Spiceland | Thomas | Herrmann Financial Accounting Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Long-Term Assets Chapter 7

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7-2 Learning Objectives Identify the major types of property, plant, and equipment Identify the major types of intangible assets Describe the accounting treatment of expenditures after acquisition Calculate depreciation of property, plant, and equipment Calculate amortization of intangible assets Account for the disposal of long-term assets

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7-3 Learning Objectives Describe the links among return on assets, profit margin, and asset turnover Identify impairment situations and describe the two-step impairment process

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7-4 Long-Term Assets Tangible assets Land Land improvements Buildings Equipment Natural resources Intangible assets Patents Trademarks Copyrights Franchises Goodwill

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part A Acquisitions 7-5

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 1 Identify the Major Types of Property, Plant, and Equipment 7-6

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7-7 Property, Plant, and Equipment Capitalize: recording an expenditure as an asset Recorded at: Cost of asset All expenditures necessary to get it ready for use +

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7-8 Land and Land Improvements Land: includes land used for operations Land improvements include: Parking lots, sidewalks, driveways, landscaping, lighting systems, fences, sprinklers, etc. Depreciation: the allocation of the cost of a tangible asset over its service life

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7-9 Buildings Administrative offices, retail stores, manufacturing facilities, and storage warehouses

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Equipment Machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures Recurring costs not part of the cost of equipment

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Basket Purchases Purchase of more than one asset for one purchase price Allocate total purchase price based on individual fair values

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Natural Resources Oil, natural gas, timber, and salt Physically use up, or deplete Depletion: allocation of the cost of a natural resource over its service life Identical to the activity-based method of recording depreciation

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 2 Identify the Major Types of Intangible Assets 7-13

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Intangible Assets No physical substance Can be very valuable Acquired in two ways: Purchase Create internally

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Patents Exclusive right to manufacture a product or to use a process Granted for a period of 20 years When purchased: Capitalized for purchase price plus legal and filing fees When internally developed: Capitalized for legal and filing fees

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Copyrights Exclusive right of protection given to the creator of a published work Granted for the life of the creator plus 70 years Legal action against anyone who attempts to infringe the copyright Accounting is virtually identical to that of patents

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Trademarks Word, slogan, or symbol that distinctively identifies a company, product, or service Renewed for an indefinite number of 10-year periods Capitalized for legal, registration, and design fees Advertising costs are recorded as advertising expense

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Franchises Local outlets that pay for the exclusive right to use the franchisor’s name and to sell its products Within a specified geographical area May include other benefits Capitalized for initial fee Additional periodic payments usually expensed as incurred

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Goodwill Represents the value of a company as a whole, over and above the value of its identifiable net assets Recorded at: Purchase Price Fair value of the net assets acquired –

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 3 Describe the Accounting Treatment of Expenditures After Acquisition 7-20

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Expenditures After Acquisition Repairs and maintenance Additions Improvements Legal defense of intangible assets Capitalize If it increases future benefits Expense If it benefits only the current period

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Illustration 7.7—Expenditures after Acquisition

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Materiality An item is said to be material if it is large enough to influence a decision Immaterial: Costs expensed under a certain dollar amount

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part B Cost Allocation 7-24

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 4 Calculate Depreciation of Property, Plant, and Equipment 7-25

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Depreciation The process of allocating to an expense the cost of an asset over its service life

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Common Terms Accumulated depreciation: contra asset account to record the total depreciation taken to date Book value: Service life: how long the company expects to receive benefits from the asset before disposing of it Residual value: salvage value or the amount the company expects to receive from selling the asset at the end of its service life Original CostCurrent Balance in Accumulated Depreciation –

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Depreciation Methods Straight-line method Declining-balance method Activity-based method

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Illustration 7.16 and 7.17—Comparison of Depreciation Methods

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Tax Depreciation Accelerated methods reduce taxable income more in the earlier years of an asset’s life Companies use: Straight-line method for financial reporting Accelerated method for tax reporting

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 5 Calculate Amortization of Intangible Assets 7-31

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Amortization of Intangible Assets Allocating the cost of intangible assets to expense is called amortization

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Intangible Assets not Subject to Amortization Intangible assets with indefinite useful lives Subjected to impairment rules

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part C Asset Disposition: Sale, Retirement, or Exchange 7-34

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 6 Account for the disposal of long-term assets 7-35

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Three Methods of Asset Disposal Disposal of Long-Term Assets Sale RetirementExchange Can result in either a gain or a loss Occurs when a long- term asset is no longer useful but cannot be sold Occurs when two companies trade assets

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 7 Describe the Links Among Return on Assets, Profit Margin, and Asset Turnover 7-37

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Return on Assets Indicates the amount of net income generated for each dollar invested in assets Profit margin: indicates the earnings per dollar of sales Asset turnover: measures the sales per dollar of assets invested

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 8 Identify Impairment Situations and Describe the Two-Step Impairment Process 7-39

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Asset Impairment Impairment: occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value Recording the loss

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education Illustration 7.32—Two-Step Impairment Process

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. End of Chapter