Chapter 9
Long-Lived Tangible and Intangible
Assets
PowerPoint Authors:
Brandy Mackintosh
Lindsay Heiser
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 9-1
Define, classify, and explain
the nature of long-lived assets.
9-2
Definition and Classification
Actively Used in Operations



9-3
Value represented by rights
that produce benefits.
Will not be
up within the next year
Intangibles
withused
a limited
life, such as patents and
copyrights, are subject to
Examples
amortization.
 Land
Intangibles
Intangible
Tangiblewith an
 Assets subject to depreciation
unlimited (or indefinite)
and
equipment
No
Physical
life,
such as goodwill and Buildings
Physical
trademarks,
FurnitureSubstance
and fixtures
Substanceare not
amortized.
Learning Objective 9-2
Apply the cost principle to
the acquisition of long-lived
assets.
9-4
Acquisition of Tangible Assets
Acquisition cost includes:
1. purchase price, and
2. all expenditures needed to prepare
the asset for its intended use.
Recording costs as
assets is called
capitalizing the costs.
9-5
Acquisition of Tangible Assets

Purchase cost
Legal fees
Surveying fees
Broker’s commissions

Purchase/construction cost

Legal fees

Appraisal fees

Architectural fees

Purchase/construction cost

Sales taxes

Transportation costs

Installation costs

Land


Buildings
Equipment
9-6
Acquisition of Tangible Assets
Basket Purchase
The total cost of a combined
purchase of land and building is
allocated in proportion to their
relative market values.
Appraised
% ofpurchased
Purchase land
Apportioned
On January
1, Jones
and
Asset
Valuecash. Price
Cost
buildingValue
for $400,000
The appraised
b* $325,000,
a building,
c
b × c
values are
and land,
Land
$ 175,000 $175,000.
35% × $ 400,000 = $ 140,000
Building
Total
325,000
$ 500,000
65% ×
100%
400,000 =
260,000
$ 400,000
How much of the $400,000 purchase price will
* $175,000
= 35%
be÷ $500,000
charged
to the building and land
accounts?
$325,000 ÷ $500,000 = 65%
9-7
Acquisition of Tangible Assets
Component Allocation
IFRS takes the idea of a
basket purchase one step
further. The cost of an
individual asset’s
components is allocated
among each significant
component and then
depreciated separately over
that component’s useful life.
9-8
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.
1 Analyze
2 Record
9-9
Credit Purchase
Instead of paying cash, assume that Cedar Fair issued a
note for the new ride, but paid cash for the transportation
and installation of the ride.
Prepare the journal entry for the acquisition.
1 Analyze
2 Record
9-10
Maintenance Costs Incurred
during Use
Type of
Expenditure
9-11
Identifying Characteristics
Accounting
Treatment
Ordinary
1. Relatively small, recurring expenditures
repairs and
that maintain normal operating condition
maintenance 2. Do not increase productivity
3. Do not extend life beyond original
estimate
Expense
Extraordinary 1. Relatively large, infrequent expenditures
repairs,
such as major overhauls or replacements
replacements,
of major components
and additions 2. May extend useful life
3. May increase productivity or efficiency
Capitalize
Depreciation Expense
Depreciation is a cost allocation process that matches costs
of operational assets with periods benefited by their use.
Acquisition
Cost
Cost Allocaton
Balance Sheet
9-12
Expense
Income Statement
Depreciation
Expense
Depreciation for
the current year
Income
Statement
Accumulated
Depreciation
Total of depreciation
to date for an asset
Balance
Sheet
Depreciation Expense
The effects of $130 of depreciation on the accounting
equation and the journal entry to record them follow:
1 Analyze
Assets
=
Liabilities
Accumulated
Depreciation (+xA) -130
2
+
Stockholders’ Equity
Depreciation
Expense (+E)
-130
Record
dr
Depreciation Expense (+E, -SE)
cr Accumulated Depreciation (+xA, -A)
130
130
Depreciation calculations require three amounts for each asset:
 Acquisition cost.
 Estimated useful life.
 Estimated residual value.
9-13
Depreciation Expense
2010 Depreciation
Includes $127 for 2010
Book value 2010
9-14
Learning Objective 9-3
Apply various depreciation
methods as economic benefits
are used up over time.
9-15
Depreciation Methods
 Straight-line
 Units-of-production
 Declining balance
We will use the following information to illustrate
the three methods of depreciation:
At the beginning of the year, Cedar Fair purchased
a new go-kart Ride for $62,500 cash. The ride
has an estimated useful life of 3 years or 100,000
miles and an estimated residual value of $2,500.
9-16
Straight-Line Method
($62,500 - $2,500) ×
9-17
1
3
=
$20,000 per year
Units-of-Production Method
The ride has a 100,000-mile estimated useful life.
If the ride is used 30,000 miles in the first year,
what is the amount of depreciation expense?
($62,500 - $2,500) ×
9-18
30,000
100,000
=
$18,000
Units-of-Production Method
9-19
Declining-Balance Method
What is the amount of amount of depreciation
for each of the first two years?
First Year
Second Year
×
2
3
=
$41,667
($62,500 - $41,667) ×
2
3
=
$13,889
($62,500 - $0)
Cost – Accumulated Depreciation
Annual computation ignores residual value.
9-20
Double-Declining-Balance Method
Third Year
($62,500 - $55,556) ×
2
3
=
$4,629
Depreciation expense is limited to the amount that
reduces book value to the estimated residual value.
9-21
Summary of Depreciation
Methods
9-22
Partial Year Depreciation
Calculations
When a plant asset is acquired
during the year, depreciation is
calculated for the fraction of the
year the asset is owned.
9-23
Tax Depreciation
9-24
Learning Objective 9-4
Explain the effect of asset
impairment on the financial
statements.
9-25
Asset Impairment Losses
1 Analyze
Assets
=
Liabilities
Rides and
Equipment (-A) -63,000,000
2
Stockholders’ Equity
Loss on
Impairment (+E) -63,000,000
Record
dr
9-26
+
Loss on Impairment (+E, -SE)
cr Rides and Equipment (-A)
63,000,000
63,000,000
Learning Objective 9-5
Analyze the disposal of longlived tangible assets.
9-27
Disposal of Tangible Assets
 Update depreciation to date of disposal.
 Record the disposal.
dr Cash (+A)
dr Accumulated Depreciation (-xA)
cr Equipment (-A)
cr Gain on Disposal (+R, +SE)
Gain if cash received is greater than asset’s book value
9-28
Book
value
Disposal of Tangible Assets
 Update depreciation to date of disposal.
 Record the disposal.
dr Cash (+A)
dr Loss on Disposal (+E, -SE)
dr Accumulated Depreciation (-xA)
cr Equipment (-A)
Loss if cash received is less than asset’s book value
9-29
Book
value
Disposal of Tangible Assets
Cedar Fair sold a hotel for $3,000,000 cash at the end of its
16th year of use. The hotel originally cost $20,000,000, and
was depreciated using the straight-line method with zero
residual value and a useful life of 20 years.
The amount of depreciation per
year is:
a.
b.
c.
d.
9-30
$0.
$500,000.
$1,000,000.
$2,000,000.
Annual Depreciation:
($20,000,000 - $0) ÷ 20 Years
= $1,000,000 per year
Disposal of Tangible Assets
Cedar Fair sold a hotel for $3,000,000 cash at the end of its
16th year of use. The hotel originally cost $20,000,000, and
was depreciatedAccumulated
using the straight-line
method
Depreciation
= with zero
residual value and a useful life of 20 years.
(16 yrs. × $1,000,000) = $16,000,000
The equipment’s
value at
date
BV = Cost -book
Accumulated
Depreciation
of sale is:- $16,000,000
BV = $20,000,000
= $4,000,000
a.
b.
c.
d.
9-31
$4,000,000.
$3,000,000.
$17,000,000.
$16,500,000.
Disposal of Tangible Assets
Cedar Fair sold a hotel for $3,000,000 cash at the end of its
16th year of use. The hotel originally cost $20,000,000, and
was depreciated using the straight-line method with zero
residual value and a useful life of 20 years.
The equipment’s sale resulted in:
a.
b.
c.
d.
9-32
a loss of $1,000,000.
a gain of $3,000,000.
a gain of $1,000,000.
a loss of $5,000,000.
Loss = Cash Received - Book Value
Loss = $3,000,000 - $4,000,000 = $1,000,000
Disposal of Tangible Assets
Analyze and prepare the journal entry to
record Cedar Fair’s sale of the hotel.
1
Analyze
2 Record
9-33
Learning Objective 9-6
Analyze the acquisition, use,
and disposal of long-lived
intangible assets.
9-34
Intangible Assets
Often provide
exclusive rights
or privileges.
Noncurrent assets
without physical
substance.
Intangible
Assets
Useful life is
often difficult
to determine.
9-35
Usually acquired
for operational
use.
Intangible Assets
Record at current cash
equivalent cost, including
purchase price, legal fees,
and filing fees.
Amortize intangibles with
limited lives over the shorter
of their economic lives or
legal lives using the
straight-line method.
9-36
Trademarks and Copyrights
A trademark is a symbol, design,
or logo associated with a business.
Internally developed
trademarks have no
recorded asset cost.
Purchased trademarks
are recorded at cost.
A copyright is an exclusive right granted by the federal
government to protect artistic or intellectual properties.
Legal life is
life of creator
plus 70 years.
9-37
Amortize cost
over the period
benefited.
Patents and Licensing Rights
A patent is an exclusive right granted by the 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.
Licensing rights grant limited permission 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.
9-38
Technology Assets
Technology assets include software and Web
development work.
Usually used up over a relatively short time (3 – 7 years)
9-39
Franchises
A franchise provides legally protected rights
to sell products or provide services purchased
by a franchisee from the franchisor.
9-40
Goodwill
Purchase Price > Fair Market Value of Net Assets Acquired
9-41
Occurs when one
company buys
another company.
Only purchased
goodwill is an
intangible asset.
Is not amortized.
Is impairment
tested and may be
written down.
Amortization of Limited Life
Intangible Asset
Assume Cedar Fair purchased a patent for an uphill water-coaster
for $800,000 and intends to use it for 20 years. Each year, the company
would record $40,000 in Amortization Expense ($800,000 ÷ 20 years).
1 Analyze
Assets
=
Liabilities
Patent (-A) -40,000
2
Stockholders’ Equity
Amortization
Expense (+E)
-40,000
Record
dr
9-42
+
Amortization Expense (+E, -SE)
cr Patent (-A)
40,000
40,000
Summary of Accounting Rules
for Long-Lived Assets
9-43
Learning Objective 9-7
Interpret the fixed asset
turnover ratio.
9-44
Turnover Analysis
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 2010, Cedar Fair had $978 of
revenue. End-of-year fixed assets were $1,680
and beginning-of-year fixed assets were $1,780.
(All numbers in millions.)
9-45
Turnover Analysis
9-46
Learning Objective 9-8
Describe the factors to
consider when comparing
companies’ long-lived assets.
9-47
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.
9-48
Supplement 9A
Natural Resources
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Natural Resources
Depletion is the process of allocating a natural
resource’s cost over the period of its extraction.
Depletion is similar in concept to depreciation.
Depletion that is computed for a period is first added to
inventory and then expensed when the inventory is sold.
Total
depletion
cost
9-50
Cost of
goods sold
Inventory
for sale
Unsold
Inventory
Supplement 9B
Changes in Depreciation
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Changes in Depreciation
Estimates
Predicted
residual value
Predicted
useful life
So depreciation
is an estimate.
Over the life of an asset, new information
may come to light that indicates the
original estimates need to be revised.
9-52
Changes in Depreciation
Estimates
Cedar Fair purchased equipment that cost
$60,000,000 with an estimated useful life of
20 years and an estimated salvage value of
$3,000,000. Shortly after the start of year 5,
Cedar Fair changed the initial estimated
useful life to 25 years and lowered the
estimated salvage value to $2,400,000.
Calculate depreciation expense for year 5 and
thereafter using the straight-line method.
9-53
Changes in Depreciation
Estimates
When our estimates change, the new depreciation is:
Book value at
date of change
–
Residual value at
date of change
Remaining useful life at date of change
9-54
Chapter 9
Solved Exercises
M9-4, M9-5, M9-6, E9-6, E9-7, E9-11
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
M9-4 Computing Book Value (Straight-Line Depreciation)
Calculate the book value of a three-year-old machine that cost $400,000, has an
estimated residual value of $40,000, and has an estimated useful life of four years.
The company uses straight-line depreciation.
($400,000 - $40,000) ×
1
4
=
$90,000 per year
Depreciation
Accumulated
Undepreciated
Expense
Depreciation
Balance
(debit)
(credit balance)
(book value)
Year
$
1
9-56
$
90,000
$
400,000
90,000
310,000
2
90,000
180,000
220,000
3
90,000
270,000
130,000
M9-5 Computing Book Value (Units-of-Production Depreciation)
Calculate the book value of a three-year-old machine that cost $400,000, has an
estimated residual value of $40,000, and has an estimated useful life of 20,000
machine hours. The company uses units-of-production depreciation and ran the
machine 3,000 hours in year 1 and 8,000 hours in year 2, and 6,000 hours in year 3.
1st Year Depreciation
($400,000 - $40,000) ×
2nd Year Depreciation
($400,000 - $40,000) ×
3rd Year Depreciation
($400,000 - $40,000) ×
9-57
3,000
20,000
= $54,000
8,000
20,000
= $144,000
6,000
20,000
= $108,000
M9-5 Computing Book Value (Units-of-Production Depreciation)
Calculate the book value of a three-year-old machine that cost $400,000, has an
estimated residual value of $40,000, and has an estimated useful life of 20,000
machine hours. The company uses units-of-production depreciation and ran the
machine 3,000 hours in year 1 and 8,000 hours in year 2, and 6,000 hours in year 3.
Year
Depreciation
Accumulated
Undepreciated
Expense
Depreciation
Balance
(debit)
(credit balance)
(book value)
Hours
$
9-58
1
3,000
2
8,000
3
6,000
$
54,000
$
400,000
54,000
346,000
144,000
198,000
202,000
108,000
306,000
94,000
M9-6 Computing Book Value (Double-Declining-Balance Depreciation)
Calculate the book value of a three-year-old machine that cost $400,000, has an
estimated residual value of $40,000, and has an estimated useful life of four years.
The company uses double-declining-balance depreciation. Round to the nearest
dollar.
1st Year Depreciation
×
2
4
=
($400,000 - $200,000) ×
2
4
= $100,000
($400,000 - $0)
$200,000
2nd Year Depreciation
3rd Year Depreciation
($400,000 – ($200,000 + $100,000) × 2
4
9-59
= $50,000
M9-6 Computing Book Value (Double-Declining-Balance Depreciation)
Calculate the book value of a three-year-old machine that cost $400,000, has an
estimated residual value of $40,000, and has an estimated useful life of four years.
The company uses double-declining-balance depreciation. Round to the nearest
dollar.
Depreciation
Accumulated
Undepreciated
Expense
Depreciation
Balance
(debit)
(credit balance)
(book value)
Year
$
1
9-60
$
200,000
$
400,000
200,000
200,000
2
100,000
300,000
100,000
3
50,000
350,000
50,000
End of Chapter 9
9-61