1. Accounting for Long- Term Operational Assets Chapter Eight Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. 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.

3. 8-2 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 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

4. 8-3 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?

5. 8-4 Depreciation Methods 1.Straight-line method - the same amount is depreciated each accounting period. 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. 3.Units-of-Production – produces varying amounts of depreciation in different accounting periods depending upon the number of units produced. 1.Straight-line method - the same amount is depreciated each accounting period. 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. 3.Units-of-Production – produces varying amounts of depreciation in different accounting periods depending upon the number of units produced.

6. 8-5 Straight-Line Depreciation Life Cycle Phase 1 Acquire $25,000 cash from the sale of common stock to purchase the van.

7. 8-6 Straight-Line Depreciation Life Cycle Phase 2 Purchase the van on January 1, 2011, for a net cost of $24,000.

8. 8-7 Straight-Line Depreciation Life Cycle Phase 3 Use the van to generate $8,000 revenue for the period. Depreciation expense calculated under straight-line is determined as followed: (Asset Cost – Salvage Value) ÷ Useful Life ($24,000 – $4,000) ÷ 4 = $5,000 depreciation

9. 8-8 Straight-Line Depreciation Life Cycle Phase 3 Use the van to generate $8,000 revenue for the period. Depreciation expense calculated under straight-line is determined as followed:

10. 8-9 Straight-Line Depreciation Life Cycle Phase 4 On January 1, 2015, the van is sold for $4,500 cash.

11. 8-10 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.

12. 8-11 Double-Declining-Balance Method See how double-declining-balance depreciation works (1 ÷ 4) = (25% straight-line rate × 2) = 50%

13. 8-12 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

14. 8-13 Units-of-Production Depreciation Here is the depreciation charge per mile driven in our van: $24,000 – $4,000 100,000 miles =$0.20 per mile Here is the calculation of depreciation expense based on miles driven:

15. 8-14 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

16. 8-15 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.