Chapter 9 Long-Term Assets

Long-Term Assets Defined Life > 1 year Examples: Land, furniture, cars, etc… Think of display racks at a store versus the inventory sitting on them. –Inventory: hope to sell in < 1year –Racks: will have for many years

Tangible versus Intangible Tangible AssetsUseful LifeWrite-off Property, plant & equipmentYesDepreciation Natural resourcesYesDepletion LandNonone Intangible Assets CopyrightLife + 50 yrsOften expense Patent17 yearsAmortization TrademarksForevernone GoodwillForevernone Franchise VariesAmortize

Cost of Assets Purchase price (historical cost) - Discounts + Taxes and licensing + Shipping + Installation + Extra features Amount Capitalized

Basket Purchase Allocate based on relative fair market value: Appraisal of Fair Market ValueRelative %Purchase $ Building $ 100,000 Equipment 20,000 Furniture 10,000 Goodwill 120,000 $ 250,000100% 225,000 Need to allocate properly because each will be depreciated/amortized differently

Depreciation Methods Straight-line Double-declining-balance Units-of-production

Depreciation Example Purchase machinery on 9/30/04 for $10,000 and pay $1,500 sales tax and licensing. Salvage value is $500 and life is 5 years. Let’s do three methods…

Compare Three Methods Straight-LineDD BalanceUnit of Prod Year ,150 2,145 Year 2 2,200 4,140 2,255 Year 3 2,200 2,484 2,206 Year 4 2,200 1,490 2,118 Year 5 2, ,200 Year 6 1, Year $ 11,000

Income Taxes Uses a different type of depreciation Called MACRS –Modified Accelerated Cost Recovery System Don’t worry about calculation – will cover in income tax class.

Capitalize Versus Expense Capitalize - if it extends life or improves quality Expense – if ordinary repair to keep in working order Think of car: –Put in new radiator after old one breaks -Expense –Put in new engine after 10 years-Capitalize –Repair accident body damage-Expense –Add new $2,000 stereo-Capitalize

Nature Resources Examples: Coal, oil, etc… Need to estimate quantity available Purchase $/quantity available = cost per unit Cost per unit * quantity taking out in period = depletion for period. Like units-of-production depreciation

Intangibles Amortization –Use if there is a limited useful life –Calculated just like straight-line depreciation

Trademarks –Name or symbol identifying company/product –Registered with US govt. –Must be protected by legal action –Unlimited life, no amortization –Write-off if impaired –Example: Coca Cola

Patent Right to produce and sell unique product US Patent Office – 17 year life (amortize) Capitalize legal costs for patent Expense research and development costs Example - medicine

Copyright To protect writings, music, art… Life: life of creator + 50 years Usually expense because we are not sure of future value

Franchises Right to use a certain name to sell products/services in a certain area Example: fast-food franchises Need to look at contract terms for life

Goodwill Value of reputation, name, location, quality of products, etc… Value = total fair market of business less other assets Usually unlimited life and don’t amortize If something impairs value, then write-off Example: your favorite restaurant

Closing thoughts… Do all companies handle depreciation/amortization issues the same? Because they are different are they wrong?