Principles Of Financial Accounting Textbook PDF

WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 9 Long-Lived Assets Prepared by: Debbie M...

WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 9 Long-Lived Assets Prepared by: Debbie Musil Kwantlen Polytechnic University 1  Learning Goals Let’s turn the following into students friendly learning goals……… distinguish between capital expenditures and revenue expenditures; record transactions related to amortization, disposal and depletion of tangible assets identify the elements used in determining the cost of plant and equipment, natural resources, and intangibles; record transactions related to intangible assets Copyright John Wiley & Sons Canada, Ltd. 2 Copyright John Wiley & Sons Canada, Ltd. 3  Long-Lived Assets Property, Plant and Equipment – Determining cost and depreciation – Revising depreciation – Disposals Natural Resources – Cost, depreciation and disposal Intangible Assets – Accounting for intangible assets – Assets with finite and indefinite lives – Goodwill Statement Presentation and Analysis Copyright John Wiley & Sons Canada, Ltd. 4  Chapter 9: Success Criteria I will be successful when I can….. 1. Determine the cost of property, plant and equipment. 2. Explain and calculate depreciation. 3. Account for the disposal of property, plant and equipment. 4. Calculate and record depreciation of natural resources. 5. Identify the basic accounting issues for intangible assets and goodwill. Copyright John Wiley & Sons Canada, Ltd. 5  Property, Plant and Equipment Long-lived assets owned by a company – Used in production and sale of goods and services Characteristics: – Have physical substance (size and shape) – Used in the operations of the business – Not intended for sale to customers Expected to provide services for a number of years Divided into four classes: – Land, land improvements, buildings, equipment Copyright John Wiley & Sons Canada, Ltd. 6  Determining Cost Cost includes: – Purchase price, non-recoverable taxes, less discounts and rebates – All costs necessary to bring asset to location and make it ready for use – Obligations to remove, restore asset when it is retired (asset retirement costs) These costs are capital expenditures – Benefit future periods Costs that benefit only the current period are called operating expenditures Copyright John Wiley & Sons Canada, Ltd. 7  Land and Improvements Cost of land includes: – Purchase price – Closing costs such as legal fees and surveys – Costs of preparing land for intended use Land improvements: – Structural additions to land such as fences, parking lots, landscaping – Have limited useful lives – Recorded separately and depreciated Copyright John Wiley & Sons Canada, Ltd. 8  Textbook Questions Let’s work on BE9-1. a) b) Copyright John Wiley & Sons Canada, Ltd. 9  Buildings Include costs related to purchase or construction If purchased, include: – Purchase price and closing costs – Costs of getting a building ready for its intended use, such as remodelling and repairs If constructed, include: – Contract price plus architects’ fees, building permits, interest payments during construction, excavation costs Copyright John Wiley & Sons Canada, Ltd. 10  Equipment Broad category that includes: – Delivery equipment – Office equipment – Computers – Machinery – Vehicles – Furniture and fixtures – Other similar assets Cost includes charges paid by purchaser: – Purchase price – Freight charges and insurance during transit – Assembling, installing, testing Copyright John Wiley & Sons Canada, Ltd. 11  Textbook Questions Let’s work on BE9-2 and BE9-3. Copyright John Wiley & Sons Canada, Ltd. 12  Multiple Assets Property, plant and equipment purchased together for a single price (basket purchase) Total cost is allocated to each asset in proportion to its relative fair value Copyright John Wiley & Sons Canada, Ltd. 13 Let’s read page 382 – 383 and work on BE9-4. Textbook Questions Copyright John Wiley & Sons Canada, Ltd. 14 Homework E9-2 Textbook Questions Copyright John Wiley & Sons Canada, Ltd. 15 Copyright John Wiley & Sons Canada, Ltd. 16  Chapter 9: Success Criteria I will be successful when I can …….. 1. Determine the cost of property, plant and equipment. 2. Explain and calculate depreciation. 3. Account for the disposal of property, plant and equipment. 4. Calculate and record depreciation of natural resources. 5. Identify the basic accounting issues for intangible assets and goodwill. Copyright John Wiley & Sons Canada, Ltd. 17  Depreciation Systematic allocation of the cost over the long-lived asset’s useful life – A process of cost allocation, not determining fair value – Does not accumulate cash for replacement of the asset Copyright John Wiley & Sons Canada, Ltd. 18  Calculating Depreciation To calculate depreciation, must determine: – The cost of the asset Costs to acquire asset and make it ready for use – Its estimated useful (productive) life Can be expressed in terms of time, units of activity or units of output Based on assessment of use, obsolescence and other relevant factors – The estimated residual value Estimated value of asset at end of its useful life Copyright John Wiley & Sons Canada, Ltd. 19  Depreciation Methods Three alternative methods: – Straight-line – Diminishing-balance – Units-of-production Management chooses method that best matches the pattern of consumption of the asset’s future economic benefits Depreciation method, estimated useful life and residual value must be reviewed at least annually Copyright John Wiley & Sons Canada, Ltd. 20  Straight-Line Method Depreciation expense is constant every year of asset’s useful life Depreciable amount: the amount to be depreciated Copyright John Wiley & Sons Canada, Ltd. 21  Textbook Questions Let’s work on BE9-5. Copyright John Wiley & Sons Canada, Ltd. 22  Diminishing-Balance Method Depreciation expense based on asset’s diminishing carrying amount (cost less accumulated depreciation) Depreciation rate remains constant, but depreciation expense declines each year Copyright John Wiley & Sons Canada, Ltd. 23 Let’s work on BE9-6. Textbook Questions Copyright John Wiley & Sons Canada, Ltd. 24  Units-of-Production Method Useful life expressed as total units of production or activity Must estimate the total units of production that will be obtained from asset Copyright John Wiley & Sons Canada, Ltd. 25  Textbook Questions Let’s work on BE9-7. Copyright John Wiley & Sons Canada, Ltd. 26 E9-4 Textbook Questions Copyright John Wiley & Sons Canada, Ltd. 27 E9-4 Textbook Questions Units of Depreciable Cost Depreciation Exp. End of Year Production per Unit Year Accum. Dep. Carrying Amount $345,000 2013 2014 Copyright John Wiley & Sons Canada, Ltd. 28 E9-3 Textbook Questions Copyright John Wiley & Sons Canada, Ltd. 29  Chapter 9: Success Criteria I will be successful when I can….. 1. Determine the cost of property, plant and equipment. 2. Explain and calculate depreciation. 3. Account for the disposal of property, plant and equipment. 4. Calculate and record depreciation of natural resources. 5. Identify the basic accounting issues for intangible assets and goodwill. Copyright John Wiley & Sons Canada, Ltd. 30  Teaching the Class As a class we will read Page 394 – 395, then in your groups you will do the following: Group 1: (Amy, Famie, Priyanshu) Read Pages 395-396 (Retirement of Property, Plant and Equipment) 1. Ewing Company owns a machine that is fully depreciated but is still being used. How should Ewing account for this asset on the balance sheet? 2. Complete BE9-12 (Whiteboard) Group 2: (Adrian, Elmeri, Pritish) Read Pages 396-398 (Sale of Property, Plant and Equipment) 1. If equipment is sold in the middle of a fiscal year, why does depreciation expense have to be recorded for the partial period? 2. Complete BE9-13 (Whiteboard) Group 3: (Anshu, Jiho, Ryan) Read Pages 398-400 (Exchange of Property, Plant, and Equipment) 1. How is a gain or loss on the exchange of an item of property, plant, or equipment calculated? 2. Complete BE9-14 (Whiteboard) Copyright John Wiley & Sons Canada, Ltd. 31  Disposals of Property, Plant and Equipment Four steps required to record a disposal: 1. Update depreciation For the part of the year to the date of disposal 2. Calculate the carrying amount = Cost − Accumulated Depreciation 3. Calculate the gain or loss = Proceeds – Carrying Amount – Proceeds > Carrying amount: gain – Proceeds < Carrying amount: loss 4. Record the disposal Copyright John Wiley & Sons Canada, Ltd. 32  Textbook Questions Read 395 – 396 and work on BE9-12. Copyright John Wiley & Sons Canada, Ltd. 33  Textbook Questions Read pages 396 – 398 and work on BE9-13. Copyright John Wiley & Sons Canada, Ltd. 34  Textbook Questions Read pages 396 – 398 and work on BE9-13. Copyright John Wiley & Sons Canada, Ltd. 35  Exchanges of Property, Plant and Equipment New asset is purchased by trading in an old asset A Trade-in allowance reduces the cash cost of new asset – Cash paid = difference between trade-in allowance and purchase price – Trade-in allowance is rarely equal to fair value therefore it is ignored; fair value is more relevant New asset is recorded at fair value of asset given up plus any cash paid (or less any cash received) Copyright John Wiley & Sons Canada, Ltd. 36  Exchanges of Property, Plant and Equipment - Procedure 1. Update any unrecorded depreciation – To date of exchange 2. Calculate carrying amount of asset being given up = Cost − accumulated depreciation 3. Calculate gain or loss on disposal = Fair value − carrying amount 4. Remove both the asset and any related accumulated depreciation from the accounts 5. Determine the cash paid = list price – trade-in allowance 6. Record the cost of the new assets = fair value of old asset + cash paid 37  Disposals of Property, Plant and Equipment 2 Entry to record disposal of asset: Retirement of Property, Plant and Equipment – No proceeds are received – Debit accumulated depreciation for full amount of depreciation and credit asset account for original cost – If fully depreciated no loss; if not, loss on retirement is equal to the carrying amount of the asset Copyright John Wiley & Sons Canada, Ltd. 38  Textbook Questions Read page 398 – 400 and work on BE9-14. Copyright John Wiley & Sons Canada, Ltd. 39  Textbook Questions Homework Demonstration Problem Handout Copyright John Wiley & Sons Canada, Ltd. 40 Work on E9-9 a) and c) POP QUIZ Copyright John Wiley & Sons Canada, Ltd. 41  Chapter 9: Success Criteria I will be successful when I can….. 1. Determine the cost of property, plant and equipment. 2. Explain and calculate depreciation. 3. Account for the disposal of property, plant and equipment. 4. Calculate and record depreciation of natural resources. 5. Identify the basic accounting issues for intangible assets and goodwill. Copyright John Wiley & Sons Canada, Ltd. 42  Natural Resources Consists of standing timber and deposits of oil, gas and minerals Also called wasting assets Differ from other long-lived assets: – Physically extracted: deplete as they are used – Replaced only by an act of nature Cost determined as for other long-lived assets: – Include costs of acquiring and preparing asset for use – Include asset retirement costs: future restoration and clean-up costs Copyright John Wiley & Sons Canada, Ltd. 43  Depreciation of Natural Resources The units-of-production method is used to calculate depreciation – First calculate the depreciable amount per unit Depreciation of natural resources is debited to inventory – As it is a cost of extracting a saleable product When product is sold, the cost is expensed to cost of goods sold Copyright John Wiley & Sons Canada, Ltd. 44  Textbook Questions Let’s work on BE9-15. Copyright John Wiley & Sons Canada, Ltd. 45  Textbook Questions Let’s work on BE9-15. Copyright John Wiley & Sons Canada, Ltd. 46  Textbook Questions Homework Activity – Natural Resources Copyright John Wiley & Sons Canada, Ltd. 47  Textbook Questions Let’s work on the Handout. Copyright John Wiley & Sons Canada, Ltd. 48  Textbook Questions E9-11. Copyright John Wiley & Sons Canada, Ltd. 49  Chapter 9: Success Criteria I will be successful when I can….. 1. Determine the cost of property, plant and equipment. 2. Explain and calculate depreciation. 3. Account for the disposal of property, plant and equipment. 4. Calculate and record depreciation of natural resources. 5. Identify the basic accounting issues for intangible assets and goodwill. Copyright John Wiley & Sons Canada, Ltd. 50  Intangible Assets and Goodwill Rights, privileges, and competitive advantages that have no physical substance Recorded at cost, including costs to make ready for its intended use (legal fees and similar) If intangible asset has a finite (limited) life, it is amortized (depreciated) over its useful or legal life, whichever is shorter. Intangible assets rarely have residual values. – Straight-line method is often used Assets with indefinite lives are not amortized Copyright John Wiley & Sons Canada, Ltd. 51  Intangible Assets with Finite Lives Patents and Copyrights Research and development (R&D) costs: – Development costs with probable future benefits are capitalized – Research costs and development costs are expensed when incurred unless meeting specific criteria Other intangible assets – Customer lists, noncompetition agreements, sports contracts Copyright John Wiley & Sons Canada, Ltd. 52  Intangible Assets with Indefinite Lives Trademarks and trade names – Word, phrase, jingle or symbol that identifies an enterprise or product Franchises and licences – Franchise: contractual arrangement giving the franchisee rights to sell products and use trademarks – Licence: government grant to use public property Copyright John Wiley & Sons Canada, Ltd. 53  Goodwill The value of all favourable attributes of a company Recorded only when a business is purchased Let’s read about Goodwill in the textbook on Page 407. Copyright John Wiley & Sons Canada, Ltd. 54  Textbook Questions Homework Activity – Intangible Assets Copyright John Wiley & Sons Canada, Ltd. 55  Chapter 9: Success Criteria I will be successful when I can….. 1. Determine the cost of property, plant and equipment. 2. Explain and calculate depreciation. 3. Account for the disposal of property, plant and equipment. 4. Calculate and record depreciation of natural resources. 5. Identify the basic accounting issues for intangible assets and goodwill. Copyright John Wiley & Sons Canada, Ltd. 56  Copyright Copyright © 2014 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein. Copyright John Wiley & Sons Canada, Ltd. 57