Chapter 7 Long-Term Assets
Profit Margin
Earnings per dollar of sales Net income/net sales
Double Declining Balance Depreciation
Might be more reasonable to assume that the asset will provide greater benefits in the earlier years of its life than in the later years. - Usually 2x straight line rate - Multiply (depreciation rate) * (book value) NOT depreciable cost
Loss on Sale
- expense account - recorded on the income statement - decreases net income (and thus retained earnings)
Gain on Sale
- revenue account - recorded on the income statement - increases net income (and thus retained earnings)
Asset Impairment Steps
1) Test for Impairment => Future CF < Book Value 2) If impaired, record loss => Book Value - Fair Value
Activity Based Depreciation
Allocate an asset's cost based on use rather than time
Record Tangible Assets
Cost + expenses necessary to get asset ready for use
Acquisitions
Cost = original cost of asset + expenditures to get asset ready for use
Legal Defense of Intangible Assets
Cost of legally defending the right that gives intangible asset its value If defense successful => capitalize litigation costs If defense unsuccessful => expense litigation costs (no future benefits)
Natural Resources
Distinguished from other assets by the fact that they are physically used up, or depleted - Recorded at cost + expenses necessary to get resource ready for use
Impairment
Estimated future cash flows (future benefits) generated for a long-term asset fall below its book value.
Copyright
Exclusive right of protection given to the creator of a published work (life of creator + 70 years) - Accounting same as patent
Goodwill
Goodwill is recorded by the acquiring company for the amount that the purchase price exceeds the fair value of the acquired company's identifiable net assets. - Intangible asset = amount paid - basket got (asset - liabilities) = purchase price - fair value of identifiable net assets net assets = asset acquired - liabilities assumed
Recording Goodwill
If Goodwill is internally generated => expense as occurs
Land Improvements
Improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation
Franchises
Local outlets that pay for the exclusive right to use the franchisor's name and to sell its products within a specified geographical area - Initial fee as intangible asset (franchisee) - Additional periodic payments by the franchisee usually are for services the franchisor provides on a continuing basis. (franchisee expenses)
straight line depreciation
Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life. Depreciation Expense = (book value - residual value) * (depreciation rate)
Intangible Asset Amortization
Most use straight line amortization Debit: Amortization Expense Credit: Patent/Franchise...
Capitalization
Record the expenditures as an asset on the Balance Sheet - for expenditures that benefit future periods e.g., capitalize the acquisition cost of PPE
Expensing
Record the expenditures as an expense on the Income Statement, e.g., expense the managers' salaries - items that only benefit the current period
Methods of Asset Disposal
Sale: Most common method to dispose of a long-term asset Retirement: Occurs when a long-term asset is no longer useful but cannot be sold Exchange: Two companies trade long-term assets
Amortization
Similar to depreciation, in which we allocate the cost of intangible assets over their estimated service lives. - allocate cost of intangible assets to expense - Many firms credit amortization to intangible asset account rather than to accumulated amortization
Trademarks
Word, slogan, or symbol that distinctively identifies a company, product, or service (renewable for infinite 10 year periods) - Purchase => Capitalize purchase price, legal, registration, and design fees - Develop internally => records the advertising costs as expense when incurred
Depreciation
allocation of asset cost over time
Acquisition
amounts to include in their initial cost
Capitalize
ecording an expenditure as an asset. After initially being recorded as an asset, most capitalized expenditures are expensed over time as the asset is used in company operations
Fair Value of an Asset
estimated standalone selling price
Patents
exclusive rights to make or sell inventions (20 years) - Purchased => Capitalize the purchase price plus legal and filing fees - Developed internally => capitalize legal & filing fees // expense R&D
Cost Allocation
expense their cost while using them
Equipment
machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures price + prep costs Recurring costs (ie. property insurance & tax) are expensed
Return on Assets
net income/average total assets - Indicates income generated for dollar invested in assets
Intangible Assets
patents, copyrights, trademarks, franchises, and goodwill - no physical substance but valuable (existence on legal contract) - Acquired (purchased, developed internally)
Basket Purchases
purchase of more than one asset at the same time for one purchase price - Use relative fair values to record into each account
Asset Disposition
record LT asset sale or disposal at end of long term life
Expenditure
relates only to operations in the current year would be expensed fully in that year
Asset Turnover
sales per dollar of assets invested Net sales / average total assets