Bài giảng Financial Accounting - Chapter 9: Long - Lived Assets

201Lec09.PPTX1Have physical substanceUsed in business (not just investment)Not for sale to customersConsist of:legal rightsprocesses name recognitionpatient listscontractslicensesgoodwillProperty, Plant & Equipment (PP&E)Intangible AssetsLong - Lived Assets9Improvements, called capital expenditures, are added to the asset account. Extend life, efficiency or capacity Repairs, maintenance and recurring costs are expensed immediately. Called revenue expenditures. Record Depreciation or Amortization Expense each year if asset has a limited life. 2Purchase - companies must record plant assets at cost. Cost consists of all expenditures necessary to acquire an asset and make it ready for use. GAAP rules and issues regarding Long Lived AssetsLand (not land improvements. See later)Debit the land account for costs such as:the cash purchase price, closing costs such as title and attorney’s fees, real estate brokers’ commissions, and Accrued property taxes and other liens on the land assumed by the purchaser.Costs to prepare the land for use such as grading, filling, clearing, razing net of salvage proceedsLand has unlimited life so NO depreciation expense3Determining the Cost of Plant AssetsLand Improvements 4Limited useful lives.Expense (depreciate) the cost of land improvements over their useful lives. Examples are driveways, parking lots, fences, landscaping, and underground sprinklers.Determining the Cost of Plant AssetsBuildings 5Purchase costs:Purchase price, closing costs (attorney’s fees, title insurance, etc.) and real estate broker’s commission.Remodeling and replacing roof, floors, electrical wiring, and plumbing.Construction costs:Contract price plus payments for architects’ fees, building permits, interest and taxes during construction period and excavation costs.Chuck Co. International headquarters5Determining the Cost of Plant AssetsEquipment6Debit the equipment account for costs such as:cash purchase pricesales taxesfreight charges insurance during transit paid by the purchaserexpenditures required in assembling, installing, and testing the unitReduce by rebatesDetermining the Cost of Plant AssetsStays on balance sheet at cost less accumulated depreciation (called book value). This is NOT intended to equal MARKET value. One exception, if permanent decline (called impairment) then write down asset to market value. Spread cost over useful life to depreciation expense. Not a valuation but rather an allocationGain or loss will be recorded when disposed. 7Determining the Cost of Plant Assets GAAP allows choice of several depreciation methods. - Choose separate method for each asset category Goal is to reflect best measure of asset’s contribution to operations over its useful life. - Depreciable Cost = Portion of asset that will be depreciated = Cost less salvage value* *Salvage value is estimated value at end of asset’s useful life* *Useful life is estimated time asset will be used in your business Method used for taxes is different than on books! Called MACRS (Modified Accelerated Cost Recovery System)8Depreciation rules in generalSTRAIGHT LINE (SL) formula: Base x Rate (Cost - Salvage value ) x 1/(useful life) Expense is same amount for each year.EXPENSEY E A R OF ASSET LIFEANNUAL9Depreciation Methods - SLEXPENSEY E A R OF ASSET LIFEANNUAL10DOUBLE DECLINING BALANCE (DDB) formula: Base x Rate (Cost – Accum Depreciation) x 2 / (useful life) Considered an “accelerated” method since more depreciation in early years that later ones.Depreciation Methods - DDBEXPENSEYEAR OF ASSET LIFEUp/Down - Depends on usage *Unit Rate = Cost - Salvage value Life in Units ANNUAL11UNITS OF ACTIVITY(Units) formula: Base x Rate (Current Units Used) x (Unit Rate*) Depreciation Methods - UnitsChuck Co. purchased a small delivery truck on Jan 1, 2015.Required: Compute depreciation using the following. (a) Straight-Line.(b) Units-of-Activity.(c) Declining Balance.Cost $30,000Expected salvage value $3,000Estimated useful life in years 5Estimated useful life in miles 100,00012Example: Depreciation calculations2015$ 27,000 *20% *$ 5,400$ 5,400$ 24,600201627,000 205,40010,80019,200201727,000 205,40016,20013,800201827,000 205,40021,6008,400201927,000 205,40027,0003,000 Depreciable Annual Accum. Book Year Cost x Rate = Expense Deprec. Value 13* $30,000 cost less $3,000 estimated salvage valueVariation: Assume the delivery truck was purchased on 4/1/15. 2015 depreciation = $5,400 x 9/12 = $4,050.* 1 / 5 years times 100 (to convert to percent) Cost 30,000-Acc Depr (5,400)Example: (a) Straight Line201530,00040%$ 12,000$ 12,000$ 18,000201618,000 407,20019,20010,800201710,800 404,32023,5206,48020186,480 402,59226,1123,88820193,888 40888*27,0003,000* Annual expense in last year limited. Book value can’t be lower than estimated salvage value. Cost less 2 x SL Annual Accum. Book Year Accum Depr x Rate = Expense Deprec. Value 14Variation: Assume the delivery truck was purchased on 4/1/15. 2015 depreciation = $12,000 x 9/12 = $9,000.Example: (b) Double Declining Balance201515,000 *$ 0.27*$ 4,050$ 4,050$ 25,950201630,000 * 0.278,10012,15017,850201720,000 * 0.275,40017,55012,450201825,000 * 0.276,75024,3005,700201910,000 * 0.272,70027,0003,00015 Miles Rate Per Annual Accum. Book Year Used x Mile = Expense Deprec. Value * Assume these additional facts. * ($30,000 – 3,000) / 100,000 units = 27 cents per mileExample: (c) UnitsRecompute depreciation expense for future periods for improvements that modify useful life/salvage or if you later discover that original useful life or salvage estimates were inaccurate. Use Book Value at date of change instead of Cost and Revised Life (and/or salvage) in depreciation calculations.Fix OrRepairDaily16GAAP Rule requiring Revised depreciation AmountExample: Years 1, 2, 3, 4 : Depreciation Expense = (250,000 - 50,000) / 10 = 20,000 per year.Years 5, 6: Depreciation Expense = [(Book Value) - New Salvage ] / (Remaining life) = [(250,000-80,000) - 0] / (6-4) = 85,000 per year.Total: 4 x 20,000 + 2 x 85,000 = 250,00017Original Cost = 250,000, Salvage = 50,000, Life = 10 Years, SL used.After 4 years, revise total life to 6 yearsRevised salvage = 0.18Sale or discarding of Plant AssetsCompare the book value*of the asset with the proceeds (if any) received from the sale. If proceeds exceed the book value, record a credit to gain on disposal. If proceeds are less than the book value, record a debit to loss on disposal.* If disposed in the middle of the year, record depreciation expense for the partial year before the disposal. Recording gain or loss on DISPOSALAssume that Chuck Co in the previous example sells the truck at the end of 2016 for cash of $20,000. Also assume straight line depreciation was elected. (accumulated = $10,800)Cash 20,000Accumulated depreciation 10,800 Trucks 30,000Gain on disposal 80019Example: DisposalsVariation: Assume that the sales price was instead only $10,000. Cash 10,000Accumulated depreciation 10,800 Trucks 30,000Loss on disposal 9,20020Example: Disposals Goodwill LicenseTrademark FranchisePatentCopyright21Patents: Exclusive right to make and sellCopyrights: Like patent for artistic workTrademark: Protect name, phrase, jingleFranchise/license: Contract to use aboveGoodwill: Extra “value” of ongoing businessResearch & Development (R&D): costs incurred in creating intangibles Intangible AssetsCapitalize (record as asset) only cost of purchase, filing and legal fees in acquiring or defending in court.Amortize (typically straight line) asset over useful life. - Debit Amortization Expense and credit Asset Account - Goodwill and trademarks have unlimited life (No amortization.) - Impairment rule applies to all intangibles R & D is to be treated as EXPENSE (Not capitalized.) -Theory is its impossible to track how much results in asset or is used up. Examples: advertising, trial and error product research.22GAAP rules and issues regarding IntangiblesLease versus Buy Assets - Cash flow differences Typically lower up front cost for lease, lower monthly payments - Income statement difference Rent expense or Depreciation + interest expense - Balance sheet difference Assets and liabilities not reported with lease23Example: Lease Buy Assets $1,000,000 $11,000,000 Liabilities 100,000 10,100,000 Debt/assets 10% 91.8%Miscellaneous24Return on Asset Ratio indicates the amount of net income generated by each dollar of assets.Miscellaneous25Asset Turnover Ratio indicates how efficiently a company uses its assets to generate sales.Miscellaneous