1. Chapter 7
LONG TERM ASSETS

2. ACQUISITION & IMPROVEMENTS
PART A
ACQUISITION & IMPROVEMENTS

3. PROPERTY, PLANT, EQUIPMENT (PPE)
Land
Land Improvement
Building
Equipment

4. LAND Use in Business – not for investment
Purchase Price (Historical Cost)
+ Closing Costs and any fees
+ Commissions

5. LAND IMPROVEMENTS Parking Lots Paving, Flowers (permanent), Fences,
Lighting
Will be depreciated

6. BUILDINGS
Administrative offices Retail stores Storage Warehouses Manufacturing Facilities Cost includes the purchase price, commissions, legal fees, anything that is required to get the building ready for use If new construction: include interest on loan while building. Once revenue is produced— interest will be an expense

7. EQUIPMENT Machinery Computers & office equipment Vehicles
Furniture and fixtures
Cost is the purchase price, transportation, tax, testing, installation, legal fees—any costs to prepare the asset to use

8. NATURAL RESOURCES Can be physically used up or depleted Oil
Natural Gas
Timber
Coal

9. INTANGIBLE ASSETS Intangible –can’t be felt Patents, Copyrights,
Trademarks,
Franchise Rights
Goodwill

10. Definitions
Patent – exclusive rights to manufacture a product or process 20 yrs add legal fees
Copyrights-- protection of published work 70 yrs
Trademark – word, slogan or symbol yrs
Franchises – pay to use name and sell its products. Cost is initial fee—rest is expensed
Goodwill – Value of a company over the value of its assets

11. CLICKERS A. PPE B. Intangible C. Natural Resource 1. Water
2. Mac’s Golden Arches
3. Sprinkler System
4. Store
5. Testing Machine
6. Timber
7. Rights to a story
8. Use of Process
9. Word or Slogan
10. Rights to sell a product

12. Purchase vs creating Intangibles
Purchase – can tell the value of the asset
Create – can’t tell the value
Purchase – like PPE – cost of getting ready to use
Create – R&D – must expense—can’t determine future benefit

13. CAPITALIZE vs EXPENSE CAPITALIZE – record as an asset - depreciate
EXPENSES – record on income statement
We capitalize an expenditure as an asset if it increases future benefits, whereas we expense an expenditure if it benefits only the current period.

14. Costing an Asset Examples
Land BE 7-1 pg 332
Equipment BE 7-2 pg 332
Goodwill BE 7-3 pg 332

15. Expenditures after Acquisition
Repairs and Maintenance (Minor) – expense
Repairs and Maintenance (Major) - capitalize
Addition – major addition –capitalize
Improvements -- Capitalize
Legal Defense of Intangible Asset

16. Examples of After Acquisiting
BE 7-5 pg 332

17. PART B
COST
ALLOCATION

18. Terminology
Depreciation – taking cost from balance sheet to income statement
Accumulated Depreciation (A.D) - Accumulation of depreciation for life of asset (Contra Asset)
Book Value = Cost – A.D.
Salvage Value = Value of asset at the end of its life
Depreciable Cost – Cost less Salvage Value
LAND DOES NOT DEPRECIATE

19. DEPRECIATION METHODS
Straight-line(SL) –Conservative- doesn’t affect Net Income
Depreciable Cost/Life
Declining-Balance(DDB) – Aggressive –
Book Value X Depreciation Rate
Book Value not Salvage Value
Activity Based (UOP) – Average
Depreciable Cost / # of units expected
Tax Depreciation - MACRS

20. Examples: BE 7-8 pg 332

21. Journal Entry
Depreciation Expense
Accumulated Depreciation

22. DEPRECIATION SCHEDULE
Straight Line pg 313
Declining Balance pg 314
Activity Based pg 316
Comparison pf 316

23. AMORTIZATION Intangible Assets with a definite life
Depreciable Cost/ Life Like SL
Unlimited life do not amortize –like LAND
Amortization Expense
Patent or Franchise

24. Amortization Expense Example
BE 7-9 pg 333

25. PART C
ASSET DISPOSITION

26. Asset Deposition
Sale
Retirement
Exchange

27. Sale of an Asset Cash Accum Depr Loss (if Cash is less than BV) Asset
Gain (if Cash is more than BV)

28. Example of Sale of Asset
BE 7-10 pg 333

29. Retirement
Accumulated Depr
Loss on Retirement
Asset

30. Exchange(Trade-In) New Asset Accum Depr (old) Cash or A/P Old Asset
Gain (if more than BV)

31. Both Sides of Exchange
Buyer BE 7-11 pg 333
Seller BE 7-12 pg 333

32. Asset Analysis Return on Assets Profit Margin Asset Turnover
Net Income/ Avg Total Assets
Profit Margin
Net Income/ Net Sales
Asset Turnover
Net Sales/ Average Total Assets
Return on Assets =
Profit Margin X Asset Turnover

33. Asset Analysis
BE 7-13 pg 333

34. Asset Impairment
Impairment Loss = difference between the asset’s book value and its fair value
Like Lower of Cost or Market
Impairment Loss
Trademark

35. Asset Impairment
BE 7-14 and pg 333