CHAPTER
6
Accounting for and Presentation
of Property, Plant, and Equipment,
and Other Noncurrent Assets
CHAPTER OUTLINE:
I. Property, Plant, and Equipment
A. Land
1. Capitalizing versus expensing
B. Buildings and Equipment
1. Cost of assets acquired
2. Depreciation for financial accounting purposes
2. Units-of-production
4. Sum-of-the-years’-digits (not illustrated)
4. Repair and maintenance expenditures
5. Disposal of depreciable assets
C. Assets Acquired by Capital Lease
1. Operating lease versus capital lease
D. Intangible Assets
1. Leasehold improvements
3. Goodwill
II. Natural Resources
III. Other Noncurrent Assets
IV. Appendix—Present Value
Chapter 6 Accounting for and Presentation of Property, Plant, and Equipment, and Other Noncurrent Assets
TEACHING/LEARNING OBJECTIVES:
Principal:
1. To have the student understand the major accounting issues with respect to noncurrent assets
2. To have the student understand the present value concept and how to use tables of present
value factors of $1 and for an annuity of $1.
Supporting:
3. To have the student understand the accounting depreciation process, and the balance sheet
and income statement consequences of straight-line versus accelerated depreciation.
5. To have the student understand how to apply the present value concept to capital leases.
7. To have the student understand the nature of goodwill, the circumstances that cause goodwill
TEACHING OBSERVATIONS:
1. It is recommended that emphasis be placed on the “big picture” issues of accounting for
2. The nature of depreciation and the fact that it doesn’t involve the use of cash was presented in
Chapter 2; these basic concepts should be reviewed and emphasized.
4. The balance sheet and income statement effects of straight-line and accelerated depreciation
5. A lot of emphasis is required on the present value concept. Present value will be used in
6. The discussion of goodwill integrates the following ideas: 1) recording assets at cost, 2) the
present value concept, and 3) the importance of future cash flows from an investment. Press
reports of a contemporary business acquisition involving an amount greater than the fair
ASSIGNMENT OVERVIEW:
NO.
DIFFICULTY & TIME
ESTIMATE
OTHER
COMMENTS
M6.1.
Easy, 3-5 min.
Basic basket purchase allocation.
M6.2.
Easy, 2-3 min.
Basic capitalizing versus expensing mini-exercise.
M6.3.
Med., 5-8 min.
Straightforward depreciation calculations.
M6.4.
Med., 7-10 min.
Demonstrates the impact of depreciation methods on
ROI. Emphasize that the difference between straight
M6.5.
Easy, 3-5 min.
Goodwill is the missing debit, or the “plug figure”
that makes the journal entry balance.
M6.6.
Easy, 3-5 min.
Fun way to introduce present value analysis.
E6.7.
Easy, 5-8 min.
Demonstrates the need for judgment in accounting.
E6.8.
Easy, 5-8 min.
See E6.7. Good in-class demonstration exercise.
E6.9.
Easy, 2-3 min.
Emphasize that the nature of the expenditure, not the
E6.10.
Easy, 2-3 min.
See E6.9.
E6.11.
Easy, 5-7 min.
Good conceptual exercise.
E6.12.
Easy, 3-5 min.
See E6.11.
E6.13.
Med., 10-12 min.
Straight-forward depreciation calculations—
alternative methods.
E6.14.
Med., 10-12 min.
demonstration exercise.
E6.15.
Med., 7-10 min.
Basic present value calculations.
E6.17.
Easy, 5-7 min.
Easy way to explain the concept of goodwill.
E6.18.
Med., 10-12 min.
See E6.17. Good in-class demonstration problem.
E6.19.
Easy-Med.,
Potpourri—basic transaction analysis.
E6.20.
Easy-Med.,
Potpourri—basic transaction analysis.
P6.21.
Med.-Hard, 15-20 min.
Illustrates the financial statement impact of the
capitalizing versus expensing issue.
P6.22.
P6.23.
Med., 12-15 min.
Good “demo” assignment to prepare for P6.24.
Chapter 6 Accounting for and Presentation of Property, Plant, and Equipment, and Other Noncurrent Assets
ASSIGNMENT OVERVIEW (continued):
NO.
DIFFICULTY & TIME
ESTIMATE
OTHER
COMMENTS
P6.24.
12-15 min.
year depreciation calculations.
Med.-Hard,
See P6.23. Good homework assignment for partial–
P6.25.
Med., 10-12 min.
Excellent in-class demonstration problem.
Reinforces the student’s understanding of basic
P6.26.
Med., 10-12 min.
See P6.25. Group learning problem.
P6.27.
Med.-Hard,
Excellent way to demonstrate the relevance of the
15-20 min.
depreciation process. Makes students think.
15-20 min.
as a graded homework assignment.
P6.29.
Med., 10-12 min.
Use as an in-class demonstration of capital lease
P6.30.
Med., 10-12 min.
See P6.29.
P6.31.
Med., 5-7 min.
Basic present value calculations with a capital lease.
P6.32.
Med., 12-15 min.
Excel problem. Good homework assignment.
C6.33.
Med., 12-15 min.
Focus company case. Similar to C6.34.
C6.34.
Med., 12-15 min.
Group learning problem. Similar to C6.33.
20-30 min. or more
fixed assets and accounts receivable collection
issues.
SOLUTIONS:
M6.1.
Allocate the purchase cost in proportion to appraised values.
Cost of commercial safe = [$7,500 / ($9,000 + $13,500 + $7,500)] * $18,000 = $4,500
M6.2.
Capitalized:
$4,200 cost to replace the transmission in a company-owned vehicle. This cost
should be added to the Vehicles account because it will extend the useful life (and
M6.2. (continued)
Expensed:
$12,400 cost of annual property insurance on the company’s production facilities.
M6.3.
a.
Amount to be depreciated = Cost – Salvage value
Annual depreciation expense = Amount to be depreciated / Useful life
Net book value = Cost – accumulated depreciation
M6.4.
a.
ROI = Net income / average total assets
ROI for the year ended December 31, 2016 = $600,000 / $4,000,000 = 15%
Note that straight-line depreciation = $40,000 per year, so this amount would have
M6.5.
Solution approach:
Goodwill results from the purchase of one firm by another firm for a price greater than
the fair market value of the net assets acquired. Both elements of the goodwill definition
have been met: 1) Backstreets Co. acquired all of Jungleland, Inc.’s net assets, and 2) the
price paid ($12,600,000) exceeds the fair market value of the net assets acquired
+ 3,400,000
Goodwill
+ 3,500,000
Cash
– 12,600,000
Dr. Land………………………………………………………… 2,400,000
Dr. Buildings…………………………………………………… 5,800,000
Study suggestions:
Where the two conditions for recording goodwill have been met (as described above),
calculating the amount to be recorded as Goodwill becomes a simple exercise. Goodwill
represents the “unexplained” difference between the purchase price (which is ordinarily
recorded as a credit to Cash) and the fair market value of the net assets acquired (which
are recorded as debits to the various assets accounts, and possibly as credits for liabilities
assumed by the purchaser). The amount recorded as a debit to Goodwill thus becomes a
“plug figure” to ensure that the debits and credits in the journal entry balance.
M6.6.
E6.7.
a.
Allocate the purchase cost in proportion to appraised values.
Cost of land = ($60,000 / ($240,000 + $60,000)) * $255,000 = $51,000
b.
as feasible to be assigned to assets whose cost will become a tax-deductible expense in
time of purchase by Dorsey Co.). The old original cost data represent what the relative
asset values were (at the time of purchase by Bibb Co.), which is not relevant to Dorsey
Land is not a depreciable asset. Management would want as much of the purchase price
E6.8.
a.
36,000
The remaining useful life of the asset to Crow Co. is the appropriate life to be used for
over the estimated useful life of the asset to the owner of the asset.
The cost of the equipment ($90,800) plus the cost of moving and installation ($8,200) are
allocated on the basis of the appraiser’s estimate of fair value. The list price of the same
items if new does not represent the value of the used items being purchased. Likewise,
E6.9.
a.
Expense. Routine repair and maintenance costs would not increase the useful life or
estimated salvage of the vehicles, so the “economic benefits” of these expenditures relate
only to the current year.
cost of developing the coal mine will be recorded as depletion expense (at a cost of $12
Asset. This cost should be added to the Building account because it will extend the
Expense. Advertising costs, as well as research and development costs, are always
E6.10.
a.
Expense. Actually, this cost should be recorded as a “loss” and not as an asset because it
was not an ordinary and necessary cost incurred in the acquisition (or installation) of the
machine.
Asset. Title search fees are ordinary and necessary costs incurred to acquire land,
Expense. This is an example of an ordinary repair and maintenance expenditure. The
year incurred because it is impossible to objectively determine to what extent, if any,
E6.11.
Alpha, Inc. should have a higher ROI than Beta Co. Alpha’s plant is older and will be
E6.12.
a.
Accelerated depreciation expense in the first year will be higher than straight-line
E6.13.
a.
Amount to be depreciated = Cost – Salvage value
Annual depreciation expense = Amount to be depreciated / Useful life
Annual depreciation expense = ($1,200,000 – $180,000) / 8 = $127,500 per year
E6.14.
a. and
1. Straight-line depreciation:
2. Double-declining balance depreciation:
Straight-line rate = 1 / 4 = 25%. Double-declining rate = 25% * 2 = 50%
At End of Year .