1. Page 368 see Balance Sheet of FedEx

2. Types of Assets,P.369 ► 1) Plant Assets or Fixed Assets ► 2) Intangible Assets

3. Plant Assets or Fixed Assets ► Land ► Buildings, Machinery and Equipment (FedEx) ► Furniture and fixtures ► Land Improvements and Leasehold Improvements ► Natural resources

4. Intangible Assets, P.389 ► Patents ► Copyrights ► Trademarks or trade names ► Franchises and Licenses ► Goodwill-When the purchase price is above Market value “you give more”

5. P.369 P.369 ► Land-The cost of land includes its purchase price(Cash, plus any note payable), brokerage Commission, survey fee, legal Fee, and any back property taxes. It also includes grading and clearing the land and for demolishing or removing unwanted buildings

6. P.369 P.369 ► However, it does not include the cost of fencing, paving, security systems and lighting of the property, these are called land improvements and subject to depreciation. ► See sample on page 370

7. Lump sum purchase of assets, P. 371 ► Suppose FedEx purchased 2 acres of land with a building sitting on top of it, the combined purchased price is $2,800,000.00 and the appraised market value (MV) for land is $300,000.00 and $2,700,000.00 for the building or a total of $3,000,000.00

8. Lump sum purchase of assets, P. 371 ► How would you identify the cost of each asset? Land and building? ► Relative Sales Value Method ► $300,000.00 / $3,000,000.00 or 10% of MV ► $2,700,000.00 /$3,000,000.00 or 90% of MV

9. Lump sum purchase of assets, P. 371 ► So, 10% of the purchased price of $2,800,000.00 or $ 280,000.00 is for Land ► And 90% of $2,800,000.00 or $2,520,000.00 is for building ► $ 280,000.00 Cost of land ► + 2,520,000.00 Cost of Building ► = $2,800,000.00

10. Do exercise on P.406 (P7-48A) ► $280,000.00=land($350,000.00 x.8) ► 5,900.00=Delinquent Real Estate tax ► 8,100.00=landscaping (dirt and earth moving) ► 600.00=Attorney fee for title search insurance ► $294,600.00=Land

11. Do exercise on P.406 (P7-48A) ► $31,600.00=Fence ► 1,800.00=Company Signs ► 52,300.00=parking lot ► 7,300.00=lights ► 6,400.00=landscaping (trees and shrubs) ► 3,600.00=9% of $40,000.00(salary cost) ► $103,000.00=Land Improvements

12. Do exercise on P.406 (P7-48A) ► 300.00=Building permit ► 19,800.00=Architect fee for design ► 516,000.00=Masonry and carpentry ► 9,000.00=Interest Cost ► 34,000.00=85% of $40,000.00(salary cost) ► $579,100.00=Sales Building ► Why not add.20% to Building?

13. Do exercise on P.406 (P7-48A) ► 41,800.00=Renovation of garage ► 2,400.00=6% salary cost to garage ► 70,000.00=20% of purchase price to garage NOT to sales building ► 114,200.00=Total cost of Garage Building

14. Do exercise on P.406 (P7-48A) ► $79,400.00=Sales building Furniture ► 1,800.00=Transportation of furniture ► $81,200.00=Furniture

15. Capital Expenditures, P.372 ► Expenditures (Expenses) that increase the asset’s capacity or extend its useful life. ► For example: FedEx truck engine overhaul is a capital expenditure

16. Capital Expenditures, P.372 ► Capital expenditures are said to be capitalized, which means the cost is added to an asset account and not expenses immediately ► For example if the FedEx truck cost $50,000.00 and your repair cost $10,000.00 your total cost of the truck is $60,000.00

17. But why do we need to capitalize it and not put it to expense?

18. Immediate expense, P.372 ► Cost that do not extend the asset’s capacity or its useful life, but merely maintain the asset or restore it to working order are recorded as expenses. ► For example: buying a new tire for the FedEx truck or repainting it.

19. ► but the question is, When do you capitalize it (asset-balance sheet) and when do you expense it (expense-income statement)?

20. ► record an asset for capital expenditures when it involves Extraordinary repairs and it will prolong its useful life.

21. ► and record repair and maintenance expense and not an asset, for an expensefor ordinary and minor repairs if it maintains the asset in its running condition ► For example: YOU are the asset, YOU got sick and YOU need an operation or YOU just need to take a medicine to maintain your health

22. Consequences of mistakes Consequences of mistakes If an asset is improperly capitalized- a repair cost is capitalized instead of expensed- Assets will be overstated and because no expense has been recorded, net income is also overstated but in fact net income is understated. If an asset is improperly capitalized- a repair cost is capitalized instead of expensed- Assets will be overstated and because no expense has been recorded, net income is also overstated but in fact net income is understated.

23. Consequences of mistakes Consequences of mistakes ► If an asset is improperly expensed, assets will be understated and net income will also be understated but in fact net income is overstated

24. Depreciation, P. 374 Depreciation, P. 374 ► Depreciation-the process of allocating an assets cost to expense ► What causes depreciation? ► 1) Physical wear and tear-example? ► 2) Obsolescence-example?(No longer in Use)

25. Depreciation, P. 374 Depreciation, P. 374 ► How do you measure depreciation? ► 1)Cost (cost of an asset) ► 2) estimated useful life (5, 20 yrs for an Air plane) ► 3) Estimated residual value

26. Depreciation, P. 374 Depreciation, P. 374 ► Estimated residual value- also called scrap value or salvage value, is the expected cash value at the end of its useful life ► Example: cost of truck $41,000.00 ► Estimated residual value 1,000.00 ► Depreciable cost $40,000.00 ► Estimated useful life is 5 years ► Or Units of production is 100,000.00 units(miles) for the next 5 years

27. Methods of depreciation,P376 ► 1) So if you use straight line method, (SL) your accumulated depreciation is $8,000.00 ► $41,000.00-1,000.00=$40,000.00/5 years ► 2) The units of production method- (UOP) ► Cost – residual value/useful life in units ► $41,000.00-1,000.00=$40,000.00/100,000.00 ► $.40 per mile( see exhibit 7-6) for computation (P. 377) ►

28. Methods of depreciation,P.377 ► 3) The double declining balance method(DDB) ► 1st, compute straight line depreciation rate ► 2 nd, multiply straight line rate by 2 to get DDB rate ► 3 rd, multiply DDB rate by the beginning asset book value(less accumulated depreciation) ► 4 th, determine the final year’s depreciation amount ( see exhibit 7-7, on P. 378) ► DDB rate=40,000/5=8,000.00/40,000.00 =.20 (or 1/5) =.20 x 2=.40 ►

29. Comparing Depreciation methods ► See exhibit 7-8 on P. 379 for comparison ► Solve S7-5 on page 398