Accounting for Long-Term Operational Assets Chapter Eight McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Tangible versus Intangible Assets Tangible assets have a physical presence; they can be seen and touched. Intangible assets are rights or privileges. They cannot be seen or touched. 8-1

Tangible Long-Term Assets 1.Property, Plant, and Equipment 1.Property, Plant, and Equipment – Sometimes called plant assets or fixed assets. We depreciate these assets over their useful life. 2.Natural Resources 2.Natural Resources – Mineral deposits, oil and gas reserves, timber stands, coal mines, and stone quarries are some examples of natural resources. We deplete these assets over their useful life. 3.Land 3.Land – Has an infinite life and is not subject to depreciation. 8-2

Intangible Assets 1.Intangible Assets with Identifiable Useful Lives 1.Intangible Assets with Identifiable Useful Lives – patents and copyrights. Amortize the cost of each over its useful life. 2.Intangible Assets with Indefinite Useful Lives 2.Intangible Assets with Indefinite Useful Lives - renewable franchises, trademarks, and goodwill. The cost of these assets is not expensed unless it can be shown that there has been an impairment in value. 8-3

Cost of Long-Term Assets Buildings Purchase pricePurchase price Sales taxesSales taxes Title search and transfer document costsTitle search and transfer document costs Realtor’s and attorney’s feesRealtor’s and attorney’s fees Remodeling costsRemodeling costsBuildings Purchase pricePurchase price Sales taxesSales taxes Title search and transfer document costsTitle search and transfer document costs Realtor’s and attorney’s feesRealtor’s and attorney’s fees Remodeling costsRemodeling costs Equipment Purchase price (less discounts)Purchase price (less discounts) Sales taxesSales taxes Delivery costsDelivery costs Installation costsInstallation costs Costs to adapt to intended useCosts to adapt to intended useEquipment Purchase price (less discounts)Purchase price (less discounts) Sales taxesSales taxes Delivery costsDelivery costs Installation costsInstallation costs Costs to adapt to intended useCosts to adapt to intended use 8-4

Cost of Long-Term Assets Land Purchase pricePurchase price Sales taxesSales taxes Title search and transfer document costsTitle search and transfer document costs Realtor’s and attorney’s feesRealtor’s and attorney’s fees Costs of removal of old buildingsCosts of removal of old buildings Grading costsGrading costsLand Purchase pricePurchase price Sales taxesSales taxes Title search and transfer document costsTitle search and transfer document costs Realtor’s and attorney’s feesRealtor’s and attorney’s fees Costs of removal of old buildingsCosts of removal of old buildings Grading costsGrading costs 8-5

Basket Purchase Allocation Beatty Co. purchased land and a building for $240,000 cash. An appraiser estimated that the land has a fair market value of $90,000, and the building has a fair market value of $270,000. How will we assign the $240,000 cost between the land and building? 8-6

Life Cycle of Operational Assets 8-7

Depreciation Methods - the same amount is depreciated each accounting period. 1.Straight-line method - the same amount is depreciated each accounting period. – produces more depreciation expense in the early years of an asset’s life, with a declining amount of expense in later years. 2.Double-declining-balance – produces more depreciation expense in the early years of an asset’s life, with a declining amount of expense in later years. – produces varying amounts of depreciation in different accounting periods depending upon the number of units produced. 3.Units-of-production – produces varying amounts of depreciation in different accounting periods depending upon the number of units produced. - the same amount is depreciated each accounting period. 1.Straight-line method - the same amount is depreciated each accounting period. – produces more depreciation expense in the early years of an asset’s life, with a declining amount of expense in later years. 2.Double-declining-balance – produces more depreciation expense in the early years of an asset’s life, with a declining amount of expense in later years. – produces varying amounts of depreciation in different accounting periods depending upon the number of units produced. 3.Units-of-production – produces varying amounts of depreciation in different accounting periods depending upon the number of units produced. 8-8

Straight-Line Depreciation Life Cycle Phase 4 On January 1, 2017, the van is sold for $4,500 cash. 8-9

Double-Declining-Balance Method The double-declining-balance method is called an accelerated depreciation method because more depreciation expense is recorded in the early years than in later years. Determining the amount of depreciation expense in any year is the result of a three-step process. 1.Determine the straight-line rate of depreciation. 2.Multiply the straight-line rate times two. 3.Multiply the double-declining rate by the book value of the asset at the beginning of the period. 1.Determine the straight-line rate of depreciation. 2.Multiply the straight-line rate times two. 3.Multiply the double-declining rate by the book value of the asset at the beginning of the period. 8-10

Double-Declining-Balance Method See how double-declining-balance depreciation works (1 ÷ 4) = (25% straight-line rate × 2) = 50% 8-11

Units-of-Production Depreciation Cost – Salvage value Total estimated units of production = Depreciation charge per unit of production × Units of production in current accounting period = Periodic Depreciation Expense 8-12

Units-of-Production Depreciation Here is the depreciation charge per mile driven in our van: $24,000 – $4, ,000 miles =$0.20 per mile Here is the calculation of depreciation expense based on miles driven: 8-13

Graph of Depreciation Expense 8-14

Income Tax Considerations The maximum depreciation currently allowed by tax law is computed using the modified accelerated cost recovery system (MACRS). The rate of depreciation depends on the class life of the asset and the period in which we are calculating depreciation. There are currently six categories for property, excluding real estate. They are 3-year, 5- year, 7-year, 10-year, 15-year, and 20-year property. 8-15

Revision of Estimates Estimates are revised when new information surfaces. Assume we purchased equipment on January 1, 2013, for $50,000 cash and estimated salvage value was $3,000. The equipment has an estimated useful life of eight years, and we use straight-line depreciation. ($26,500 – $3,000) ÷ 10 = $2,350 depreciation per year On January 1, 2017, after four years of depreciation, it was determined that the machine has a useful life of fourteen years. ($50,000 – $3,000) ÷ 8 = $5,875 depreciation per year 8-16

Continuing Expenditures for Plant Assets Costs that Are Expensed Costs that Are Expensed The cost of routine maintenance and minor repairs that are incurred to keep an asset in good working order are expensed as incurred. Assume the company spent $500 cash for routine maintenance on machinery. 8-17

Continuing Expenditures for Plant Assets Costs That Are Capitalized Costs That Are Capitalized Expenditures that improve the quality of an asset are capitalized as part of the cost of that asset. Assume the company spent $4,000 cash for a major overall of equipment to improve efficiency. 8-18

Continuing Expenditures for Plant Assets Costs That Extend the Life of an Asset Costs That Extend the Life of an Asset The amount of the expenditure should reduce the balance in the Accumulated Depreciation account. Assume the company spent $4,000 cash for improvements that extended the life of equipment four years. 8-19

Natural Resources Cost – Salvage value Total estimated units recoverable = Depletion charge per unit of resource × Number of units extracted and sold this period = Periodic Depletion Expense 8-20

Intangible Assets Trademarks A name or symbol that identifies a company or a product. The cost of a trademark may include design, purchase, or defense of the trademark. Patents The exclusive legal right to produce and sell a product that has one or more unique features. The legal life of a patent is 20 years. 8-21

Intangible Assets Copyrights Protection of writings, musical composition, work of art, or other intellectual property. The protection extends for the life of the creator plus 70 years. Franchise The exclusive right to sell products or perform services in certain geographic areas. Goodwill The excess of cost over fair value of net tangible assets acquired in a business acquisition. 8-22

End of Chapter Eight 8-23