1. Long-Term and Intangible Assets
Chapter 13
Long-Term and
Intangible Assets

2. Property and Equipment
Tangible Assets
Acquired for use in the ordinary operation of the business
Useful life more than one year
©2004 Pearson Education, Inc.
Upper Saddle River, NJ 07458

3. Property and Equipment Categories
Land
Building
Leaseholds and Leasehold Improvements
Construction in Progress
Furniture and Equipment
China, Glassware, Silver, Linen, and Uniforms
Accounting for the Hospitality Industry
Elisa S. Moncarz and Nestor de Portocarrero
©2004 Pearson Education, Inc.
Upper Saddle River, NJ 07458

4. Plant Assets Tangible in Nature Actively Used in Operations
Expected to Benefit Future Periods
Plant assets are tangible assets that are used actively in the operations of the entity. We fully expect these assets, sometimes referred to as property, plant, and equipment, to benefit future periods.
Called Property, Plant, & Equipment

5. Cost Determination Acquisition Cost P1 Purchase price
All expenditures needed to prepare the asset for its intended use
Acquisition Cost
The cost of a plant asset includes the purchase price as well as all costs necessary to get the asset in place and ready for its intended use. We record the purchase price net of any cash discounts available.
Finance charges are not included in the cost of an asset. If we elect to finance the purchase over a period of time, the interest cost is charged as an expense when incurred.
Acquisition cost excludes financing charges and cash discounts.

6. Land is not depreciable.
Title insurance premiums
Purchase price
Delinquent
taxes
Real estate
commissions
Surveying fees
Land is not a depreciable plant asset. In addition to the purchase price, there are many costs generally incurred in connection with the acquisition. Many of these costs are related to obtaining legal title to the land.
Title search and transfer fees
Land is not depreciable.

7. Land Improvements P1
Parking lots, driveways, fences, walks, shrubs, and lighting systems.
Depreciate over useful life of improvements.
Land improvements are depreciated over their useful life. Land improvements include parking lots, driveways, fences, sidewalks, landscaping, and any outdoor lighting systems.

8. Buildings P1 Cost of purchase or construction Title fees
Brokerage fees
Attorney fees
Whether we purchase or construct a building, the cost should include the purchase price plus any attorney fees or title fees. If we construct the building, the cost will include all the necessary construction costs as well as the costs we have just mentioned.
Taxes

9. Machinery and Equipment
Purchase price
Taxes
Transportation
charges
Machinery and equipment is recorded at its purchase price less any available cash discount. The company may have to pay delivery charges on the truck; these costs are included in the cost of the truck. If we need to install any special parts to make the machinery or equipment ready for its intended use, we will include these costs in the price of the assets.
Installing, assembling, and testing
Insurance while in transit

10. Concept of Depreciation
Over time, fixed assets such as equipment, buildings, and land improvements lose their ability to provide services. The periodic transfer of the cost of fixed assets to expense is called depreciation
The three factors in determining the amount of depreciation expense to be recognized each period are: (a) the fixed asset’s initial cost, (b) its expected useful life, and (c) its estimated value at the end of the useful life.
The fixed asset’s estimated value at the end of its useful life is called the residual value, scrap value, salvage value, or trade-in value. A fixed asset’s residual value and its expected useful life must be estimated at the time the asset is placed in service.

11. Depreciation Methods Straight-Line Accelerated Methods Units of Output
Declining-Balance
Sum of Years’ Digits
Units of Output

12. Illustration of Depreciation Methods
Tour Bus cost $12,000
Salvage value $2,000
Useful life: five years
Miles traveled: 200,000

13. STRAIGHT-LINE DEPRECIATION
Spreads the total depreciation equally over all periods of useful life of the property or equipment
Depreciation = Cost – salvage value
# of years of useful life
Higher Net Income
Higher Asset Value
12,000-2,000 = $2,000 5

14. Double-Declining-Balance Method
Step 1:
Straight-line rate =
100 % ÷ Useful life = 100% ÷ 5 = 20%
Step 2:
Double-declining- balance rate
= 2 × Straight-line rate = 2 × 20% = 40%
Calculating depreciation expense under the double-declining-balance method is a three-step process. The first step is the calculate the straight-line depreciation rate. Recall that we do this by dividing one hundred percent by the asset’s useful life. In our specific case we divide one hundred percent by the five-year useful life to get a straight-line rate of twenty percent. The second step is to calculate the double-declining-balance rate. We do this by multiplying the straight-line rate times two. In our case that would be twenty percent times two, or forty percent. The third, and final step is to determine depreciation expense. We multiply the double-declining rate times the book value of the asset at the beginning of the period. Under the double-declining-balance method we ignore estimated salvage value. The beginning book value (cost less accumulated depreciation), is fifty thousand dollars. Depreciation expense for 2008 is twenty thousand dollars, forty percent times fifty thousand dollars.
Don’t forget that salvage value is not used in the double-declining-balance method.
Step 3:
Depreciation expense =
Double-declining- balance rate ×
Beginning period book value
40% × $12,000 = $4,800

15. Double-Declining Balance
Apply double the straight Line Rate to the Net book value of the property or equipment
Straight Line Rate X = = 20% x 2 = 40%
5 years
40% x 12,000 = 4, Year 1 Depreciation Expense $4800
Accumulated Depreciation $4,800
Net Book value-end of Year $7,200
40% x 7,200 = 2, Year 2 Depreciation Expense $2,880
Accumulated Depreciation $7,680
Net Book value-end of Year $4,320
YEAR 1
YEAR 2

16. Units-of-Production Method
Depreciation
Per Unit =
Cost - Salvage Value
Total Units of Production
Step 1:
Step 2:
Depreciation
Expense =
Per Unit ×
Number of Units Produced in the Period
Under the units-of-production method, the first step is to calculate the depreciation expense per unit of production. Take the asset’s cost less its salvage value and divide this amount by the total estimated number of units that will be produced by the assets. Once we complete the first step, we may calculate depreciation expense for the period. Multiply the depreciation expense per unit that we determined in step one by the number of units produced in the current period. Let’s look at a specific example.

17. Units of Production (or Activity) Method
Cost – Salvage Value X Annual units of output
Estimated units of output over entire life
12, , = $0.05 per mile depreciation
200,000 miles
Year 1 Bus travels 40,000 miles
Depreciation Expense $0.05 x 40,000 miles = $2,000
Accumulated Depreciation $2,000
Net Book Value $12,000-2,000 = $8,000
Year 2 Bus travels 20,000 miles
Depreciation Expense $0.05 X 20,000 miles = $1,000
Accumulated Depreciation $3,000
Net Book value $9,000

18. 13-3 Units-of-Activity Depreciation
Formula for Units-of-Activity Method
Depreciable Cost ÷
Total Units of Activity =
Depreciation Cost per Unit X
Units of Activity during the Year
Depreciation Expense
Example:
COST:
$20,000
SALVAGE:
$2,000
LIFE:
10,000 units
Depreciable Cost ÷
Total Units of Activity =
Depreciation Cost per Unit
$18,000
10,000
$1.80 X
Units of Activity during the Year
Depreciation Expense
2,500
$4,500
Depreciation Schedule
Year
Cost / Unit
Units / Activity
Depreciation Expense 1
$1.80 X
2,500
$4,500 2
2,800
$5,040 3
1,100
$1,980 4
1,900
$3,420 5
1,700
$3,060
10,000
$18,000
PLANT ASSET
ACCUMULATED DEPRECIATION
20,000
Year ,500
Year ,040
Year ,980
Year ,420
Year ,060
Bal ,000

19. Sum of Years’ Digits
The depreciation rate each year is a fraction in which
the sum of digits and the numerator is years in inverse order
n (n+1) = 5 (6) = Fractions year 15
Year 1 depreciation
5/15 X 10,000= $3,333
Year 2 depreciation
4/15 X 10,000= $2,667
ACCELERATED
METHOD

20. 13-5 Sum-of-Years’ Digit Depreciation
Depreciable Cost X
Years’ Digits in Reverse Order ÷ Sum of Years’ Digits =
Depreciation Expense
Formula for Sum-of-Years’ Digit
Example:
COST:
$20,000
SALVAGE:
$2,000
LIFE:
5 years
Depreciable Cost X
Years’ Digits in Reverse Order ÷ Sum of Years’ Digits =
Depreciation Expense
$18,000
5/15
$6,000
Depreciation Schedule
Year
Book Value at Beginning of Year
Rate
Depreciation Expense 1
$18,000 X
5/15
$6,000 2
18,000
4/15
$4,800 3
3/15
$3,600 4
2/15
$2,400 5
1/15
$1,200
PLANT ASSET
ACCUMULATED DEPRECIATION
20,000
Year ,000
Year ,800
Year ,600
Year ,400
Year ,200
Bal ,000

21. Amortization
Write-off of the cost of an asset over its estimated useful life
Always calculated on the straight line basis
It is used to record cost expiration of leasehold and leasehold improvements and other intangible assets

22. Depreciation for Tax Reporting
Most corporations use the Modified Accelerated Cost Recovery System (MACRS) for tax purposes.
MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate new investment.
When filing a tax return most corporations use the modified accelerated cost recovery system developed by the Internal Revenue Service. Because the title of the method is so long most accountants refer to the tax method as MACRS. MACRS is an accelerated depreciation method. It was designed to permit companies to quickly write off the cost of plant assets and thereby stimulate investment in new plant assets.

23. 13-8 Long-Term Asset Disposals - Retirements
Fully Depreciated Asset
Asset originally purchased on 1/1/07 is discarded on 1/1/10 and there is no salvage value.
Equipment
Accumulated Depreciation – Equipment
20,000
12/31/07
5,000
12/31/08
12/31/09
12/31/10
Bal.
Book Value = $0
Entry:
20,0000
Note: When recording a plant asset disposal, the plant asset account is always credited and the related accumulated depreciation account is always debited to remove them from the books

24. 13-8 Long-Term Asset Disposals – Retirements (continued)
Asset is Not Fully Depreciated
Asset originally purchased on 1/1/07 is discarded on 1/1/10 and there is no salvage value.
Equipment
Accumulated Depreciation – Equipment
20,000
12/31/07
5,000
12/31/08
12/31/09
Bal.
15,000
Book Value = $0
Entry:
Loss on Disposal

25. 13-9 Long-Term Asset Disposals – Sales
Asset Sold at a Gain
Asset originally purchased on 1/1/07 is discarded on 1/1/10 for $8,000.
Equipment
Accumulated Depreciation – Equipment
20,000
12/31/07
5,000
12/31/08
12/31/09
Bal.
15,000
Book Value = $5,000
Entry:
Cash
8,000
Gain on Disposal
3,000
Calculation of gain or loss on disposal:
Cash proceeds
$8,000
Book value of asset
Gain on disposal
$3,000

26. 13-9 Long-Term Asset Disposals – Sales (continued)
Asset Sold at a Loss
Asset originally purchased on 1/1/07 is discarded on 1/1/10 for $3,000.
Equipment
Accumulated Depreciation – Equipment
20,000
12/31/07
5,000
12/31/08
12/31/09
Bal.
15,000
Book Value = $5,000
Entry:
Cash
3,000
Loss on Disposal
2,000
Calculation of gain or loss on disposal:
Cash proceeds
$3,000
Book value of asset
Gain on disposal
($2,000)

27. 13-10 Long-Term Asset Disposals – Exchange of Similar Assets
Asset Exchanged at a Loss
Asset originally purchased on 1/1/07 is exchanged for a similar asset on 1/1/10. Cash of $10,000 is also paid and the old asset has fair market value of $4,000 on the date of exchange.
Equipment
Accumulated Depreciation – Equipment
20,000
12/31/07
5,000
12/31/08
12/31/09
Bal.
15,000
Book Value = $5,000
Entry:
Equipment (new)
14,000
Loss on Disposal
1,000
Equipment (old)
Cash
10,000
Cost of new asset acquired:
Loss on exchange of old asset:
Fair value of old asset
$4,000
Cash paid
Book value of old asset
Cost of new asset
$14,000
Loss on disposal
($1,000)

28. Accumulated Depreciation – Equipment
13-10 Long-Term Asset Disposals – Exchange of Similar Assets (continued)
Asset Exchanged at a Gain
Asset originally purchased on 1/1/07 is exchanged for a similar asset on 1/1/10. Cash of $10,000 is also paid and the old asset has fair market value of $8,000 on the date of exchange.
Equipment
Accumulated Depreciation – Equipment
20,000
12/31/07
5,000
12/31/08
12/31/09
Bal.
15,000
Book Value = $5,000
Entry:
Equipment (new)
Equipment (old)
Cash
10,000
Cost of new asset acquired:
Gain on exchange of old asset:
Fair value of old asset
$8,000
Cash paid
Book value of old asset
$18,000
Gain on disposal
$3,000
Less: Gain on disposal
3,000
$15,000

29. Amortization Period, the Shorter of
13-11 Intangible Assets
Asset Type
Legal Life
Amortization Period, the Shorter of
Minimum
Maximum
Patents
20 years
Useful life
Franchise & Licenses
By contract of indefinite
40 years
Copyrights
Life of creator plus 50 years
Not Amortized
Goodwill
Indefinite
Trademarks & Tradenames