Chapter Seven - Long Term Assets

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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
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