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:
C1. Compute the cost of plant
assets.
1, 2, 3, 4, 6,
8-1, 8-2
8-1, 8-3,
BTN 8-1
partial years and changes in
estimates.
8-8
C3. Distinguish between
revenue and capital
expenditures, and account
for them.
7
8-9
8-14, 8-15
8-4
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
line, units-of-production,
and declining-balance
methods.
17, 18
8-3, 8-5,
8-6, SP
through discarding or
selling an asset.
P3. Account for natural
resource assets and their
depletion.
9
8-11,
8-12, 8-14
8-18, 8-21
8-7
BTN 8-6
P4. Account for intangible
assets.
11, 12, 13,
14
8-12,
8-13, 8-14
8-19, 8-20,
8-21
8-8
BTN 8-3, BTN 8-6
P5A Account for asset
exchanges (Appendix 8A).
8-16
8-23, 8-24
*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
BTN refers to Beyond the Numbers
Guided Example included
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.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints without
the video and audio functions for the Guided Examples are also available in the Connect Instructor Library and Exercise
Presentations. These are indicated in the Related Assignment Materials grid on page 1 in blue bold font.
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
Explain depreciation for partial years and changes in estimates.
Partial-Year Depreciation
1:59
Changes in Estimates
2:13
C3
Distinguish between revenue and capital expenditures, and account for them.
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
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).
Simplified “Partial–Year Depreciation.”
Added margin table to Exhibit 8.14 as learning aid.
New Decision Insight box on extraordinary repairs to SpaceX’s reusable orbital rocket.
Financial and Managerial Accounting, 8e
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.
A. Machinery and Equipment
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
renovations.
the asset). Cost also includes design fees, building permits, and insurance during construction.
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).
2. Costs are charged to a separate Land Improvement account.
3. Costs are allocated to the periods they benefit (depreciated)
any existing structures (less proceeds from sale of salvaged material). Land cost is not allocated to
E. Lump-Sum Purchase
A group of plant assets purchased with a single transaction for a lump-sum price. Individual asset
cost is determined by allocating the cost of the purchase among the different types of assets acquired
based on their relative market (or appraised) values.
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.
2. Salvage value—(residual value or scrap value) an estimate of the asset’s value at the end of its
useful life.
3. Useful life—(service life) length of time the asset is expected to be used in a company’s
operations. Factors affecting useful life include:
4. Relationships:
a. Depreciable cost = Cost – Salvage Value
b. Book Value = Cost – Accumulated Depreciation
B. Depreciation Methods
1. Straight-line method—charges the same amount to expense for each period of the asset’s useful
8-5
life. Method used by most companies.
Computation: Cost minus salvage value (equals the depreciable cost) divided by the number of
accounting periods in the asset’s useful life equals the periodic depreciation.
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,
product outputs, hours used. Computation:
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
book value by a depreciation rate (usually twice the straight-line rate) to determine the period’s
depreciation. If double the straight-line rate is used the method is referred to as double
declining-balance. (Note that salvage value is not used in the calculation.)
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
lower amounts in the later years.
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
depreciated over the revised useful life remaining.
2. The revision is referred to as a change in an accounting estimate and only effects current and
future financial statements.
E. Reporting Depreciation
1. Cost of plant assets and accumulated depreciation are reported on the balance sheet or in its
notes.
2. To satisfy the full-disclosure principle, the depreciation method or methods used must be
disclosed in a balance sheet note.
4. Accumulated depreciation (normal credit balance) on the balance sheet does not represent
funds accumulated to buy new assets when the presently owned assets must be replaced.
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.
A. Ordinary Repairs—expenditures to keep an asset in normal, good operating condition. They do not
2. Examples: cleaning, repainting, and lubricating.
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.
a. Examples: adding a wing to a building or changing a machine from manual function to
automatic.
2. Extraordinary repairs or replacements are expenditures that do extend the asset’s useful life
beyond its original estimate.
a. Examples: roofing replacement and major overhauls of machinery and equipment.
b. Treated as capital expenditures (debited to asset account) because they benefit future
periods.
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.
• Remove account balances of the disposed asset—including its 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
4. Natural resources are reported on the balance sheet at cost less accumulated depletion.
B. Plant Assets Tied into Extracting
When the usefulness of these plant assets is directly related to the depletion of the resource, the plant
asset is depreciated in proportion to the depletion of the resource (use units-of-production method
and the life of the resource).
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.
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
but is tested annually for impairment—this test is discussed in advanced course)
a. Useful or economic life may differ from legal life.
3 Gross acquisition cost is disclosed on the balance sheet along with their accumulated
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
4. Trademarks and Trade Names—symbols, names, phrases, or jingles identified with a
company, product, or service.
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
cost is charged to Rent Expense.
7. Leasehold improvements—improvements to leased property, such as partitions, painting, and
storefronts. Amortization results in debit to Amortization Expense—Leasehold Improvements.
8-8
8. Research and Development – expenditures aimed at discovering new products, new processes, or
knowledge. Costs are expensed when incurred because it is difficult to predict future benefits.
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
exchange has commercial substance if the company’s future cash flows change as a result of the
exchange of one asset for another asset.
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
machine can produce 210,000 widgets during its useful life.
The New Times Company purchases this machine on January 1, 2019, and uses it for
exactly three years. During these years the annual production of widgets has been
80,000, 50,000, and 30,000 units, respectively. On January 1, 2022, the machine is sold
for $45,000.
Required:
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
by useful life. In this example the cost is $120,000, the salvage value is $15,000,
and the useful life is 5 years. Therefore,
(120,000 – 15,000) / 5
21,000 each year
1b. Units–of-production
The depreciation expense each year is equal to a rate [(cost minus salvage)
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
accumulated depreciation) at the beginning of the year. In this example the rate
would be 2/5, or 40%, and the depreciation expense for each of the first three
years would be:
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.
The gain or loss on disposal of the asset is determined by comparing the sale
price, in this case $45,000, with the net book value of the asset at the time of the
sale.
Straight-line
Cash
45,000
Accumulated depreciation
63,000
Machine
120,000
* 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
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.
The Nation Express Company purchases this van on April 1, 2019. During 2019 the van
is driven 13,000 miles and during 2020 it was driven 21,000 miles.
Required:
8-13
Chapter 8 Solution: Alternate Demonstration Problem #2
Straight Line
Cost – Salvage value
=
25000 – 5000
useful life
5 years
20,000
5
$4,000
per year
Double declining balance
2
x
book
value
=
Depreciation expense
life
x
=
10,000
x
9/12 =
7,000
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
25,000 – 5,000
=
$ 0.20
per mile
(rate)
100,000 miles
rate
actual
mileage
=
Expense
$ 0.20
x
=
$ 2,600
$ 0.20
x
=
$ 4,200