MODULE 6
PRIMARY LONG-TERM ASSETS
 Fixed Assets
 Intangibles
FIXED ASSETS
Allocation of Capitalized Costs
Depreciation – allocates asset use expenses over
multiple periods.
Important points to remember:
 The purpose of depreciation is allocation of cost, not
valuation of the asset!
 Land is not depreciated.
 Any method can be used if it is (1) systematic, and (2)
rational.
Three choices must be made before depreciating an
asset:
 Depreciation method
 Estimated salvage or residual value
 Estimated useful life
Goal: Determine the amount for this entry:
Depreciation Expense
Accumulated Depreciation
XXX
XXX
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FIXED ASSETS
Depreciation Example
Purchase: Company purchases a $40,000 machine.
Useful Life: Expected to be four years.
Depreciation Expense: $40,000 ÷ 4 years = $10,000 per year
Rule: Do not recognize the $40,000 cost in one period.
Instead, spread the cost over the periods the machine will be
used.
Purchase
Disposal
$10,000 $10,000
$10,000
Year 2
Year 4
$10,000
Year 1
Original
Asset Cost
Accumulated
Deprecation
Net Asset
Value
Year 3
Year 0
Year 1
Year 2
Year 3
Year 4
$40,000
$40,000
$40,000
$40,000
$40,000
$0
$10,000
$20,000
$30,000
$40,000
$40,000
$30,000
$20,000
$10,000
$0
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FIXED ASSETS
Straight-Line Depreciation Method
Facts:
Original Cost
Salvage Value
Asset Life
$18,000
$3,000
5 years
Formula:
Annual Depreciation = Cost – Estimated Salvage Value
Estimated Useful Life
Calculation:
Dn = $18,000 - $3,000
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Dn = $15,000
5
Dn = $3,000
Year
1
2
3
4
5
Total
Beginning
Book Value
$18,000
$15,000
$12,000
$9,000
$6,000
Amount that appears
on the balance sheet
Depreciation
Expense
$3,000
$3,000
$3,000
$3,000
$3,000
$15,000
Ending
Book Value
$15,000
$12,000
$9,000
$6,000
$3,000
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FIXED ASSETS
Disclosure of Fixed Assets
Cisco Systems, Inc.
Property and Equipment
Property and equipment, net:
2007
Land, buildings, and lease improvements $4,022
Computer equipment and software
1,605
Production and engineering equipment
4,264
Operating lease assets
181
Furniture and fixtures
394
10,466
Less accumulated depreciation
(6,573)
Total
$3,893
2006
$ 3,647
1,352
3,678
153
363
9,193
(5,753)
$3,440
Original
Purchase
Price
Amount that appears
on the Balance Sheet
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INTANGIBLES
Qualities:
 Lack Physical Existence
 Not Financial Instruments
 Long Term in Nature
Asset
Example
Copyrights
Franchises
Goodwill
Leasehold
Licenses
Patents
Trademarks
Trade Secrets
Trade Dress
Book, musical creation
Right to sell product or
use a trademark
Excess of purchase price
over book of a subsidiary
Right to use PP&E owned
by others
Right granted by
government
Drug discovery, software
design
Word, phrase, or symbol
for company or product
Recipes, customer
information, production
processes
Appearance of a retail
store
Life
Author life + 70
years
Length of
contract
Indefinite
Length of
contract
Length of
contract
20 years
20 years,
renewable
(indefinite)
Indefinite
Indefinite
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INTANGIBLE ASSETS
Classification of Intangibles
Purchased
Purchased Patents
or Copyright
Limited Life
Internally
Created
Research and
Development
(Patents and
copyrights developed
internally)
Indefinite Life
Purchased
Goodwill
Generated
Goodwill
INTANGIBLE ASSETS
Treatment of Intangibles
Internally
Created
Purchased
Limited
Life
Indefinite
Life
Capitalize and amortize
over useful life; evaluate
for impairment annually
Capitalize and evaluate for
impairment annually (do
not amortize)
Expense as
incurred*
Expense as
incurred*
*except direct costs such as legal costs in defense of successful
patent
Capitalize – put in long
term section of the balance
sheet.
Amortize – spread the
expense over multiple
years (even if paid for in
one year).
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