1. Long-term Assets

2. Types of Long-Term Assets
Property, plant, and equipment
Long-term assets acquired for use in operations
Natural resources
Long-term assets with a value that decreases through use or sale

3. Types of Long-Term Assets
Intangible assets
Long-term assets that do not have physical substance

4. Purchase price (less cash discount)
Plant Asset Cost
Purchase price (less cash discount)

5. Plant Asset Cost
Purchase price (less cash discount) plus all other reasonable and necessary expenditures

6. Plant Asset Cost
Purchase price (less cash discount) plus all other reasonable and necessary expenditures to prepare the asset for use

7. Examples of Items Included
Purchase price less any cash discount
Shipping costs
Installation costs
Cost of modifications
Interest cost during construction

8. Depreciation
Allocation of the cost of an asset to the periods the asset benefits
Not a valuation process

9. Factors in Estimating Depreciation
Initial cost
Estimated residual value
Estimated Useful Life

10. Depreciation Methods Straight-line Production unit
allocate an equal amount to each period
Production unit
depreciation based on volume of output

11. Accelerated Depreciation Methods
Double Declining-balance
apply a uniform rate to a declining amount (book value)
Sum-of-the-Years’-Digits
annual amount the decreases by a constant amount

12. Example Data Depreciable Asset - Truck Invoice price $20,000
Cash discount 2%
Modifications $3,400
Estimated residual value $2,000
Useful life - 4 years or 200,000 miles
Acquisition date - January 8, 19X1

13. Cost of Truck Invoice price $20,000 Less: Cash discount 400
subtotal $19,600
Modification 3,400
Cost $23,000

14. Cost - Est. Residual Value
Straight-Line Method
Cost - Est. Residual Value
Depreciation
Expense =
Est. Useful Life

15. Straight-Line Method
Expense Accum 19X1: ($23,000 - $2,000) / 4 $5,250 $5,250 19X2: ($23,000 - $2,000) / 4 $5,250 $10,500 19X3: ($23,000 - $2,000) / 4 $5,250 $15,750 19X4: ($23,000 - $2,000) / 4 $5,250 $21,000

16. Production Units Method
Depreciation
Expense
per Unit
Cost - Est. Residual Value =
Est. Useful Life in Units
Depreciation
Expense
per Unit
Units
Produced
Depreciation
Expense X =

17. Production Units Method
Exp Accum ($23,000 - $2,000) / 200,000 = $0.105 per mile 19X1: 50,000 miles X $0.105 $5,250 $5,250 19X2: 40,000 miles x $0.105 $4,200 $9,450 19X3: 60,000 miles x $0.105 $6,300 $15,750 19X4: 10,000 miles x $0.105 $1,050 $16,800 19X5: 20,000 miles x $0.105 $2,100 $18,900 19X6: 20,000 miles x $0.105 $2,100 $21,000

18. Double-Declining Balance
Calculate a straight-line rate
1 divided by estimated useful life
Multiply straight-line rate by 2
Multiply previous asset book value by doubled rate

19. Double-Declining Balance
Exp Accum
19X1: ($23,000 - $0) x (2)(1/4) $11,500 $11,500
19X2: ($23,000 - $11,500) x .5 $5,750 $17,250
19X3: ($23,000 - $17,250) x .5 $2,875 $20,125
19X4: ($23,000 - $20,125) x .5 $1,438 $21,623
overdepreciated

20. Double-Declining Balance
Exp Accum
19X1: ($23,000 - $0) x (2)(1/4) $11,500 $11,500
19X2: ($23,000 - $11,500) x .5 $5,750 $17,250
19X3: ($23,000 - $17,250) x .5 $2,875 $20,125
19X4: ($23,000 - $20,125) x .5 $1,438 $21,623
overdepreciated
19X4: ($23,000 - $2,000) - $20,125
$875 $21,000

21. Double-Declining Balance
Exp Accum 19X1: ($23,000 - $0) x (2)(1/4) $11,500 $11,500 19X2: ($23,000 - $11,500) x .5 $5,750 $17,250 19X3: ($23,000 - $17,250) x .5 $2,875 $20,125 19X4: ($23,000 - $2,000) - $20,125 $875 $21,000

22. Sum-of-the-Years’-Digits
Individual Year
(reverse order)
(Cost - Est. Residual Value) x
Sum of Years’
Digits

23. Sum-of-the-Years’-Digits
Calculating sum of years’ digits
Add the numeric digits in useful life
Example
= 10

24. Sum-of-the-Years’-Digits
Exp Accum 19X1: ($23,000 - $2,000) x 4/10 $8,400 $ 8,400 19X2: ($23,000 - $2,000) x 3/10 $6,300 $14,700 19X3: ($23,000 - $2,000) x 2/10 $4,200 $18,900 19X4: ($23,000 - $2,000) x 1/10 $2,100 $21,000

25. Pattern of depreciation expense
Straight-line
Amount is constant and equal
Production
Amount varies depending on usage

26. Pattern of depreciation expense
Double declining
Amount is decreasing by decreasing amounts
Sum-of-the-Year’s-Digits
Amount is decreasing by constant amount

27. Comparison of Depreciation
Straight-line
Production

28. Comparison of Depreciation
Double-declining balance
Sum-of-the-Years’ Digits

29. Modified Accelerated Cost Recovery System - MACRS
Income tax reporting method
Applies to tangible property placed in service after 1986
Eight cost recovery classes with rates for each year
Tax deduction equals cost times appropriate rate for each year

30. Revenue and Capital Expenditures
Revenue expenditure
Benefits only the current accounting period
Capital expenditure
Significant costs that benefit two more accounting periods

31. Capital Expenditures Additions Betterments
Enhance usefulness by enlarging asset
Debited to asset
Betterments
Increase or improve services

32. Capital Expenditures Extraordinary repairs In all capital expenditures
Significant expenditures that extend useful life or change residual value
Debited to accumulated depreciation
In all capital expenditures
Depreciate increased book value over remaining useful life

33. Disposal of Plant Assets
Sale
Retirement
Exchange

34. Accounting for Disposal
Remove asset cost and related accumulated depreciation from the records
Book value is cost - accum deprec
Determine gain or loss on disposal
Gain
Received more than book value
Loss
Received less than book value

35. Sales or Retirements Always recognize any gain or loss

36. Exchanges Always recognize loss
Recognize gain only if exchange of dissimilar assets
If gain on exchange of similar assets
Reduce cost of new asset by gain

37. Natural Resources Mineral deposits, oil reserves, timber tracts
Consumption has a cost
Recognize depletion by production method

38. Intangible Assets Long-term rights that have future value
Patents, R&D, Goodwill
Consumption has a cost
Recognize amortization by straight-line method

39. Analyzing Information
Are methods, asset lives, and residual values used reasonable?
If methods, lives, or residual values are changed during year, what is impact on net income?
If some interest cost was capitalized, what is total interest cost for period?
How would this change ratio “Times Interest Earned”?

40. Times Interest Earned
Net income + Income Tax Expense + Total Interest Cost
divided by
Total Interest Cost