1. Accounting for Long-lived and intangible assets
Chapter 9
Accounting for Long-lived and intangible assets
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2. Long-Lived Assets Two categories of long-lived or long-term assets
Plant Assets
Intangible Assets
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3. Plant Assets
Plant assets refer to a company’s property, plant and equipment.
Land
Buildings
Equipment
Furniture and fixtures
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4. Intangible Assets
Intangible assets are economic resources that benefit the company, but lack physical substance
Copyrights
Trademarks
Patents
Franchises
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5. Accounting for Long-Lived Assets
Accounting issues
Account for the acquisition cost.
Expense the asset’s cost over time.
Determine the treatment of future expenditures on the original assets.
Account for the disposal of the assets.
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6. Acquisition Cost
Long-lived assets are initially recorded at their acquisition cost.
Called the historical cost
Includes cash and/or cash equivalent given up to acquire the assets and get it ready for its intended use
Note: normal maintenance is not included in asset cost. It is expensed in the current period.
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7. Package Purchases
Assets purchased as a group need to be allocated since different assets are off course separate on the balance sheet and also likely will have different useful lives, depreciation methods, and reporting requirements.
The allocation is done based on relative market value or appraisal values.
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8. Expenditures Related to Land
All costs necessary to bring the land into condition for use should be capitalized. This includes:
Property taxes on purchase
Insurance on purchase
Legal fees on purchase
Fees to remove old buildings
Special assessments
Net recoveries from selling removed items reduce capitalized cost.
Limited life items of land improvements such as driveways and fences should be accounted for as separate items.
Leasehold improvements are accounted for separately (assuming the land is being leased).
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9. Select the correct answer.
Sienna Corp paid $30,000 for a new specialized machine. In addition Sienna paid $600 to transport the equipment to its installation location and paid an additional $300 to have the equipment professionally installed. Sienna expects the new machine to lower operating costs by $5,000 the first year. What is the amount Sienna should show as the cost of the equipment?
$30,000
.$30,900
$30,600
$25,900
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10. Depreciation Land does not depreciate.
Other than land, a plant asset cost must be allocated to the periods of the plant asset use.
The period of depreciation is the asset’s useful life, which may differ from its physical life.
The company must also estimate the asset’s salvage value, which represents the asset’s value at the end of its useful life.
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11. Depreciation Is Not for Valuation
Depreciation is a systematic allocation for matching expenses to revenue recognition derived by utilizing the asset.
Depreciation is not intended to align the book value of an asset to its market value.
Market Value
Accounting Value
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12. Calculating Depreciation Expense
Many different methods are allowed for calculating depreciation.
Some common methods
Straight-line
Declining balance
Units-of-production
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13. (Acquisition cost – Salvage value)
Straight-Line Method
Assume equipment costs $5,000, with a three-year useful life, and a $500 salvage value.
Annual depreciation =
(Acquisition cost – Salvage value)
Estimated useful life
($5,000 - $500) =
$1,500 per year
3 years
Depreciation expense
$1,500
Accumulated depreciation
To record depreciation expense for the year.
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14. Straight-Line Method Year of Useful Life Balance of Equipment Account
Annual Depreciation Expense
Accumulated Depreciation Account
Asset’s Book Value 1
$5,000
$1,500
$3,500 2
5,000
1,500
3,000
2,000 3
4,500
500
Total
$4,500
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15. Declining-Balance Method
An accelerated depreciation method that calculates depreciation expense as a constant percentage of an asset’s beginning-of-year book value.
Since book value declines each year as accumulated depreciation increases, annual depreciation expense declines each year.
There are many versions of declining-balance depreciation.
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16. Double Declining-Balance Method
Assume equipment costs $5,000, with a three-year useful life, a $500 salvage value, and is depreciated using a double-declining method.
Assets are not depreciated below their salvage value so year 3 depreciation is forced at $55 so that the ending book value remains at the $500 salvage value.
Annual depreciation =
Book value at the beginning of the year x
Double-declining balance rate
Year of Useful Life
Acquisition Cost
Beginning Accumulated Depreciation
Beginning Book Value
Twice Straight-line Percentage
Annual Depreciation Expense 1
$5,000 $ x
66.67 % =
$3,334 2
5,000
3,334
1,666
66.67%
1,111 3
4,445
555 55
Total
$4,500
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17. Units-of-Production Method
Allocate an asset’s cost based on an asset’s use rather than based on time.
Annual depreciation is then computed based on how many units are used.
Units may be miles for a vehicle, hours used, or units produced for a machine.
Depreciation per unit =
(Acquisition cost – Salvage value)
Total estimated units of production
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18. Units-of-Production Method
Assume a piece of equipment is estimated to last 9,000 hours. The acquisition cost of the equipment is $5,000 and the salvage value is estimated to be $500.
($5,000 - $500) =
$0.50 per hour
9,000 hours
Year
Depreciation per Unit
Annual Hours Used
Annual Depreciation Expense 1
$0.50 x
2,000 =
$1,000 2
0.50
4,000 3
500
250 4
1,500
750 5
1,000
Total
$4,500
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19. Depreciation for Income Taxes
A company may use a different method of depreciation for its taxes than it uses for its financial reporting.
The method used for taxes is a form of accelerated depreciation called modified accelerated cost recovery system (MACRS).
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20. Select the correct answer.
Jager Inc. purchased a new machine at a total cost of $25,000. The machine is expected to have a 5-year useful life, at which time it is expected to be sold for $5,000. Which of the following is true regarding depreciation in the first year?
$5,000 if straight-line; $10,000 if double declining balance.
$4,000 if straight-line; $8,000 if double declining balance.
.$4,000 if straight-line; $10,000 if double declining balance.
$5,000 if straight-line; $8,000 if double declining balance.
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21. Impairment Loss
If the value of a plant asset suddenly falls so severely that its future cash flows are estimated to be less than its current book value, the asset is deemed to be impaired and an impairment loss is then recorded.
Assume equipment with a cost of $100,000 and accumulated depreciation of $60,000 is estimated to have a current fair value of only $10,000.
Impairment loss
30,000
Accumulated depreciation
To record impairment loss on equipment.
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22. the distinction between revenue expenditures and capital expenditures.
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23. Expenditures During the Life of the Plant Asset
Two types of expenditures
Revenue expenditures
Betterments
Revenue expenditures are debited to expense
Maintenance and repairs
Capital expenditures are debited to the asset (capitalized)
Extend the useful life of the asset
Improve the quality or quantity of the asset’s output
Reduce the asset’s operating costs
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24. the accounting for disposals of plant assets.
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25. Disposals of Plant Assets
Disposals can be either sales, retirements, or exchanges.
To record a disposal
Remove asset’s cost
Remove accumulated depreciation
Record proceeds
Record any gain or loss
Difference between proceeds received and book value removed
Book Value (BV) = Asset Cost - Accumulated Depreciation
If Cash received > BV, record a gain (credit)
If Cash received < BV, record a loss (debit)
If Cash received = BV, no gain or loss
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26. Disposals of Plant Assets—Example
Assume a vehicle with an acquisition cost of $20,000 and accumulated depreciation of $18,000 is sold for $3,500.
Cash
3,500
Accumulated depreciation
18,000
Vehicles
20,000
Gain on sale
1,500
To record sale of vehicle.
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27. Intangible Assets
Intangible assets consist of the various resources that benefit the company’s operations, but do not have a physical substance.
Intangible assets acquired from outside firms are recorded at their acquisition cost.
Similar to plant assets and depreciation, intangible assets are amortized over the term of their expected lives.
*Unlike plant assets, there is no accumulated amortization expense, instead the credit goes straight to the intangible asset.
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28. Types of Intangible Assets
Patents—an exclusive privilege granted to an inventor for a period of 20 years.
Copyrights—protects an owner against unauthorized use of a written work, recorded work, or artwork for the life of the author plus 70 years.
Franchises—are exclusive rights to operate or sell a specific brand of product in a given geographic area.
Trademarks—the right to use certain terms, names, or symbols.
Goodwill—the amount paid by a company for another company above the identifiable net assets of the acquired company.
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29. Analyzing Assets
The ability to use a firm’s assets efficiently and effectively is the sign of a well managed company.
The rate of return on a company’s assets is a commonly used measure of the overall company health.
Return on assets =
Net income
Average total assets
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30. Analyzing Assets
The asset turnover ratio evaluates a company’s effective use of its assets. It indicates how effectively a firm is able to generate sales from its assets.
Asset turnover =
Net sales
Average total assets
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31. Select the correct answer.
Nash Co. reported a net income for the current year of $120,000, cash flow from operating activities of $150,000, total average assets of $1,500,000, and paid cash dividends of $40,000. What was Nash’s return on assets for the year?
5.3%
.8.0%
10.0%
10.7%
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32. Corporate Social Responsibility
Corporate Social Responsibility takes many forms.
One area that has received a lot of attention is a responsibility to business practices that protect the environment.
This can be a win-win situation since both the environment benefits and so may the company.
Improved brand image
Less governmental scrutiny
Avoidance of possible future regulations
Potential cost savings for waste, disposal, and cleanup
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