Chapter
Six
Accounting for
Long-Term
Operational
Assets
© 2015 McGraw-Hill Education.
Intangible Assets
1. Intangible Assets with Identifiable Useful Lives –
These intangibles include patents and copyrights. We
amortize the cost of each over its useful life.
2. Intangible Assets with Indefinite Useful Lives These intangibles include renewable franchises,
trademarks, and goodwill. The cost of these assets is
not expensed unless it can be shown that there has
been an impairment in value.
6-2
Cost of Long-Term Assets
Buildings –
•Purchase price,
•Sales taxes,
•Title search and transfer document
costs,
•Realtor’s and attorney’s fees, and
•Remodeling costs.
Equipment –
•Purchase price (less
discounts),
•Sales taxes,
•Delivery costs,
•Installation costs, and
•Costs to adapt to intended
use.
6-3
Cost of Long-Term Assets
Land –
•Purchase price,
•Sales taxes,
•Title search and transfer document
costs,
•Realtor’s and attorney’s fees,
•Costs of removal of old buildings,
and
•Grading costs.
6-4
Basket Purchase Allocation
Beatty Company paid $240,000 for land and a building.
An independent appraiser provided these fair value
estimates: land $90,000, and building $270,000.
The $240,000 cost paid is separately assigned based on
% of total fair value.
Fair market value of building
Fair market value of land
Total fair market value
Amount
$ 270,000
90,000
$ 360,000
%
75%
25%
100%
6-5
Basket Purchase Allocation
The land and building that Beatty Company are assigned
their own allocation of the $240,000 paid based on the
individual % of total fair value. The “Allocation” is the
amount recorded in the accounting records.
Assign to building
Assign to land
$
Cost
240,000
240,000
%
75%
25%
100%
Allocation
$ 180,000
60,000
$ 240,000
6-6
Life Cycle of Operational Assets
Acquire
Funding
Buy
Asset
Retire
Asset
Use
Asset
6-7
Depreciation Method
1. Straight-line method - the same amount of
depreciation is taken each accounting period.
2. Double-declining-balance – produces more
depreciation expense in the early years of an
asset’s life, with a declining amount of
expense in later years.
3. Units-of-Production – produces varying
amounts of depreciation in different
accounting periods depending upon the
number of units produced.
6-8
Revision of Estimates
Estimates are frequently revised when new information
surfaces. Assume we purchased equipment on January
1, 2016, for $50,000 cash and estimated salvage value
was $3,000. The equipment has an estimated useful life
of eight years, and the company uses straight-line
depreciation.
($50,000 – $3,000) ÷ 8 = $5,875 depreciation per year
On January 1, 2020, after four years of depreciation,
it was determined that the machine has a remaining
useful life of ten more years for a total estimated
useful life of fourteen years.
6-9
Revision of Life Estimates
Year
2016
2017
2018
2019
2020
2021
2022
2023
Annual
Depreciation
$ 5,875
5,875
5,875
5,875
Accumulated
Depreciation
$5,875
11,750
17,625
23,500
Book Value
$44,125
38,250
32,375
26,500
We determine the
remaining annual
depreciation like
this:
$26,500 – $3,000 = $23,500 ÷ 10 years = $2,350 per year
for years 2020 through 2029
Year
2016
2017
2018
2019
2020
Annual
Depreciation
$ 5,875
5,875
5,875
5,875
2,350
Accumulated
Depreciation
$ 5,875
11,750
17,625
23,500
25,850
Book Value
$44,125
38,250
32,375
26,500
24,150
6-10
Revision of Salvage Estimates
Year
2016
2017
2018
2019
2020
2021
2022
2023
Annual
Depreciation
$ 5,875
5,875
5,875
5,875
Accumulated
Depreciation
$5,875
11,750
17,625
23,500
Book Value
$44,125
38,250
32,375
26,500
We determine the
remaining annual
depreciation like
this:
$26,500 – $6,000 = $20,500 ÷ 4 years = $5,125 per year
Year
2016
2017
2018
2019
2020
2021
7
2022
2023
Annual
Depreciation
$ 5,875
5,875
5,875
5,875
5,125
5,125
5,125
5,125
Accumulated
Depreciation
$5,875
11,750
17,625
23,500
28,625
33,750
38,875
44,000
Book
Value
$ 44,125
38,250
32,375
26,500
21,375
16,250
11,125
6,000
6-11
Continuing Expenditures for
Plant Assets
Costs that Are Expensed
The cost of routine maintenance and minor repairs that
are incurred to keep an asset in good working order are
expensed as incurred.
Assume McGraw spent $500 cash for routine lubrication
and minor parts on machinery.
Assets
Cash
=
=
(500) =
Equity
Com. Stk. +
n/a
+
Ret.
Earn.
(500)
Rev.
-
n/a
-
Exp.
500
=
=
Net
Income
(500)
Cash
Flow
(500) OA
6-12
Continuing Expenditures for
Plant Assets
Costs that Are Capitalized
Expenditures that improve the quality of an asset are
capitalized as part of the cost of that asset.
Assume McGraw spent $4,000 cash for a major overhaul
of equipment to improve efficiency.
Assets
Cash
+
(4,000) +
=
Equity
-
Acc.
Dep.
=
Com.
Stk.
4,000 -
n/a
=
n/a
Mach.
+ Ret. Earn.
Rev.
-
Exp.
=
Net
Income
+
n/a
-
n/a
=
n/a
n/a
Cash
Flow
(4,000) IA
6-13
Continuing Expenditures for
Plant Assets
Costs that Extend the Life of an Asset
The amount of the expenditure should reduce the
balance in the accumulated depreciation account.
Assume McGraw spent $4,000 cash for improvements
that extended the life of machine two years.
Assets
Cash
+
(4,000) +
=
Mach.
-
Acc.
Dep.
n/a
-
(4,000) =
=
Equity
Com.
Stk.
n/a
+ Ret. Earn.
Rev.
-
Exp.
=
Net
Income
+
n/a
-
n/a
=
n/a
n/a
Cash
Flow
(4,000) IA
6-14
Natural Resources
Cost – Salvage value
Total estimated units recoverable
=
Depletion
charge per unit
of resource
Depletion
Number of units
Periodic
charge per unit × extracted and sold = Depletion
of resource
this period
Expense
6-15
Intangible Assets
Trademarks
A name or symbol that
identifies a company or a
product. The cost of a
trademark may include
design, purchase, or
defense of the trademark.
Patents
The exclusive legal right to
produce and sell a product
that has one or more
unique features. The legal
life of a patent is 20 years.
6-16
Intangible Assets
Copyrights
Protection of writings,
musical composition, work
of art, or other intellectual
property. The protection
extends for the life of the
creator plus 70 years.
Franchise
The exclusive right to sell
products or perform
services in certain
geographic areas.
6-17
Goodwill
ASSUME: Your company is willing to pay
$350,000 ($300,000 cash and assumption of
$50,000 liabilities) to acquire Seller Company.
Goodwill
The excess of
cost over fair
value of net
tangible assets
acquired in a
business
acquisition.
Cash
+
(300,000) +
Assets
Rest.
Assets
Seller Company
Balance Sheet
At December 31, 20XX
Assets
$
280,000
Liabilities
Stockholders' Equity
Total
=
+ Goodwill
280,000 +
Liab.
+
50,000
+
$
50,000
230,000
280,000
Equity
=
70,000 =
$
n/a
Rev.
-
Exp.
=
Net
Income
n/a
-
n/a
=
n/a
Cash Flow
(300,000) IA
6-18
Impairment of Intangible Asset
Intangible assets with indefinite useful lives must be tested for
impairment annually. If the fair value of the intangible asset is
less than its book value, an impairment loss is recognized.
Assume that the asset goodwill is determined to be
impaired and a decline in value of $30,000, The effects
on the financial statements would be:
Assets
Goodwill
=
Liab.
=
(30,000) =
+
+
n/a
+
Equity
Ret.
Earn.
(30,000)
Rev.
n/a
-
Exp.
30,000
=
=
Net
Income
(30,000)
Cash
Flow
n/a
6-19
Balance Sheet Presentation
6-20
End of Chapter Six
6-21