1. THERE ARE TWO TYPES OF LONG TERM ASSETS WE WILL LEARN ABOUT I. PLANT ASSETS II. INTANGIBLE ASSETS Long-Term Assets

2. Long-Term Assets – In general Have a useful life of more than one accounting period Are used in operations to produce income (not an investment or otherwise idle)  To match the cost of the asset against the income the asset helped to produce, depreciation is expensed in a consistent manner and the contra asset account “accumulated depreciation” collects or “accumulates” all depreciation for the asset from the time the asset was placed in service.  Net Book Value for an Asset is Cost minus Accumulated Depreciation.  Depreciable Base of an Asset is Cost minus Salvage Value.

3. I. Plant Assets in general All plant assets except land are depreciated.  Land acquisition costs are separated from the cost of land improvements  Land acquisition costs include removal of structures (less any salvage) to prepare the land for use  Land improvements (unlike land) are depreciated and include such items as parking lots, paving, fences, signs, shrubs and lighting systems. When considering what expenditures should become part of the asset cost, consider what is normal, reasonable and necessary to prepare the plant asset for its intended use. Include such items as sales tax, insurance, freight, installation and testing costs.

4. I. Plant Assets – Lump Sum Purchases If a company purchases several items together, it is a lump sum purchase. The cost of the purchase must be divided among the assets in the accounting records. The division of cost is based on the appraised value of the individual assets as follows:

5. I. Plant Assets – Calculating Depreciation Depreciation is the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use. Accumulated Depreciation represent the accumulation of all depreciation since the asset was placed in service. Book Value represents Cost minus Accumulated Depreciation.

6. I. Plant Assets – Depreciation Methods We will learn about three (3) methods  Straight Line Method (Most commonly used)  Units of Production Method  Double Declining Balance Method

7. I. Plant Assets – Straight Line Depreciation Full or Partial Year To determine the months an asset should be depreciated in a period, consider the date the asset was placed in service and the date for which you are preparing financial statements.  Full Year - If an asset was placed in service on Jan 1 and the company is preparing financial statements as of Dec 31, twelve (12)months of depreciation will be recorded.  Partial Year - If, however, the asset was placed in service on Jul 1 and the financial statement date is Dec 31, six (6) months of depreciation will be recorded.

8. I. Plant Assets – Straight Line Depreciation Full or Partial Year

9. I. Plant Assets – Book Value Straight Line

10. I. Plant Assets – Units of Production

11. I. Plant Assets – Book Value Units of Production

12. I. Plant Assets – Double Declining Balance DDB Rate applied to Beginning Book Value

13. I. Plant Assets – Double Declining Book Value

14. I. Plant Assets – Changes in Depreciation Estimates Depreciation is based on estimates of salvage value and useful life. During the useful life of an asset, these estimates can change. Use the new estimate to compute depreciation for current and future periods. Steps  Bring accumulated depreciation up to date  Take current book value (cost minus accumulated depreciation) and subtract the revised (if applicable) salvage value  Divide by revised (if applicable) remaining useful life

15. I. Plant Assets Revised Depreciation – Revision in year 3 Instead of depreciating for 36 more months, will depreciate for 48 more months

16. I. Plant Assets Balance Sheet Presentation Plant assets are shown on the balance sheet net of accumulated depreciation. This helps the readers of the financial statements compare assets and determine how long the assets have been in service.

17. I. Plant Assets – Disposals or Sales Plant assets can be discarded or sold  Disposal – There can only be a loss on a disposal  Fully Depreciated  Not Fully Depreciated

18. I. Plant Assets – Disposal or Sales Sales – Cash sales can have either a gain or a loss.  Sold for book value (cost minus accumulated depreciation)  Sold above book value  Sold below book value

19. III. Intangible Assets – In General Non-physical assets used in operations that confer on their owners certain rights, privileges or competitive advantages Patents – legal life of 20 years, Copyrights – legal life of creator plus 70 years, Licenses – life depends upon agreement, Leaseholds – life depends upon agreement, Franchises – life depends upon agreement, Trademarks – expected useful life Goodwill – not amortized. Has a specific accounting treatment. If an intangible asset is purchased, asset is recorded at cost. If developed internally, only some limited costs can be capitalized. Assets are amortized not depreciated If the asset has an unlimited life, it is NOT amortized; but if it has a limited life, it is amortized. The cost is amortized over the period the asset is expected to benefit the company but can never be more than its legal life.

20. III. Intangible Assets – Goodwill Goodwill has a specific meaning in accounting. When a company acquires another company, goodwill is recorded. It implies the company as a whole is worth more than the value of the fair value of the assets and liabilities. Example: