Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 9 Long-Lived Assets

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Long-Lived Assets Property, Plant and Equipment Property, Plant and Equipment Determining cost and depreciationDetermining cost and depreciation Revising depreciationRevising depreciation DisposalsDisposals Natural Resources Natural Resources Cost, depreciation and disposalCost, depreciation and disposal Intangible Assets Intangible Assets Accounting for intangible assetsAccounting for intangible assets Assets with finite and indefinite livesAssets with finite and indefinite lives GoodwillGoodwill Statement Presentation and Analysis Statement Presentation and Analysis

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Property, Plant and Equipment Long-lived assets owned by a company Long-lived assets owned by a company Used in production & sale of goods & servicesUsed in production & sale of goods & services Characteristics: Characteristics: Have physical substance (size and shape)Have physical substance (size and shape) Used in the operations of the businessUsed in the operations of the business Not intended for sale to customersNot intended for sale to customers Has probable future economic benefitsHas probable future economic benefits Divided into four classes: Divided into four classes: Land, land improvements, buildings, equipmentLand, land improvements, buildings, equipment

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Determining Cost Cost includes: Cost includes: Purchase price, taxes, less discounts and rebatesPurchase price, taxes, less discounts and rebates All costs necessary to bring asset to location and make it ready for useAll costs necessary to bring asset to location and make it ready for use Obligations to remove, restore asset when it is retired (asset retirement costs)Obligations to remove, restore asset when it is retired (asset retirement costs) These costs are capital expenditures These costs are capital expenditures Benefit future periodsBenefit future periods Costs that benefit only the current period are called operating expenditures Costs that benefit only the current period are called operating expenditures

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Land and Improvements Cost of land includes: Cost of land includes: Purchase pricePurchase price Closing costs such as legal fees and surveysClosing costs such as legal fees and surveys Costs of preparing land for intended useCosts of preparing land for intended use Land improvements: Land improvements: Structural additions to land such as fences, parking lots, landscapingStructural additions to land such as fences, parking lots, landscaping Have limited useful livesHave limited useful lives Recorded separately and depreciatedRecorded separately and depreciated

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Buildings Include costs related to purchase or construction Include costs related to purchase or construction If purchased, include: If purchased, include: Purchase price and closing costsPurchase price and closing costs Costs to make building ready for its intended use, such as remodelling and repairsCosts to make building ready for its intended use, such as remodelling and repairs If constructed, include: If constructed, include: Contract price plus architects’ fees, building permits, interest payments during construction, excavation costsContract price plus architects’ fees, building permits, interest payments during construction, excavation costs

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Equipment Cost includes charges paid by purchaser: Cost includes charges paid by purchaser: Purchase pricePurchase price Freight charges and insurance during transitFreight charges and insurance during transit Assembling, installing, testingAssembling, installing, testing

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Multiple Assets Property, plant and equipment purchased together for a single price Property, plant and equipment purchased together for a single price Total cost is allocated to each asset in proportion to its relative fair value Total cost is allocated to each asset in proportion to its relative fair value Significant Components If parts of an asset have a cost that is significant in relation to total cost of asset, then these components are depreciated separately If parts of an asset have a cost that is significant in relation to total cost of asset, then these components are depreciated separately Known as component depreciationKnown as component depreciation Allocate total costs as aboveAllocate total costs as above

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Depreciation Systematic allocation of the cost of a long- lived asset over that asset’s useful life Systematic allocation of the cost of a long- lived asset over that asset’s useful life A process of cost allocation, not determining fair valueA process of cost allocation, not determining fair value Does not accumulate cash for replacement of the assetDoes not accumulate cash for replacement of the asset Two models available: Two models available: Cost model – more commonly usedCost model – more commonly used Revaluation modelRevaluation model

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Calculating Depreciation To calculate depreciation, must determine: To calculate depreciation, must determine: The cost of the assetThe cost of the asset Costs to acquire asset and make it ready for useCosts to acquire asset and make it ready for use Its estimated useful (productive) lifeIts estimated useful (productive) life Can be expressed in terms of time, units of activity or units of outputCan be expressed in terms of time, units of activity or units of output Based on assessment of use, obsolescence and other relevant factorsBased on assessment of use, obsolescence and other relevant factors The estimated residual valueThe estimated residual value Estimated value of asset at end of its useful lifeEstimated value of asset at end of its useful life

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Depreciation Methods Three alternative methods: Three alternative methods: Straight-lineStraight-line Diminishing-balanceDiminishing-balance Units-of-productionUnits-of-production Management chooses method that best matches the pattern of consumption of the asset’s economic benefits Management chooses method that best matches the pattern of consumption of the asset’s economic benefits Depreciation method, estimated useful life and residual value must be reviewed at least annually Depreciation method, estimated useful life and residual value must be reviewed at least annually

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Straight-Line Method Depreciation expense is constant every year of asset’s useful life Depreciation expense is constant every year of asset’s useful life Depreciable amount: the amount to be depreciated Depreciable amount: the amount to be depreciated Estimated Useful Life Annual Depreciation Expense ÷ = Cost Residual Value Depreciable Amount − =

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Diminishing-Balance Method Depreciation expense based on asset’s diminishing carrying amount (cost less accumulated depreciation) Depreciation expense based on asset’s diminishing carrying amount (cost less accumulated depreciation) Depreciation rate remains constant, but carrying amount declines each year Depreciation rate remains constant, but carrying amount declines each year Carrying Amount at Beginning of Year Straight-Line Rate x 2 Annual Depreciation Expense × =

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Units-of-Production Method Useful life expressed as total units of production or activity Useful life expressed as total units of production or activity Must estimate the total units of production that will be obtained from asset Must estimate the total units of production that will be obtained from asset Total Estimated Units of Production Depreciable Amount per Unit ÷ = Units of Production during the Year Annual Depreciation Expense × = Depreciable Amount Depreciable Amount per Unit

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Revising Depreciation Annual depreciation must be revised if there are: Annual depreciation must be revised if there are: Capital expenditures during the useful life of an assetCapital expenditures during the useful life of an asset Impairments in the fair value of an assetImpairments in the fair value of an asset Changes in an asset’s fair value using the revaluation modelChanges in an asset’s fair value using the revaluation model Changes in the appropriate depreciation model, asset’s useful life or residual valueChanges in the appropriate depreciation model, asset’s useful life or residual value

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Capital Expenditures During Useful Life Expenditures on existing capital assets are classified as operating or capital Expenditures on existing capital assets are classified as operating or capital Ordinary repairs (operating expenditures): Ordinary repairs (operating expenditures): Costs to maintain operating efficiency and productive life of the long-lived assetCosts to maintain operating efficiency and productive life of the long-lived asset Usually small amounts that occur frequentlyUsually small amounts that occur frequently Debited to Repairs Expense as incurredDebited to Repairs Expense as incurred

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Capital Expenditures During Useful Life 2 Additions and improvements (capital expenditures): Additions and improvements (capital expenditures): Costs to increase the efficiency, capacity or expected useful life of the long-lived assetCosts to increase the efficiency, capacity or expected useful life of the long-lived asset Usually material in amount and occur infrequentlyUsually material in amount and occur infrequently Debited to the long-lived asset affectedDebited to the long-lived asset affected

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Impairments Long-lived assets are considered impaired when carrying value > asset’s recoverable amount Long-lived assets are considered impaired when carrying value > asset’s recoverable amount Greater of asset’s fair value less costs to sell or asset’s value in useGreater of asset’s fair value less costs to sell or asset’s value in use Amount of impairment loss Amount of impairment loss = Carrying Amount − Recoverable Amount Entry to record impairment loss: Entry to record impairment loss:

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Revaluation Model Carrying amount = fair value less accumulated depreciation, less impairment losses Carrying amount = fair value less accumulated depreciation, less impairment losses Can only be used if fair value can be reliably measured Can only be used if fair value can be reliably measured Only for IFRS; rarely used by any companies Only for IFRS; rarely used by any companies Changes in Depreciation Method, Useful Life, Residual Value Each must be reviewed at least annually Each must be reviewed at least annually Any Changes will cause a revision to the depreciation calculations Any Changes will cause a revision to the depreciation calculations

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Revised Depreciation Calculations When a change is made: When a change is made: No correction of previous depreciation expenseNo correction of previous depreciation expense Depreciation expense for current and future years is revisedDepreciation expense for current and future years is revised Revised Residual Value Remaining Depreciable Amount at Time of Change in Estimate − = Remaining Estimated Useful Life Revised Annual Depreciation Expense ÷ = Carrying Amount at Time of Change in Estimate Remaining Depreciable Amount at Time of Change in Estimate

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Disposals of Property, Plant and Equipment Four steps required to record a disposal: Four steps required to record a disposal: 1. Update depreciation For the part of the year to the date of disposalFor the part of the year to the date of disposal 2. Calculate the carrying amount = Cost − Accumulated Depreciation 3. Calculate the gain or loss = Proceeds – Carrying Amount Proceeds > Carrying amount: gainProceeds > Carrying amount: gain Proceeds < Carrying amount: lossProceeds < Carrying amount: loss 4. Record the disposal

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Disposals of Property, Plant and Equipment 2 Entry to record disposal of asset: Entry to record disposal of asset: Retirement of Property, Plant and Equipment Retirement of Property, Plant and Equipment No proceeds are receivedNo proceeds are received Debit accumulated depreciation for full amount of depreciation and credit asset account for original costDebit accumulated depreciation for full amount of depreciation and credit asset account for original cost If fully depreciated no loss; if not, loss on retirement is equal to the carrying amount of the assetIf fully depreciated no loss; if not, loss on retirement is equal to the carrying amount of the asset

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Exchanges of Property, Plant and Equipment New asset is purchased by trading in an old asset New asset is purchased by trading in an old asset A Trade-in allowance reduces the cash cost of new asset A Trade-in allowance reduces the cash cost of new asset Cash paid = difference between trade-in allowance and purchase priceCash paid = difference between trade-in allowance and purchase price Trade-in allowance is rarely equal to fair value therefore it is ignored; fair value is more relevantTrade-in allowance is rarely equal to fair value therefore it is ignored; fair value is more relevant New asset is recorded at fair value of asset given up plus any cash paid (or less any cash received) New asset is recorded at fair value of asset given up plus any cash paid (or less any cash received)

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Exchanges of Property, Plant and Equipment - Procedure 1. Update any unrecorded depreciation To date of exchangeTo date of exchange 2. Calculate carrying amount of asset being given up = Cost − accumulated depreciation 3. Calculate gain or loss on disposal = Fair value − carrying amount 4. Record the exchange

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Exchanges of Property, Plant and Equipment – Procedure 2 Entry to record exchange of assets: Entry to record exchange of assets:

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Natural Resources Consists of standing timber and deposits of oil, gas and minerals Consists of standing timber and deposits of oil, gas and minerals Also called wasting assets Also called wasting assets Differ from other long-lived assets: Differ from other long-lived assets: Physically extracted: deplete as they are usedPhysically extracted: deplete as they are used Replaced only by an act of natureReplaced only by an act of nature Cost determined as for other long-lived assets: Cost determined as for other long-lived assets: Include costs of acquiring and preparing asset for useInclude costs of acquiring and preparing asset for use Include asset retirement costs: future restoration and clean-up costsInclude asset retirement costs: future restoration and clean-up costs

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Depreciation of Natural Resources The units-of-production method is used to calculate depreciation The units-of-production method is used to calculate depreciation First calculate the depreciable amount per unitFirst calculate the depreciable amount per unit Depreciation of natural resources is debited to inventory Depreciation of natural resources is debited to inventory As it is a cost of extracting a saleable productAs it is a cost of extracting a saleable product When product is sold the cost is expensed to cost of goods sold When product is sold the cost is expensed to cost of goods sold

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Intangible Assets & Goodwill Rights, privileges, and competitive advantages that have no physical substance Rights, privileges, and competitive advantages that have no physical substance Recorded at cost, including costs to make ready for its intended use (legal fees and similar) Recorded at cost, including costs to make ready for its intended use (legal fees and similar) If intangible asset has a finite (limited) life, it is amortized (depreciated) over its useful or legal life, whichever is shorter If intangible asset has a finite (limited) life, it is amortized (depreciated) over its useful or legal life, whichever is shorter Straight-line method is often usedStraight-line method is often used Assets with indefinite lives are not amortized Assets with indefinite lives are not amortized

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Intangible Assets with Finite Lives Patents and Copyrights Patents and Copyrights Research and development (R&D) costs: Research and development (R&D) costs: Development costs with probable future benefits are capitalizedDevelopment costs with probable future benefits are capitalized Research costs and development costs are expensed when incurred unless meet specific criteriaResearch costs and development costs are expensed when incurred unless meet specific criteria Other intangible assets Other intangible assets Customer lists, noncompetition agreements, sports contractsCustomer lists, noncompetition agreements, sports contracts

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Intangible Assets with Indefinite Lives Trademarks and trade names Trademarks and trade names Word, phrase, jingle or symbol that identifies an enterprise or productWord, phrase, jingle or symbol that identifies an enterprise or product Franchises and licences Franchises and licences Franchise: contractual arrangement giving the franchisee rights to sell products and use trademarksFranchise: contractual arrangement giving the franchisee rights to sell products and use trademarks Licence: government grant to use public propertyLicence: government grant to use public property Goodwill Goodwill The value of all favourable attributes of a companyThe value of all favourable attributes of a company Recorded only when a business is purchasedRecorded only when a business is purchased

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Statement Presentation Balance sheet: Balance sheet: Property, plant, and equipment often includes natural resourcesProperty, plant, and equipment often includes natural resources Intangible assets are listed separately as a group (except goodwill, which is separate)Intangible assets are listed separately as a group (except goodwill, which is separate) For assets that are depreciated or amortized: For assets that are depreciated or amortized: The balances and accumulated depreciation of major classes of assets should be disclosedThe balances and accumulated depreciation of major classes of assets should be disclosed Depreciation and amortization: Depreciation and amortization: Methods used should be describedMethods used should be described Amount of depreciation and amortization expense for period should be disclosedAmount of depreciation and amortization expense for period should be disclosed Impairment policy must be disclosed Impairment policy must be disclosed

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Financial Statement Analysis Asset Turnover Ratio: Asset Turnover Ratio: = Net Sales ÷ Average Total Assets Indicates how efficiently a company is using its assets to generate salesIndicates how efficiently a company is using its assets to generate sales Return on Assets: Return on Assets: = Net Income ÷ Average Total Assets Measures overall profitability of assets used in earnings processMeasures overall profitability of assets used in earnings process

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