Chapter 7LONG TERM ASSETS

PART A

ACQUISITION & IMPROVEMENTS

PROPERTY, PLANT, EQUIPMENT

(PPE)LandLand ImprovementBuildingEquipment

LANDUse in Business – not for

investmentPurchase Price (Historical Cost)+ Closing Costs and any fees+ Commissions

LAND IMPROVEMENTSParking LotsPaving,Flowers (permanent),Fences,LightingWill be depreciated

BUILDINGSAdministrative officesRetail storesStorage WarehousesManufacturing FacilitiesCost 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

EQUIPMENTMachineryComputers & office equipmentVehiclesFurniture and fixturesCost is the purchase price,

transportation, tax, testing, installation, legal fees—any costs to prepare the asset to use

NATURAL RESOURCESCan be physically used up or

depletedOilNatural GasTimberCoal

INTANGIBLE ASSETSIntangible –can’t be feltPatents,Copyrights,Trademarks,Franchise RightsGoodwill

DefinitionsPatent – exclusive rights to manufacture a

product or process 20 yrs add legal feesCopyrights-- protection of published work

70 yrsTrademark – word, slogan or symbol

10 yrsFranchises – 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

CLICKERSA. PPEB.

IntangibleC. Natural

Resource

1. Water2. Mac’s Golden Arches3. Sprinkler System4. Store5. Testing Machine6. Timber7. Rights to a story8. Use of Process9. Word or Slogan10. Rights to sell a

product

Purchase vs creating IntangiblesPurchase – can tell the value of

the assetCreate – can’t tell the valuePurchase – like PPE – cost of

getting ready to useCreate – R&D – must expense—

can’t determine future benefit

CAPITALIZE vs EXPENSECAPITALIZE – record as an asset -

depreciateEXPENSES – 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 ExamplesLand BE 7-1 pg 332Equipment BE 7-2 pg 332Goodwill BE 7-3 pg 332

Expenditures after AcquisitionRepairs and Maintenance (Minor)

– expenseRepairs and Maintenance (Major)

- capitalizeAddition – major addition –

capitalizeImprovements -- CapitalizeLegal Defense of Intangible Asset

Examples of After AcquisitingBE 7-5 pg 332

PART B

COSTALLOCATION

TerminologyDepreciation – taking cost from balance

sheet to income statementAccumulated 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 lifeDepreciable Cost – Cost less Salvage

ValueLAND DOES NOT DEPRECIATE

DEPRECIATION METHODSStraight-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

expectedTax Depreciation - MACRS

Examples: BE 7-8 pg 332

Journal EntryDepreciation Expense Accumulated Depreciation

DEPRECIATION SCHEDULEStraight Line pg 313Declining Balance pg 314Activity Based pg 316Comparison pf 316

AMORTIZATION Intangible Assets with a definite

lifeDepreciable Cost/ Life Like SL

Unlimited life do not amortize –like LAND

Amortization Expense Patent or Franchise

Amortization Expense ExampleBE 7-9 pg 333

PART C

ASSET DISPOSITION

Asset Deposition

SaleRetirementExchange

Sale of an AssetCashAccum DeprLoss (if Cash is less than BV) Asset Gain (if Cash is more than

BV)

Example of Sale of AssetBE 7-10 pg 333

Retirement Accumulated DeprLoss on Retirement Asset

Exchange(Trade-In)New AssetAccum Depr (old) Cash or A/P Old Asset Gain (if more than BV)

Both Sides of ExchangeBuyer BE 7-11 pg 333Seller BE 7-12 pg 333

Asset Analysis

Return on Assets Net Income/ Avg Total AssetsProfit Margin Net Income/ Net SalesAsset TurnoverNet Sales/ Average Total Assets

Return on Assets = Profit Margin X Asset Turnover

Asset AnalysisBE 7-13 pg 333

Asset ImpairmentImpairment Loss = difference

between the asset’s book value and its fair value

Like Lower of Cost or Market

Impairment Loss Trademark

Asset ImpairmentBE 7-14 and 7-15 pg 333