Long Lived Assets
Long Lived Assets
Long Lived Assets
Long-Lived Assets
Chapter
9-1 Financial Accounting, Fifth Edition
Study Objectives
Chapter
9-2
Understanding The Business
How much
is enough?
8-3
Reporting and Analyzing Long-Lived Assets
Intangible
Plant Assets
Assets
Chapter
9-4
Plant Assets Section One
Chapter
9-5
Plant Assets as “Stream of future Services” Section One
Chapter
9-7
Plant Assets Section One
Chapter
9-8
Classifying Long-Lived Assets
Chapter
9-10
1. Acquisition
Determining the Cost of Plant Assets
Cost Principle - requires that companies record plant
assets at cost.
Cost consists of all expenditures reasonable and
necessary to acquire an asset and make it ready for its
intended use.
For example, assume that a machine is dropped and
damaged while it is being unloaded.
The cost of repairing this damage should be recognized
as expense of the current period, not added to the cost
of the machine, it was not necessary to drop it and
that’s what brought about the need for the repairs.
Chapter
9-11 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Land
All necessary costs incurred in making land ready for its
intended use increase (debit) the Land account.
Chapter
9-12 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Chapter
9-13 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Chapter
9-14 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Land Improvements
Includes all expenditures necessary to make the
improvements ready for their intended use.
Chapter
9-15 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Buildings
Includes all costs related directly to purchase or
construction.
Purchase costs:
Purchase price, closing costs (attorney’s fees, title
insurance, etc.) and real estate broker’s commission.
Remodeling and replacing or repairing the roof, floors,
electrical wiring, and plumbing.
Construction costs:
Contract price plus payments for architects’ fees, building
permits, and excavation costs.
Chapter
9-16 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Equipment
Include all costs incurred in acquiring the equipment and
preparing it for use.
Costs typically include:
cash purchase price
sales taxes
freight charges
insurance during transit paid by the purchaser
expenditures required in assembling, installing, and
testing the unit
Chapter
9-17 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Chapter
9-19 SO 1 Describe how the cost principle applies to plant assets.
2. Depreciation
Accounting for Plant Assets
Depreciation
The process of allocating to expense the cost of a plant
asset over its useful (service) life in a rational and
systematic manner.
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and equipment,
not land.
Depreciable, because the revenue-producing ability of
asset will decline over the asset’s useful life.
Chapter
9-20 SO 2 Explain the concept of depreciation.
Depreciation Concepts
Depreciation is a cost allocation process that
systematically and rationally matches acquisition costs
of operational assets with periods benefited by their use.
Chapter
9-22 SO 2 Explain the concept of depreciation.
Accounting for Plant Assets
Depreciation Methods
Management selects the method it believes best measures
an asset’s contribution to revenue over its useful life.
Examples include:
(1) Straight-line method.
(2) Declining-balance method.
(3) Units-of-Activity method.
Illustration 9-7
Use of depreciation
methods in major U.S.
companies
$13,000 - $1,000
=
5 years
Depreciation
= $2,400
Expense per Year
8-25
Accounting for Plant Assets
Straight-Line
Expense is same amount for each year.
Depreciable cost is cost of the asset less its salvage
value.
Illustration 9-8
Declining-Balance
Accelerated method.
Decreasing annual depreciation expense over the
asset’s useful life.
Double declining-balance rate is double the straight-
line rate.
Rate applied to book value.
Chapter
9-30 * Computation of $674 ($1,685 x 40%) is adjusted to $685.
Accounting for Plant Assets
Units-of-Activity
Companies estimate total units of activity to calculate
depreciation cost per unit. Illustration 9A-3
Comparison of
Depreciation
Methods
Illustration 9-13
Each method is
acceptable because
each recognizes the
decline in service
potential of the asset
in a rational and
systematic manner.
Chapter
9-35 SO 5 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals
Chapter
9-36 SO 5 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals
Illustration 9-16
Computation of gain
on disposal
Chapter
9-39 SO 5 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals
Chapter
9-40 SO 5 Explain how to account for the disposal of a plant asset.
Intangible Assets Section Two
Chapter
9-41 SO 7 Identify the basic issues related to reporting intangible assets.
Accounting for Intangible Assets
Amortization of Intangibles
Limited-Life Intangibles:
Amortize to expense.
Credit asset account or accumulated amortization.
Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to
provide cash flows.
No amortization.
Chapter
9-42 SO 7 Identify the basic issues related to reporting intangible assets.
Types of Intangible Assets
Patents
Exclusive right to manufacture, sell, or otherwise
control an invention for a period of 20 years from the
date of the grant.
Capitalize costs of purchasing a patent and amortize
over its 20-year life or its useful life, whichever is
shorter.
Expense any R&D costs in developing a patent.
Legal fees incurred successfully defending a patent
are capitalized to Patent account.
Chapter
9-43 SO 7 Identify the basic issues related to reporting intangible assets.
Types of Intangible Assets
Chapter
9-45 SO 7 Identify the basic issues related to reporting intangible assets.
Types of Intangible Assets
Copyrights
Give the owner the exclusive right to reproduce and
sell an artistic or published work.
Copyright is granted for the life of the creator plus
70 years.
Capitalize costs of acquiring and defending it.
Amortized to expense over useful life.
Chapter
9-46 SO 7 Identify the basic issues related to reporting intangible assets.
Types of Intangible Assets
Chapter
9-47 SO 7 Identify the basic issues related to reporting intangible assets.
Types of Intangible Assets
Chapter
9-48 SO 7 Identify the basic issues related to reporting intangible assets.
Types of Intangible Assets
Goodwill
Includes exceptional management, desirable location,
good customer relations, skilled employees, high-quality
products, etc.
Only recorded when an entire business is purchased.
Chapter
9-49 SO 7 Identify the basic issues related to reporting intangible assets.
Types of Intangible Assets
Chapter
9-51 SO 7 Identify the basic issues related to reporting intangible assets.