Comm 295 - Plant and Intangible Assets

Acquisition cost

- purchase price

- legal fees

- transportation

- installation/setup

land improvements

- to improve and not needed

- depreciated

- limited life

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- fencing

- lighting

- parking lots

- paving

- landscaping

Land

needed to run first

- not depreciated

- unlimited life

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- purchasing price

- legal fees

- grading

- demolition (less salvage)

- site cleaning

Revenue Expenditures

- reduce current income

- expense immediately

- maintains asset

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repairs, cleaning

Dr. Revenue Expenditure

Cr. Cash

example

Dr. Maintenance expense

Cr. Cash

Capital Expenditures

Increase asset, affect income later

- add to asset and depreciated

- extend/improve useful life and capacity

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building

Dr. Capital Expenditure

Cr. Cash

example

Dr. Stadium

Cr. Cash

Depreciation Basic - NBV

- not a measure of market decline

- allocates asset over useful life

follows MATCHING PRINCIPLE

(exp = rev over time)

Straight-Line Method

Even depreciation every year

• book value at the end of the year is just the salvage

Units of activity method

Depreciation based on usage/output

first half is cost per unit

ending book value = salvage price

Double declining balance method

accelerated depreciation → more expense early

book value = beginning of year value

• Ignore salvage at first

• Stop depreciating once NBV = salvage

Partial year depreciation

• if asset purchased mid-year

Fully depreciated asset

• can still be used even if fully depreciated

• No further depreciation recorded

• Asset & accumulated depreciation remain on books

Changes in Depreciation Estimates

• revise only for current and future years

Natural Resources Equation

• long-lived assets extracted from nature

• Use depletion instead of depreciation

Natural Resources Journal Entries

1. Record Depletion

Dr. Inventory                  $XX

    Cr. Accumulated Depletion     $XX

2. When sold

Dr. COGS                        $XX

    Cr. Inventory                  $XX

Dr. Cash                        $XX

    Cr. Sales Revenue             $XX

Asset Impairment equation and journal entries

Occurs when: BOOK VALUE > FAIR VALUE (due to damage, obsolescence…)

Impairment Loss = Book Value – Fair Value

Disposal of Assets (steps)

1. Depreciate to sale date

2. Calculate Net Book Value = Cost - Acc. Dep.

3. Compare NBV to sale price → gain vs loss

   • If proceeds > NBV → Gain

   • If proceeds < NBV → Loss

Disposal of assets (journal entries)

GAIN

Dr. Cash                       $XX

Dr. Accumulated Depreciation  $XX

    Cr. Asset                     $XX

    Cr. Gain on Disposal (I/S)   $XX

LOSS

Dr. Cash                       $XX

Dr. Accumulated Depreciation  $XX

Dr. Loss on Disposal (I/S)    $XX

    Cr. Asset                     $XX

Fixed Asset Turnover

Net Sales / Avg. Net PPE

• How efficiently PPE generates sales (is used)

Asset Turnover

Net Sales / Avg. Total Assets

• Efficiency of all asset usage

Return on Assets (ROA)

Net Income / Avg. Total Assets

• Profitability per dollar of assets

Intangible Assets

• no physical substance that provide future benefits

• Arise from legal or contractual rights

• Can be sold, licensed, or transferred

• Provide economic benefits over time

Research & Development (R&D)

• not an intangible asset itself but leads to one

Research

expense immediately

Dr. R&D Expense       $XXX

    Cr. Cash              $XXX

Development Costs

capitalize only if feasible and measurable future benefits are proven

Dr. Development Costs (Asset)   $XXX

    Cr. Cash                        $XXX

Definite / Finite life

Amortized (similar to depreciation) over useful or legal life (whichever shorter).

• uses straight line method

• salvage life assumed to be 0

• Amortize over shorter of legal or useful life

Patents, Copyrights, Licenses, Franchises

Dr. Intangible Asset
Cr. CashP

Patents

• Exclusive legal right (20 yrs in Canada).

• Protects inventions; encourages innovation.

• Amortized over shorter of useful life or legal life.

Copyrights

• Protect artistic/literary works.

• Legal life: life of creator + 50 years.

• Example: Disney’s “Mickey Mouse”.

Franchises & Licenses

• Legal right to operate or distribute goods/services (private or government).

• Accounted for same as patents/copyrights.

Amortization (Straight-Line only):

Dr. Amortization Expense XXX
Cr. Accumulated Amortization XXX

No salvage value usually.

Innovation

• Can produce intangible assets like patents

• Most innovation costs -> expensed (research, testing)

• Input: R&D spending

• Output: patents, trademarks, new products, trade secrets

Indefinite Life Intangibles

IMPAIRMENT

• test annually

• If book value > fair value, record impairment loss

Dr. Impairment Loss (I/S)     $YY

    Cr. Asset                     $YY

Trademarks

• not amortized

• Tested annually for impairment

• Renewable indefinitely (10-year terms)

• Legal rights to use name/slogo/logo (not own)

Goodwill

• unidentifiable intangible asset

• Arises from acquistion of a business

• Arises when a company buys another for > fair value of net assets

Represents premium paid for:

• Brand reputation

• Skilled employees

• Customer relationships

• Location

Dr. Assets (e.g., Equipment, Inventory, Intangibles)

Dr. Goodwill

Cr. Liabilities

Cr. Cash