1. 9-1

2. 9-2 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 9 Reporting and Interpreting Long-Lived Tangible and Intangible Assets

3. 9-3 Tangible Physical Substance Intangible No Physical Substance Will not be used up within the next year Actively Used in Operations Defining and Classifying Long-Lived Assets

4. 9-4 Tangible Physical Substance Defining and Classifying Long-Lived Assets Will not be used up within the next year Land Assets subject to depreciation Buildings and equipment Furniture and fixtures Examples Actively Used in Operations

5. 9-5 Actively Used in Operations Tangible Physical Substance Intangible No Physical Substance Defining and Classifying Long-Lived Assets Will not be used up within the next year Value represented by rights that produce benefits. Intangibles with a limited life, such as patents and copyrights, are subject to amortization. Intangibles with an unlimited (or indefinite) life, such as goodwill and trademarks, are not amortized.

6. 9-6 Acquisition of Tangible Assets Acquisition cost includes the purchase price and all expenditures needed to prepare the asset for its intended use. Acquisition cost does not include financing charges. Recording costs as assets is called capitalizing the costs. Acquisition cost includes the purchase price and all expenditures needed to prepare the asset for its intended use. Acquisition cost does not include financing charges. Recording costs as assets is called capitalizing the costs.

7. 9-7 Purchase price Construction costs Legal fees Appraisal fees Architectural fees Purchase price Construction costs Legal fees Appraisal fees Architectural fees Acquisition Cost Buildings

8. 9-8 Purchase price Sales taxes Transportation costs Installation costs Purchase price Sales taxes Transportation costs Installation costs Acquisition Cost Equipment

9. 9-9 Purchase price Legal fees Surveying fees Broker’s Commissions Purchase price Legal fees Surveying fees Broker’s Commissions Land is not depreciable. Acquisition Cost Land

10. 9-10 On January 1, Jones purchased land and building for $400,000 cash. The appraised values are building, $325,000, and land, $175,000. How much of the $400,000 purchase price will be charged to the building and land accounts? On January 1, Jones purchased land and building for $400,000 cash. The appraised values are building, $325,000, and land, $175,000. How much of the $400,000 purchase price will be charged to the building and land accounts? The total cost of a combined purchase of land and building is allocated in proportion to their relative market values. Acquisition Cost Basket Purchase

11. 9-11 Acquisition Cost Basket Purchase

12. 9-12 Cedar Fair purchased a new ride for $26,000,000 less a $1,000,000 discount. Cedar Fair paid $125,000 for transportation and $625,000 for installation of the ride. Prepare the journal entry for the acquisition assuming Cedar Fair paid cash for the new ride. Acquisition Cash Purchase

13. 9-13 Acquisition Cash Purchase Cedar Fair purchased a new ride for $26,000,000 less a $1,000,000 discount. Cedar Fair paid $125,000 for transportation and $625,000 for installation of the ride. Prepare the journal entry for the acquisition assuming Cedar Fair paid cash for the new ride. $26,000,000 - $1,000,000 + $125,000 + $625,000

14. 9-14 Acquisition Credit Purchase Cedar Fair purchased on credit a new ride for $26,000,000 less a $1,000,000 discount. Cedar Fair paid $125,000 cash for transportation and $625,000 cash for installation of the ride. Prepare the journal entry for the acquisition assuming Cedar Fair issued a note payable for the new ride.

15. 9-15 $26,000,000 - $1,000,000 + $125,000 + $625,000 Acquisition Credit Purchase Cedar Fair purchased on credit a new ride for $26,000,000 less a $1,000,000 discount. Cedar Fair paid $125,000 cash for transportation and $625,000 cash for installation of the ride. Prepare the journal entry for the acquisition assuming Cedar Fair issued a note payable for the new ride.

16. 9-16 Self- Constructed Tangible Assets Asset cost includes: All materials and labor traceable to the construction. A reasonable amount of overhead. Interest on debt incurred during the construction.

17. 9-17 Maintenance Costs Incurred During Time of Use

18. 9-18 Depreciation is a cost allocation process that systematically and rationally matches acquisition costs of operational assets with periods benefited by their use. Cost Allocation (Unused) Balance Sheet (Used) Income Statement Expense Depreciation Acquisition Cost

19. 9-19 Depreciation Depreciation Expense Income Statement Balance Sheet Accumulated Depreciation Depreciation for the current year Total of depreciation to date on an asset

20. 9-20 Book Values Book value = Market value / Depreciation on a Balance Sheet

21. 9-21 Depreciation calculations require three amounts for each asset:  Acquisition cost.  Estimated useful life.  Estimated residual value. Depreciation calculations require three amounts for each asset:  Acquisition cost.  Estimated useful life.  Estimated residual value. Depreciation Calculations

22. 9-22 Alternative Depreciation Methods  Straight-line  Units-of-production  Accelerated Method: Declining balance  Straight-line  Units-of-production  Accelerated Method: Declining balance

23. 9-23 At the beginning of the year, Cedar Fair purchased a new Go-Cart Ride for $62,500 cash. The ride has an estimated useful life of 3 years and an estimated residual value of $2,500. Cost - Residual Value Life in Years Depreciation Expense per Year = Straight-Line Method SL

24. 9-24 Depreciation Expense per Year = Depreciation Expense per Year = $20,000 $62,500 - $2,500 3 years Straight-Line Method Cost - Residual Value Life in Years Depreciation Expense per Year = SL

25. 9-25 Residual Value Straight-Line Method About 84 percent of companies use the straight-line method for some or all of their assets disclosed in financial reports. SL

26. 9-26 Units-of-Production Method Depreciation Rate = Cost - Residual Value Life in Units of Production Step 1: Step 2: Depreciation Expense = Depreciation Rate × Number of Units Produced for the Year

27. 9-27 Units-of-Production Method At the beginning of the year, Cedar Fair purchased a new Go-Cart ride for $62,500 cash. The ride has a 100,000 mile useful life and an estimated residual value of $2,500. If the ride is used 30,000 miles in the first year, what is the amount of depreciation expense?

28. 9-28 Units-of-Production Method $62,500 - $2,500 100,000 miles = $.60 per mile Depreciation Rate = Step 1: Step 2: $.60 per mile × 30,000 miles = $18,000 Depreciation Expense =

29. 9-29 Units-of-Production Method

30. 9-30 Residual Value Units-of-Production Method

31. 9-31 Declining-Balance Method DepreciationRepair Expense Early YearsHighLow Later YearsLowHigh The declining-balance method matches higher depreciation expense with higher revenues in the early years of an asset’s useful life when the asset is more efficient.

32. 9-32 Double-Declining-Balance Method Annual Depreciation Expense Net Book Value () Useful Life in Years 2 = × Cost – Accumulated Depreciation Declining balance rate of 2 is double-declining-balance (DDB) rate. Annual computation ignores residual value.

33. 9-33 At the beginning of the year, Cedar Fair purchased a new Go-Cart Ride for $62,500 cash. The ride has an estimated useful life of 3 years and an estimated residual value of $2,500. Calculate the depreciation expense for the first two years. Double-Declining-Balance Method

34. 9-34 Annual Depreciation expense Net Book Value () Useful Life in Years 2 = × () $62,500 × 3 years 2 = $41,667 () ($62,500 – $41,667) × 3 years 2 = $13,889 Double-Declining-Balance Method Year 1 Depreciation: Year 2 Depreciation:

35. 9-35 () ($62,500 – $55,556) × 3 years 2 = $4,629 Below residual value Double-Declining-Balance Method

36. 9-36 Depreciation expense is limited to the amount that reduces book value to the estimated residual value. Double-Declining-Balance Method

37. 9-37 For tax purposes, most corporations use the Modified Accelerated Cost Recovery System (MACRS). MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate new investment. For tax purposes, most corporations use the Modified Accelerated Cost Recovery System (MACRS). MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate new investment. Tax Depreciation

38. 9-38 Asset Impairment Losses Impairment is the loss of a significant portion of the utility of an asset through... Casualty. Obsolescence. Lack of demand for the asset’s services. A loss should be recognized when an asset suffers a permanent impairment.

39. 9-39  Update depreciation to the date of disposal. Writing off accumulated depreciation (debit). Writing off the asset cost (credit).  Record the disposal by: Recording cash received (debit) or paid (credit). Recording a gain (credit) or loss (debit). Disposal of Tangible Assets

40. 9-40 If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. Disposal of Tangible Assets

41. 9-41 Cedar Fair sold a hotel for $5,000,000 cash in the middle of its 17th year of use. The hotel originally cost $20,000,000, and was depreciated using the straight-line method with zero salvage value and a useful life of 20 years. Disposal of Tangible Assets

42. 9-42 The amount of depreciation recorded for the first half of the 17 th year to bring depreciation up to date is: a.$0. b.$500,000. c.$1,000,000. d.$2,000,000. The amount of depreciation recorded for the first half of the 17 th year to bring depreciation up to date is: a.$0. b.$500,000. c.$1,000,000. d.$2,000,000. Disposal of Tangible Assets

43. 9-43 The amount of depreciation recorded for the first half of the 17 th year to bring depreciation up to date is: a.$0. b.$500,000. c.$1,000,000. d.$2,000,000. The amount of depreciation recorded for the first half of the 17 th year to bring depreciation up to date is: a.$0. b.$500,000. c.$1,000,000. d.$2,000,000. Annual Depreciation: ($20,000,000 - $0) ÷ 20 Years = $1,000,000 per year $1,000,000 × ½ year = $500,000 Disposal of Tangible Assets

44. 9-44 After updating the depreciation, the equipment’s book value at date of sale is: a.$3,500,000. b.$3,000,000. c.$17,000,000. d.$16,500,000. After updating the depreciation, the equipment’s book value at date of sale is: a.$3,500,000. b.$3,000,000. c.$17,000,000. d.$16,500,000. Disposal of Tangible Assets

45. 9-45 After updating the depreciation, the equipment’s book value at date of sale is: a.$3,500,000. b.$3,000,000. c.$17,000,000. d.$16,500,000. After updating the depreciation, the equipment’s book value at date of sale is: a.$3,500,000. b.$3,000,000. c.$17,000,000. d.$16,500,000. Accumulated Depreciation = (16½ yrs. × $1,000,000) = $16,500,000 BV = Cost - Accumulated Depreciation BV = $20,000,000 - $16,500,000 = $3,500,000 Disposal of Tangible Assets

46. 9-46 Disposal of Tangible Assets The equipment’s sale resulted in: a.a gain of $1,500,000. b.a gain of $3,000,000. c.a gain of $3,500,000. d.a loss of $5,000,000. The equipment’s sale resulted in: a.a gain of $1,500,000. b.a gain of $3,000,000. c.a gain of $3,500,000. d.a loss of $5,000,000.

47. 9-47 The equipment’s sale resulted in: a.a gain of $1,500,000. b.a gain of $3,000,000. c.a gain of $3,500,000. d.a loss of $5,000,000. The equipment’s sale resulted in: a.a gain of $1,500,000. b.a gain of $3,000,000. c.a gain of $3,500,000. d.a loss of $5,000,000. Gain = Cash Received - Book Value Gain = $5,000,000 - $3,500,000 = $1,500,000 Disposal of Tangible Assets

48. 9-48 Prepare the journal entry to record Cedar Fair’s sale of the hotel in the 17 th year. Disposal of Tangible Assets

49. 9-49 Disposal of Tangible Assets Prepare the journal entry to record Cedar Fair’s sale of the hotel in the 17 th year.

50. 9-50 Intangible Assets Noncurrent assets without physical substance. Useful life is often difficult to determine. Usually acquired for operational use. Often provide exclusive rights or privileges. Intangible Assets

51. 9-51 Trademarks Copyrights Patents Licensing Rights Technology Franchises Goodwill Record at current cash equivalent cost, including purchase price, legal fees, and filing fees. Intangible Assets

52. 9-52 Amortize intangible assets with limited lives over the shorter of their economic lives or legal lives, subject to rules specified by GAAP. Use straight-line method. Research and development costs are normally expensed as incurred. Amortize intangible assets with limited lives over the shorter of their economic lives or legal lives, subject to rules specified by GAAP. Use straight-line method. Research and development costs are normally expensed as incurred. Intangible Assets

53. 9-53 A symbol, design, or logo associated with a business. Purchased trademarks are recorded at cost. Internally developed trademarks have no recorded asset cost. Intangible Assets Trademarks

54. 9-54 Intangible Assets Copyrights Exclusive right granted by the federal government to protect artistic or intellectual properties. Amortize cost over the period benefited. Legal life is life of creator plus 70 years.

55. 9-55 Intangible Assets Patents Exclusive right granted by federal government to sell or manufacture an invention. Cost is purchase price plus legal cost to defend. Amortize cost over the shorter of useful life or 20 years.

56. 9-56 Intangible Assets Licensing Rights Limited permissions to use a product or service according to specific terms and conditions. You may be using computer software that is made available to you through a campus licensing agreement.

57. 9-57 Intangible Assets Technology A category of intangible assets that includes a company’s website and any computer programs written by its employees.

58. 9-58 Legally protected right to sell products or provide services purchased by franchisee from franchisor. Purchase price is an intangible asset that is amortized. Intangible Assets Franchises

59. 9-59 Occurs when one company buys another company. The amount by which the purchase price exceeds the fair market value of net assets acquired. Only purchased goodwill is an intangible asset. Intangible Assets Goodwill Goodwill

60. 9-60 Not amortized. Subject to assessment for impairment value and may be written down. Goodwill Intangible Assets Goodwill

61. 9-61 Intangible Assets Goodwill Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised at a fair value of $900,000.

62. 9-62 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 Intangible Assets Goodwill

63. 9-63 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 Intangible Assets Goodwill

64. 9-64 Summary of Accounting Rules for Long-Lived Assets

65. 9-65 Optimal Level of Investment How much is enough? Insufficient capacity results in lost sales. Costly excess capacity reduces profits.

66. 9-66 Evaluating the Use of Long-Lived Tangible Assets Fixed Asset Turnover Net Sales Revenue Average Net Fixed Assets = This ratio measures the sales dollars generated by each dollar invested in fixed assets. For the year 2003, Cedar Fair had $509,976 of revenue. End-of-year fixed assets were $777,039 and beginning-of-year fixed assets were $781,502. (All numbers in millions.)

67. 9-67 Fixed Asset Turnover $509,976 ($777,039 + $781,502) ÷ 2 == 0.65 Fixed Asset Turnover Net Sales Revenue Average Net Fixed Assets =

68. 9-68 The Impact of Depreciation Differences Accelerated depreciation, in the early years of an asset’s useful life, results in higher depreciation expense, lower net income, and lower book value than would result using straight-line depreciation. Selling an asset with a low book value, resulting from accelerated depreciation, might result in a gain. Selling the same asset with a higher book value, resulting from straight-line depreciation, might result in a loss. Accelerated depreciation, in the early years of an asset’s useful life, results in higher depreciation expense, lower net income, and lower book value than would result using straight-line depreciation. Selling an asset with a low book value, resulting from accelerated depreciation, might result in a gain. Selling the same asset with a higher book value, resulting from straight-line depreciation, might result in a loss.

69. 9-69 End of Chapter 9