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Chapter 7LONG TERM ASSETS
PART A
ACQUISITION & IMPROVEMENTS
PROPERTY, PLANT, EQUIPMENT
(PPE)LandLand ImprovementBuildingEquipment
LANDUse in Business – not for
investmentPurchase Price (Historical Cost)+ Closing Costs and any fees+ Commissions
LAND IMPROVEMENTSParking LotsPaving,Flowers (permanent),Fences,LightingWill be depreciated
BUILDINGSAdministrative officesRetail storesStorage WarehousesManufacturing FacilitiesCost 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
EQUIPMENTMachineryComputers & office equipmentVehiclesFurniture and fixturesCost is the purchase price,
transportation, tax, testing, installation, legal fees—any costs to prepare the asset to use
NATURAL RESOURCESCan be physically used up or
depletedOilNatural GasTimberCoal
INTANGIBLE ASSETSIntangible –can’t be feltPatents,Copyrights,Trademarks,Franchise RightsGoodwill
DefinitionsPatent – exclusive rights to manufacture a
product or process 20 yrs add legal feesCopyrights-- protection of published work
70 yrsTrademark – word, slogan or symbol
10 yrsFranchises – 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
CLICKERSA. PPEB.
IntangibleC. Natural
Resource
1. Water2. Mac’s Golden Arches3. Sprinkler System4. Store5. Testing Machine6. Timber7. Rights to a story8. Use of Process9. Word or Slogan10. Rights to sell a
product
Purchase vs creating IntangiblesPurchase – can tell the value of
the assetCreate – can’t tell the valuePurchase – like PPE – cost of
getting ready to useCreate – R&D – must expense—
can’t determine future benefit
CAPITALIZE vs EXPENSECAPITALIZE – record as an asset -
depreciateEXPENSES – 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.
Costing an Asset ExamplesLand BE 7-1 pg 332Equipment BE 7-2 pg 332Goodwill BE 7-3 pg 332
Expenditures after AcquisitionRepairs and Maintenance (Minor)
– expenseRepairs and Maintenance (Major)
- capitalizeAddition – major addition –
capitalizeImprovements -- CapitalizeLegal Defense of Intangible Asset
Examples of After AcquisitingBE 7-5 pg 332
PART B
COSTALLOCATION
TerminologyDepreciation – taking cost from balance
sheet to income statementAccumulated 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 lifeDepreciable Cost – Cost less Salvage
ValueLAND DOES NOT DEPRECIATE
DEPRECIATION METHODSStraight-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
expectedTax Depreciation - MACRS
Examples: BE 7-8 pg 332
Journal EntryDepreciation Expense Accumulated Depreciation
DEPRECIATION SCHEDULEStraight Line pg 313Declining Balance pg 314Activity Based pg 316Comparison pf 316
AMORTIZATION Intangible Assets with a definite
lifeDepreciable Cost/ Life Like SL
Unlimited life do not amortize –like LAND
Amortization Expense Patent or Franchise
Amortization Expense ExampleBE 7-9 pg 333
PART C
ASSET DISPOSITION
Asset Deposition
SaleRetirementExchange
Sale of an AssetCashAccum DeprLoss (if Cash is less than BV) Asset Gain (if Cash is more than
BV)
Example of Sale of AssetBE 7-10 pg 333
Retirement Accumulated DeprLoss on Retirement Asset
Exchange(Trade-In)New AssetAccum Depr (old) Cash or A/P Old Asset Gain (if more than BV)
Both Sides of ExchangeBuyer BE 7-11 pg 333Seller BE 7-12 pg 333
Asset Analysis
Return on Assets Net Income/ Avg Total AssetsProfit Margin Net Income/ Net SalesAsset TurnoverNet Sales/ Average Total Assets
Return on Assets = Profit Margin X Asset Turnover
Asset AnalysisBE 7-13 pg 333
Asset ImpairmentImpairment Loss = difference
between the asset’s book value and its fair value
Like Lower of Cost or Market
Impairment Loss Trademark
Asset ImpairmentBE 7-14 and 7-15 pg 333