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