MGMT 30A Ch 8

Characteristics of long-term operating assets

1. Not acquired for resale

2. Help produce revenues for multiple accounting periods

Capital expenditures

expenditures recorded as an asset

• All normal costs incurred to acquire an asset and prepare it for its intended use should be capitalized

• Include purchase prices, installation costs, taxes, shipping costs, legal fees, setup costs

Characteristics of capital expenditures

1. Owned or controlled by company

2. Expected to provide future benefits

Accumulated depreciation

contra asset account (XA)

Need 2 estimates to compute depreciation

1. Useful life

2. Residual (or salvage) value

Useful life

period of time the asset is expected to provide economic benefits to the company

• Not the same as physical life

Residual value

expected realizable value of the asset at the end of its useful life

Depreciation base

portion of the cost that’s depreciated

• = Capitalized Cost of Asset - Residual Value

Depreciation methods

1. Straight-line

2. Units of production

Straight-line depreciation

depreciation expense is recorded evenly over the useful life of the asset

• Depreciation rate = 1/Useful life 

• Depreciation base = Cost - Residual value

• Depreciation expense = Depreciation Base * Depreciation Rate

• Aka: = (Cost - Residual Value) / Useful life

Units of production depreciation

useful life is defined in terms of the number of units of service provided by the asset

• Depreciation rate = (Cost - Residual value) / Useful life

• Depreciation expense = Units of production for that year * Depreciation rate

Depletion rate per unit consumed

= (Acquisition cost - Residual value) / Estimated quantity of resource available

Asset Book Value (aka net book value or carrying value)

= Cost - Accumulated Depreciation

Gain or loss on asset sale

= Proceeds from sale - Net book value of asset sold

Impairment

determined by comparing the sum of expected future (undiscounted) cash flows from the asset with its net book value

If Sum of Expected Cash Flows > Net Book Value

= no impairment

If Sum of Expected Cash Flows < Net Book Value

= asset is impaired and needs to be written down to its current fair value

New Depreciation Expense

= (Fair Value - Salvage Value)/Remaining Useful Life

2 challenges of asset write downs

• 1. Insufficient write down = current income is overstated and income in future years will be lower

• 2. Aggressive write down = big bath situation

• NOT ALLOWED UNDER GAAP

Net PPE

= Gross PPE - Accumulated Depreciation

• Higher ratio = good because lower level of capital investment is required to get a level of sales revenue

2 types of PPE that aren’t depreciated

1. Land: indefinite life

2. Construction in progress: not yet placed in service

Cost of depreciable assets

= Total cost of PPE - Land - Construction in progress

Intangible asset classifications

1. Separately transferable

2. Not separately transferable

Separately transferable

• Assets that are a product of contractual or other legal rights OR

• Benefits that aren’t contractually or legally defined but can be separated from the company and sold/transferred/exchanged

Not separately transferable

Goodwill

Intangible assets classified as expenses

• advertising costs

• employee training costs

• research and development costs

• software development costs (before it’s ready for use)

Intangible assets classified as assets

• Anything acquired externally

• software and development costs (after project is almost ready for use)

Goodwill

= Purchase Price - Fair value of the target’s net assets

Intangible assets with definite lives should be…

amortized over their useful lives

Impairment loss

need to check if indefinite assets have been impaired each year

• = Book Value - Fair Value

An intangible indefinite asset is impaired if…

Book Value > Fair Value