Before Class starts.(make sure your name is on all submissions) March 27 exam conflicts must be resolved before Spring break. Fourth Homework due Thursday 3/6 before class. Fifth Homework due 3/20 before class. Help session Sunday 3/16 1:30-3pm in GBS130 What questions do you have for me? TA Office Hours 6-7 T&R in GBS401 & Accounting Lab Hours on http://bus.emory.edu/scrosso File cabinet downstairs contains your mail folder. Your homework and exams returned there.
BUS210 Accounting for Investment Decisions: Property, Plant, & Equipment & Intangibles
What do you know?
E9-18 T account analysis The following financial information was taken from the records of Fredrickson and Peiffer. a. Reconstruct the entry that recorded the sale of equipment during 2011. b. How much equipment was purchased during 2011? 2011 2010 BALANCE SHEET: Equipment $26,900 $23,400 Less: Accumulated depreciation 10,500 9,800 Net book or carrying value $16,400 $13,600 INCOME STATEMENT: Depreciation expense $3,800 $3,500 Loss on sale of equipment 900 0 STATEMENT OF CASH FLOWS: Cash received from sale of equipment $4,300 0
Acquisition - What Costs to Capitalize? General Rule: Capitalize (add to an asset account) the costs to acquire the asset and to prepare it for its intended use. Dr. Asset (purchase price, sales tax, delivery, installation, etc) Cr. Cash, Notes Payable, etc
Land Has indefinite life and therefore is not depreciated Historical Cost includes: Purchase price, Closing costs, Cost to get ready for intended use (i.e., clearing, grading, soil testing, filling), permanent improvements. (Note: Sale of salvaged materials reduces cost) Land Improvements Depreciable since directly associated with building rather than inextricably associated with land. i.e. if building replaced then these improvements would be replaced or their costs would be incurred again. Have definite life and therefore are depreciated Fences, walls, parking lots, driveways Buildings Have definite life and therefore are depreciated Proportionate share of purchase price, or construction cost, Closing Cost, Architect & Attorney fees Machinery, Equipment, Furniture & Fixtures Purchase price (net of cash discounts), Freight & handling, Insurance while in transit, Installation Example: Server farm--invoice cost, transportation, assembly, installation, testing labor, any modifications to building to get into working order.
Self Constructed Assets What to Capitalize? Direct Materials & Labor Variable Overhead Applied Fixed Overhead Interest During Construction, if constructed for company s own use by someone else and progress payments &/or deposit are required
Lump Sum or Group Purchase of PPE Generally allocate price to the assets acquired based on their relative fair market values. Up to management to subjectively determine the relative FMVs.
Group Purchase
Post-acquisition Expenditures: Betterments or Maintenance? Betterments: Increase asset s useful life Improve quality of asset s output Increase quantity of asset s output Reduce asset s operating costs Maintenance maintain existing productivity or useful life Accounting treatment Betterments are capitalized [Capital expenditures] Maintenance expenditures are expensed[revenue expenditures]
What do you know about depreciation?
Homework:
Depreciation (Cost Allocation) Depreciation is a method of cost allocation. it is used to allocate the capitalized cost of PP&E over the years benefited (matching) Note: depreciation will decrease the carrying value of the asset, but it is not a valuation technique (i.e., book value is not market value)
Depreciation (Cost Allocation) Useful Life Cost or Basis Salvage Value Depreciation methods (1) Activity (units-of-production) (2) Straight-line (3) Double-declining balance (4) 150 percent declining balance (5) Sum-of-the-years digits (6) MACRS (income tax depreciation) Under IFRS, depreciation accounting is very similar to US GAAP.
Class Example Given the following information regarding an automobile purchased by the company on January 2, 2008: Cost to acquire = $10,000 Estimated life = 4 years Estimated miles = 100,000 miles Salvage value = $2,000 Calculate depreciation expense for the first two years under each of the following methods.
(1) Units-of-Production (Activity) Assume that the car was driven 20,000 miles in the year 2008, and 30,000 miles in 2009. Annual depreciation = Cost - Salvage Value x Current Activity Total expected activity For 2008= 10,000-2,000 x 20,000 = $1,600 100,000 miles For 2009 = 10,000-2,000 x 30,000 = $2,400 100,000 miles
(2) Straight-Line Annual depreciation = Cost - Salvage Estimated Life = $10,000 - $2,000 = $2,000 per year 4 years
(3) Double-Declining Balance DDB is an accelerated depreciation technique. It generates more expense in the early years and less in the later years. Annual depreciation = % (Cost - A/D) or %(Book Value) where A/D is the accumulated depreciation for all prior years, and the percentage is double the straight line rate, or 2 x 1/Estimate life. In the example, the % = 2 x 1/4 = 2/4 = 50%. Depreciation expense (D.E.)for: 2008 = 50% x (10,000-0) = $5,000 2009 = 50% x(10,000-5,000) = $2,500
Depreciation Example
Straight line
Your turn
Production/Units of Production/Activity Method
Your turn
Double declining balance or 200% declining balance
Your turn
MACRS MACRS (modified accelerated cost recovery system) is a technique developed by the IRS for tax reporting. It utilizes combinations of DDB, 150%DB, and SL to calculate a table of percentages that can be applied to any depreciable asset. Additionally, the IRS assumes no salvage value, and a half year in the first and last year of depreciation (some limitations on fourth quarter purchases).
Change in Estimate The change in estimate affects only the current and future years; we do not go back and change the previous years that have already been posted. To calculate the new depreciation expense, first find out how much depreciation has been posted (the Accumulated Depreciation to date). Then use the following formula (to modify the straight-line depreciation rate): Remaining Book Value - New Est. Salvage Remaining Estimated Life
Class Problem: Problem 9-7 Facts: In 2006 equipment costing $180,000, a salvage value of $30,000, and a useful life of 10 years was acquired. In the beginning of 2011 it was determined the equipment s remaining useful life was 3 years. Two steps in solving: (1)Determine Book Value at 1/1/11: First: annual depr. expense = (180,000-30,000)/10 years = 15,000/yr. Then Accumulated Depr. to 1/1/11: 15,000 x 5 yrs = $75,000 So BV = 180,000-75,000 = 105,000
Class Problem: Problem 9-7 (2) Estimate depreciation expense for 2011, assuming revised useful life: BV - SV = 105,000-30,000 = $9,375 per yr. Remaining life 10-5 +3 Journal entry: Depreciation Expense 9,375 Accum. Depreciation 9,375
PPE Disposals Depreciate PPE up to date of disposal. Remove PPE and its associated Accumulated depreciation. Record receipt or payment of cash. Recognize any gain or lass on disposal (the difference between to disposed asset s book value and the net value of the assets received). Types: Retirements (i.e., garbage, donation), Sales, Trade-in on Dissimilar assets
Disposal: Retirement, Sale or Trade-In Retirement : Dr. Loss (if not fully depreciated) Dr. Acc Dep Cr. Asset Sale: Dr. Cash Dr. Acc Dep Cr. Asset Dr. Loss if BV > Cash or Cr. Gain if BV < Cash Trade-ins (for dissimilar assets): asset received should be valued at the fair market value of assets given up, or the fair market value of the asset received, whichever is more evident and objectively determined
Sample Disposal Example Using earlier example (cost = $10,000, salvage = $2,000). After 4 years straight-line, $8,000 would be in A/D. 1. Assume the asset is retired (no cash received) Loss on retirement 2,000 Accumulated Depr. 8,000 Automobiles 10,000 2. Assume the asset is sold for $3,000: Cash 3,000 Accumulated Depr. 8,000 Automobiles 10,000 Gain on sale 1,000
Class Exercise: Exercise 9-15 Facts: Cost $25,000; Salvage $5,000, useful life 5 years. DDB used. First calculate depreciation: DDB % = 1/5 x 2 = 2/5 = 40% Depr. Book Date % Cost - A/D Expense Value 1/1/09 25,000 12/31/09 40% (25,000-0) = 10,000 15,000 12/31/10 40% (25,000-10,000) = 6,000 9,000 12/31/11 40% (25,000-16,000) = 3,600 5,400 12/31/12 PLUG 400* 5,000=SV 12/31/13-0- 5,000 *formula will exceed salvage value limit in 2012; just depreciate $400, to salvage of $5,000.
Exercise 9-15, continued (a) JE to scrap after 3 years, at 12/31/11, assumes that no cash is received: (b) JE to scrap after 5 years, assumes that no cash is received:
Exercise 9-15, continued (c) JE to sell for $8,000 after 3 years: (d) JE if, after 5 years, the equipment and $28,000 traded for a dissimilar asset with a fair market value of $30,000:
B. Intangible Assets Intangible assets are characterized by (1) lack of physical evidence, and (2) high uncertainty about future benefits. Cost is amortized over useful life (or legal life, if less), but not to exceed 40 years. Adjusting Journal Entry if definite life: Dr. Amortization expense XX Cr. Intangible asset XX Exception is Goodwill which has an indefinite life, no longer amortized but subject to impairment test. If balance sheet value of asset is determined to exceed its estimated fair market value, it is found to be impaired and written down to its fair value. Under IFRS, revaluing intangibles is an option, but not a requirement. Under US GAAP, revaluation is not an option.
(1) Patents (20 year legal life) A company may capitalize the following the cost of acquiring an externally developed patent. filing fees for internally or externally developed patents. the legal fees for acquiring and successfully defending a patent (internal or external). A company cannot capitalize the following: legal fees for unsuccessfully defending a patent expense instead Most research and development costs for an internally developed patent--expense
Research and Development Costs (for internally developed patents) Prior to 1974, most companies capitalized research and development costs, then amortized the cost to future periods. The FASB stated in SFAS 2 that, because future benefits were uncertain, companies should expense all R&D costs, unless they were related to tangible assets (like buildings and equipment) that had multi-year lives. Companies complied with the standard, but for several years many companies actually reduced their R&D activities, because of concern for excess expense on the income statement.
Other Intangible Assets (2) Copyrights granted for the life of the creator plus 70 years. capitalization rules similar to patents: costs of internally developed copyright material cannot be capitalized. (3) Trademarks and Trade Names granted for 10 year periods, but indefinite renewals. some of design costs may be capitalized. (4) Organization Costs costs related to the creation of a company including underwriting fees, legal and accounting, licenses, titles, etc. treatment similar to R&D costs; even though there may be some future benefit, costs are expensed in the period incurred. (5) Software Development Costs (SFAS 86) Capitalize the costs of developing software for sale or lease. Expense software development costs if for internal use.
Other Intangible Assets - continued (6) Goodwill (also discussed in Chapter 8) Recognized when one company purchases another company. Causes include reputation, good customer relations, superior product development, etc. To calculate: Purchase price paid for the company versus the fair market value of the net assets acquired = Goodwill (the excess amount paid) No longer amortized, instead subjected to an impairment test, i.e.,
IFRS vs. US GAAP: Revaluations to Fair Market Value One very important way in which IFRS differs from US GAAP involves the use of fair market value as a basis for valuation on the balance sheet. Under US GAAP, long-lived assets must be accounted for at original cost less accumulated depreciation. Under IFRS, companies can either follow the US GAAP method or they can periodically revalue their long-lived assets to fair market value. In essence, US GAAP tends to follow a conservative lower-ofcost-or-market valuation principle, whereas IFRS allows managers the option to more closely follow a pure market valuation principle.
ID9-13 NIKE 10-K Disclosures Answer the following questions: a. What % of total assets do property, plant, and equipment and long-lived assets in total make up? b. What is the largest category of property, plant, and equipment?
ID9-13 NIKE 10-K Disclosures Answer the following questions: c. How large is the depreciation and/or amortization expense relative to sales, and why is it listed on the statement of cash flows? d. How much did NIKE invest in PPE, and how much cash did it receive from disposals of PPE?