1. PRINCIPLES OF FINANCIAL ACCOUNTING
WEYGANDT . KIESO . KIMMEL . TRENHOLM . KINNEAR . BARLOW . ATKINS
PRINCIPLES OF
FINANCIAL ACCOUNTING
CANADIAN EDITION
Chapter 9
Long-Lived Assets
Prepared by:
Debbie Musil
Kwantlen Polytechnic University

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Long-Lived Assets
Property, Plant and Equipment
Determining cost and depreciation
Revising depreciation
Disposals
Natural Resources
Cost, depreciation and disposal
Intangible Assets
Accounting for intangible assets
Assets with finite and indefinite lives
Goodwill
Statement Presentation and Analysis
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3. Chapter 9: Long-Lived Assets
Study Objectives
Determine the cost of property, plant and equipment.
Explain and calculate depreciation.
Explain the factors that cause changes in periodic depreciation and calculate revisions.
Account for the disposal of property, plant and equipment.
Calculate and record depreciation of natural resources.
Identify the basic accounting issues for intangible assets and goodwill.
Illustrate the reporting and analysis of long-lived assets.
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4. Property, Plant and Equipment
Long-lived assets owned by a company
Used in production and sale of goods and services
Characteristics:
Have physical substance (size and shape)
Used in the operations of the business
Not intended for sale to customers
Expected to provide services for a number of years
Divided into four classes:
Land, land improvements, buildings, equipment
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Determining Cost
Cost includes:
Purchase price, non-recoverable taxes, less discounts and rebates
All costs necessary to bring asset to location and make it ready for use
Obligations to remove, restore asset when it is retired (asset retirement costs)
These costs are capital expenditures
Benefit future periods
Costs that benefit only the current period are called operating expenditures
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Land and Improvements
Cost of land includes:
Purchase price
Closing costs such as legal fees and surveys
Costs of preparing land for intended use
Land improvements:
Structural additions to land such as fences, parking lots, landscaping
Have limited useful lives
Recorded separately and depreciated
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Buildings
Include costs related to purchase or construction
If purchased, include:
Purchase price and closing costs
Costs of getting a building ready for its intended use, such as remodelling and repairs
If constructed, include:
Contract price plus architects’ fees, building permits, interest payments during construction, excavation costs
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Equipment
Broad category that includes:
Delivery equipment
Office equipment
Computers
Machinery
Vehicles
Furniture and fixtures
Other similar assets
Cost includes charges paid by purchaser:
Purchase price
Freight charges and insurance during transit
Assembling, installing, testing
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Multiple Assets
Property, plant and equipment purchased together for a single price (basket purchase)
Total cost is allocated to each asset in proportion to its relative fair value
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10. Significant Components
If parts of an asset have a cost that is significant in relation to total cost of asset, then these components are depreciated separately
Known as component depreciation
Same process to allocate costs as used for basket purchases
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11. Chapter 9: Long-Lived Assets
Study Objectives
Determine the cost of property, plant and equipment.
Explain and calculate depreciation.
Explain the factors that cause changes in periodic depreciation and calculate revisions.
Account for the disposal of property, plant and equipment.
Calculate and record depreciation of natural resources.
Identify the basic accounting issues for intangible assets and goodwill.
Illustrate the reporting and analysis of long-lived assets.
Copyright John Wiley & Sons Canada, Ltd.

12. Copyright John Wiley & Sons Canada, Ltd.
Depreciation
Systematic allocation of the cost over the long-lived asset’s useful life
A process of cost allocation, not determining fair value
Does not accumulate cash for replacement of the asset
Two models available:
Cost model – more commonly used
Revaluation model
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13. Calculating Depreciation
To calculate depreciation, must determine:
The cost of the asset
Costs to acquire asset and make it ready for use
Its estimated useful (productive) life
Can be expressed in terms of time, units of activity or units of output
Based on assessment of use, obsolescence and other relevant factors
The estimated residual value
Estimated value of asset at end of its useful life
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Depreciation Methods
Three alternative methods:
Straight-line
Diminishing-balance
Units-of-production
Management chooses method that best matches the pattern of consumption of the asset’s future economic benefits
Depreciation method, estimated useful life and residual value must be reviewed at least annually
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Straight-Line Method
Depreciation expense is constant every year of asset’s useful life
Depreciable amount: the amount to be depreciated
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16. Diminishing-Balance Method
Depreciation expense based on asset’s diminishing carrying amount (cost less accumulated depreciation)
Depreciation rate remains constant, but depreciation expense declines each year
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17. Units-of-Production Method
Useful life expressed as total units of production or activity
Must estimate the total units of production that will be obtained from asset
Copyright John Wiley & Sons Canada, Ltd.

18. Chapter 9: Long-Lived Assets
Study Objectives
Determine the cost of property, plant and equipment.
Explain and calculate depreciation.
Explain the factors that cause changes in periodic depreciation and calculate revisions.
Account for the disposal of property, plant and equipment.
Calculate and record depreciation of natural resources.
Identify the basic accounting issues for intangible assets and goodwill.
Illustrate the reporting and analysis of long-lived assets.
Copyright John Wiley & Sons Canada, Ltd.

19. Revising Depreciation
Annual depreciation must be revised if there are:
Capital expenditures during the useful life of an asset
Impairments in the fair value of an asset
Changes in an asset’s fair value using the revaluation model
Changes in the appropriate depreciation model, asset’s useful life or residual value
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20. Capital Expenditures During Useful Life
Expenditures on existing capital assets are classified as operating or capital
Ordinary repairs (operating expenditures):
Costs to maintain operating efficiency and productive life of the long-lived asset
Usually small amounts that occur frequently
Debited to Repair Expense as incurred
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21. Capital Expenditures During Useful Life 2
Additions and improvements (capital expenditures):
Costs to increase the efficiency, capacity or expected useful life of the long-lived asset
Usually material in amount and happen less often than ordinary repairs
Debited to the long-lived asset affected
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Impairments
Long-lived assets are considered impaired when carrying value > asset’s recoverable amount
Greater of asset’s fair value less costs to sell or asset’s value in use
Amount of impairment loss
= Carrying Amount − Recoverable Amount
Entry to record impairment loss:
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Revaluation Model
Carrying amount = fair value less accumulated depreciation, less impairment losses
Can only be used if fair value can be reliably measured
Only for IFRS; rarely used by any companies
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24. Changes in Depreciation Method, Useful Life, Residual Value
Each must be reviewed at least once per year at year end
Any changes will cause a revision to the depreciation calculations
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25. Revised Depreciation Calculations
When a change is made:
No correction of previous depreciation expense
Depreciation expense for current and future years is revised
Copyright John Wiley & Sons Canada, Ltd.

26. Chapter 9: Long-Lived Assets
Study Objectives
Determine the cost of property, plant and equipment.
Explain and calculate depreciation.
Explain the factors that cause changes in periodic depreciation and calculate revisions.
Account for the disposal of property, plant and equipment.
Calculate and record depreciation of natural resources.
Identify the basic accounting issues for intangible assets and goodwill.
Illustrate the reporting and analysis of long-lived assets.
Copyright John Wiley & Sons Canada, Ltd.

27. Disposals of Property, Plant and Equipment
Four steps required to record a disposal:
1. Update depreciation
For the part of the year to the date of disposal
2. Calculate the carrying amount
= Cost − Accumulated Depreciation
3. Calculate the gain or loss
= Proceeds – Carrying Amount
Proceeds > Carrying amount: gain
Proceeds < Carrying amount: loss
4. Record the disposal
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28. Disposals of Property, Plant and Equipment 2
Entry to record disposal of asset:
Retirement of Property, Plant and Equipment
No proceeds are received
Debit accumulated depreciation for full amount of depreciation and credit asset account for original cost
If fully depreciated no loss; if not, loss on retirement is equal to the carrying amount of the asset
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29. Exchanges of Property, Plant and Equipment
New asset is purchased by trading in an old asset
A Trade-in allowance reduces the cash cost of new asset
Cash paid = difference between trade-in allowance and purchase price
Trade-in allowance is rarely equal to fair value therefore it is ignored; fair value is more relevant
New asset is recorded at fair value of asset given up plus any cash paid (or less any cash received)
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30. Exchanges of Property, Plant and Equipment - Procedure
Update any unrecorded depreciation
To date of exchange
Calculate carrying amount of asset being given up
= Cost − accumulated depreciation
Calculate gain or loss on disposal
= Fair value − carrying amount
Record the exchange
Copyright John Wiley & Sons Canada, Ltd.

31. Chapter 9: Long-Lived Assets
Study Objectives
Determine the cost of property, plant and equipment.
Explain and calculate depreciation.
Explain the factors that cause changes in periodic depreciation and calculate revisions.
Account for the disposal of property, plant and equipment.
Calculate and record depreciation of natural resources.
Identify the basic accounting issues for intangible assets and goodwill.
Illustrate the reporting and analysis of long-lived assets.
Copyright John Wiley & Sons Canada, Ltd.

32. Copyright John Wiley & Sons Canada, Ltd.
Natural Resources
Consists of standing timber and deposits of oil, gas and minerals
Also called wasting assets
Differ from other long-lived assets:
Physically extracted: deplete as they are used
Replaced only by an act of nature
Cost determined as for other long-lived assets:
Include costs of acquiring and preparing asset for use
Include asset retirement costs: future restoration and clean-up costs
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33. Depreciation of Natural Resources
The units-of-production method is used to calculate depreciation
First calculate the depreciable amount per unit
Depreciation of natural resources is debited to inventory
As it is a cost of extracting a saleable product
When product is sold the cost is expensed to cost of goods sold
Copyright John Wiley & Sons Canada, Ltd.

34. Chapter 9: Long-Lived Assets
Study Objectives
Determine the cost of property, plant and equipment.
Explain and calculate depreciation.
Explain the factors that cause changes in periodic depreciation and calculate revisions.
Account for the disposal of property, plant and equipment.
Calculate and record depreciation of natural resources.
Identify the basic accounting issues for intangible assets and goodwill.
Illustrate the reporting and analysis of long-lived assets.
Copyright John Wiley & Sons Canada, Ltd.

35. Intangible Assets and Goodwill
Rights, privileges, and competitive advantages that have no physical substance
Recorded at cost, including costs to make ready for its intended use (legal fees and similar)
If intangible asset has a finite (limited) life, it is amortized (depreciated) over its useful or legal life, whichever is shorter
Straight-line method is often used
Assets with indefinite lives are not amortized
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36. Intangible Assets with Finite Lives
Patents and Copyrights
Research and development (R&D) costs:
Development costs with probable future benefits are capitalized
Research costs and development costs are expensed when incurred unless meeting specific criteria
Other intangible assets
Customer lists, noncompetition agreements, sports contracts
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37. Intangible Assets with Indefinite Lives
Trademarks and trade names
Word, phrase, jingle or symbol that identifies an enterprise or product
Franchises and licences
Franchise: contractual arrangement giving the franchisee rights to sell products and use trademarks
Licence: government grant to use public property
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Goodwill
The value of all favourable attributes of a company
Recorded only when a business is purchased
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39. Chapter 9: Long-Lived Assets
Study Objectives
Determine the cost of property, plant and equipment.
Explain and calculate depreciation.
Explain the factors that cause changes in periodic depreciation and calculate revisions.
Account for the disposal of property, plant and equipment.
Calculate and record depreciation of natural resources.
Identify the basic accounting issues for intangible assets and goodwill.
Illustrate the reporting and analysis of long-lived assets.
Copyright John Wiley & Sons Canada, Ltd.

40. Statement Presentation
Balance sheet:
Property, plant, and equipment often includes natural resources
Intangible assets are listed separately as a group
Goodwill is also listed separately
For assets that are depreciated or amortized:
The balances and accumulated depreciation of major classes of assets should be disclosed
Depreciation and amortization:
Methods used should be described
Amount of depreciation and amortization expense for period should be disclosed
Impairment policy must be disclosed
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41. Financial Statement Analysis
Asset Turnover Ratio:
= Net Sales ÷ Average Total Assets
Indicates how efficiently a company is using its assets to generate sales
Return on Assets:
= Net Income ÷ Average Total Assets
Measures overall profitability of assets used in earnings process
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42. Copyright John Wiley & Sons Canada, Ltd.
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