1. Chapter Six Accounting for Long-Term Operational Assets © 2015 McGraw-Hill Education.

2. Intangible Assets 1.Intangible Assets with Identifiable Useful Lives 1.Intangible Assets with Identifiable Useful Lives – These intangibles include patents and copyrights. We amortize the cost of each over its useful life. 2.Intangible Assets with Indefinite Useful Lives 2.Intangible Assets with Indefinite Useful Lives - These intangibles include 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. 6-2

3. Cost of Long-Term Assets Buildings – Purchase price, Sales taxes, Title search and transfer document costs, Realtor’s and attorney’s fees, and Remodeling costs. Buildings – Purchase price, Sales taxes, Title search and transfer document costs, Realtor’s and attorney’s fees, and Remodeling costs. Equipment – Purchase price (less discounts), Sales taxes, Delivery costs, Installation costs, and.Costs to adapt to intended use. Equipment – Purchase price (less discounts), Sales taxes, Delivery costs, Installation costs, and.Costs to adapt to intended use. 6-3

4. Cost of Long-Term Assets Land – Purchase price, Sales taxes, Title search and transfer document costs, Realtor’s and attorney’s fees, Costs of removal of old buildings, and Grading costs. Land – Purchase price, Sales taxes, Title search and transfer document costs, Realtor’s and attorney’s fees, Costs of removal of old buildings, and Grading costs. 6-4

5. Basket Purchase Allocation Beatty Company paid $240,000 for land and a building. An independent appraiser provided these fair value estimates: land $90,000, and building $270,000. The $240,000 cost paid is separately assigned based on % of total fair value. 6-5

6. Basket Purchase Allocation The land and building that Beatty Company are assigned their own allocation of the $240,000 paid based on the individual % of total fair value. The “Allocation” is the amount recorded in the accounting records. 6-6

7. Life Cycle of Operational Assets Acquire Funding Buy Asset Use Asset Retire Asset 6-7

8. Depreciation Method 1.Straight-line method - the same amount of depreciation is taken 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 of depreciation is taken 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

9. Revision of Estimates Estimates are frequently revised when new information surfaces. Assume we purchased equipment on January 1, 2016, for $50,000 cash and estimated salvage value was $3,000. The equipment has an estimated useful life of eight years, and the company uses straight-line depreciation. ($50,000 – $3,000) ÷ 8 = $5,875 depreciation per year On January 1, 2020, after four years of depreciation, it was determined that the machine has a remaining useful life of ten more years for a total estimated useful life of fourteen years. 6-9

10. Revision of Life Estimates Year Annual Depreciation Accumulated Depreciation Book Value 20165,875$ $ 44,125$ 20175,875 11,750 38,250 20185,875 17,625 32,375 20195,875 23,500 26,500 2020 2021 2022 2023 We determine the remaining annual depreciation like this: $26,500 – $3,000 = $23,500 ÷ 10 years = $2,350 per year for years 2020 through 2029 Year Annual Depreciation Accumulated Depreciation Book Value 20165,875$ $ 44,125$ 20175,875 11,750 38,250 20185,875 17,625 32,375 20195,875 23,500 26,500 20202,350 25,850 24,150 6-10

11. Revision of Salvage Estimates We determine the remaining annual depreciation like this: $26,500 – $6,000 = $20,500 ÷ 4 years = $5,125 per year Year Annual Depreciation Accumulated Depreciation Book Value 20165,875$ $ 44,125$ 20175,875 11,750 38,250 20185,875 17,625 32,375 20195,875 23,500 26,500 2020 7 5,125 28,625 21,375 20215,125 33,750 16,250 20225,125 38,875 11,125 20235,125 44,000 6,000 Year Annual Depreciation Accumulated Depreciation Book Value 20165,875$ $ 44,125$ 20175,875 11,750 38,250 20185,875 17,625 32,375 20195,875 23,500 26,500 2020 2021 2022 2023 6-11

12. Continuing Expenditures for Plant Assets 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 McGraw spent $500 cash for routine lubrication and minor parts on machinery. 6-12

13. Continuing Expenditures for Plant Assets Costs that Are Capitalized Expenditures that improve the quality of an asset are capitalized as part of the cost of that asset. Assume McGraw spent $4,000 cash for a major overhaul of equipment to improve efficiency. 6-13

14. Continuing Expenditures for Plant Assets Costs that Extend the Life of an Asset The amount of the expenditure should reduce the balance in the accumulated depreciation account. Assume McGraw spent $4,000 cash for improvements that extended the life of machine two years. 6-14

15. 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 6-15

16. 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. 6-16

17. 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. 6-17

18. Goodwill ASSUME: Your company is willing to pay $350,000 ($300,000 cash and assumption of $50,000 liabilities) to acquire Seller Company. Assets280,000$ Liabilities50,000$ Stockholders' Equity230,000 Total280,000$ Seller Company Balance Sheet At December 31, 20XX Goodwill The excess of cost over fair value of net tangible assets acquired in a business acquisition. 6-18

19. Impairment of Intangible Asset Intangible assets with indefinite useful lives must be tested for impairment annually. If the fair value of the intangible asset is less than its book value, an impairment loss is recognized. Assume that the asset goodwill is determined to be impaired and a decline in value of $30,000, The effects on the financial statements would be: 6-19

20. Balance Sheet Presentation 6-20

21. End of Chapter Six 6-21