1. Long-term Assets

2. Types of Long-Term Assets n Property, plant, and equipment –Long-term assets acquired for use in operations n Natural resources –Long-term assets with a value that decreases through use or sale

3. Types of Long-Term Assets n Intangible assets –Long-term assets that do not have physical substance

4. Plant Asset Cost Purchase price (less cash discount)

5. Plant Asset Cost Purchase price (less cash discount) plus all other reasonable and necessary expenditures

6. Plant Asset Cost Purchase price (less cash discount) plus all other reasonable and necessary expenditures to prepare the asset for use

7. Examples of Items Included n Purchase price less any cash discount n Shipping costs n Installation costs n Cost of modifications n Interest cost during construction

8. Depreciation n Allocation of the cost of an asset to the periods the asset benefits n Not a valuation process

9. Factors in Estimating Depreciation n Initial cost n Estimated residual value n Estimated Useful Life

10. Depreciation Methods n Straight-line –allocate an equal amount to each period n Production unit –depreciation based on volume of output

11. Accelerated Depreciation Methods n Double Declining-balance –apply a uniform rate to a declining amount (book value) n Sum-of-the-Years’-Digits –annual amount the decreases by a constant amount

12. Example Data n Depreciable Asset - Truck n Invoice price$20,000 n Cash discount2% n Modifications $3,400 n Estimated residual value$2,000 n Useful life - 4 years or 200,000 miles n Acquisition date - January 8, 19X1

13. Cost of Truck n Invoice price$20,000 n Less: Cash discount400 n subtotal$19,600 n Modification3,400 n Cost$23,000

14. Straight-Line Method Cost - Est. Residual Value Est. Useful Life = Depreciation Expense

15. Straight-Line Method ExpenseAccum 19X1: ($23,000 - $2,000) / 4$5,250$5,250 19X2: ($23,000 - $2,000) / 4$5,250$10,500 19X3: ($23,000 - $2,000) / 4$5,250$15,750 19X4: ($23,000 - $2,000) / 4$5,250$21,000

16. Production Units Method Cost - Est. Residual Value Est. Useful Life in Units = Depreciation Expense per Unit Depreciation Expense per Unit X Units Produced = Depreciation Expense

17. Production Units Method Exp Accum ($23,000 - $2,000) / 200,000 = $0.105 per mile 19X1: 50,000 miles X $0.105$5,250$5,250 19X2: 40,000 miles x $0.105$4,200$9,450 19X3: 60,000 miles x $0.105$6,300$15,750 19X4: 10,000 miles x $0.105$1,050$16,800 19X5: 20,000 miles x $0.105$2,100$18,900 19X6: 20,000 miles x $0.105$2,100$21,000

18. Double-Declining Balance n Calculate a straight-line rate ›1 divided by estimated useful life n Multiply straight-line rate by 2 n Multiply previous asset book value by doubled rate

19. Double-Declining Balance Exp Accum 19X1: ($23,000 - $0) x (2)(1/4)$11,500$11,500 19X2: ($23,000 - $11,500) x.5$5,750$17,250 19X3: ($23,000 - $17,250) x.5$2,875$20,125 19X4: ($23,000 - $20,125) x.5$1,438$21,623 overdepreciated

20. Double-Declining Balance Exp Accum 19X1: ($23,000 - $0) x (2)(1/4)$11,500$11,500 19X2: ($23,000 - $11,500) x.5$5,750$17,250 19X3: ($23,000 - $17,250) x.5$2,875$20,125 19X4: ($23,000 - $20,125) x.5$1,438$21,623 overdepreciated 19X4: ($23,000 - $2,000) - $20,125 $875$21,000

21. Double-Declining Balance Exp Accum 19X1: ($23,000 - $0) x (2)(1/4)$11,500$11,500 19X2: ($23,000 - $11,500) x.5$5,750$17,250 19X3: ($23,000 - $17,250) x.5$2,875$20,125 19X4: ($23,000 - $2,000) - $20,125 $875$21,000

22. Sum-of-the-Years’-Digits (Cost - Est. Residual Value)x Individual Year (reverse order) Sum of Years’ Digits

23. Sum-of-the-Years’-Digits n Calculating sum of years’ digits n Add the numeric digits in useful life n Example ›1 + 2 + 3 + 4 = 10

24. Sum-of-the-Years’-Digits Exp Accum 19X1: ($23,000 - $2,000) x 4/10$8,400$ 8,400 19X2: ($23,000 - $2,000) x 3/10$6,300$14,700 19X3: ($23,000 - $2,000) x 2/10$4,200$18,900 19X4: ($23,000 - $2,000) x 1/10$2,100$21,000

25. Pattern of depreciation expense n Straight-line –Amount is constant and equal n Production –Amount varies depending on usage

26. Pattern of depreciation expense n Double declining –Amount is decreasing by decreasing amounts n Sum-of-the-Year’s-Digits –Amount is decreasing by constant amount

27. Comparison of Depreciation Straight-lineProduction

28. Double-declining balance Sum-of-the-Years’ Digits

29. Modified Accelerated Cost Recovery System - MACRS n Income tax reporting method n Applies to tangible property placed in service after 1986 n Eight cost recovery classes with rates for each year n Tax deduction equals cost times appropriate rate for each year

30. Revenue and Capital Expenditures n Revenue expenditure –Benefits only the current accounting period n Capital expenditure –Significant costs that benefit two more accounting periods

31. Capital Expenditures n Additions –Enhance usefulness by enlarging asset –Debited to asset n Betterments –Increase or improve services –Debited to asset

32. Capital Expenditures n Extraordinary repairs –Significant expenditures that extend useful life or change residual value –Debited to accumulated depreciation n In all capital expenditures –Depreciate increased book value over remaining useful life

33. Disposal of Plant Assets n Sale n Retirement n Exchange

34. Accounting for Disposal n Remove asset cost and related accumulated depreciation from the records n Book value is cost - accum deprec n Determine gain or loss on disposal n Gain –Received more than book value n Loss –Received less than book value

35. Sales or Retirements n Always recognize any gain or loss

36. Exchanges n Always recognize loss n Recognize gain only if exchange of dissimilar assets n If gain on exchange of similar assets –Reduce cost of new asset by gain

37. Natural Resources n Mineral deposits, oil reserves, timber tracts n Consumption has a cost –Recognize depletion by production method

38. Intangible Assets n Long-term rights that have future value n Patents, R&D, Goodwill n Consumption has a cost –Recognize amortization by straight- line method

39. Analyzing Information n Are methods, asset lives, and residual values used reasonable? n If methods, lives, or residual values are changed during year, what is impact on net income? n If some interest cost was capitalized, what is total interest cost for period? –How would this change ratio “Times Interest Earned”?

41. Times Interest Earned n Net income + Income Tax Expense + Total Interest Cost n divided by n Total Interest Cost