Chapter 7 Outline (pages 318 348) Long Term Assets CLASSIFICATION OF OP !

!ATIN" ASS TS -shows the productive capacity of the firm -non-current assets Tangi#le -PPE (also known as FIXED ASSE S! -property (land"does not depreciate! -plant -e#uipment$ furniture and fi%tures and -&atural resources (can 'e included as part of the company(s fi%ed assets! Intangi#le (E%amples) Patents$ copyri*hts$ trademarks$ franchises$ and *oodwill! PA!T A$ A%&uisiti'n an( I)pr'*e)ents P+,PE+ -$ P.A& $ A&D E/0IP1E& (PPE! Capitali+e 2 an e%penditure that is classified as an asset A%&uisiti'n C'sts -3osts to 'uy"cash e#uivalent price$ includin* ta%es and other fees -Setup costs (transportation costs$ installation costs! -3osts to place the asset in service (to make usa'le! -Does &, include interest Lan( -Property (land! the company is usin* in operations -Ac#uisition cost includes) -purchase price -all closin* costs and fees -*ettin* the land ready to use (clearin*$ etc4! -reduce ac#uisition cost 'y any salva*e value of items sold from the land prior to *ettin* it ready to use4

Chapter 7

Page 7,1

Pra%ti%e 5arvis Inc4$ incurred the followin* costs associated with the purchase of a piece of land that it will use to re-'uild an office 'uildin*) Sale price of land Sale of salva*e parts already on land Demolition of the old 'uildin* <round 'reakin* ceremony (food = supplies! .e*al fees to lawyers for the land purchase 6788$88 8 9:$888 9;$888 >$888 ?$888

@hat amount should 'e recorded to the .and accountA

Lan( I)pr'*e)ents -includes) parkin* lots$ fences$ landscapin*$ etc4 and should 'e kept separate from the land account -uil(ings -,ffices$ stores$ stora*e$ manufacturin* plants$ etc4 -Ac#uisition cost includes) -purchase price -all closin* costs and fees -*ettin* the 'uildin* ready to use (remodelin*$ etc4! Self Constructed Assets -only time interest is included in the ac#uisition cost ( Capitali+e( Interest! -once asset is completed$ interest is no lon*er capitaliBed -3apitaliBed interest satisfies the 1atchin* Principle &uip)ent -1achinery$ computers$ copiers$ vehicles$ furniture$ fi%tures$ etc4 -Ac#uisition cost includes) -purchase price -includin* ta%es and transportation -installation costs and other costs to *et the asset ready to use Pra%ti%e S#uare 3o4$ purchased a piece of e#uipment 'y payin* 69>$888 cash4 S#uare 3o4$ also incurred a shippin* cost of 6;88 to *et the e#uipment 'ack to its factory and 6788 to *et
Chapter 7 Page 7,.

the e#uipment cali'rated and installed4 he fair value of this e#uipment is 69C$8884 For what amount should S#uare 3o4$ record the e#uipmentA Natural !es'ur%es -,il$ natural *as$ tim'er$ etc4 6

INTAN"I-L ASS TS (Patents$ 3opyri*hts$ rademarks$ Franchises$ <oodwill! Ac#uisition cost"purchase price plus all costs (le*al and filin* fees! to *et the asset ready for use4 Additional le*al fees add to cost Internally developed"most costs are e%pensed as incurred (+=D$ advertisin*!4 .e*al fees related to the intan*i'le asset add to the cost of the asset4 "''(/ill -+eco*niBed (recorded! when a company purchases another 'usiness for more than the fair value of assets 2 lia'ilities4 -Indefinite life EXPE&DI 0+E AF E+ A3/0IS I,& EXPENDITURE to EXPENSE -'enefits current accountin* period onlyD -e%penditures that simply maintain a *iven level of service from the assetD -amounts are normally small(er!D -the cost is treated as an e%pense4 !epairs an( 0aintenan%e$ -normal maintenanceD -e%pense these costs as they are incurred4 EXPENDITURE to CAPITALIZE -the cost is treated as an asset (added to the ori*inal ac#uisition cost of the asset! -costs incurred to achieve *reater future 'enefits I)pr'*e)ents10a2'r !epairs$ -increases asset(s life$ makes the asset more efficient$ or increases asset(s capacity -add the cost to the assetD depreciate it over the remainin* life of the asset A((iti'ns$ -add the cost to the assetD depreciate it over the life of the asset4

Chapter 7

Page 7,3

Legal 3e4ense '4 Intangi#le Assets -if successful$ add to the le*al costs of the intan*i'le asset -if unsuccessful$ e%pense the le*al costs 0aterialit5 -if amount is small it will 'e e%pensed (i4e4$ a stapler! Pra%ti%e E . 1anufacturin* 3ompany incurs the followin* e%penditures durin* the year) +emodel the manufacturin* plant to improve production +eplaced oil and filters on all company trucks for the year Security system installed in warehouse 6C:$888 69$?88 6>>$888 6

Determine the amount that should 'e recorded as an e%pense this year) Determine the amount that should 'e capitaliBed as an asset)

If all of the costs are e%pensed in the year of e%penditure$ how would that affect) &et income in the year of e%penditure Assets in the year of e%penditure &et income in future years Assets in future years PA!T -$ COST ALLOCATION A.. .on*-term Assets 0SED in ,perations are considered operational assets4 ,nly operational assets will 'e depreciated$ depleted or amortiBed4 3epre%iati'n -systematic and rational %'st all'%ati'n -matchin* principal depreciation e%pense (EFSE-! and accumulated depreciation (XAF A-! -''6 7alue (net 'ook value or carryin* value! G 3ost 2 Accumulated depreciation 94 A%&uisiti'n %'st (discussed a'ove!

Chapter 7

Page 7,4

>4 !esi(ual *alue (salva*e value or scrap value! -estimate 38 sti)ate( use4ul li4e (Ser*i%e Li4e) -estimate Alternati*e 3epre%iati'n 0eth'(s Depreciable cost G C'st !esi(ual *alue Straight,line (SL) Depreciation e%pense G 3ost - +esidual value .ife in years

3e%lining,#alan%e (3-) 'r A%%elerate( )eth'(4 (>88H ma%imum! DI +ate G Declinin* rate .ife in years Depreciation e%pense G DI +ate % Ie*innin* of the year Iook Jalue Depreciation e%pense G DI +ate % (3ost 2 Accumulated depreciation!

A%ti*it5,-ase( (9nits '4 Pr'(u%ti'n! Depreciation rate G 3ost - +esidual value .ife in units of production

Depreciation e%pense G Depreciation rate % 0nits of production for the year Pra%ti%e A new stampin* machine was purchased at a cost of 69>:$8884 he estimated residual value is 67:$888$ and the estimated useful life is 7 years4 he estimated productive life of the machine is 9:8$888 units4 3ost +J Deprecia'le cost .ife

3omplete the followin* ta'le for Straight line 3epre%iati'n

Chapter 7 Page 7,:

Depreciation E%pense Day of Purchase -ear 9 -ear > -ear 7

Accumulated Depreciation

&et Iook Jalue

Chapter 7

Page 7,;

3omplete the followin* ta'le for 1:<= 3e%lining -alan%e 3epre%iati'n 3ost +J Deprecia'le cost .ife

Depreciation E%pense Day of Purchase -ear 9 -ear > -ear 7

Accumulated Depreciation

&et Iook Jalue

3omplete the followin* ta'le for A%ti*it5,-ase( (9nits '4 Pr'(u%ti'n) 3epre%iati'n 3ost +J Deprecia'le cost .ife

-ear 9 > 7

0nits made :>$888 units :8$888 units C?$888 units Depreciation Accumulated Depreciation &et Iook Jalue
Page 7,7

Chapter 7

E%pense Day of Purchase -ear 9 -ear > -ear 7

Partial >ear 3epre%iati'n Assume the stampin* machine was purchased on ,cto'er 9 st$ usin* strai*ht-line depreciation$ depreciation e%pense for year 9 would 'e) Change in sti)ate Determine 'ook value 'efore the chan*e in estimate Determine the remainin* useful life 'ased on the chan*e in estimate Determine the new residual value 'ased on the chan*e in estimate +ecalculate depreciation e%pense usin* the 'ook value prior to the chan*e in estimate as the Knew costL and use the new residual value and remainin* useful life4 Depreciation e%pense after chan*e in estimate G IJ prior to chan*e 2 +esidual value +emainin* .ife in years NAT9!AL ! SO9!C S A%&uisiti'n an( C'st All'%ati'n (3 PL TION) -cost principal Depletion +ate G 3ost - +esidual value .ife in units Depletion G Depletion rate % 0nits e%tracted +esidual value is rarely used for natural resources4 An Accumulated Depletion account may 'e used4 Mowever$ usuall5 the natural res'ur%e (asset) is re(u%e( (ire%tl5 4 INTAN"I-L ASS TS A%&uisiti'n an( C'st All'%ati'n (A0O!TI?ATION) 3ost principle 'nl5 i4 pur%hase(4 Intan*i'le assets *enerated internally are e%pensed immediately 6

Chapter 7

Page 7,8

AmortiBation G 3ost - +esidual Jalue .ife in years An Accumulated AmortiBation account may 'e used4 Mowever$ usuall5 the intangi#le asset is re(u%e( (ire%tl54 +esidual value for most intan*i'le assets is 84 If an intan*i'le asset has an indefinite life$ a)'rti+ati'n sh'ul( n't 'e reco*niBed (<oodwill and most trademarks!

Chapter 7

Page 7,@

PA!T C$ ASS T 3ISPOSITION - +ecord depreciation for time used in the year of disposal - +emove asset from 'ooks (Asset and Accumulated Depreciation (XA!! - +ecord *ainNloss from removal of asset$ if any4 Pra%ti%e) .andscape 3ompany sells a mower it used in its 'usiness4 Ac#uisition (historical! cost was 6?$888$ C year useful life$ no residual valueD mower is sold after 94: years of use4 3alculate annual depreciation) 3alculate depreciation for the year of sale4 +ecord depreciation in the year of sale) Depreciation e%pense (EFSE-! Accumulated depreciation (XAF! 1ower ?$888 Accumulated Depreciation >$888 6 6

otal accumulated depreciation at time of sale) Iook value of the asset at the time of sale is) +ecord the sale of the mower for 6:$888) 3ash (AF! Accumulated depreciation (XA- AF! 1ower (A-! Record the sale of mower +ecord the sale of the mower for 6;$888) 3ash (AF! Accumulated depreciation (XA- AF! 1ower (A-! Record the sale of mower

6 6

Chapter 7

Page 7,1<

+ecord the sale of the mower for 6C$888) 3ash (AF! Accumulated depreciation (XA- AF! 1ower (A-! Record the sale of mower Asset Anal5sis Assets show the productive capacity of the company4 Question: Mow well is the company usin* its assetsA !eturn 'n Assets (+,A!) +eturn on Assets G or +eturn on Assets G Profit mar*in % Asset turnover &et Income Avera*e otal Assets

Question: For each dollar of sales$ how much profit is the company makin*A Pr'4it 0argin (net pr'4it )argin)) &et income &et sales

&et Profit mar*in G

% 988 G &P1H

Question: Is the company effectively *eneratin* sales from its assetsA Asset Turn'*er) Asset urnover +atio G &et Sales Avera*e otal Assets

Pra%ti%e he 'alance sheet of All hat and 1ore +esorts reports total assets of 6O88$888 at the
Chapter 7 Page 7,11

'e*innin* of the year and 6O?8$888 at the end of the year4 &et sales for the year were 69$??8$888 and net income was 6>7:$8884 Determine +eturn on Assets) H

Determine &et Profit 1ar*in)

Determine Asset urnover)

Asset I)pair)ent S EP 9) est for impairment (check to see if the undiscounted future cash flows are less than the 'ook value!4 S EP >) +ecord impairment loss4 .oss e#uals the difference 'etween 'ook value and the discounted future cash flows (fair value! of the asset4 If asset is impaired the loss reduces net income in the period it is impaired4 -ig -ath

Chapter 7

Page 7,1.