Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 9 Reporting and Interpreting Long-Lived Tangible and Intangible Assets

9-2 Learning Objective 1 Define, classify, and explain the nature of long-lived assets.

9-3 Tangible Physical Substance Intangible No Physical Substance Will not be used up within the next year Actively Used in Operations Definition and Classification of Long-Lived Assets

9-4 Tangible Physical Substance Will not be used up within the next year Land Assets subject to depreciation Buildings and equipment Furniture and fixtures Examples Actively Used in Operations Defining and Classifying Long-Lived Assets

9-5 Actively Used in Operations Tangible Physical Substance Intangible No Physical Substance Will not be used up within the next year 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. Defining and Classifying Long-Lived Assets

9-6 Learning Objective 2 Apply the cost principle to the acquisition of long- lived assets.

9-7 Acquisition cost includes the purchase price and all expenditures needed to prepare the asset for its intended use. Acquisition cost does not include financing charges. Recording costs as assets is called capitalizing the costs. Acquisition cost includes the purchase price and all expenditures needed to prepare the asset for its intended use. Acquisition cost does not include financing charges. Recording costs as assets is called capitalizing the costs. Acquisition of Tangible Assets

9-8 Purchase/construction cost Legal fees Appraisal fees Architectural fees Purchase/construction cost Legal fees Appraisal fees Architectural fees Acquisition Cost Buildings

9-9 Purchase/construction cost Sales taxes Transportation costs Installation costs Purchase/construction cost Sales taxes Transportation costs Installation costs Acquisition Cost Equipment

9-10 Purchase cost Legal fees Surveying fees Broker’s commissions Purchase cost Legal fees Surveying fees Broker’s commissions Land is not depreciable. Acquisition Cost Land

9-11 Asset cost includes: All materials and labor traceable to the construction. A reasonable amount of overhead. Interest on debt incurred during the construction. Self- Constructed Tangible Assets

9-12 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. How much of the $400,000 purchase price will be charged to the building and land accounts? The total cost of a combined purchase of land and building is allocated in proportion to their relative market values. Acquisition Cost Basket Purchase

9-13 Acquisition Cost Basket Purchase

9-14 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. Acquisition Cash Purchase

9-15 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. $26,000,000 - $1,000,000 + $125,000 + $625,000 Acquisition Cash Purchase

9-16 Cedar Fair purchased on credit a new ride for $26,000,000 less a $1,000,000 discount. Cedar Fair paid $125,000 cash for transportation and $625,000 cash for installation of the ride. Prepare the journal entry for the acquisition assuming Cedar Fair issued a note payable for the new ride. Acquisition Credit Purchase

9-17 $26,000,000 - $1,000,000 + $125,000 + $625,000 Cedar Fair purchased on credit a new ride for $26,000,000 less a $1,000,000 discount. Cedar Fair paid $125,000 cash for transportation and $625,000 cash for installation of the ride. Prepare the journal entry for the acquisition assuming Cedar Fair issued a note payable for the new ride. Acquisition Credit Purchase

9-18 Maintenance Costs Incurred During Time of Use

9-19 Depreciation is a cost allocation process that systematically and rationally matches acquisition costs of operational assets with periods benefited by their use. Cost Allocation (Unused) Balance Sheet (Used) Income Statement Expense Acquisition Cost Depreciation Expense

9-20 Depreciation Expense Income Statement Balance Sheet Accumulated Depreciation Depreciation for the current year Total of depreciation to date on an asset Depreciation Expense

9-21 Book Values Book value = Market value / Depreciation on a Balance Sheet

9-22 Depreciation calculations require three amounts for each asset:  Acquisition cost.  Estimated useful life.  Estimated residual value. Depreciation calculations require three amounts for each asset:  Acquisition cost.  Estimated useful life.  Estimated residual value. Depreciation Calculations

9-23 Learning Objective 3 Apply various depreciation methods as future economic benefits are used up over time.

9-24  Straight-line  Units-of-production  Accelerated Method: Declining balance  Straight-line  Units-of-production  Accelerated Method: Declining balance Depreciation Methods

9-25 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. Cost - Residual Value Life in Years Depreciation Expense per Year = SL Straight-Line Method

9-26 Depreciation Expense per Year = Depreciation Expense per Year = $20,000 $62,500 - $2,500 3 years Cost - Residual Value Life in Years Depreciation Expense per Year = SL Straight-Line Method

9-27 Residual Value Over 80 percent of companies use the straight-line method for some or all of their assets disclosed in financial reports. SL Straight-Line Method

9-28 Depreciation Rate = Cost - Residual Value Estimated Total Production Step 1: Step 2: Depreciation Expense = Depreciation Rate × Number of Units Produced for the Year Units-of-Production Method

9-29 At the beginning of the year, Cedar Fair purchased a new Go-Cart ride for $62,500 cash. The ride has a 100,000 mile useful life and an estimated residual value of $2,500. If the ride is used 30,000 miles in the first year, what is the amount of depreciation expense? Units-of-Production Method

9-30 $62,500 - $2, ,000 miles = $.60 per mile Depreciation Rate = Step 1: Step 2: $.60 per mile × 30,000 miles = $18,000 Depreciation Expense = Units-of-Production Method

9-31 Units-of-Production Method

9-32 Residual Value Units-of-Production Method

9-33 DepreciationRepair Expense Early YearsHighLow Later YearsLowHigh The declining-balance method matches higher depreciation expense with higher revenues in the early years of an asset’s useful life when the asset is more efficient. Declining-Balance Method

9-34 Double-Declining-Balance Method Annual Depreciation Expense Net Book Value () Useful Life in Years 2 = × Cost – Accumulated Depreciation Declining balance rate of 2 is double-declining-balance (DDB) rate. Annual computation ignores residual value.

9-35 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. Calculate the depreciation expense for the first two years. Double-Declining-Balance Method

9-36 Annual Depreciation expense Net Book Value () Useful Life in Years 2 = × () $62,500 × 3 years 2 = $41,667 () ($62,500 – $41,667) × 3 years 2 = $13,889 Year 1 Depreciation: Year 2 Depreciation: Double-Declining-Balance Method

9-37 () ($62,500 – $55,556) × 3 years 2 = $4,629 Below residual value Double-Declining-Balance Method

9-38 Depreciation expense is limited to the amount that reduces book value to the estimated residual value. Double-Declining-Balance Method

9-39 For tax purposes, most corporations use the Modified Accelerated Cost Recovery System (MACRS). MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate new investment. For tax purposes, most corporations use the Modified Accelerated Cost Recovery System (MACRS). MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate new investment. Tax Depreciation

9-40 Learning Objective 4 Explain the effect of asset impairment on the financial statements.

9-41 Impairment is the loss of a significant portion of the utility of an asset through...  Casualty.  Obsolescence.  Lack of demand for the asset’s services. A loss should be recognized when an asset suffers a permanent impairment. Asset Impairment Losses

9-42 Learning Objective 5 Analyze the disposal of long-lived assets.

9-43  Update depreciation to the date of disposal. Writing off accumulated depreciation (debit). Writing off the asset cost (credit).  Record the disposal by: Recording cash received (debit) or paid (credit). Recording a gain (credit) or loss (debit). Disposal of Tangible Assets

9-44 If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. Disposal of Tangible Assets

9-45 Cedar Fair sold a hotel for $3,000,000 cash at the end of its 16 th year of use. The hotel originally cost $20,000,000, and was depreciated using the straight-line method with zero residual value and a useful life of 20 years. Disposal of Tangible Assets

9-46 The amount of depreciation per year is: a.$0. b.$500,000. c.$1,000,000. d.$2,000,000. The amount of depreciation per year is: a.$0. b.$500,000. c.$1,000,000. d.$2,000,000. Disposal of Tangible Assets

9-47 The amount of depreciation per year is: a.$0. b.$500,000. c.$1,000,000. d.$2,000,000. 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 Disposal of Tangible Assets

9-48 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. 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

9-49 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. 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 Disposal of Tangible Assets

9-50 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. 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

9-51 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. 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 Disposal of Tangible Assets

9-52 Prepare the journal entry to record Cedar Fair’s sale of the hotel. Disposal of Tangible Assets

9-53 Disposal of Tangible Assets Prepare the journal entry to record Cedar Fair’s sale of the hotel.

9-54 Learning Objective 6 Analyze the acquisition, use, and disposal of long-lived intangible assets.

9-55 Noncurrent assets without physical substance. Useful life is often difficult to determine. Usually acquired for operational use. Often provide exclusive rights or privileges. Intangible Assets

9-56 Trademarks Copyrights Patents Licensing Rights Technology Franchises Goodwill Record at current cash equivalent cost, including purchase price, legal fees, and filing fees. Intangible Assets

9-57 Amortize intangible assets with limited lives over the shorter of their economic lives or legal lives, subject to rules specified by GAAP. Use straight-line method. Research and development costs are normally expensed as incurred. Amortize intangible assets with limited lives over the shorter of their economic lives or legal lives, subject to rules specified by GAAP. Use straight-line method. Research and development costs are normally expensed as incurred. Intangible Assets

9-58 A symbol, design, or logo associated with a business. Purchased trademarks are recorded at cost. Internally developed trademarks have no recorded asset cost. Intangible Assets Trademarks

9-59 Exclusive right granted by the federal government to protect artistic or intellectual properties. Amortize cost over the period benefited. Legal life is life of creator plus 70 years. Intangible Assets Copyrights

9-60 Exclusive right granted by federal government to sell or manufacture an invention. Cost is purchase price plus legal cost to defend. Amortize cost over the shorter of useful life or 20 years. Intangible Assets Patents

9-61 Limited permissions to use a product or service according to specific terms and conditions. Limited permissions to use a product or service according to specific terms and conditions. You may be using computer software that is made available to you through a campus licensing agreement. Intangible Assets Licensing Rights

9-62 A category of intangible assets that includes a company’s website and any computer programs written by its employees. Intangible Assets Technology

9-63 Legally protected right to sell products or provide services purchased by franchisee from franchisor. Purchase price is an intangible asset that is amortized. Intangible Assets Franchises

9-64 Occurs when one company buys another company. The amount by which the purchase price exceeds the fair market value of net assets acquired. Only purchased goodwill is an intangible asset. Goodwill Intangible Assets Goodwill

9-65 Not amortized. Subject to assessment for impairment value and may be written down. Goodwill Intangible Assets Goodwill

9-66 Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised at a fair value of $900,000. Intangible Assets Goodwill

9-67 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 Intangible Assets Goodwill

9-68 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 Intangible Assets Goodwill

9-69 Summary of Accounting Rules for Long-Lived Assets

9-70 Learning Objective 7 Interpret the fixed asset turnover ratio.

9-71 How much is enough? Insufficient capacity results in lost sales. Costly excess capacity reduces profits. Management Decisions

9-72 Fixed Asset Turnover Net Sales Revenue Average Net Fixed Assets = This ratio measures the sales dollars generated by each dollar invested in fixed assets. For the year 2005, Cedar Fair had $568,700 of revenue. End-of-year fixed assets were $967,300 and beginning-of-year fixed assets were $947,000. (All numbers in millions.) Turnover Analysis

9-73 Turnover Analysis Fixed Asset Turnover $568,700 ($967,300 + $947,000) ÷ 2 == 0.59 Fixed Asset Turnover Net Sales Revenue Average Net Fixed Assets =

9-74 Learning Objective 8 Describe the factors to consider when comparing across companies.

9-75 Accelerated depreciation, in the early years of an asset’s useful life, results in higher depreciation expense, lower net income, and lower book value than would result using straight-line depreciation. Selling an asset with a low book value, resulting from accelerated depreciation, might result in a gain. Selling the same asset with a higher book value, resulting from straight-line depreciation, might result in a loss. Accelerated depreciation, in the early years of an asset’s useful life, results in higher depreciation expense, lower net income, and lower book value than would result using straight-line depreciation. Selling an asset with a low book value, resulting from accelerated depreciation, might result in a gain. Selling the same asset with a higher book value, resulting from straight-line depreciation, might result in a loss. The Impact of Depreciation Differences

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 9 Supplement A Natural Resources

9-77 Total depletion cost Inventory for sale Unsold Inventory Cost of goods sold Natural Resources Depletion is the process of allocating a natural resource’s cost over the period of its extraction. Depletion is similar in concept to depreciation. Depletion that is computed for a period is first added to inventory and then expensed when the inventory is sold.

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 9 Supplement B Changes in Depreciation

9-79 estimate So depreciation is an estimate. Predicted salvage value Predicted useful life Over the life of an asset, new information may come to light that indicates the original estimates need to be revised. Changes in Depreciation

9-80 Cedar Fair purchased equipment that cost $60,000,000 with an estimated useful life of 20 years and and an estimated salvage value of $3,000,000. During year 5, Cedar Fair changed the estimated useful life to 25 years and lowered the estimated salvage value to $2,400,000. Calculate depreciation expense for year 5 and thereafter using the straight-line method. Cedar Fair purchased equipment that cost $60,000,000 with an estimated useful life of 20 years and and an estimated salvage value of $3,000,000. During year 5, Cedar Fair changed the estimated useful life to 25 years and lowered the estimated salvage value to $2,400,000. Calculate depreciation expense for year 5 and thereafter using the straight-line method. Changes in Depreciation

9-81 When our estimates change, the new depreciation is: Book value at date of change Salvage value at date of change Remaining useful life at date of change – Changes in Depreciation

9-82 When a plant asset is acquired during the year, depreciation is calculated for the fraction of the year the asset is owned. June 30 Partial Year Calculations

9-83 End of Chapter 9