Financial and Managerial Accounting, 8e
8-1
CHAPTER 8
ACCOUNTING FOR LONG-TERM ASSETS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
AA and
BTN
Conceptual objectives:
assets.
partial years and changes in
8-8
8-13
expenditures, and account
C1. Compute the cost of plant
1, 2, 3, 4, 6,
8-1, 8-2
8-1, 8-2,
8-1, 8-3,
BTN 8-1
Analytical objectives:
A1. Compute total asset
turnover and apply it to
analyze a company’s use of
assets.
15
8-15
8-22
SP
AA 8-1, AA 8-2,
AA 8-3, BTN 8-2,
BTN 8-5
Procedural objectives:
methods.
through discarding or
P3. Account for natural
resource assets and their
depletion.
9
8-12, 8-14
8-7
BTN 8-6
P1 Compute and record
depreciation using straight-
line, units-of-production,
and declining-balance
5, 10, 16,
17, 18
8-3, 8-4,
8-5, 8-14
8-4, 8-5,
8-6, 8-7,
8-8, 8-9.
8-10, 8-18,
8-1, 8-2,
8-3, 8-5,
8-6, SP
BTN 8-4
*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
Financial and Managerial Accounting, 8e
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in
Connect.
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
o Connect also provides algorithmic versions for Quick Study, Exercises, and Problems.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints without
Need-to-Know Videos
LO
Need–to-Know
Title
Time
C1
8-1
Cost Determination
1:51
P1, C2
8-2
Depreciation Computations
9:16
C3, P2
8-3
Additional Expenditures and Asset Disposals
4:22
8-4
Depletion Accounting
1:53
8-5
Accounting for Intangibles
2:35
8-7
Asset Exchange
3:08
Concept Overview Videos
LO
Title
Time
C1
Compute the cost of plant assets.
Features of Plant Assets
2:01
Cost Determination
1:01
Purchases of Equipment and Buildings
1:15
Purchase of Land
1:35
Lump-Sum Purchase
1:14
C2
1:59
2:13
C3
Additional Expenditures
1:20
Ordinary Repairs and Betterments
1:42
A1
Compute total asset turnover and apply it to analyze a company’s use of
assets.
Total Asset Turnover
1:24
Total Asset Turnover — Illustration
1:46
P1
Compute and record depreciation using straight-line, units-of-production,
and declining-balance methods.
Factors in Computing Depreciation
2:00
Financial and Managerial Accounting, 8e
8-3
Deprecation Methods- Straight-Line Method
2:07
Book Value
2:16
Units-of-Production Method
1:26
Declining-Balance Method
1:23
Declining-Balance Method – Last Year Computation
1:14
Comparing Depreciation Methods
1:32
P2
Account for asset disposal through discarding or selling an asset.
Disposals of Plant Assets
1:02
Discarding Plant Assets
2:33
Selling Plant Assets
3:14
P3
Account for natural resource assets and their depletion.
Natural Resources; Cost Determination and Depletion
3:12
P4
Account for intangible assets.
Types of Intangibles
4:31
Amortization of Intangibles
0:48
P5
Account for asset exchanges (Appendix 8A).
Exchanging Plant Assets
1:00
Exchanges with Economic Substance — Loss
2:00
Exchanges with Economic Substance — Gain
1:21
Synopsis of Chapter Revisions
New opener—New Glarus Brewery and entrepreneurial assignment.
Updated company data in Exhibit 8.1.
Added entry with Exhibit 8.3 and Exhibit 8.4.
Continued Excel demos for straight-line (Exhibit 8.6) and double-declining balance (Exhibit 8.11).
Financial and Managerial Accounting, 8e
8-4
Chapter Outline
I. Plant Assets—Tangible assets used in a company’s operations that have a useful life of more than one
accounting period. Consistent with cost principle, recorded at cost. Cost includes all normal and
reasonable expenditures necessary to get an asset in place and ready for use. Must be normal,
reasonable and necessary for its intended use.
Costs include all normal and necessary expenditures to purchase them and prepare them for their
intended use (purchase price, taxes, transportation charges, insurance while in transit, and the
installing, assembling and testing of machinery and equipment).
B. Buildings
2. If constructed for own use, cost includes materials and labor plus a reasonable amount of
A. Machinery and Equipment
C. Land Improvements
Costs that increase the usefulness of the land.
1. Examples: parking lots, driveways, fences, and lighting
systems (all have limited useful lives).
A group of plant assets purchased with a single transaction for a lump-sum price. Individual asset
D. Land
Cost includes purchase price, realtor commissions, title insurance, legal fees, accrued property taxes,
legal fees, title insurance fees, accrued property taxes, surveying, clearing, landscaping, and local
government assessments (current or future) for streets, sewers, etc. Also includes cost of removal of
any existing structures (less proceeds from sale of salvaged material). Land cost is not allocated to
II. Depreciation—The process of allocating the cost of a plant asset to expense while it is in use. Recorded
as a debit to Depreciation Expense and a credit to Accumulated Depreciation.
A. Factors in Computing Depreciation
1. Cost—described in section I above.
3. Useful life—(service life) length of time the asset is expected to be used in a company’s
4. Relationships:
B. Depreciation Methods
1. Straight-line method—charges the same amount to expense for each period of the asset’s useful
Financial and Managerial Accounting, 8e
8-5
2. Units-of-production method—charges a varying amount of cost to expense for each period of an
asset’s useful life depending on its usage. Examples of capacity measurements: miles driven,
3. Declining-balance method—an accelerated depreciation method has more depreciation during
the early years and less in later years. Computation: Multiply the asset’s beginning of period
4. Depreciation for tax reporting—differences between financial and tax accounting systems are
normal and expected.
a. Many companies use accelerated depreciation in computing taxable income because it
postpones its tax payments by charging higher depreciation expense in the early years and
C. Partial Year Depreciation
When an asset is purchased (or sold) at a time other than the beginning or end of an accounting
period, depreciation is recorded for part of that period.
D. Change in Estimates
If estimated salvage and/or useful life is revised:
E. Reporting Depreciation
2. To satisfy the full-disclosure principle, the depreciation method or methods used must be
4. Accumulated depreciation (normal credit balance) on the balance sheet does not represent
1. Cost of plant assets and accumulated depreciation are reported on the balance sheet or in its
notes.
Financial and Managerial Accounting, 8e
III. Additional Expenditures—Those made to operate, maintain, repair, or improve plant assets after their
initial purchase. To record these expenditures one must decide whether to capitalize (increase an asset)
or expense in current period.
2. Examples: cleaning, repainting, and lubricating.
A. Ordinary Repairs—expenditures to keep an asset in normal, good operating condition. They do not
B. Betterments (Improvements) and Extraordinary Repairs—expenditures to make a plant asset more
efficient or productive; both are treated as a capital expenditure.
1. Betterments often involve adding a component to an asset that does not always extend its useful
life.
2. Extraordinary repairs or replacements are expenditures that do extend the asset’s useful life
beyond its original estimate.
IV. Disposals of Plant Assets—Assets may be discarded, sold, or exchanged due to wear and tear,
obsolescence, inadequacy, or damage by fire or other accident. General accounting steps in a disposal of a
plant asset:
• Record depreciation up to the date of disposal—this also updates Accumulated Depreciation.
A. Discarding Plant Assets—no longer useful and has no market value
Follow general accounting steps above.
1. If fully depreciated, no loss.
2. If not fully depreciated, record loss equal to the book value.
B. Selling Plant Assets
Follow general accounting steps above.
V. Natural Resources—Assets that are physically consumed when used. Examples include timber, mineral
deposits, and oil and gas fields.
A. Cost Determination and Depletion
1. Recorded at cost, which includes all expenditures necessary to acquire the resource and prepare
it for use.
Financial and Managerial Accounting, 8e
When the usefulness of these plant assets is directly related to the depletion of the resource, the plant
VI. Intangible Assets—Certain nonphysical assets (used in operations) that confer on owner’s long-term
rights, privileges, competitive advantages. Examples in B below.
A. Cost Determination and Amortization
1. Recorded at cost when purchased. If simply developed by the business, relative immaterial
costs are expensed.
but is tested annually for impairment—this test is discussed in advanced course)
2. Amortization—process of systematically allocating cost of intangible asset to expense over its
estimated useful or economic life. (If it has an indefinite useful life, it should not be amortized
4. Trademarks and Trade Names—symbols, names, phrases, or jingles identified with a
amortization.
B. Types of Intangibles
1. Patent—an exclusive right granted to its owner to produce and sell a patented item or to use a
process for 20 years. Costs of research and development leading to a new patent are expense
when incurred.
5. Goodwill—the amount by which the value of a company exceeds the value of its individual
assets and liabilities. Implies the company as a whole has certain valuable attributes not
measured in assets and liabilities. Goodwill is measured as the excess of cost of an acquired
entity over the valuable of net assets acquired. Only recorded when an entire company or
business segment is purchased. It is not amortized but is tested annually for impairment.
6. Right-of-Use Asset (Lease)—the rights to possess and use leased property granted by the
property’s owner (lessor) to the lessee in a contract called a lease. Recorded, if there was a cost
involved, as an intangible asset by the lessee (or sublessee). As Leaseholds are amortized, the
7. Leasehold improvements—improvements to leased property, such as partitions, painting, and
storefronts. Amortization results in debit to Amortization Expense—Leasehold Improvements.
Financial and Managerial Accounting, 8e
8-8
VII. Decision Analysis—Total Asset Turnover
A. Measure of company’s efficiency using assets to generate sales.
B. Calculated by dividing net sales by average total assets.
VIII. Exchanging Plant Assets
A. Accounting for the exchange depends on whether the transaction has commercial substance. An
Financial and Managerial Accounting, 8e
8-9
Chapter 8 Alternate Demonstration Problem
A new machine costs $120,000, has an estimated useful life of five years and an
estimated salvage value of $15,000 at the end of that time. It is expected that the
Required:
1. Calculate the depreciation expense for each of the first three years using:
2. Prepare the proper journal entry for the sale of the machine under the three
different depreciation methods.
Financial and Managerial Accounting, 8e
Chapter 8 Solution: Alternate Demonstration Problem
1a. Straight-line
The depreciation expense each year is equal to cost minus salvage value divided
1b. Units–of-production
The depreciation expense each year is equal to a rate [(cost minus salvage)
divided by total production] multiplied by the actual number of units produced
1c. Double-declining balance
The depreciation expense each year is equal to a rate (twice the straight-line rate
divided by useful life) multiplied by the asset’s net book value (cost minus
Cash
45,000
Accumulated depreciation
63,000
Machine
120,000
Financial and Managerial Accounting, 8e
8-11
2. The journal entry for the sale of the asset will have the same general form
regardless of the method of depreciation adopted, except that whether there is a
gain or a loss on the sale may change according to the depreciation method used.
* Book value of 57,000 less sale price $45,000 equals loss of $12,000
Units–of-production
Cash
45,000
Accumulated depreciation
80,000
Machine
120,000
Gain on sale of machine
5,000
* Sale price $45,000 less book value of $40,000 equals gain of $5,000
Double-declining balance
Cash
45,000
Accumulated depreciation
94,080
Machine
120,000
Gain on sale of machine
19,080
*Sale price $45,000 less book value of $25,920 equals gain of $19,080
Financial and Managerial Accounting, 8e
Chapter 8 Alternate Demonstration Problem #2
A new van costs $25,000, has an estimated useful life of five years and an estimated
salvage value of $5,000 at the end of that time. It is expected that the van will be driven
100,000 miles during its useful or service life.
Required:
1. Calculate the depreciation expense for 2019 and 2020 using:
Financial and Managerial Accounting, 8e
8-13
Chapter 8 Solution: Alternate Demonstration Problem #2
Straight Line
Cost – Salvage value
=
25000 – 5000
useful life
5 years
per year
Double declining balance
2
x
book
value
=
Depreciation expense
life
x
=
x
9/12 =
x
12/12 =
Financial and Managerial Accounting, 8e
8-14
Units of Production
cost – salvage
=
depreciation rate per mile
total miles
Rate
x
actual
mileage
=
Depreciation
expense
=
(rate)
rate
actual
mileage
=
Expense
$ 0.20
x
=
$ 2,600
$ 0.20
x
=
$ 4,200