1. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen University College Chapter 9 Long-Lived Assets

2. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Long-Lived Assets Property, Plant and Equipment Property, Plant and Equipment Determining cost and amortizationDetermining cost and amortization Revising amortization; disposalsRevising amortization; disposals Natural Resources Natural Resources Cost, amortization and disposalCost, amortization and disposal Intangible Assets Intangible Assets Accounting for intangible assetsAccounting for intangible assets Assets with limited and indefinite livesAssets with limited and indefinite lives Statement Presentation and Analysis Statement Presentation and Analysis

3. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 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 substanceHave physical substance Used in the operations of the businessUsed in the operations of the business Not intended for sale to customersNot intended for sale to customers Divided into four classes: Divided into four classes: Land, land improvements, buildings, equipmentLand, land improvements, buildings, equipment

4. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Determining Cost Cost principle: Cost principle: Include all costs to acquire asset and make it ready for useInclude all costs to acquire asset and make it ready for use Include purchase price, freight costs paid, testing and installation costsInclude purchase price, freight costs paid, testing and installation 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

5. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 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 from land and amortizedRecorded separately from land and amortized

6. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 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

7. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 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 Basket Purchases 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 market valueTotal cost is allocated to each asset in proportion to its relative fair market value

8. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Amortization The process of allocating cost to expense over the useful (service) life of an asset The process of allocating cost to expense over the useful (service) life of an asset Provides proper matching of expenses with revenuesProvides proper matching of expenses with revenues A process of cost allocation, not determining market valueA process of cost allocation, not determining market value Does not accumulate cash for replacement of the assetDoes not accumulate cash for replacement of the asset

9. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Calculating Amortization To calculate amortization, must determine: To calculate amortization, 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

10. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Amortization Methods Three alternative methods: Three alternative methods: Straight-lineStraight-line Declining-balanceDeclining-balance Units-of-activityUnits-of-activity Each method is acceptable under generally accepted accounting principles Each method is acceptable under generally accepted accounting principles Management selects the method that best measures an asset’s contribution to revenue Management selects the method that best measures an asset’s contribution to revenue Once chosen, it should be applied consistently Once chosen, it should be applied consistently

11. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Straight-Line Method Amortization expense is constant every year of asset’s useful life Amortization expense is constant every year of asset’s useful life Amortizable cost: the amount to be amortized Amortizable cost: the amount to be amortized Estimated Useful Life Annual Amortization Expense ÷ = Cost Residual Value Amortizable Cost - =

12. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Declining-Balance Method Amortization expense based on asset’s declining net book value Amortization expense based on asset’s declining net book value Cost less accumulated amortizationCost less accumulated amortization Amortization rate remains constant, but net book value declines each yearAmortization rate remains constant, but net book value declines each year Net Book Value at Beginning of Year Straight-Line Rate x 2 Annual Amortization Expense x =

13. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Units-of-Activity 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 activity that will be obtained from asset Must estimate the total units of activity that will be obtained from asset Total Estimated Units of Activity Amortizable Cost per Unit ÷ = Units of Activity during the Year Annual Amortization Expense x = Amortizable Cost Amortizable Cost per Unit

14. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Revising Amortization Annual amortization must be revised if there are: Annual amortization 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 market value of an assetImpairments in the market value of an asset Changes in an asset’s useful life or residual valueChanges in an asset’s useful life or residual value

15. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 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

16. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 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 useful life of the long-lived assetCosts to increase the efficiency, capacity or 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

17. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Revised Amortization Calculations When a change is made: When a change is made: No correction of previous amortization expenseNo correction of previous amortization expense Amortization expense for current and future years is revisedAmortization expense for current and future years is revised Revised Residual Value Remaining Amortizable Cost at Time of Change in Estimate - = Remaining Estimated Useful Life Revised Annual Amortization Expense ÷ = Net Book Value at Time of Change in Estimate Remaining Amortizable Cost at Time of Change in Estimate

18. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Impairments Long-lived assets are written down to market value when their value is permanently impaired Long-lived assets are written down to market value when their value is permanently impaired Impairment loss occurs when: Impairment loss occurs when: Decline in market value of asset is permanent, andDecline in market value of asset is permanent, and Net book value of asset is not recoverableNet book value of asset is not recoverable Amount of loss = net book value less market valueAmount of loss = net book value less market value Entry to record impairment loss: Entry to record impairment loss:

19. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 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 amortization For the part of the year to the date of disposalFor the part of the year to the date of disposal 2. Calculate the net book value = Cost - Accumulated Amortization 3. Calculate the gain or loss = Proceeds – Net Book Value Proceeds > net book value: gainProceeds > net book value: gain Proceeds < net book value: lossProceeds < net book value: loss 4. Record the disposal

20. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 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 amortization for full amount of amortization and credit asset account for original costDebit accumulated amortization for full amount of amortization and credit asset account for original cost May be no difference if fully amortized; otherwise difference is a loss on retirementMay be no difference if fully amortized; otherwise difference is a loss on retirement

21. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Exchanges in 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 price of new assetA Trade-in allowance reduces the price of new asset Cash paid = difference between trade-in allowance and purchase priceCash paid = difference between trade-in allowance and purchase price

22. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Exchanges in Property, Plant and Equipment 2 Trade-in allowance is ignored as fair market value is more relevant Trade-in allowance is ignored as fair market value is more relevant Accounting treatment is dependent upon whether the exchange is considered: Accounting treatment is dependent upon whether the exchange is considered: A monetary exchange of assets: when a significant amount of cash is involved; orA monetary exchange of assets: when a significant amount of cash is involved; or A non-monetary exchange of assets: when little or no cash is involvedA non-monetary exchange of assets: when little or no cash is involved

23. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Monetary Exchange of Assets Monetary exchanges of assets occur when: Monetary exchanges of assets occur when: The assets exchanged are dissimilar, or The assets exchanged are dissimilar, or A significant amount of cash is involved A significant amount of cash is involved Viewed as sale of old asset & purchase of new asset Viewed as sale of old asset & purchase of new asset Old asset sold for proceeds = fair market valueOld asset sold for proceeds = fair market value New asset recorded at fair market value of old asset + cash paid (or less cash received)New asset recorded at fair market value of old asset + cash paid (or less cash received) Gain or loss = difference between net book value and the fair market value of old assetGain or loss = difference between net book value and the fair market value of old asset

24. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Non-Monetary Exchange of Assets Exchange of assets accounted as for monetary exchanges unless: Exchange of assets accounted as for monetary exchanges unless: No effect on the operation of the business, orNo effect on the operation of the business, or Fair values cannot be determinedFair values cannot be determined Then accounted for as non-monetary exchange: Then accounted for as non-monetary exchange: New asset is recorded at net book value of old asset plus any cash paid (or less any cash received)New asset is recorded at net book value of old asset plus any cash paid (or less any cash received) No gain or loss is recordedNo gain or loss is recorded New asset is basically substituted for old asset New asset is basically substituted for old asset

25. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 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 obligations: future restoration and clean-up costsInclude asset retirement obligations: future restoration and clean-up costs

26. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Amortization of Natural Resources The units-of-activity method is used to calculate amortization The units-of-activity method is used to calculate amortization First calculate the amortizable cost per unitFirst calculate the amortizable cost per unit Amortization of natural resources is debited to inventory Amortization 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

27. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Intangible Assets 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 Recorded at cost, including costs to make ready for its intended use If asset has a limited life, it is amortized over its useful or legal life, whichever is shorter If asset has a limited life, it is amortized 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

28. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Intangible Assets with Limited Lives Patent: right to control an invention for 20 years Patent: right to control an invention for 20 years Copyright: right to reproduce and sell artistic or published work for life of creator + 50 years Copyright: right to reproduce and sell artistic or published work for life of creator + 50 years Research and development (R&D) costs: Research and development (R&D) costs: Research costs are expensed when incurredResearch costs are expensed when incurred Development costs which lead to patents, copyrights and new products and processes are capitalizedDevelopment costs which lead to patents, copyrights and new products and processes are capitalized Other intangible assets Other intangible assets Customer lists, noncompetition agreements, sports contractsCustomer lists, noncompetition agreements, sports contracts

29. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 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

30. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 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 normally listed separatelyIntangible assets are normally listed separately For assets that are amortized: For assets that are amortized: The balances and accumulated amortization of major classes of assets should be disclosedThe balances and accumulated amortization of major classes of assets should be disclosed Amortization: Amortization: Methods used should be describedMethods used should be described Amount of amortization expense for period should be disclosedAmount of amortization expense for period should be disclosed

31. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Using Information in the Financial Statements 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

32. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. COPYRIGHT Copyright © 2007 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.