Chapter 7 Financial 3 Ed

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Spiceland | Thomas | Herrmann

Financial Accounting

Long-Term Assets

Chapter 7


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Learning Objectives

• Identify the major types of property, plant, and equipment

• Identify the major types of intangible assets• Describe the accounting treatment of

expenditures after acquisition• Calculate depreciation of property, plant, and

equipment• Calculate amortization of intangible assets• Account for the disposal of long-term assets


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Learning Objectives

• Describe the links among return on assets, profit margin, and asset turnover

• Identify impairment situations and describe the two-step impairment process


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Long-Term Assets

Tangible assets

• Land• Land improvements• Buildings• Equipment• Natural resources

Intangible assets

• Patents• Trademarks• Copyrights• Franchises• Goodwill


Part A

Acquisitions

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Learning Objective 1

Identify the Major Types of Property, Plant, and Equipment

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Property, Plant, and Equipment

• Capitalize: recording an expenditure as an asset• Recorded at:

Cost of assetAll expenditures necessary

to get it ready for use+


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Land and Land Improvements

• Land: includes land used for operations• Land improvements include:

• Parking lots, sidewalks, driveways, landscaping, lighting systems, fences, sprinklers, etc.

• Depreciation: the allocation of the cost of a tangible asset over its service life


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Buildings

• Administrative offices, retail stores, manufacturing facilities, and storage warehouses


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Equipment

• Machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures

• Recurring costs not part of the cost of equipment


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Basket Purchases

• Purchase of more than one asset for one purchase price

• Allocate total purchase price based on individual fair values


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Basket Purchases—Example


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Natural Resources

• Oil, natural gas, timber, and salt• Physically use up, or deplete• Depletion: allocation of the cost of a natural

resource over its service life• Identical to the activity-based method of recording

depreciation



Identify the Major Types of Intangible Assets

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Intangible Assets

• No physical substance• Can be very valuable• Acquired in two ways:

• Purchase• Create internally


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Patents

• Exclusive right to manufacture a product or to use a process

• Granted for a period of 20 years• When purchased:

• Capitalized for purchase price plus legal and filing fees

• When internally developed:• Capitalized for legal and filing fees


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Copyrights

• Exclusive right of protection given to the creator of a published work

• Granted for the life of the creator plus 70 years• Legal action against anyone who attempts to

infringe the copyright• Accounting is virtually identical to that of patents


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Trademarks

• Word, slogan, or symbol that distinctively identifies a company, product, or service

• Renewed for an indefinite number of 10-year periods

• Capitalized for legal, registration, and design fees • Advertising costs are recorded as advertising

expense


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Franchises

• Local outlets that pay for the exclusive right to use the franchisor’s name and to sell its products • Within a specified geographical area

• May include other benefits• Capitalized for initial fee • Additional periodic payments usually expensed as

incurred


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Goodwill

• Represents the value of a company as a whole, over and above the value of its identifiable net assets

• Recorded at:

Purchase Price

Fair value of the netassets acquired–


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Illustration 7.6—Business Acquisition with Goodwill



Describe the Accounting Treatment of Expenditures After Acquisition

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Expenditures After Acquisition

• Repairs and maintenance• Additions• Improvements• Legal defense of intangible assets

CapitalizeIf it increasesfuture benefits

ExpenseIf it benefits only

the current period


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Illustration 7.7—Expenditures afterAcquisition


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Materiality

• An item is said to be material if it is large enough to influence a decision

• Immaterial:• Costs expensed under a certain dollar amount


Part B

Cost Allocation

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Calculate Depreciation of Property, Plant, and Equipment

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Depreciation

• The process of allocating to an expense the cost of an asset over its service life


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Recording Depreciation

• A local Starbucks pays $1,200 for equipment—say, an espresso machine. The machine is expected to have a useful life of four years


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Common Terms

• Accumulated depreciation: contra asset account to record the total depreciation taken to date

• Book value:

• Service life: how long the company expects to receive benefits from the asset before disposing of it

• Residual value: salvage value or the amount the company expects to receive from selling the asset at the end of its service life

Original Cost Current Balance in Accumulated Depreciation–


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Depreciation Methods

• Straight-line method• Declining-balance method• Activity-based method


Calculating Depreciation Under Straight-line method

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Calculating Depreciation Under Declining-Balance Method


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Calculating Depreciation Under Activity-Based Method


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Illustration 7.16 and 7.17—Comparison of Depreciation Methods


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Tax Depreciation

• Accelerated methods reduce taxable income more in the earlier years of an asset’s life

• Companies use: • Straight-line method for financial reporting• Accelerated method for tax reporting



Calculate Amortization of Intangible Assets

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Amortization of Intangible Assets

• Allocating the cost of intangible assets to expense is called amortization


Amortization Example7-39


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Intangible Assets not Subject to Amortization

• Intangible assets with indefinite useful lives• Subjected to impairment rules


Part C

Asset Disposition: Sale, Retirement,

or Exchange

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Account for the disposal of long-term assets

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Three Methods of Asset Disposal

Disposal of Long-Term Assets

Sale Retirement Exchange

Can result in either a gain or

a loss

Occurs when a long-term asset is no longer useful but cannot be sold

Occurs when two companies trade assets


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Sale of Long-Term Assets—Gain


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Sale of Long-Term Assets—Loss


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Retirement of Long-Term Assets—Loss


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Exchange of Long-Term Assets—Gain



Describe the Links Among Return on Assets, Profit Margin, and Asset Turnover

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Return on Assets

• Indicates the amount of net income generated for each dollar invested in assets

• Profit margin: indicates the earnings per dollar of sales

• Asset turnover: measures the sales per dollar of assets invested



Identify Impairment Situations and Describe the Two-Step Impairment Process

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Asset Impairment

• Impairment: occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value

• Recording the loss


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Illustration 7.32—Two-Step Impairment Process


End of Chapter 7

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Chapter 7 Financial 3 Ed

Business

Transcript of Chapter 7 Financial 3 Ed