Ch. 7 Long-Term Assets

ASSET ACCOUNT or EXPENSE of the current period:

"Is this a cost of acquiring this asset and getting it ready for use, or is it a recurring cost that benefits the company in the current period?"

Sustainability

"Meeting the needs of the present without compromising the ability of future generations to meet their own needs."

Advertising costs factor into Trademark

Expense Advertising Costs in the INCOME STATEMENT.

Repairs and Maintenance

Expense because they maintain a given level of benefits in the period incurred. - Capitalize more extensive repairs that INCREASE the future benefits.

Land and Land improvements are recorded separately because:

Land is an asset that does not depreciate. (It's life in indefinite) Land Improvements have limited lives.

Tangible Assets

Land, land improvements, buildings, equipment, and natural resources.

Exception to the Rule:

Legal Fees of securing a internally developed patent. - *Recorded in the Patent Asset Account

Trademark

A word, slogan, or symbol that distinctively identifies a company, product, or service. - Lasts for 10 years, renewed an indefinite number of times.

Goodwill also

- Cannot be separated sand sold individually if the company. - Largest & Most confusing Intangible Asset recorded in the Balance Sheet.

When making an expenditure:

1.) Recording it as an EXPENSE of the current period 2.) Recording it as an ASSET & then allocating that cost as an expense over future periods. <Capitalize>

Long-term Assets

1.) Tangible Assets 2.) Intangible Assets

Companies acquire Intangible Assets in two ways:

1.) They PURCHASE intangible assets like patents, copyrights, trademarks, or franchise rights from other entities. 2.) They CREATE intangible assets internally, by developing a new product or process and obtaining a protective patent.

Land Improvements

Adding parking lot, sidewalks, driveways, landscaping, lighting systems, fences, sprinklers, and similar additions.

Copyright

An exclusive right of protection given by the U.S. Copyright Office to the creator of a published work; such as a song, a film, a painting, photograph, book, or computer software. - Lasts for the creator's lifetime + 70 years Accounting costs are identical to that of Patents.

Patents

An exclusive right to manufacture a product or to use a process. - Lasts 20 years

We expense an expenditure if it

Benefits only the current period.

Unique accounting issues arise when a firm:

Constructs a building rather than purchasing it.

Capitalized costs include:

Cost + ALL expenditures necessary to get the asset ready for use. Purchase price + closing costs + recording fees + (any back taxes or obligations)

Franchises

Local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area.

Equipment

Machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures.

Recurring equipment costs are NOT part of the equipment cost, we:

Expense them as we incur them.

Matching Principle

Expenses are to be matched with the revenues they help to create (Included on the same INCOME STATEMENT).

Advertising Costs reported as:

Expenses in the Income Statement.

Benefits to Franhcisee

Franchisor's participate in the construction of the retail outlet, training employees, and purchasing national advertising.

Treatment of R&D costs

IFRS says: Research expenditures are expensed in the period incurred; Development costs that benefit future periods can be recorded as an intangible asset. U.S. GAAP says: Expense all R&D expenditures in the period incurred.

Acquisitions

Identify assets and measure their costs.

Buildings

Include administrative offices, retail stores, manufacturing facilities, and storage warehouses.

We capitalize an expenditure as an asset if it

Increases future benefit.

Capitalized Interest

Interest costs we add to the ASSET account rather than recording them as INTEREST EXPENSE.

A company's most valuable intangible asset is:

Its Trademark or Brand.

During the construction of a building, no revenues are created therefore, INTEREST represents a cost similar to:

Materials, labor, and overhead necessary in preparing an asset for use.

Natural Resources

Oil, natural gas, timber, and even salt.

Reporting purchased intangibles

On the BALANCE SHEET, record purchased intangible assets at their original cost + all other costs, such as legal and filing fees, necessary to get the asset ready for use.

Properly report Tangible & Intangible Assets

On the Balance Sheet: 1.) Which amounts to include in their cost 2.) How to expense their costs while using them 3.) how to record their sale or disposal at the end of their usual life.

If a company borrows money to finance the construction of an asset, the INTEREST PAID to borrow the funds is:

Part of the ASSET'S COST.

Intangible Assets

Patents, trademarks, copyrights, franchises, and goodwill. - Lack physical substance; existence based on legal contract.

Depreciation

Process of allocating the cost of an asset over its life.

We record Goodwill as an intangible asset on the balance sheet ONLY when we:

Purchase it as part of the acquisition of another company. Goodwill = Purchase price - the fair value of the net assets acquired

Trademark Asset Account

Record Attorney fees, registration fees, design costs, successful legal defense, and other costs directly related to securing the trademark as an intangible asset. Estimate value of the trademark is NOT recorded on the balance sheet.

Capitalize

Recording an expenditure as an asset.

Expenditures after Acquisition

Repair, maintenance, additions, improvement. We CREDIT these costs to cash, accounts payable, or notes payable; DEBIT either an asset or expense.

Land

Represents land a company is using in operations. (Not for investment purposes - recorder separately in investment account)

Intangible Assets are recorded as an EXPENSE to the INCOME STATEMENT, NOT an asset on the balance sheet due to:

The difficulty in determining the portion that benefits future periods.

Goodwill

The value of a company as a whole, over and above the value of its identifiable net assets. - Value can emerge from a company's reputation, its trained employees, management team, its favorable business location, and any other unique features of the company that we are unable to associate with a specif asset.

How much should we record in the separate accounts?

We allocate the total purchase price based on the estimated fair values of each.

Reporting Internally Developed Intangibles

We expense to the INCOME STATEMENT most of the costs for internally developed intangible assets as we incur these costs.

We expense them as we incur them because:

We have to properly match them with the revenues generated during the same period.

Property, Plant, and Equipment

We record a long-term asset as its cost PLUS all expenditures necessary to get the asset ready for use.

Basket Purchases

When companies purchase more than one asset at the same time for ONE purchase price.

Unlike property, plant, and equipment - Natural Resources can be:

physically used up or depleted. *Sustainability is a primary concern.

Fair value of the net assets =

value of all identifiable assets acquired - the value of all liabilities assumed.

Making an expenditure depends on:

when the company benefits from having the assets. - Either in the: CURRENT period or FUTURE period