HFT 2401 Chapter 11 Property, Equipment and Other Assets

Categories of Assets Current Assets Non-Current Assets –Property & Equipment –Investments –Non-current Receivables –Other

Property & Equipment Also called Fixed Assets Includes assets that are depreciated or amortized as well as ones that are not –Land (Not depreciated) –Building –Furniture –Other fixtures

USALI Categories of Property & Equipment LandBuildings Furnishings & Equipment Leaseholds Leasehold Improvements Construction in Progress China, Glass, Silver,Linen & Uniforms

Revenue Expenditures or Capital Expenditures Revenue Expenditures –Used to generate revenue –Short term benefit Capital Expenditures –Benefits to be received over many years –Includes all costs to get the asset in operating condition –Do not include maintenance expenses

Cost of a Capital Asset Example Purchase Price$40,000 Cash Discount (2%) ( 800) Net Price 39,200 Freight Charges 1,800 Sales Tax 2,400 Installation & Permitting 1,000 Total Cost on Balance Sheet 43,400 Total Cost on Balance Sheet 43,400

Not Included in the cost 5 year maintenance contract $5,000 Disposal of packing materials $500 Speeding ticket for the driver delivering the new sofa 100 delivering the new sofa 100

Purchase of Land Include –Title costs –Property taxes –Surveying costs –Brokerage fees –Excavating expenses –Any other governmental expenses

Capital Lease An asset that is “leased” but has a minimum, lump sum buyout value at the end of the lease Record as an asset as Leased Asset under Capital Lease

Leasehold Improvements Improvements made to a leased space to make it ready for business –i.e. Leasing a vacant storefront for a new restaurant –Amortize these improvements over the life of the lease

Lump Sum Purchase Purchasing land, building, equipment as one total price Allocate the purchase based on current market values to establish value of assets for depreciation purposes

Depreciation Spreading the cost of the capital asset over it’s useful life –Straight Line –Units of Production –Sum of the years digits –Double Declining Balance

Straight Line Easiest to calculate Cost of asset$ 35,000 Less: Salvage Value ( 5,000) Depreciable Cost 30,000 Estimated Life 5 years Annual Depreciation $6,000 / year

Units of Production Based on usage of the asset Cost $35,000 Cost $35,000 Salvage Value ( 5,000) Salvage Value ( 5,000) Depreciable cost 30,000 Depreciable cost 30,000 Total number of units produced 100,000 Total number of units produced 100,000 Depreciation Rate = $30,000 / 100,000 =.30 Depreciation Rate = $30,000 / 100,000 =.30 Year one production = 10,000 units Year one production = 10,000 units Year one depreciation = $3,000 Year one depreciation = $3,000

Sum of the years digits Add all the years of life together to get denominator for calculating deprecation rate Net cost of asset $30,000 Life 5 Years Add: = 15 Or: n(n+1)/2 where n = number of years Year one rate = 5/15 * $30,000 = $10,000 Year two rate = 4/15 * $30,000 = 8,000 Year three rate = 3/15 * $30,000 6,000 Year four rate = 2/15 * $30,000 = 4,000 Year five rate = 1/15 * $30,000 = 2,000

Double Declining Balance Ignores salvage value Calculate straight line rate & then multiply by two Subtract each years depreciation expense to get new net value

Double Declining Balance Cost $35,000 Life 5 years Salvage Value $4,000 Divide life into 100% to get straight line rate 100% / 5 = 20% Multiply by 2 to get DDB Rate Year 1 $35,000 * 40% = $14,000 Year 2 $21,000 * 40% = 8,400 Year 3 $12,600 * 40% = 5,040 Year 4 $7,560 * 40% = 3,024 Year 5 $4,536 * 40% = 1,814 Year 5 expense recorded = 536 The $4,000 salvage value remains on the books until the asset is disposed of The $4,000 salvage value remains on the books until the asset is disposed of

Intangible Assets Franchise – The right to do business in a certain geographical area Trademark – A name, mark or character given legal protection Patent – An exclusive right given by the federal government for use and sale of a product Goodwill – the excess of purchase price over appraised value of an asset Copyright – Exclusive right to a literary or artistic work Leasehold – The right to lease a given property for a fixed number of years –All of the above are to be amortized over the life of the asset

Other Assets Security Deposit – Funds deposited to secure occupancy or utility services Deferred Charges – Prepaid but not current. i.e. Financing costs (points) Deferred Income Taxes – result from tax effects from financial and income tax basis of assets

Homework Problem 4 Problem 5 Problem 8: Calculate all 5 years for DDB Problem 9: Calculate all 5 years. Use mileage of YR 1 15,000; YR 2 25,000 Yr 3 30,000; YR 4 20,000; YR 5 10,000 Problem 13