises are agreements entered into by two parties in which,for a fee,one party(franchisor)gives the other party(franchisee)rights to perform certain functions or sell certain
24、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 leasehold improvementLease are i
25、ntangible assets because a right to use the property is held by the lessee,but the property itself is still owned by the lessor.Unidentifiable intangiblesAccounting for such goodwill depends on whether it is internally developed or purchased through a transaction.Internally developed goodwillAll com
26、panies develop unidentifiable intangibles.For example:p79Two characteristics distinguish intangibles of this type.Acquired goodwillAcquired goodwill arises when a company is acquired.Goodwill is recorded only when a transaction occurs.Recording goodwillExample:p80Impairment of goodwillFor fiscal yea
27、rs 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 greater than the book value,goodwill is not cons
28、idered to be impaired,and the second step is not necessary.Entry Example:p823.3 InvestmentsCorporations purchase investments in debt or stock securities generally for one of three reasons.Accounting for debit investmentDebit investments are investments in government and corporation bonds.In accounti
29、ng for debit investment,entries are required to record 1.the acquisition 2.the interest revenue 3.the sale Entry Example:p82Accounting for stock investmentsStock investments are investments in the capital stock of corporations.The accounting for investments in common stock is based on the extent of
30、the investors influence over the operation and financial affairs of the issuing corporation.Holding less than 20%Recording acquisition of stock investmentsRecording dividendsRecording sale of stockAccounting for stock investmentsHolding between 20%and 50%If investor owns between 20%and 50%of the com
31、mon 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 called the equity method.Example:p 86Holding of more than 50%parent company
32、and subsidiary(affiliated)companyWhen a company owns more than 50%of the common stock of another company,consolidated financial statements are usually prepared.Valuing and reporting investmentsCategories of securities1.Trading securities:are securities bought and held primarily for sale in the near
33、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 the intent and ability to hold to maturity.Balance sheet presentationIn 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.
