Investments in Property,

1

• Chapter 9
• Investments in Property,
• Plant, and Equipment
• and in Intangible Assets

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Operating Assets
Long-term, or noncurrent, assets acquired for use
in a business to facilitate operating activities
rather than for resale

• Property, plant, and equipment
• Tangible, long-lived assets acquired for
  business operations. Depreciation is the process
  of allocating the costs of these assets over
  their estimated lives
• Intangible assets
• Long-lived assets without physical substance
  that are used in business. Amortization is the
  process of allocating the costs of these assets
  over their estimated useful lives

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Capital Budgeting

• Systematic planning for long-term investments in
  operating assets
• Long-term operating assets have value because
  they are expected to help a company generate cash
  flows in the future
• If events occur to change the expectation
  concerning those future cash flows, then the
  value of the asset changes
• Time value of money concepts are used in capital
  budgeting decisions

4
Assets Acquired by Purchase
Franks Fruit Farm purchased a fork lift for use
in its wholesale business. Franks paid 12,000
cash for the fork lift. Make the necessary
journal entry for this purchase.
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Operating Lease
Franks Fruit Farm leases a building with monthly
rental payments of 1,000. Make the appropriate
entry if rent is paid in cash the first month.
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Capital Lease
Franks Fruit Farm enters into a non-cancelable
lease agreement that requires lease payments of
100,000 a year for 20 years. At the end of 20
years, Franks will own the property. It fulfils
the capital lease criteria in substance, an
installment purchase of asset.
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Assets Acquired bySelf Construction

• Self-constructed assets
• recorded at cost
• include all expenditures incurred to build the
  asset and make it ready for its intended use
• Costs include
• materials used to build the asset
• the construction labor
• capitalized interest
• some reasonable share of the general company
  overhead

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Acquisition of SeveralAssets at Once Basket
Purchase

• Basket Purchase
• The purchase of two or more assets acquired
  together at a single price.

A way of allocating a basket purchase price to
the individual assets acquired based on their
respective market values
Relative Fair Market Value Method
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Example Basket Purchase
When two or more assets are acquired at a single
price, the prices are allocated on a relative
fair market value method. In this example,
Franks Fruit Farm purchased land and a new
sorting facility at a total cost of 3,600,000.
Prepare the entry to record the purchase.
of Total
Asset
FMV
Cost
Value
Land
1,000,000
25
0.25 x 3,600,000
900,000
3,000,000
Building

75
0.75 x 3,600,000
2,700,000
100
3,600,000
Total
4,000,000


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Depreciation Terms

• Depreciation
• The process of cost allocation that assigns the
  original cost of plant and equipment to the
  periods benefited
• Accumulated depreciation contra asset contra
  to property, plant, equipment sum of
  depreciation expense taken up to this point in
  time for the asset
• Book Value
• For a long-term operating asset, book value is
  equal to the assets original (acquisition) cost
  less any accumulated depreciation
• Salvage Value/residual value
• The amount expected to be received when an asset
  is sold at the end of its useful life

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Methods of Depreciation

• Straight-Line
• The cost of the asset is allocated equally over
  the periods of an assets estimated useful life.
• Units-of-Production
• The cost of an asset is allocated to each period
  on the basis of the productive output or use of
  the asset during the period.
• Declining-Balance Method
• An assets book value is multiplied by a
  constant depreciation rate such as double the
  straight-line percentage, in the case of
  double-declining balance (DDB).
• Sum-of-the-Years-Digits Method (SYD)
• A constant balance (cost minus salvage value) is
  multiplied by a declining depreciation rate
• Examples - textbook

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More Depreciation Terms

• Natural Resources
• Assets that are physically consumed or waste
  away, such as oil, minerals, gravel, and timber.
• Depletion
• The process of cost allocation that assigns the
  original cost of a natural resource to the
  periods benefited.
• Example

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Expenditures on Existing Assets

• Ordinary expenditures - expensed
• Typically benefit only the period in which they
  are made (repairs, maintenance, and minor
  improvements).
• Expense
• Cash or accounts payable
• Capitalized expenditures - capitalized
• Significant in amount
• Benefit the company over several periods, not
  just the current one
• Increase the productive life or capacity of the
  asset Asset
• Cash or some payable

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Impairment Test
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Disposal of Property, Plant, and Equipment
Franks Fruit Farm purchased a conveyor system
for 15,000. It has a 5-year life, no salvage
value, and is depreciated on a straight-line
basis. If Franks scraps the conveyor after 5
full years, what is the appropriate entry?
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Disposal of Property, Plant, and Equipment
Franks Fruit Farm purchased a conveyor system
for 15,000. It has a 5-year life, no salvage
value, and is depreciated on a straight-line
basis. Frank pays 300 to get rid of the conveyor
after only 4 years of service, what is the
appropriate journal entry?
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Disposal of Property, Plant, and Equipment
Franks Fruit Farm purchased a conveyor system
for 15,000. It has a 5-year life, no salvage
value, and is depreciated on a straight-line
basis. If the conveyor is sold for 600 after 5
full years of service, what is the appropriate
journal entry?
18
Disposal of Property, Plant, and Equipment
Franks Fruit Farm purchased a conveyor system
for 15,000. It has a 5-year life, no salvage
value, and is depreciated on a straight-line
basis. If the conveyor is sold for 600 after
only four years of service, make the appropriate
journal entry
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Intangible Assets

• Rights and privileges that are
• long-lived
• not held for resale
• have no physical substance
• usually provide owner with competitive
  advantage over other firms
• examples patents, franchises, licenses,
  goodwill
• Amortization
• Periodic allocation to expense of an intangible
  assets cost
• Conceptually, the same as depreciation
• Intangible assets generally use straight-line
  amortization
• Amortized using the lower of legal life or
  useful life

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Goodwill

• An intangible asset that exists when a business
  is valued at more than the fair market value of
  its net assets, usually due to
• strategic location
• reputation
• good customer relations
• similar factors
• Equal to the excess of the purchase price over
  the fair market value of the net assets purchased
• Goodwill, an intangible asset with indefinite
  life, is no longer amortized
• It is checked for impairment periodically

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Example Goodwill
Franks Fruit Farm purchased Farmers Market for
1,200,000. At the time of the purchase,
Farmers recorded the following market values of
its assets and liabilities
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Change in estimates

• Franks purchased a fork lift for 12,000 with a
  2,000 salvage value Fruit Farm a 4-year useful
  life. After 3 years, better information reveals
  the fork lift has a 6-year useful life and a
  3,000 salvage value. Calculate a new
  depreciation expense for the next three years
  (straight line method)
• Year 1 Depreciation expense 12,000-2,000/4
  2,500
• Year 2 Depreciation expense 2,500
• Year 3 Depreciation expense 2,500
• Book value at the end of 3 years 12,000 7,500
  4,500
• Change in estimate occurs
• Year 4 Depreciation expense 4,500-3,000/3 500
• Year 5 Depreciation expense 500
• Year 6 Depreciation expense 500
• Book value at the end of 6 years
  12,000-7,500-1,500 3,000 new residual value