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Chapter 7 LONG TERM ASSETS. PART A ACQUISITION & IMPROVEMENTS.

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Presentation on theme: "Chapter 7 LONG TERM ASSETS. PART A ACQUISITION & IMPROVEMENTS."— Presentation transcript:

1 Chapter 7 LONG TERM ASSETS

2 PART A ACQUISITION & IMPROVEMENTS

3 PROPERTY, PLANT, EQUIPMENT (PPE) Land Land Improvement Building Equipment

4 LAND Use in Business – not for investment Purchase Price (Historical Cost) + Closing Costs and any fees + Commissions

5 LAND IMPROVEMENTS Parking Lots Paving, Flowers (permanent), Fences, Lighting Will be depreciated

6 BUILDINGS Administrative offices Retail stores Storage Warehouses Manufacturing Facilities Cost 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

7 EQUIPMENT Machinery Computers & office equipment Vehicles Furniture and fixtures Cost is the purchase price, transportation, tax, testing, installation, legal fees—any costs to prepare the asset to use

8 NATURAL RESOURCES Can be physically used up or depleted Oil Natural Gas Timber Coal

9 INTANGIBLE ASSETS Intangible –can’t be felt Patents, Copyrights, Trademarks, Franchise Rights Goodwill

10 Definitions Patent – exclusive rights to manufacture a product or process 20 yrs add legal fees Copyrights-- protection of published work 70 yrs Trademark – word, slogan or symbol 10 yrs Franchises – 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

11 CLICKERS A. PPE B. Intangible C. Natural Resource 1. Water 2. Mac’s Golden Arches 3. Sprinkler System 4. Store 5. Testing Machine 6. Timber 7. Rights to a story 8. Use of Process 9. Word or Slogan 10. Rights to sell a product

12 Purchase vs creating Intangibles Purchase – can tell the value of the asset Create – can’t tell the value Purchase – like PPE – cost of getting ready to use Create – R&D – must expense—can’t determine future benefit

13 CAPITALIZE vs EXPENSE CAPITALIZE – record as an asset - depreciate EXPENSES – 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.

14 Costing an Asset Examples Land BE 7-1 pg 332 Equipment BE 7-2 pg 332 Goodwill BE 7-3 pg 332

15 Expenditures after Acquisition Repairs and Maintenance (Minor) – expense Repairs and Maintenance (Major) - capitalize Addition – major addition –capitalize Improvements -- Capitalize Legal Defense of Intangible Asset

16 Examples of After Acquisiting BE 7-5 pg 332

17 PART B COST ALLOCATION

18 Terminology Depreciation – taking cost from balance sheet to income statement Accumulated 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 life Depreciable Cost – Cost less Salvage Value LAND DOES NOT DEPRECIATE

19 DEPRECIATION METHODS Straight-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 expected Tax Depreciation - MACRS

20 Examples: BE 7-8 pg 332

21 Journal Entry Depreciation Expense Accumulated Depreciation

22 DEPRECIATION SCHEDULE Straight Line pg 313 Declining Balance pg 314 Activity Based pg 316 Comparison pf 316

23 AMORTIZATION Intangible Assets with a definite life Depreciable Cost/ Life Like SL Unlimited life do not amortize –like LAND Amortization Expense Patent or Franchise

24 Amortization Expense Example BE 7-9 pg 333

25 PART C ASSET DISPOSITION

26 Asset Deposition Sale Retirement Exchange

27 Sale of an Asset Cash Accum Depr Loss (if Cash is less than BV) Asset Gain (if Cash is more than BV)

28 Example of Sale of Asset BE 7-10 pg 333

29 Retirement Accumulated Depr Loss on Retirement Asset

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

31 Both Sides of Exchange Buyer BE 7-11 pg 333 Seller BE 7-12 pg 333

32 Asset Analysis Return on Assets Net Income/ Avg Total Assets Profit Margin Net Income/ Net Sales Asset Turnover Net Sales/ Average Total Assets Return on Assets = Profit Margin X Asset Turnover

33 Asset Analysis BE 7-13 pg 333

34 Asset Impairment Impairment Loss = difference between the asset’s book value and its fair value Like Lower of Cost or Market Impairment Loss Trademark

35 Asset Impairment BE 7-14 and 7-15 pg 333


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