John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-1
CHAPTER 8
REPORTING AND ANALYZING LONG-TERM ASSETS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Explain the cost principle for
computing the cost of plant
assets.
1, 2, 3, 4, 6,
7, 20, 21
8-1, 8-2,
8-15
8-1, 8-2,
8-3, 8-21
8-1, 8-3,
8-4, 8-6
8-3
C2. Explain depreciation for partial
years and changes in estimates
8-5, 8-7
8-11, 8-12
8-13, 8-25
8-4, 8-5
C3. Distinguish between revenue
and capital expenditures, and
account for them.
8
8-8, 8-15
8-14, 8-15
8-4
Analytical objectives:
A1. Compute total asset turnover
and apply it to analyze a
company’s use of assets.
16
8-13
8-22
SP 8
8-1, 8-2,
8-4, 8-7,
8-9
Procedural objectives:
P1 Compute and record
depreciation using straight-line,
units-of-production, and
declining-balance methods.
5, 11, 17,
18, 19
8-3, 8-4,
8-6
8-4, 8-5, 8-6,
8-7, 8-8, 8-9,
8-10, 8-18,
8-25
8-1, 8-2,
8-3, 8-5,
8-6, SP 8
8-6
through discarding, or selling an
asset.
9
8-9
8-16, 8-17,
8-24, 8-25
8-5, 8-6
assets and their depletion.
10
8-10, 8-11
8-18
8-7
8-8
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-2
Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises and
Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and Problems. It allows
instructors to monitor, promote, and assess student learning. It can be used in practice, homework, or exam mode.
Connect Insight
The first and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed
The Serial Problem for Success Systems continues in this chapter.
General Ledger
Excel Simulations
Assignable within Connect, Excel Simulations allow students to practice their Excel skills—such as basic formulas
and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me
tutorials (when enabled). Excel Simulations are auto-graded and provide instant feedback to the student.
Synopsis of Chapter Revisions
• NEW opener—Kate Spade
• Updated data in Exhibit 8.1.
• Added info-boxes to Exhibits 8.8, 8.10 and 8.12.
• New margin notes added for SL and DDB rates.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-3
Chapter Outline
Notes
I. Plant Assets—Tangible assets used in a company’s operations that
have a useful life of more than one accounting period. Consistent with
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
1. If purchased, cost usually includes its purchase price,
brokerage fees, taxes, title fees, attorney costs, and all
expenditures to make it ready for its intended use (any
necessary repairs or renovations such as wiring, lighting,
flooring and wall coverings).
2. If constructed for own use, cost includes materials and labor
plus a reasonable amount of indirect overhead cost (heat,
lighting, power, and depreciation on machinery used to
construct 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 lot surfaces, 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)
for streets, sewers, etc. Also includes cost of removal of any
existing structures (less proceeds from sale of salvaged material).
the cost of the purchase among the different types of assets
D. Land
Cost includes purchase price, real estate commissions, title
insurance, legal fees, accrued property taxes, legal fees, title
insurance fees, accrued property taxes, surveying, clearing,
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-4
Chapter Outline
Notes
II. Depreciation—The process of allocating the cost of a plant asset to
expense in the accounting periods benefiting from its 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 benefit period.
3. Useful life—(service life) length of time the asset is expected
to be productively 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 life. Method used by most
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:
a. Cost minus salvage value divided by the total number of
calculation.)
3. Declining-balance method—an accelerated depreciation
method which yields larger depreciation expenses during the
early years of an asset’s life and smaller charges in later years.
Computation: Multiply the asset’s beginning of period book
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-5
Chapter Outline
Notes
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
C. Partial Year Depreciation
When an asset is purchased (or disposed of) at a time other than
the beginning or end of an accounting period, depreciation is
recorded for part of the year.
D. Change in Estimates for Depreciation
If estimated salvage and/or useful life is revised:
statements, not prior statements.
1. Depreciation expense computations are revised by spreading
the remaining cost to be depreciated over the revised useful
life remaining.
E. Reporting Depreciation
new assets when the presently owned assets must be replaced.
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.
3. Plant assets are reported at their undepreciated costs (book
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-6
Chapter Outline
Notes
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 materially increase the asset’s life
or productive capabilities.
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 involves 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
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.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-7
Chapter Outline
Notes
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
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.
2. Sale is at a loss if value received is less than book value.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-8
Chapter Outline
Notes
V. Natural Resources—Assets that are physically consumed when used.
Examples include timber, mineral deposits, and oil and gas fields.
Often called wasting assets.
A. Cost Determination and Depletion
1. Recorded at cost, which includes all expenditures necessary to
acquire the resource and prepare it for its intended use.
2. Depletion is the process of allocating the cost of natural
resources to the period when it is consumed
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 owners 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.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-9
Chapter Outline
Notes
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.
4. Trademarks and Trade Names—symbols, names, phrases, or
jingles identified with a company, product, or service.
5. Goodwill—specific meaning in accounting: the amount by
which the value of a company exceeds the value of its
individual assets and liabilities. Implies the company as a
6. Leaseholds—the rights to possess and use leased property
7. Leasehold improvements—alterations or improvements to
VII. Global View—Compares U.S. GAAP to IFRS
A. Accounting for Plant Assets—both systems are broadly similar on
issues involving cost determination, additional expenditures and
disposal.
1. Decreases in value—although both systems require recording
decline in value to be recorded as asset impairment, the test
for impairment under each system differs. U.S.GAAP uses
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-10
Chapter Outline
Notes
B. Accounting for Intangibles—similarities and differences are
consistent with accounting for plant assets however the
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 —Appendix 8A
A. Accounting for the exchange depends on whether the transaction
has commercial substance. Commercial substance exists if the
company’s future cash flows change as a result of the transaction.
B. Exchanges with Commercial Substance: if commercial substance
exists, a gain or loss is recorded based on the difference between
=
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-11
VISUAL #8-1
FORMULAS FOR DEPRECIATION METHODS
1. STRAIGHT LINE
*Full Historical Cost
2. UNITS OF PRODUCTION
(Depreciable)
a) FHC – Estimated salvage Cost per
Predicted units of production Unit
**Cost Per Unit
3. DOUBLE-DECLINING BALANCE
Book Value (beginning of year) x RATE* = Depreciation (for that year)
=
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-12
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-13
Alternate Demonstration Problem
Chapter 8
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, 2017, 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, 2020, the machine is sold for $45,000.
Required:
1. Calculate the depreciation expense for each of the first three years
using:
a. Straight-line
b. Units–of-production
c. Double-declining-balance
2. Prepare the proper journal entry for the sale of the machine under the
three different depreciation methods.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-14
Solution: Alternate Demonstration Problem
Chapter 8
1a. Straight-line
The depreciation expense each year is equal to cost minus salvage
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
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
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
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
Straight-line
Cash …………………………………..
45,000
Accumulated depreciation …..
63,000
Machine …………………………
Cash …………………………………..
45,000
Accumulated depreciation …..
80,000
Machine …………………………
Double-declining balance
Cash …………………………………..
45,000
Accumulated depreciation …..
94,080
Machine …………………………
19,080
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-16
Alternate Demonstration Problem #2
Chapter 8
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, 2017. During
2017 the van is driven 13,000 miles and during 2018 it was driven 21,000
miles.
Required:
1. Calculate the depreciation expense for 2017 and 2018 using:
a. Straight-line
b. Double-declining-balance
c. Units–of-production
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
8-17
Solution: Alternate Demonstration Problem #2
Chapter 8
Straight Line
per year
Double declining balance
2
x
book
value
=
Depreciation expense
life
x
=
x
9/12 =
x
12/12 =
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
Units of Production
cost – salvage
=
depreciation rate per mile
total miles
Rate
x
actual
mileage
=
Depreciation
expense
=
(rate)
rate
mileage
=
Expense
$ 0.20
x
=
$ 2,600
$ 0.20
x
=
$ 4,200