mcgraw-hill/irwincopyright © 2013 by the mcgraw-hill companies, inc. all rights reserved. chapter 9...

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 9

Long-Lived Tangible and Intangible Assets

PowerPoint Authors:Brandy MackintoshLindsay Heiser

9-2

Learning Objective 9-1

Define, classify, and explain the nature of long-lived assets.

9-3

Tangible

PhysicalSubstance

Intangible

No PhysicalSubstance

Will not be used up within the next year

Actively Used in Operations

Definition and Classification

Land Assets subject to depreciation

Buildings and equipmentFurniture and fixtures

Examples

Value represented by rights that produce benefits. Intangibles with a limited life, such as patents and copyrights, are subject to amortization. Intangibles with an unlimited (or indefinite) life, such as goodwill and trademarks, are not amortized.

9-4


Apply the cost principle tothe acquisition of long-lived

assets.

9-5

Acquisition of Tangible Assets

Recording costs as Recording costs as assets is calledassets is called

capitalizingcapitalizing the costs. the costs.

Recording costs as Recording costs as assets is calledassets is called

capitalizingcapitalizing the costs. the costs.

Acquisition cost includes:

1.purchase price, and

2.all expenditures needed to prepare the asset for its intended use.

9-6

Acquisition of Tangible Assets Purchase costPurchase cost Legal feesLegal fees Surveying feesSurveying fees Broker’s commissionsBroker’s commissions

LandLand

Purchase/construction Purchase/construction costcost

Legal feesLegal fees

Appraisal feesAppraisal fees

Architectural fees Architectural fees

BuildingsBuildings

Purchase/construction costPurchase/construction cost Sales taxesSales taxes Transportation costsTransportation costs Installation costsInstallation costs

EquipmentEquipment

9-7

The total cost of a combined purchase of land and building is allocated in proportion to their

relative market values.

The total cost of a combined purchase of land and building is allocated in proportion to their

relative market values.

Acquisition of Tangible Assets Basket Purchase

Appraised % of Purchase ApportionedAsset Value Value Price Cost

a b* c b × c

Land 175,000$ 35% × 400,000$ = 140,000$ Building 325,000 65% × 400,000 = 260,000 Total 500,000$ 100% 400,000$

* $175,000 ÷ $500,000 = 35%

$325,000 ÷ $500,000 = 65%

On January 1, Jones purchased land and On January 1, Jones purchased land and building for $400,000 cash. The appraised building for $400,000 cash. The appraised

values are building, $325,000, and land, values are building, $325,000, and land, $175,000. $175,000.

How much of the $400,000 purchase price will How much of the $400,000 purchase price will be charged to the building and land be charged to the building and land

accounts?accounts?

On January 1, Jones purchased land and On January 1, Jones purchased land and building for $400,000 cash. The appraised building for $400,000 cash. The appraised

values are building, $325,000, and land, values are building, $325,000, and land, $175,000. $175,000.

How much of the $400,000 purchase price will How much of the $400,000 purchase price will be charged to the building and land be charged to the building and land

accounts?accounts?

9-8

Acquisition of Tangible AssetsComponent Allocation

IFRS takes the idea of a basket purchase one step further. The cost of an individual asset’s components is allocated among each significant component and then depreciated separately over that component’s useful life.

9-9

Cash Purchase

Cedar Fair purchased a new ride for $26,000,000 less a $1,000,000 discount. Cedar Fair paid $125,000 for

transportation and $625,000 for installation of the ride.

Prepare the journal entry for the acquisition assuming Cedar Fair paid cash for the new ride.

2 Record

1 Analyze

9-10

Credit Purchase

Instead of paying cash, assume that Cedar Fair issued a note for the new ride, but paid cash for the transportation

and installation of the ride.

Prepare the journal entry for the acquisition.

1 Analyze

2 Record

9-11

Type of AccountingExpenditure Identifying Characteristics Treatment

Ordinary 1. Relatively small, recurring expenditures Expenserepairs and that maintain normal operating condition

maintenance 2. Do not increase productivity3. Do not extend life beyond original estimate

Extraordinary 1. Relatively large, infrequent expenditures Capitalizerepairs, such as major overhauls or replacements

replacements, of major componentsand additions 2. May extend useful life

3. May increase productivity or efficiency

Maintenance Costs Incurredduring Use

9-12

Depreciation is a cost allocation process that matches costs of operational assets with periods benefited by their use.

Cost Allocaton

Balance Sheet Income Statement

ExpenseAcquisition

Cost

Depreciation Expense

DepreciationExpense

IncomeStatement

Depreciation for

the current year

BalanceSheet

AccumulatedDepreciation

Total of depreciation

to date for an asset

9-13


Depreciation calculations require three amounts for each asset:

Acquisition cost.

Estimated useful life.

Estimated residual value.

The effects of $130 of depreciation on the accounting equation and the journal entry to record them follow:

1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+

AccumulatedDepreciation (+xA) -130

DepreciationExpense (+E) -130

2 Record

dr Depreciation Expense (+E, -SE) cr Accumulated Depreciation (+xA, -A) 130

130

9-14


2010 Depreciation

Includes $127 for 2010Book value 2010

9-15


Apply various depreciation methods as economic benefits

are used up over time.

9-16

Straight-line

Units-of-production

Declining balance

Depreciation Methods

At the beginning of the year, Cedar Fair At the beginning of the year, Cedar Fair purchased a new go-kart Ride for $62,500 cash. purchased a new go-kart Ride for $62,500 cash. The ride has an estimated useful life of 3 years or The ride has an estimated useful life of 3 years or 100,000 miles and an estimated residual value of 100,000 miles and an estimated residual value of

$2,500.$2,500.

We will use the following information to illustratethe three methods of depreciation:

9-17

Straight-Line Method

= $20,000 per year ($62,500 - $2,500) × 13

9-18

Units-of-Production Method

= $18,000 ($62,500 - $2,500) × 30,000

100,000

The ride has a 100,000-mile estimated useful life. The ride has a 100,000-mile estimated useful life. If the ride is used 30,000 miles in the first year, If the ride is used 30,000 miles in the first year, what is the amount of depreciation expense?what is the amount of depreciation expense?

9-19

Units-of-Production Method

9-20

Declining-Balance Method

= $41,667($62,500 - $0) × 23First Year

Second Year = $13,889($62,500 - $41,667) × 23

What is the amount of amount of depreciationfor each of the first two years?

Annual computation ignores residual value.Annual computation ignores residual value.

Cost – Accumulated Depreciation

9-21

Double-Declining-Balance Method

Third Year = $4,629($62,500 - $55,556) × 23

Depreciation expense is limited to the amount thatDepreciation expense is limited to the amount thatreduces book value to the estimated residual value.reduces book value to the estimated residual value.

9-22

Summary of Depreciation Methods

9-23

When a plant asset is acquired When a plant asset is acquired during the year, depreciation is during the year, depreciation is calculated for the fraction of the calculated for the fraction of the

year the asset is owned.year the asset is owned.

When a plant asset is acquired When a plant asset is acquired during the year, depreciation is during the year, depreciation is calculated for the fraction of the calculated for the fraction of the

year the asset is owned.year the asset is owned.

June 30

Partial Year Depreciation Calculations

9-24

Tax Depreciation

9-25


Explain the effect of asset impairment on the financial

statements.

9-26

Asset Impairment Losses


Rides andEquipment (-A) -63,000,000

Loss onImpairment (+E) -63,000,000

2 Record

dr Loss on Impairment (+E, -SE) cr Rides and Equipment (-A) 63,000,000

63,000,000

9-27


Analyze the disposal of long-lived tangible assets.

9-28

Update depreciation to date of disposal.

Record the disposal.

dr Cash (+A)

dr Accumulated Depreciation (-xA) cr Equipment (-A)

Book value

Disposal of Tangible Assets

cr Gain on Disposal (+R, +SE)

Gain if cash received is greater than asset’s book value

9-29

dr Cash (+A)

dr Accumulated Depreciation (-xA) cr Equipment (-A)

Book value


Update depreciation to date of disposal.

Record the disposal.

dr Loss on Disposal (+E, -SE)

Loss if cash received is less than asset’s book value

9-30

The amount of depreciation per year is:

a. $0.

b. $500,000.

c. $1,000,000.

d. $2,000,000.

Disposal of Tangible AssetsCedar Fair sold a hotel for $3,000,000 cash at the end of its Cedar Fair sold a hotel for $3,000,000 cash at the end of its

1616thth year of use. The hotel originally cost $20,000,000, and year of use. The hotel originally cost $20,000,000, and was depreciated using the straight-line method with zero was depreciated using the straight-line method with zero

residual value and a useful life of 20 years. residual value and a useful life of 20 years.

The amount of depreciation per year is:

a. $0.

b. $500,000.

c. $1,000,000.

d. $2,000,000.

Annual Depreciation:

($20,000,000 - $0) ÷ 20 Years

= $1,000,000 per year

9-31

Cedar Fair sold a hotel for $3,000,000 cash at the end of its Cedar Fair sold a hotel for $3,000,000 cash at the end of its 1616thth year of use. The hotel originally cost $20,000,000, and year of use. The hotel originally cost $20,000,000, and was depreciated using the straight-line method with zero was depreciated using the straight-line method with zero


The equipment’s book value at date of sale is:

a. $4,000,000.

b. $3,000,000.

c. $17,000,000.

d. $16,500,000.


The equipment’s book value at date of sale is:

a. $4,000,000.

b. $3,000,000.

c. $17,000,000.

d. $16,500,000.

Accumulated Depreciation =

(16 yrs. × $1,000,000) = $16,000,000

BV = Cost - Accumulated Depreciation

BV = $20,000,000 - $16,000,000 = $4,000,000

9-32

Cedar Fair sold a hotel for $3,000,000 cash at the end of its Cedar Fair sold a hotel for $3,000,000 cash at the end of its 1616thth year of use. The hotel originally cost $20,000,000, and year of use. The hotel originally cost $20,000,000, and was depreciated using the straight-line method with zero was depreciated using the straight-line method with zero


The equipment’s sale resulted in:

a. a loss of $1,000,000.

b. a gain of $3,000,000.

c. a gain of $1,000,000.

d. a loss of $5,000,000.


The equipment’s sale resulted in:

a. a loss of $1,000,000.

b. a gain of $3,000,000.

c. a gain of $1,000,000.

d. a loss of $5,000,000.Loss = Cash Received - Book ValueLoss = $3,000,000 - $4,000,000 = $1,000,000

9-33

Analyze and prepare the journal entry to record Cedar Fair’s sale of the hotel.


2 Record

1 Analyze

9-34


Analyze the acquisition, use, and disposal of long-lived

intangible assets.

9-35

Noncurrent assetswithout physical

substance.

Useful life isoften difficultto determine.

Usually acquired for operational

use.

Often provideexclusive rights

or privileges.

Intangible Assets

IntangibleAssets

9-36

Intangible Assets

Record at current cash Record at current cash equivalent cost, including equivalent cost, including purchase price, legal fees, purchase price, legal fees,

and filing fees.and filing fees.

Record at current cash Record at current cash equivalent cost, including equivalent cost, including purchase price, legal fees, purchase price, legal fees,

and filing fees.and filing fees.

Amortize intangibles with Amortize intangibles with limited lives over the shorter limited lives over the shorter

of their economic lives or of their economic lives or legal lives using the legal lives using the straight-line method.straight-line method.

Amortize intangibles with Amortize intangibles with limited lives over the shorter limited lives over the shorter

of their economic lives or of their economic lives or legal lives using the legal lives using the straight-line method.straight-line method.

9-37

Trademarks and Copyrights A trademark is a symbol, design,or logo associated with a business.

Internally developedtrademarks have norecorded asset cost.

Purchased trademarksare recorded at cost.

Amortize costover the period

benefited.

Legal life islife of creatorplus 70 years.

A copyright is an exclusive right granted by the federalA copyright is an exclusive right granted by the federalgovernment to protect artistic or intellectual properties.government to protect artistic or intellectual properties.

9-38

Cost is purchaseprice plus legalcost to defend.

Amortize costover the shorter of

useful life or 20 years.

Patents and Licensing RightsA patent is an exclusive right granted by the federal

government to sell or manufacture an invention.

You may be using computersoftware that is made

available to you through acampus licensing agreement.

Licensing rights grant limited permission to use a productor service according to specific terms and conditions.

9-39

Technology Assets

Technology assets include software and Web development work.

Usually used up over a relatively short time (3 – 7 years)

9-40

Franchises

A franchise provides legally protected rightsto sell products or provide services purchased

by a franchisee from the franchisor.

9-41

Goodwill

Occurs when onecompany buys

another company.

Purchase Price > Fair Market Value of Net Assets Acquired

Only purchased goodwill is an

intangible asset.

Is not amortized.Is impairment

tested and may bewritten down.

9-42

Amortization of Limited Life Intangible Asset

Assume Cedar Fair purchased a patent for an uphill water-coasterAssume Cedar Fair purchased a patent for an uphill water-coasterfor $800,000 and intends to use it for 20 years. Each year, the company for $800,000 and intends to use it for 20 years. Each year, the company would record $40,000 in Amortization Expense ($800,000 ÷ 20 years).would record $40,000 in Amortization Expense ($800,000 ÷ 20 years).

Assume Cedar Fair purchased a patent for an uphill water-coasterAssume Cedar Fair purchased a patent for an uphill water-coasterfor $800,000 and intends to use it for 20 years. Each year, the company for $800,000 and intends to use it for 20 years. Each year, the company would record $40,000 in Amortization Expense ($800,000 ÷ 20 years).would record $40,000 in Amortization Expense ($800,000 ÷ 20 years).


Patent (-A) -40,000 AmortizationExpense (+E) -40,000

2 Record

dr Amortization Expense (+E, -SE) cr Patent (-A) 40,000

40,000

9-43

Summary of Accounting Rulesfor Long-Lived Assets

9-44


Interpret the fixed asset turnover ratio.

9-45

This ratio measures the sales This ratio measures the sales dollars generated by each dollar dollars generated by each dollar

invested in fixed assets. invested in fixed assets.

For the year 2010, Cedar Fair had $978 ofrevenue. End-of-year fixed assets were $1,680and beginning-of-year fixed assets were $1,780.

(All numbers in millions.)

Turnover Analysis

FixedAsset

Turnover

Net Sales Revenue

Average Net Fixed Assets=

9-46

Turnover Analysis

9-47


Describe the factors to consider when comparing

companies’ long-lived assets.

9-48

Impact of Depreciation DifferencesAccelerated depreciation, in the early years of an asset’s useful life, results in higher depreciation expense, lower

net income, and lower book value than would result using straight-line depreciation.

Selling an asset with a low book value, resulting from accelerated depreciation, might result in a gain.

Selling the same asset with a higher book value, resulting from straight-line depreciation, might result in

a loss.


Supplement 9A

Natural Resources

9-50

Totaldepletion

cost

Inventoryfor sale

UnsoldInventory

Cost ofgoods sold

Natural Resources

Depletion is the process of allocating a naturalDepletion is the process of allocating a naturalresource’s cost over the period of its extraction.resource’s cost over the period of its extraction.Depletion is similar in concept to depreciation.Depletion is similar in concept to depreciation.

Depletion is the process of allocating a naturalDepletion is the process of allocating a naturalresource’s cost over the period of its extraction.resource’s cost over the period of its extraction.Depletion is similar in concept to depreciation.Depletion is similar in concept to depreciation.

Depletion that is computed for a period is first added toDepletion that is computed for a period is first added toinventory and then expensed when the inventory is sold.inventory and then expensed when the inventory is sold.Depletion that is computed for a period is first added toDepletion that is computed for a period is first added to

inventory and then expensed when the inventory is sold.inventory and then expensed when the inventory is sold.


Supplement 9B

Changes in Depreciation

9-52

So depreciationis an estimateestimate.

So depreciationis an estimateestimate.

Predictedresidual valueresidual value

Predictedresidual valueresidual value

Predicteduseful lifeuseful life

Predicteduseful lifeuseful life

Over the life of an asset, new information may come to light that indicates the

original estimates need to be revised.

Changes in Depreciation Estimates

9-53

Cedar Fair purchased equipment that cost $60,000,000 with an estimated useful life of 20 years and an estimated salvage value of $3,000,000. Shortly after the start of year 5,

Cedar Fair changed the initial estimated useful life to 25 years and lowered the

estimated salvage value to $2,400,000.

Calculate depreciation expense for year 5 and thereafter using the straight-line method.

Cedar Fair purchased equipment that cost $60,000,000 with an estimated useful life of 20 years and an estimated salvage value of $3,000,000. Shortly after the start of year 5,

Cedar Fair changed the initial estimated useful life to 25 years and lowered the

estimated salvage value to $2,400,000.

Calculate depreciation expense for year 5 and thereafter using the straight-line method.


9-54

Book value at date of change

Residual value atdate of change

Remaining useful life at date of change

–


When our estimates change, the new depreciation is: When our estimates change, the new depreciation is:


Chapter 9Solved Exercises

M9-4, M9-5, M9-6, E9-6, E9-7, E9-11

9-56

M9-4 Computing Book Value (Straight-Line Depreciation)Calculate the book value of a three-year-old machine that cost $400,000, has an estimated residual value of $40,000, and has an estimated useful life of four years. The company uses straight-line depreciation.

Year

1

2

3

Depreciation

Expense

(debit)

$ 90,000

90,000

90,000

Undepreciated

Balance

(book value)

$ 400,000

310,000

220,000

130,000

Accumulated

Depreciation

(credit balance)

$ 90,000

180,000

270,000

= $90,000 per year ($400,000 - $40,000) × 14

9-57

M9-5 Computing Book Value (Units-of-Production Depreciation)Calculate the book value of a three-year-old machine that cost $400,000, has an estimated residual value of $40,000, and has an estimated useful life of 20,000 machine hours. The company uses units-of-production depreciation and ran the machine 3,000 hours in year 1 and 8,000 hours in year 2, and 6,000 hours in year 3.

= $54,000 ($400,000 - $40,000) × 3,00020,000

1st Year Depreciation

= $144,000 ($400,000 - $40,000) × 8,00020,000

2nd Year Depreciation

= $108,000 ($400,000 - $40,000) × 6,00020,000

3rd Year Depreciation

9-58

M9-5 Computing Book Value (Units-of-Production Depreciation)Calculate the book value of a three-year-old machine that cost $400,000, has an estimated residual value of $40,000, and has an estimated useful life of 20,000 machine hours. The company uses units-of-production depreciation and ran the machine 3,000 hours in year 1 and 8,000 hours in year 2, and 6,000 hours in year 3.

Year

1

2

3

Hours

3,000

8,000

6,000

Depreciation

Expense

(debit)

$ 54,000

144,000

108,000

Undepreciated

Balance

(book value)

$ 400,000

346,000

202,000

94,000

Accumulated

Depreciation

(credit balance)

$ 54,000

198,000

306,000

9-59

M9-6 Computing Book Value (Double-Declining-Balance Depreciation)Calculate the book value of a three-year-old machine that cost $400,000, has an estimated residual value of $40,000, and has an estimated useful life of four years. The company uses double-declining-balance depreciation. Round to the nearest dollar.

= $200,000($400,000 - $0) × 24

1st Year Depreciation

2nd Year Depreciation

= $100,000($400,000 - $200,000) × 24

3rd Year Depreciation

= $50,000($400,000 – ($200,000 + $100,000) × 24

9-60

M9-6 Computing Book Value (Double-Declining-Balance Depreciation)Calculate the book value of a three-year-old machine that cost $400,000, has an estimated residual value of $40,000, and has an estimated useful life of four years. The company uses double-declining-balance depreciation. Round to the nearest dollar.

Year

1

2

3

Depreciation

Expense

(debit)

$ 200,000

100,000

50,000

Undepreciated

Balance

(book value)

$ 400,000

200,000

100,000

50,000

Accumulated

Depreciation

(credit balance)

$ 200,000

300,000

350,000

9-61

End of Chapter 9

mcgraw-hill/irwincopyright © 2013 by the mcgraw-hill companies, inc. all rights reserved. chapter 9...

Documents

total cost

cost principle

record slide

asset slide

use slide

depreciation buildings

costs of operational

combined purchase of