1. 10–1 Objective 1: What are Long-Term Assets? … are assets that have a useful life greater than one year, are acquired for use in the operation of a business, and are not intended for resale to customers Are reported at carrying value Information about long-term acquisitions can be found under investing activities in the statement of cash flows

2. 10–2 Carrying Value … is the unexpired cost of an asset Unexpired Cost = Cost – Accumulated Depreciation Also called book value

3. 10–3 Financing Long-Term Assets Financing alternatives –Use cash flows from operations –Take a long-term loan –Issue common stock –Issue long-term notes –Issue bonds

4. 10–4 Issues of Accounting for Long-Term Assets

5. 10–5 Long-Term Assets It is helpful to think of a long-term asset as a long-term prepaid expense –Spread the cost of the services provided by the asset over its useful life –As the services benefit the company, the cost of the asset becomes an expense

6. 10–6 Discussion Q.What are the characteristics of long- term assets? A.Long-term assets Have a useful life of more than one year Are acquired for use in the operation of a business Are not intended for resale to customers

7. 10–7 Acquisition Cost of Property, Plant, and Equipment –Accounting for the cost of property, plant, and equipment

8. 10–8 Expenditures … are payments or obligations to make future payments for assets or services Capital expenditure –An expenditure for the purchase or expansion of a long-term asset Revenue expenditure –An expenditure for the repair, maintenance, and operation of a long-term asset

9. 10–9 Expenditures (cont’d) Careful distinction between expenditures is important to the proper application of the matching rule Understatements and overstatements of income can occur Determining when a payment is an expense and when it is an asset is a matter of management judgment

10. 10–10 Acquisition Costs of Property, Plant, and Equipment … include all expenditures reasonable and necessary to get the asset in place and ready for use Acquisition costs include –Cost of installing and testing a machine –Freight, insurance while in transit, and installation Interest charges?????????

11. 10–11 Example: Equipment Acquisition costs include –Purchase price (less cash discounts) –All expenditures connected with purchasing the equipment and preparing it for use Freight Insurance in transit Excise taxes and tariffs Buying expenses Installation costs Cost of test runs Equipment is subject to depreciation because it has a limited useful life

12. 10–12 Discussion Q.Dyeing a carpet may make it look almost new. Why isn’t this a capital expenditure? A.Although the carpet looks better, its fibers are not stronger, and it probably will not last significantly longer than it would have before the color was changed

13. Costs Subsequent to Acquisition Recognize costs subsequent to acquisition as an asset when the costs can be ► measured reliably and ► it is probable that the company will obtain future economic benefits. Future economic benefit would include increases in 1.useful life, 2.quantity of product produced, and 3.quality of product produced.

14. Costs Subsequent to Acquisition Illustration 10-21