Chapter 7 LONG TERM ASSETS PART A ACQUISITION & IMPROVEMENTS PROPERTY, PLANT, EQUIPMENT (PPE) Land Land Improvement Building Equipment LAND Use in Business – not for investment Purchase Price (Historical Cost) + Closing Costs and any fees + Commissions LAND IMPROVEMENTS Parking Lots Paving, Flowers (permanent), Fences, Lighting Will be depreciated BUILDINGS Administrative offices Retail stores Storage Warehouses Manufacturing Facilities Cost includes the purchase price, commissions, legal fees, anything that is required to get the building ready for use If new construction: include interest on loan while building. Once revenue is produced— interest will be an expense EQUIPMENT Machinery Computers & office equipment Vehicles Furniture and fixtures Cost is the purchase price, transportation, tax, testing, installation, legal fees—any costs to prepare the asset to use NATURAL RESOURCES Can be physically used up or depleted Oil Natural Gas Timber Coal INTANGIBLE ASSETS Intangible –can’t be felt Patents, Copyrights, Trademarks, Franchise Rights Goodwill Definitions Patent – exclusive rights to manufacture a product or process 20 yrs add legal fees Copyrights-- protection of published work 70 yrs Trademark – word, slogan or symbol 10 yrs Franchises – pay to use name and sell its products. Cost is initial fee—rest is expensed Goodwill – Value of a company over the value of its assets CLICKERS A. PPE B. Intangible C. Natural Resource 1. Water 2. Mac’s Golden Arches 3. Sprinkler System 4. Store 5. Testing Machine 6. Timber 7. Rights to a story 8. Use of Process 9. Word or Slogan 10. Rights to sell a product Purchase vs creating Intangibles Purchase – can tell the value of the asset Create – can’t tell the value Purchase – like PPE – cost of getting ready to use Create – R&D – must expense—can’t determine future benefit CAPITALIZE vs EXPENSE CAPITALIZE – record as an asset depreciate EXPENSES – record on income statement We capitalize an expenditure as an asset if it increases future benefits, whereas we expense an expenditure if it benefits only the current period. Costing an Asset Examples Land BE 7-1 pg 332 Equipment BE 7-2 pg 332 Goodwill BE 7-3 pg 332 Expenditures after Acquisition Repairs and Maintenance (Minor) – expense Repairs and Maintenance (Major) capitalize Addition – major addition –capitalize Improvements -- Capitalize Legal Defense of Intangible Asset Examples of After Acquisiting BE 7-5 pg 332 PART B COST ALLOCATION Terminology Depreciation – taking cost from balance sheet to income statement Accumulated Depreciation (A.D) Accumulation of depreciation for life of asset (Contra Asset) Book Value = Cost – A.D. Salvage Value = Value of asset at the end of its life Depreciable Cost – Cost less Salvage Value LAND DOES NOT DEPRECIATE DEPRECIATION METHODS Straight-line(SL) –Conservative- doesn’t affect Net Income ◦ Depreciable Cost/Life Declining-Balance(DDB) – Aggressive – ◦ Book Value X Depreciation Rate ◦ Book Value not Salvage Value Activity Based (UOP) – Average ◦ Depreciable Cost / # of units expected Tax Depreciation - MACRS Examples: BE 7-8 pg 332 Journal Entry Depreciation Expense Accumulated Depreciation DEPRECIATION SCHEDULE Straight Line pg 313 Declining Balance pg 314 Activity Based pg 316 Comparison pf 316 AMORTIZATION Intangible Assets with a definite life Depreciable Cost/ Life Like SL Unlimited life do not amortize –like LAND Amortization Expense Patent or Franchise Amortization Expense Example BE 7-9 pg 333 PART C ASSET DISPOSITION Asset Deposition Sale Retirement Exchange Sale of an Asset Cash Accum Depr Loss (if Cash is less than BV) Asset Gain (if Cash is more than BV) Example of Sale of Asset BE 7-10 pg 333 Retirement Accumulated Depr Loss on Retirement Asset Exchange(Trade-In) New Asset Accum Depr (old) Cash or A/P Old Asset Gain (if more than BV) Both Sides of Exchange Buyer BE 7-11 pg 333 Seller BE 7-12 pg 333 Asset Analysis Return on Assets Net Income/ Avg Total Assets Profit Margin Net Income/ Net Sales Asset Turnover Net Sales/ Average Total Assets Return on Assets = Profit Margin X Asset Turnover Asset Analysis BE 7-13 pg 333 Asset Impairment Impairment Loss = difference between the asset’s book value and its fair value Like Lower of Cost or Market Impairment Loss Trademark Asset Impairment BE 7-14 and 7-15 pg 333