Welcome to Week 11! Financial Accounting: Chapter 7 Ashton Converse Plant Assets, Natural Resources, and Intangibles *** OH, LET IT SNOW! ***

 Welcome  Review  Long-lived Assets Chapter 7  Statement of Retained Earnings  Intangible Assets!  Application and Practice Objectives/Schedule

 What is the consistency principle?  What does conservatism mean in accounting terms?  The disclosure principle means?  Tell me what LCM means?  Another name for gross profit is?  What is gross profit percentage?  What is the inventory turnover?  How do we figure out the “goods available”? Review

 What is a “plant asset”?  Long-lived assets, such as land, buildings, and equipment, used in the operation of the businesses  Also called fixed assets  What is an “intangible asset”?  An asset with no physical form, a special right to current and expected future benefits  The cost of land does not include “land improvements” Types of Long-Lived Assets

 Lets say that Chipotle wants to open a store in Xinzheng.  FOREIGNERS SHOUT IN EXCITEMENT!  They sign a $300,000 note payable to purchase land for their new store. In building, McDonalds must also pay $10,000 for real estate commission, $8,000 of property tax, $5,000 for removal of an old building, a $1,000 survey fee.  Now, Chipotle has the big question for Sias Students to help figure out their money situation.  What is Chipotle’s cost of this land? Example: Lets See

 Purchase price of land…………………….$300,000  Add Related Costs:  Real Estate Commission $10,000  Property Tax… ,000  Removal of Building…………. 5,000  Survey Fee……………………. 1,000  Total Related………………… 24,000  Total Cost of Land……………… $324,000 Answer for Chipotle

 Land ………324,000  Note Payable……300,000  Cash…… 24,000 Assets=Liabilities+Stockholders’ Equity +324,000=+300, ,000  Summary: The purchase increases both assets and liabilities…no impact on equity. Transaction Accounting Slip

 Capital Expenditure:  Expense that increases an asset’s capacity or efficiency or extends its useful life.  Costs that do not add life or value to an asset, but only help make it continue to just work, are just considered expenses  Most firms must make the big decision to capitalize or expense a certain cost for a plant asset Converse about Concepts

 Only land has unlimited life and is not depreciated  Usually always true  Other plant assets must be  For most plant assets, depreciation is caused by these 2 things: 1.Physical Wear and Tear 2.Obsolescence LAND…how is its life?

 Must know 3 things before measuring an assets depreciation. 1.Cost 2.Estimated Useful Life 3.Estimated Residual Value  We have discussed cost before and understand its mean to be: “a known amount for something”.  The other two parts to measure depreciation must be “ESTIMATED”. Measuring Depreciation

 Estimated Useful Life:  Length of a service that a business expects to get from an asset.  May be life in years, units of output (work), miles, or other measures.  Estimated Residual Life:  Expected cash value of an asset at the end of its useful life.  How much you can sell it for at the end of its life…market value after use. Measuring Depreciation

 There are 3 Main Depreciation Methods  Straight-Line  Units-of-Production  Double-declining-balance  The Accelerated Depreciation Method  Double-Declining-balance method (DDB) Depreciation Methods

 The cost of a plant asset minus its estimated residual value Depreciable cost = Asset’s cost – Estimated residual value To Know Before Looking at Methods

Depreciation method in which an equal amount of depreciation expense is given to each year of asset use  Meaning:  Depreciable Cost is divided by useful life in years to determine the annual depreciation expense.  Equation: SL depreciation per year = Cost – Residual Value/Useful life (years) Straight-line Method (SL)

 If DHL, a large shipping and mailing company wants to buy a new truck for $41,000. The estimated residual value is 1,000. DHL plans on the truck lasting 5 years and producing 100,000 units in miles.  First, what is the depreciable cost?  40,000  Second, what is the Straight-Line Method Depreciation Cost?  $8,000  The recorded entry will look as follows:  Depreciation Expense = 8,000 and Accumulated Depreciation = 8,000 Straight-Line Method Example

Depreciation method by which a fixed amount of depreciation is assigned to each unit of output produced by the plant asset. Meaning:  The depreciable cost is divided by useful life (in units of production).  We then multiply this number by the number of units produced each period to figure out depreciation. Equation:  UOP = Cost – Residual Value/Useful life (in units of production) Units-of-Production (UOP)

 Same information as before for SL, but the useful life is 100,000 miles.  Depreciable Cost remains the 40,000 So what is the equation:  $41,000 – $1,000/100,000 miles = ?  UOP Depreciation for DHL = $0.40 per mile  Multiply this by the number of units per year and you will get the depreciation expense per year…which can be used to know the book value UOP Method Example

AA ccelerated Depreciation Method (fast) CC omputes the annual depreciation by multiplying the assets decreasing book value by a constant percentage WW hich is 2 times the straight-line rate FF irst Step: CC ompute the straight-line depreciation rate per year SS econd Step: MM ultiply the straight-line rate by 2 to compute the DDB rate TT hird Step: MM ultiply the DDB rate by the period’s beginning asset book value (cost – accumulated depreciation) Double-Declining-Balance Method

Fourth Step: DD etermine the final year’s depreciation amount DDB depreciation rate per year = (1/Useful life, in years) *2 DD DB = (1 / 5)*2 DD DB = 20% * 2 = 40% MM ultiply by asset book value to get depreciation expense .. 4 * 41,000 = 16,400 SS ubtract expense from book value to get new book value for the next year. NN ow.4 * 24,600 = $9,840 (year 2 depreciation expense) DDB Equation

Depletion Expense  Portion of a natural resource’s cost that is used up in a particular period.  Calculated in the same way as Units-of-production depreciation Accounting for Natural Expenses

 Intangible Assets are long-lived assets  Each intangible asset is unique, and the accounting can be different from one intangible to another  Intangibles are very valuable because of their special rights for that company.  Examples: patents, copyrights, trademarks, franchises, leaseholds, and goodwill. Accounting for Intangibles

Amortization: CC ost is expensed through amortization over the intangible’s estimated useful life unless the asset has a indefinite life. WW hat is a Patent? FF ederal government grant giving the holder the right for 20 years to produce and sell an invention WW hat is a Copyright? RR ight to produce and sell a book, musical composition, film, or other work of art and computer programming. Converse about Intangibles

WW hat is a Trademark, trade name? AA specific identification of a product or service (brand name) WW hat are Franchises and licenses? PP rivileges given by a private business or a government to sell a product or service. WW hat is Goodwill? EE xtra cost of purchasing another company over the sum of the market values of its net assets. AA purchaser is willing to pay for goodwill when it buys a company with big earning power. Intangibles Continued