Kế toán, kiểm toán - Chapter 6: Accounting for and presentation of property, plant, and equipment, and other noncurrent assets

CHAPTER 6ACCOUNTING FOR AND PRESENTATION OF PROPERTY, PLANT, AND EQUIPMENT, AND OTHER NONCURRENT ASSETSMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesHow are the costs of land, buildings, and equipment reported on the balance sheet?How are the terms capitalize and expense used with respect to property, plant, and equipment?What are the alternative methods of calculating depreciation for financial accounting purposes, and what are the relative effects of each on the income statement (depreciation expense) and the balance sheet (accumulated depreciation)?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesWhy is depreciation for income tax purposes an important concern of tax- payers, and how does tax depreciation differ from financial accounting depreciation?What is the accounting treatment of maintenance and repair expenditures?What is the effect on the financial statements of the disposition of noncurrent assets either by abandonment or sale?What is the difference between and operating lease and a capital lease?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesWhat are the similarities in the financial statement effects of buying an asset compared to using a capital lease to acquire the rights to an asset?What are the meanings of various intangible assets, how are their values measured, and how are their costs reflected in the income statement?What is the role of present value concepts in financial reporting, and what is their usefulness in decision making?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 1How are the costs of land, buildings, and equipment reported on the balance sheet? McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002LandShown on the balance sheet at its original costCost includes all ordinary and necessary items to get the land ready for its intended useLand acquired for investment or potential future use is classified as a noncurrent, nonoperating assetLand is not depreciatedGains and losses on the sale of land are recognized as the difference between the cost of the land and the amount receivedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 2How are the terms capitalize and expense used with respect to property, plant, and equipment?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002CapitalizationExpenditures should be capitalized if the item acquired will have an economic benefit beyond the current fiscal yearCapitalized assets – except land – are depreciatedDepreciation expense is recognized over the useful life of the assetMateriality concept is applied to capitalizationAccounting judgment plays a role in determination of capitalizationMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002ExpenseExpenditures should be expensed if the item acquired will not have an economic benefit beyond the current fiscal yearExpenditures for preventive maintenance are expensedItems are expensed if their costs are not material, even if they have a useful life of several yearsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 1How are the costs of land, buildings, and equipment reported on the balance sheet? McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Buildings and EquipmentRecorded at original costCost includes all ordinary and necessary costs to get the asset ready to useInterest costs associated with the loans used to finance construction are capitalized until the building is put in operationInstallation costs and shake-down costs are capitalizedSelf-manufactured asset cost includes materials, labor, and overhead costsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Basket Purchase AllocationWhen two or more items are purchased in a single transaction, the cost of each asset must be determinedThe allocation of the purchase price is made based on the relative appraisal values of each asset to the totalSee Exhibit 6-2 in textMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Depreciation for Financial Accounting PurposesAn application of the matching concept since an asset is a prepaid costA portion of the cost should be subtracted from the revenues that are generated through the use of the assetDepreciation is the allocation of the cost of an asset to the time periodsbenefitedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Recording DepreciationThe expense “Depreciation Expense” is increasedThe contra asset account “Accumulated Depreciation” is increasedThe journal entry is as follows: Depreciation Expense XX Accumulated Depreciation XX McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Depreciation DetailsThe balance in the Accumulated Depreciation account is the cumulative total of all depreciation expense recorded over the life of the assetNet book value is the cost of the asset less the accumulated depreciationNote: cash is not involved in the depreciation entryMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 3What are the alternative methods of calculating depreciation for financial accounting purposes, and what are the relative effects of each on the income statement (depreciation expense) and the balance sheet (accumulated depreciation)? McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Depreciation MethodsAccelerated depreciation results in greater depreciation expense and lower net income during the early years of an asset’s lifeStraight-line depreciation results in even amounts of depreciation being taken over the life of the assetMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Depreciation Calculation MethodsThe specific depreciation calculation methods are:Straight-lineUnits of productionSum-of-the-years’-digitsDeclining balanceMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Straight-Line DepreciationAnnual amount of depreciation is calculated as follows: Cost – Estimated salvage value Estimated useful lifeThe same amount of depreciation expense is taken each yearMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Units-of-Production DepreciationThe depreciation expense per unit produced is calculated as follows: Cost – Estimated salvage value Estimated total units to be madeThe depreciation expense for the period is calculated by multiplying the number of units produced that period timesthe depreciation expenseper unitMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Sum-of-the-Years’ Digits DepreciationAnnual depreciation expense is calculated as follows: (Cost – Estimated salvage value) x Remaining life in years Sum-of-the-years’ digitsResults in greater depreciationexpense earlier in the lifeof the assetMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Declining-Balance DepreciationAnnual depreciation expense is calculated as follows: Double the Asset’s net book straight-line X value at beginning depreciation rate of yearGreater depreciation expense istaken earlier in the life of the assetMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 4Why is depreciation for income tax purposes an important concern of taxpayers, and how does tax depreciation differ from financial accounting depreciation?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Depreciation Expense for Income Tax PurposesDepreciation is a deductible expense for income tax purposesIn 1981, ACRS was placed in useIn 1986, MACRS lengthened the lives of the assets for depreciation purposes and additional categories were addedMost firms do not use income tax depreciation methods for financial reporting purposes – tax rules are subject to frequent changeMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 5What is the accounting treatment of maintenance and repair expenditures?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Maintenance and Repair ExpendituresPreventative maintenance expenditures and routine repair costs are expenses of the period in which they were incurredIf a maintenance expenditure will extend the useful life or salvage value of an asset beyond that originally used in the depreciation expense calculation, the expenditure should be capitalizedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 6What is the effect on the financial statements of the disposition of noncurrent assets either by abandonment or sale?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Disposal of Depreciable AssetsWhen a depreciable asset is sold or scrapped, both the asset and the related accumulated depreciation account must be reduced by the appropriate amountsIf net book value is greater than amount received, a loss will resultIf net book value is less than the amount received, a gain will resultMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 7What is the difference between and operating lease and a capital lease?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Assets Acquired by Capital LeaseOperating lease – just the use of the asset; does not involve any attributes of ownershipCapital lease (financing lease) – lessee (renter) assumes all of the risks and benefits of ownershipMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Capital Lease CriteriaA lease is categorized as a capital lease if any of the following apply:The lease transfers ownership of the asset to the lesseeThe lease permits the lessee to purchase the asset at a nominal price at the end of the leaseThe lease term is at least 75% of the asset’s economic lifeThe present value of the lease payments is at least 90% of the fair value of the assetMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 8What are the similarities in the financial statement effects of buying an asset compared to using a capital lease to acquire the rights to an asset?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Similarities of Buying and LeasingBefore the FASB lease standard was issued in 1976, many capital leases were not reported in the financial statementsLeases not appearing on financial statements is called off-balance-sheet financingNow both the asset and the related liability are reported on the balance sheetMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Lease TransactionsA lease payment reduces cash, reduces the lease liability, and increases interest expense: Interest expense XX Capital lease liability XX Cash XXThe leased asset is depreciated: Depreciation expense XX Accumulated depreciation XXMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 9What are the meanings of various intangible assets, how are their values measured, and how are their costs reflected in the income statement?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Intangible AssetsLong-lived assets that are represented by a contractual right or result from a purchase transactionIs not physically identifiableAre amortized – the process of allocating the cost of the intangible asset to expense over timeMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Examples of Intangible AssetsLeasehold improvements – modification expenses for leased spacesPatents – licenses granted by the government giving the control of the use or sale of an invention for a period of 17 yearsTrademarks – registered with the Federal Trade Commission foran unlimited lifeMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002More Examples of Intangible AssetsCopyrights – protections granted to writers and artists to prevent unauthorized copying of a work. The protection is granted for the life of the artist or writer plus 50 yearsGoodwill – the result of a purchase of one firm by another for a pricegreater than the fair value ofthe net assets acquiredMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Natural ResourcesConsist of coal deposits, crude oil reserves, timber, mineral deposits , etc.The using up of the natural resource is called depletionThe concept of depletion is similar to depreciation, only more complicatedUsually computed on astraight-line basisMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Other Noncurrent AssetsLong-term investmentsNotes receivable that are due more than one year in the futureAre reclassified as they become current (receivable within a year)McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 10What is the role of present value concepts in financial reporting, and what is their usefulness in decision making?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Present ValueAn application of compound interest – the process of earning interest on interestInvolves determining the present amount that is equivalent to an amount to be paid or received in the futureRecognizes that money does have value over timeThe interest rate is called the discount rateMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Present Value CalculationsCan use for events that consist of a single payment or a series of payments (called an annuity)Formulas and computer programs and calculators can calculate present valueThe appendix demonstrates how to calculate present value using tables containing present value factorsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002