1. Chapter 9: Reporting and Interpreting Long-Lived Tangible and Intangible Assets Learning Objective 1 Define, classify, and explain the nature of long-lived assets. 9-1

2. Tangible Physical Substance Intangible No Physical Substance Will not be used up within the next year Actively Used in Operations Definition and ClassificationDefinition and Classification Land Assets subject to depreciation Buildings and equipment Furniture and fixtures Examples Value represented by rights that produce benefits. Intangibles with a limited life, such as patents and copyrights, are subject to amortization. Intangibles with an unlimited (or indefinite) life, such as goodwill and trademarks, are not amortized. 9-2

3. Learning Objective 2Learning Objective 2 Apply the cost principle to the acquisition of long-lived assets. 9-3

4. Acquisition of Tangible AssetsAcquisition of Tangible Assets Recording costs as assets is called capitalizing the costs. Acquisition cost includes: 1.purchase price, and 2.all expenditures needed to prepare the asset for its intended use. 9-4

5. Acquisition of Tangible AssetsAcquisition of Tangible Assets Equipment 9-5

6. The total cost of a combined purchase of land and building is allocated in proportion to their relative market values. Acquisition of Tangible Assets ( Basket Purchase) On January 1, Jones purchased land and building for $400,000 cash. The appraised values are building, $325,000, and land, $175,000. On January 1, Jones purchased land and building for $400,000 cash. The appraised values are building, $325,000, and land, $175,000. How much of the $400,000 purchase price will be charged to the building and land accounts? On January 1, Jones purchased land and building for $400,000 cash. The appraised values are building, $325,000, and land, $175,000. On January 1, Jones purchased land and building for $400,000 cash. The appraised values are building, $325,000, and land, $175,000. How much of the $400,000 purchase price will be charged to the building and land accounts? 9-6

7. Cash PurchaseCash Purchase Cedar Fair purchased a new ride for $26,000,000 less a $1,000,000 discount. Cedar Fair paid $125,000 for transportation and $625,000 for installation of the ride. Prepare the journal entry for the acquisition assuming Cedar Fair paid cash for the new ride. 2 Record 1 Analyze 9-7

8. Credit PurchaseCredit Purchase Instead of paying cash, assume that Cedar Fair issued a note for the new ride, but paid cash for the transportation and installation of the ride. Prepare the journal entry for the acquisition. 1 Analyze 2 Record 9-8

9. Maintenance Costs Incurred during UseMaintenance Costs Incurred during Use 9-9

10. Depreciation is a cost allocation process that matches costs of operational assets with periods benefited by their use. Cost Allocaton Balance Sheet Income Statement Expense Acquisition Cost Depreciation ExpenseDepreciation Expense Depreciation Expense Income Statement Depreciation for the current year Balance Sheet Accumulated Depreciation Total of depreciation to date for an asset 9-10

11. Depreciation ExpenseDepreciation Expense Depreciation calculations require three amounts:  Acquisition cost.  Estimated useful life.  Estimated residual value. The effects of $130 of depreciation on the accounting equation and the journal entry to record them follow: 1 Analyze 2 Record 9-11

12. Depreciation ExpenseDepreciation Expense 2008 Depreciation Includes $130 for 2008 Book value 2008 9-12

13. Learning Objective 3Learning Objective 3 Apply various depreciation methods as economic benefits are used up over time. 9-13

14. Depreciation MethodsDepreciation Methods  Straight-line  Units-of-production  Declining balance At the beginning of the year, Cedar Fair purchased a new Go-Cart Ride for $62,500 cash. The ride has an estimated useful life of 3 years and an estimated residual value of $2,500. We will use the following information to illustrate the three methods of depreciation: 9-14

15. Straight-Line MethodStraight-Line Method = $20,000 per year ($62,500 - $2,500) × 1313 9-15

16. Units-of-Production MethodUnits-of-Production Method = $18,000 ($62,500 - $2,500) × 30,000 100,000 9-16

17. Declining-Balance MethodDeclining-Balance Method = $41,667 ($62,500 - $0) × 2323 First Year Second Year = $13,889 ($62,500 - $41,667) × 2323 What is the amount of amount of depreciation for each of the first two years? Cost – Accumulated Depreciation 9-17

18. Below residual value Double-Declining-Balance MethodDouble-Declining-Balance Method Third Year = $4,629 ($62,500 - $55,556) × 2323 9-18

19. Partial Year Depreciation CalculationsPartial Year Depreciation Calculations When a plant asset is acquired during the year, depreciation is calculated for the fraction of the year the asset is owned. June 30 9-19

20. Summary of Depreciation MethodsSummary of Depreciation Methods 9-20

21. Learning Objective 5Learning Objective 5 Analyze the disposal of long- lived tangible assets. 9-21

22.  Update depreciation to date of disposal.  Record the disposal. dr Cash (+A) dr Accumulated Depreciation (-xA) cr Equipment (-A) Book value Disposal of Tangible Assets cr Gain on Disposal (+R, +SE) Gain if cash received is greater than asset’s book value 9-22

23. dr Cash (+A) dr Accumulated Depreciation (-xA) cr Equipment (-A) Book value Disposal of Tangible Assets  Update depreciation to date of disposal.  Record the disposal. dr Loss on Disposal (+E, -SE) Loss if cash received is less than asset’s book value 9-23

24. The amount of depreciation per year is: a.$0. b.$500,000. c.$1,000,000. d.$2,000,000. Disposal of Tangible Assets The amount of depreciation per year is: a.$0. b.$500,000. c.$1,000,000. d.$2,000,000. Annual Depreciation: ($20,000,000 - $0) ÷ 20 Years = $1,000,000 per year 9-24

25. The equipment’s book value at date of sale is: a.$4,000,000. b.$3,000,000. c.$17,000,000. d.$16,500,000. Disposal of Tangible Assets The equipment’s book value at date of sale is: a.$4,000,000. b.$3,000,000. c.$17,000,000. d.$16,500,000. Accumulated Depreciation = (16 yrs. × $1,000,000) = $16,000,000 BV = Cost - Accumulated Depreciation BV = $20,000,000 - $16,000,000 = $4,000,000 9-25

26. The equipment’s sale resulted in: a.a loss of $1,000,000. b.a gain of $3,000,000. c.a gain of $1,000,000. d.a loss of $5,000,000. Disposal of Tangible Assets The equipment’s sale resulted in: a.a loss of $1,000,000. b.a gain of $3,000,000. c.a gain of $1,000,000. d.a loss of $5,000,000. Loss = Cash Received - Book Value Loss = $3,000,000 - $4,000,000 = $1,000,000 9-26

27. Analyze and prepare the journal entry to record Cedar Fair’s sale of the hotel. Disposal of Tangible Assets 2 Record 1 Analyze 9-27

28. Learning Objective 6Learning Objective 6 Analyze the acquisition, use, and disposal of long-lived intangible assets. 9-28

29. Noncurrent assets without physical substance. Useful life is often difficult to determine. Usually acquired for operational use. Often provide exclusive rights or privileges. Intangible AssetsIntangible Assets Intangible Assets 9-29 Record at current cash equivalent cost, including purchase price, legal fees, and filing fees. Amortize intangibles with limited lives over the shorter of their economic lives or legal lives using the straight-line method.

30. Trademarks and CopyrightsTrademarks and Copyrights A trademark is a symbol, design, or logo associated with a business. Internally developed trademarks have no recorded asset cost. Purchased trademarks are recorded at cost. Amortize cost over the period benefited. Legal life is life of creator plus 70 years. A copyright is an exclusive right granted by the federal government to protect artistic or intellectual properties. 9-30

31. Cost is purchase price plus legal cost to defend. Amortize cost over the shorter of useful life or 20 years. Patents and Licensing Rights A patent is an exclusive right granted by the federal government to sell or manufacture an invention. You may be using computer software that is made available to you through a campus licensing agreement. Licensing rights grant limited permission to use a product or service according to specific terms and conditions. 9-31

32. Goodwill Occurs when one company Buys another company. Purchase Price > Fair Market Value of Net Assets Acquired Only purchased goodwill is an intangible asset. Is not amortized. Is impairment tested and may be written down. 9-32 Franchises A franchise provides legally protected rights to sell products or provide services purchased by a franchisee from the franchisor.

33. Amortization of Limited Life Intangible Asset 1 Analyze 2 Record 9-33

34. Summary of Accounting Rules for Long-Lived Assets 9-34

35. Learning Objective 7Learning Objective 7 Interpret the fixed asset turnover ratio. 9-35

36. This ratio measures the sales dollars generated by each dollar invested in fixed assets. For the year 2008, Cedar Fair had $1,000,000 of revenue. End- of-year fixed assets were $1,800,000 and beginning-of-year fixed assets were $1,940,000. (All numbers in millions.) Turnover AnalysisTurnover Analysis Fixed Asset Turnover Net Sales Revenue Average Net Fixed Assets = 9-36 Fixed Asset Turnover $1,000,000 ($1,800,000 + $1,940,000) ÷ 2 == 0.53