Long-Lived Assets Presentations for Chapter 9 by Glenn Owen

Key Points How the matching principle underlies the methods used to account for long-lived assets. Major questions that are addressed when accounting for long-lived assets and how the financial statements are affected. Major economic consequences associated with the methods used to account for long-lived assets. Costs that should be included in the capitalized cost of a long-lived asset. Accounting treatment of post acquisition expenditures. How the cost of a long-lived asset is allocated over its useful life and the alternative allocation methods. Disposition of long-lived assets.

Property, Plant, Equipment, and Intangibles as a Percentage of Total Assets

Overview of Long-Lived Asset Accounting 1.What costs to capitalize? General rule Specific issues Land Lump-sum purchases Construction Acquisition Use 1.Post acquisition expenditures Betterments Maintenance 2.Cost allocation Estimate useful life Estimate salvage value Choose allocation method Straight-line Accelerated Activity Allocation for tax purposes Disposal 1.Retirement 2.Sale – exchange asset for cash or receivable 3.Trade-in – exchange of long-lived assets

Acquisition: What Costs to Capitalize? Land – Purchase price, closing costs, costs to get land in condition for its intended purpose, assumptions of back taxes, liens, or mortgages, and permanent land improvements. Lump-sum purchases – Allocate based on FMV Construction of long-lived assets – Costs required to get the assets into operating condition – Interest on funds borrowed to finance construction

Post Acquisition Expenditures: Betterments or Maintenance? Betterments: – Increase asset’s useful life – Improve quality of asset’s output – Increase quantity of asset’s output – Reduce asset’s operating costs Accounting treatment – Betterments are capitalized – Maintenance expenditures are expensed

Cost Allocation: Amortizing Capitalized Costs Estimating useful life and salvage value Revising useful life estimate Depreciation methods – Straight-line – Double-declining balance – Activity (units-of-production) The matching principle Choosing a method Income tax depreciation methods

Depreciation Method: Straight Line Equal benefits across each year of useful life Simple and easy to apply Higher net income and book values in the early years of life Formula: (Cost – Salvage Value) Estimated Useful Life

Depreciation Method: Double-Declining-Balance Accelerated method since greater amounts of cost are allocated to the earlier periods of the asset’s life than to later periods Formula: 2 x Book Value * Estimated Useful Life *Book Value = Cost – Accumulated Depreciation

Effects of Depreciation Methods on Net Income

Disposal: Retirements, Sales, and Trade-ins Retirement – Obsolescence – Lack of a market – Closure Sales Trade-ins – Two or more long-lived assets are exchanged – Similar – Dissimilar

Intangible Assets and Deferred Costs Copyrights, patents, and trademarks Developing computer software Goodwill Organizational costs Research and development