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25-Mar-14

Classifying Long-Lived Assets

Akuntansi

LONG-LIVED ASSETS are tangible and


intangible resources owned by a business and
used in its operations over several years.

Chapter 8
Reporting and Interpreting Property,
Plant, and Equipment; Natural
Resources; and Intangibles

TANGIBLE ASSETS (or fixed assets) have physical


substance. Ex: Land, Buildings and equipment,
Natural resources.
INTANGIBLE ASSETS have special rights but not
physical substance.

Measuring and Recording Acquisition


Cost

Measuring and Recording Acquisition


Cost

Acquisition cost includes the purchase price and all


expenditures needed to prepare the asset for its intended use.
Acquisition cost does not include
financing charges and cash discounts.
Buildings
Purchase price
Renovation and repair costs
Legal and realty fees
Title fees

Equipment
Purchase price
Installation costs
Modification to building
necessary to install
equipment
Transportation costs

Land
Purchase price
Real estate commissions
Title insurance premiums
Delinquent taxes
Surveying fees
Title search and transfer fees

Land is not depreciable.

Cash
Acquisition Cost

Debt
Acquisition Cost

25-Mar-14

Equity (or Other Noncash Considerations)


Acquisition Cost

Construction
Acquisition Cost
A company may construct an asset for its own
use instead of buying it from a manufacturer.
Capitalized interest the cost of the asset
includes all the necessary costs associated with
construction, such as labor, materials, and in
most situations, a portion of the interest incurred
during the construction period.

Acquisition Cost

Acquisition Cost

McDonalds Corporation purchased property, plant, and equipment priced at


$2.1 billion. Assume that the company also paid $168 million for sales tax; 20
million for transportation costs; $12 million for installation and preparation of
the property, plant, and equipment before use; and $1 million in maintenance
contracts to cover repairs to the property, plant, and equipment during use.
1. Compute the acquisition cost for the property, plant, and equipment:
2. How did you account for the sales tax, transportation costs, and
installation costs? Explain.
3. Under the following assumptions, indicate the effects of the acquisition
on the accoun?ng equa?on. Use + for increase and for decrease
and indicate the accounts and amounts

McDonalds Corporation purchased property, plant, and equipment


priced at $2.1 billion. Assume that the company also paid $168 million
for sales tax; 20 million for transportation costs; $12 million for
installation and preparation of the property, plant, and equipment
before use; and $1 million in maintenance contracts to cover repairs to
the property, plant, and equipment during use.
1. Compute the acquisition cost for the property, plant, and
equipment:

Because the maintenance contracts are not necessary to ready the


assets for use, they are not included in the acquisition cost.

Acquisition Cost

Acquisition Cost

McDonalds Corporation purchased property, plant, and equipment


priced at $2.1 billion. Assume that the company also paid $168 million
for sales tax; 20 million for transportation costs; $12 million for
installation and preparation of the property, plant, and equipment
before use; and $1 million in maintenance contracts to cover repairs to
the property, plant, and equipment during use.

McDonalds Corporation purchased property, plant, and equipment


priced at $2.1 billion. Assume that the company also paid $168 million
for sales tax; 20 million for transportation costs; $12 million for
installation and preparation of the property, plant, and equipment
before use; and $1 million in maintenance contracts to cover repairs to
the property, plant, and equipment during use.

2. How did you account for the sales tax, transportation costs, and
installation costs? Explain.

3. Under the following assumptions, indicate the effects of the


acquisi?on on the accoun?ng equa?on. Use + for increase and for
decrease and indicate the accounts and amounts

Sales tax and transportation and installation costs are capitalized


because they are reasonable and necessary for getting the asset ready
for its intended use.

25-Mar-14

Repairs, Maintenance, and Additions


Type of
Expenditure

Capital or
Revenue

Identifying Characteristics

Ordinary
Revenue
1. Maintains normal operating condition
repairs and Expenditures 2. Does not increase productivity
maintenance
3. Does not extend life beyond original
estimate

Repairs, Maintenance, and Additions


A building that originally cost $400,000 has been used over
the past 10 years and needs continual maintenance and
repairs. For each of the following expenditures, indicate
whether it should be expensed in the current period or
capitalized as part of the cost of the asset.

Extraordinary
Capital
1. Major overhauls or partial
repairs
Expenditures
replacements
2. Extends life beyond original estimate
Additions

Capital
Expenditures

1. Increases productivity
2. May extend useful life
3. Improvements or expansions

Repairs, Maintenance, and Additions


A building that originally cost $400,000 has been used over
the past 10 years and needs continual maintenance and
repairs. For each of the following expenditures, indicate
whether it should be expensed in the current period or
capitalized as part of the cost of the asset.

Depreciation Concepts

Depreciation Concepts
Depreciation is a cost allocation process that systematically and
rationally matches acquisition costs of operational assets with
periods benefited by their use.
Balance Sheet
Acquisition
Cost
(Unused)

Income Statement
Cost

Expense

Allocation

(Used)

Depreciation
Expense

Depreciation for
the current year

Income
Statement

Accumulated
Depreciation

Total of depreciation
to date on an asset

Balance
Sheet

Depreciation Concepts

25-Mar-14

Depreciation Concepts

Straight-Line Method

The calculation of depreciation requires


three amounts for each asset:
 Acquisition cost.
 Estimated useful life.
 Estimated residual value.

Alternative depreciation methods:


Straight-line
 Units-of-production
Accelerated Method: Declining balance

Straight-Line Method

Depreciation expense is a constant amount each


year.
Accumulated depreciation increases by an equal
amount each year.
Net book value decreases by the same amount
each year until it equals the estimated residual
value.

Units-of-Production Method
Allocates the cost of an asset over its useful
life based on the relation of its periodic output
to its total estimated output.

Units-of-Production Method

Declining-Balance Method
Allocates the cost of an asset over its useful
life based on a multiple of the straight-line
rate (often two times).

25-Mar-14

Declining-Balance Method

Depreciation Concepts

Depreciation Concepts

Depreciation Concepts

Assume that Southwest has acquired new computer


equipment at a cost of $240,000. The equipment
has an estimated life of six years, an estimated
operating life of 50,000 hours, and an estimated
residual value of $30,000. Determine depreciation
expense for the first full year under each of the
following methods:
1. Straight-line method.
2. Units-of-production method (assume the
equipment ran for 8,000 hours in the first year).
3. Double-declining-balance method.

Assume that Southwest has acquired new computer


equipment at a cost of $240,000. The equipment has an
estimated life of six years, an estimated operating life of
50,000 hours, and an estimated residual value of $30,000.
Determine depreciation expense for the first full year under
each of the following methods:
1. Straight-line method.
($240,000 $30,000) 1/6 = $35,000
2. Units-of-production method (assume the equipment ran
for 8,000 hours in the first year).
[($240,000 $30,000) 50,000] 8,000 = $33,600
3. Double-declining-balance method.
($240,000 $0) 2/6 = $80,000

Measuring Asset Impairment

Measuring Asset Impairment

Impairment is the loss of a significant portion


of the utility of an asset through . . .
Casualty.
Obsolescence.
Lack of demand for the assets services.

Recognize a
loss when
an asset
suffers a
permanent
impairment.

Disposal of Property, Plant and Equipment


Voluntary disposals:
Sale
Trade-in
Retirement
Involuntary disposals:
Fire
Accident

25-Mar-14

Measuring Asset Impairment


Assume that Southwest did a review for asset
impairment and identified an aircraft with the
following information:

Measuring Asset Impairment


Step 1: Net book value of $10 million > the
estimated future cash flows of $8 million
impaired
Step 2: Impairment Loss = $10 million $7.5
million = $2.5 million

Disposal of Property, Plant, and


Equipment

Disposal of Property, Plant, and


Equipment

Update depreciation
to the date of disposal.

Assume that at the end of year 17, Southwest sold an aircraft


that was no longer needed because of the elimination of
service to a small city. The aircraft was sold for $11 million
cash. The original cost of the flight equipment of $30 million
was depreciated using the straight-line method over 25 years
with no residual value ($1.2 million depreciation expense per
year).
The last accounting for depreciation was at the end of year 16;
thus, depreciation expense must be recorded for year 17. The
computations are:

 Journalize disposal by:


Recording cash
received (debit)
or paid (credit).

Recording a
gain (credit)
or loss (debit).

Writing off accumulated


depreciation (debit).

Writing off the


asset cost (credit).

Disposal of Property, Plant, and


Equipment
1. Update depreciation expense for year 17:

2. Record the sale:

Disposal of Property, Plant, and


Equipment
Assume that at the end of year 17, Southwest sold
an aircraft that was no longer needed because of
the elimination of service to a small city. The
aircraft was sold for $2 million cash. The original
cost of the flight equipment of $30 million was
depreciated using the straight-line method over 25
years with no residual value ($1.2 million
depreciation expense per year).

25-Mar-14

Disposal of Property, Plant, and


Equipment
1. Update depreciation expense for year 17:

Acquisition and Depletion of Natural


Resources
A noncurrent
Extracted from
the natural
environment.

asset presented
at cost less
accumulated
depletion.

Total cost of
asset is the cost
of acquisition,
exploration,
and development.

2. Record the sale:

Total cost is
allocated over
periods benefited
by means of
depletion.

Examples: oil, coal, gold

Depletion is like units-of-production depreciation.

Acquisition and Depletion of Natural


Resources

Acquisition and Amortization of


Intangible Assets
Noncurrent assets
without physical
substance.

Note that the amount of the natural resource that is


depleted is capitalized as inventory, not expensed.
When the inventory is sold, the cost of goods sold will be
included as an expense on the income statement.

Acquisition and Amortization of


Intangible Assets
Goodwill
Occurs when one
Only purchased
company buys
goodwill is an
another company.
intangible asset.
The amount by which the purchase price exceeds
the fair market value of net assets acquired.
Goodwill is not amortized. Its value must be reviewed
at least annually for possible impairment, and the
book value is reduced to fair value if impaired.

Useful life is
often difficult
to determine.

Intangible
Assets

Often provide
exclusive rights
or privileges.
Usually acquired
for operational
use.

Record at current cash equivalent cost, including


purchase price, legal fees, and filing fees.

Acquisition and Amortization of


Intangible Assets
Trademarks

Copyrights

A symbol, design, or
logo associated with
a business.

The exclusive right to


publish, use, and sell a
literary, musical, or
artistic work.

An exclusive legal right


to use a name, image
or slogan.

Legal life is life of


creator plus 70 years.

Purchased trademarks
are recorded at cost.

Amortize cost over the


period benefited.

25-Mar-14

Acquisition and Amortization of


Intangible Assets

Acquisition and Amortization of


Intangible Assets

Patents

Franchises

Exclusive right granted by the federal government to sell or


manufacture an invention.

Legally protected right


purchased by a
franchisee to sell
products or provide
services for a specified
period and purpose.

Cost is purchase price plus legal cost to defend.


Amortize cost over the shorter of useful life or 20 years.
Research and development costs that might result in a patent are
normally expensed as incurred.

Technology
A category of intangible assets that includes a companys website and
any computer programs written by its employees.

Purchase price is an
intangible asset that is
amortized.

Licenses and Operating


Rights
Limited permissions to use
a product or service
according to specific terms
and conditions.
You may be using
computer software that is
made available to you
through a campus
licensing agreement.