Long-Term Assets Cost of long-term assets Leasing long-term assets Depreciation Capital and revenue expenditures Impairments Disposition of long-term assets Intangible assets

Cost of long-term assets Includes all expenditures to acquire the asset and getting it ready for use –Freight, installation, sales taxes, etc. –Demolition of existing structures Allocation of cost of real estate –Land is not depreciable –Building is Tax implications –Sidewalks, parking lots

Leasing long-term assets Advantages of operating leases –No concern about residual value –Generally smaller down payment –Can deduct rent on tax return –Keeps liability off balance sheet However, should disclose lease commitments in footnotes

Depreciation Allocating the cost of an asset to expense over its estimated useful life –Not a reduction in the value of the asset Record depreciation even if you think asset is increasing in value –Mc Donald’s –Does not represent cash set aside to purchase replacement asset

Computing depreciation Straight line –Depreciation expense = Cost / Useful life Depreciation expense is generally the same each year except in the year of acquisition and disposition –Pro rate depreciation in year of acquisition and disposition –Method used by most companies for financial accounting purposes

Computing depreciation Declining balance (Page 449) –Depreciation expense = “Book value” x Double straight-line depreciation rate Book value = Cost – Accumulated Depreciation Large amount of depreciation expense in early years Less depreciation in later years

Computing depreciation MACRS (used for Federal income tax) –Depreciation expense = Cost of asset x depreciation percent for the year Based on double-declining balance depreciation over prescribed life of asset –Equipment: 7 years; Buildings 27 ½ or 31 ½ years Generally more depreciation in early years and less in later years –From an income tax viewpoint, that is what companies prefer –Can use straight-line for financial statements and MACRS for tax return

Revenue and capital expenditures Revenue expenditures: expenses –Routine maintenance Painting building; repairs to machine –Expense on financial statements and income tax return Capital expenditures: long-term assets –Extend useful life: new motor in delivery truck –Additions and improvements: installing A/C in a warehouse Depreciated over useful life

Impairments Assets are generally recorded at cost What if market value of asset has fallen materially below “book value” of asset? –Assets on balance sheet would be overstated Not conservative Entry is made to record impairment if asset permanently declines in value below cost –Expense – Asset Often done when Net Income is below prior expectations

Disposal of long-term assets Record depreciation expense for portion of year up to time of disposal No matter how asset is disposed, you: –Accumulated depreciation xxx (Total) – Asset xxx (Cost)

Disposal of long-term assets If asset is “placed in the trash” –Accumulated depreciation xxx (Total) –Loss on disposal xxx – Asset xxx (Cost)

Disposal of long-term assets If asset is sold for less than “basis” Basis = Cost – Accumulated Depreciation “Book Value” –Cash xxx –Accumulated depreciation xxx (Total) –Loss on disposal xxx – Asset xxx (Cost)

Disposal of long-term assets If asset is sold for more than “basis” Basis = Cost – Accumulated Depreciation “Book Value” –Cash xxx –Accumulated depreciation xxx (Total) – Gain on disposal xxx – Asset xxx (Cost)