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Chapter 7 - property, plant, and equipment and intangible assets.docx

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University of Toronto Mississauga
Catherine Seguin

Chapter 7: Property, Plant and Equipment, and Intangible Assets Inventory (assets) – debit normal balance COGS (expense) – debit normal blance Accounting principles: comparability – being able to compare previous years with this year’s financial statements Disclosure: notes – any discrepancies or additional information Lower of cost and net realizable value rule : before prepare financial statements – compare actual cost with net realizable value and choose the lower of the 2 amounts Effect of inventory errors: get carried over to the next fiscal year Lee corporation had 400 units of inventory on hand at july 12006, costing 20 each. Purchases and sales of goods during the month of july were as follows July 12 Sales 200 units @ 40$ July 15 Purchases 100 units @ 26$ July 25 Purchases 300 units @ 28$ July 30 sales 200 units @ 40$ Assuming lee corp maintain periodic inventory records.According to physical count 400 units were on hand at july 31 2006 *answer multiple choice question 1 with this question* Review Question #1 Using the information on the overhead projector, the cost of inventory at july 31, 2006 using the FIFO method is: a) 9500 b) 10800 c) 11000 d) 13400 July 25 : 300 x$28 = 8400 July 15: 100 x $26 = 2600 Therefore 8400 + 2600 = 11000 Question # 2 Land and building were bought for a total of 458000. The market value for the land was 175000 and 325000 for the building. What amounts should be recorded for them? Land Building a) 175000 325000 b) 160000 325000 c) 175000 310000 d) 169750 315250 Land 175/500 = 35% Building 325/500 = 65% Total : 500 35% x 485000 = 169750 65% x 485000 = 315250 Question 3 On jan 1, 3 years ago, the companybought a machine for $15000. The estimated useful life was 10 years and residual value was 3000. If double declining balance is used what is the depreciation expense for the third year? Chapter 7: Property, Plant and Equipment, and Intangible Assets a) 1500 b) 1536 c) 1920 d) 3000 Solution: (1/10) = 0.10 x 2 = .20 Year 1: 15000 x 0.20 = 3000 Year 2: (15000 – 3000) x 0.2 = 2400 Year 3: (15000-3000-2400) x 0.20 = 1920 Solution is B 8000./4 = 20000 x (1/2) = 10000 Chapter 7: Property, Plant and Equipment, and Intangible Assets Learning Objective 1: Determine the cost of property, plant and equipment Type ofAssets: Long lived assets used in the operation of a business are divided into categories: property, plant and equipment (tangible long lived assets), intangible assets Property, plant and equipment such as land, buildings, machinery and equipment, etc are held for use in the business The cost of these assets is the purchase price plus any other amount paid to acquire it and make it ready for use e.g. of costs are: purchase price less any discount, freight, taxes, commissions, assembly costs, installation costs, testing costs, etc Lump Sum (or basket) purchases of Assets When a company purchases a group of assets, they must identify the cost of each asset using the relative sales value. E.g. company paid $1 million for building and land Market value of building = 960000 Land = 240,000 Total market value 1200000 Allocation: Building = (960/1200) x $ 1 million = $800,000 Land = (240/1200) x $1 million = $200,000 Total cost allocated 1000000 Dr Building 800,000 Dr Land 200,000 Cr Cash 1000000 Capital expenditure versus an Immediate Expense Does the expenditure increase capacity or efficiency or extend useful life? Yes : Capital expenditures: record an asset No:Expense: record an expense Record anAsset for Capital Expenditres Extrodinary repairs: • Major engine overhaul • Modification of body for new use of truck • Addition to storage capacity of truck Record repair and maintenance expense Ordinary Repairs: • Repairof transmission or other mechanism • Oil change, lubrication, etc • Relacement tires, windshield • Paint job Learning Objective 2: Account for depreciation Chapter 7: Property, Plant and Equipment, and Intangible Assets Depreciation allocates the cost of property, plant and equipment to expense over future periods The cost of “using it” is recorded in the same period the revenue is earned An adjusting entry is prepared using an “estimate” DR depreciation exp CRAccumulated depreciation Cost – all costs incurred to get the asset ready to use Accumulated depreciation: depreciation expensed over the accounting periods Estimated useful life – lenth of service the business expects from asset Estimated residual value – it is expected cash value of an asset at end of its useful life Depreciation Methods: straight line, units of production, diminishing balance or doublie diminishing balance Ammortization example: Cost of delivery van 55000 Estimated residual value 5000 Estimated useful life 4 years Units of production 200000 km Actual km driven Ye 1: 52000 Year 3: 47000 Yr 2: 48000 Year 4: 53000 Now Before Diminishing  declining Carrying amount  Book value Depreciation  ammortization (55000-5000)/200000 = Chapter 7: Property, Plant and Equipment, and Intangible Assets
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