Chapter 8- (THIS ONE) Long-Term Assets

What are the 3 main types of long-term assets?

• PP&E (Physical assets)

• Intangible Assets (Rights/benefits)

• Goodwill (Business combination excess)

What is a long-term asset?

Resources expected to provide economic benefits > 1 year; appear as non-current assets

What is PP&E?

Physical assets used to generate revenue (land, buildings, machinery, equipment)

How is PP&E initially recorded?

At cost, including:

• purchase price

• taxes

• legal fees

• shipping

• site prep

• installation

Carrying amount (net book value) of PP&E

Carrying Amount = Cost − Accumulated Depreciation − Accumulated Impairment Losses

What does carrying amount represent?

Remaining unallocated cost of the asset on the balance sheet

How does carrying amount affect disposal?

• Gain: Selling Price > Carrying Amount

• Loss: Selling Price < Carrying Amount

Example journal entry for disposal of PP&E

Cash 7,000 / Accumulated Depreciation 3,750 / Equipment 30,000 / Gain 750

What is depreciation?

Systematic allocation of the cost of a tangible asset over its useful life

Depreciable amount formula

Depreciable Amount = Cost − Residual Value

Straight-line depreciation formula

Depreciation Expense = (Cost − Residual Value) ÷ Useful Life

Double-declining balance (DDB) depreciation method

• Step 1: SL rate = 1 ÷ Useful Life

• Step 2: DDB rate = 2 × SL rate

• Step 3: Expense = Beginning Carrying Amount × DDB rate

Units-of-production depreciation method

• Depreciation/unit = (Cost − Residual Value) ÷ Total Units

• Expense = Depreciation/unit × Units produced

How to calculate average age of PP&E?

Average Age = Accumulated Depreciation ÷ Annual Depreciation Expense

How to calculate average age % of PP&E?

Average Age % = (Accumulated Depreciation ÷ Total PP&E excluding land) × 100

Fixed Asset Turnover Ratio formula

Fixed Asset Turnover = Sales Revenue ÷ Average Net PP&E

What are intangible assets?

Long-term assets without physical form that provide identifiable rights (e.g., patents, trademarks, licenses)

How are finite-life intangible assets treated?

• Amortized over useful life (usually straight-line)

• residual value often zero

How are indefinite-life intangible assets treated?

Not amortized; tested annually for impairment

Factors influencing useful life of intangibles

• Technology

• market demand

• competitors

• legal life vs economic benefit

How is a patent acquired and amortized?

• Acquisition: Debit Patent / Credit Cash

• Amortization: Debit Amortization Expense / Credit Accumulated Amortization

How are trademarks, franchises, and licenses accounted for?

• Finite-life: amortize

• Indefinite-life: annual impairment test

How is goodwill calculated?

Goodwill = Purchase Price − Fair Value of Net Assets Acquired

How is goodwill accounted for?

Not amortized; reviewed annually for impairment

Can internally generated goodwill be recognized?

No; cannot be reliably measured or controlled

What are right-of-use assets?

Company’s right to use leased property; depreciated over lease term

What are biological assets?

Living plants/animals under management; measured at fair value minus selling costs; harvested → inventory → sold

How does climate change affect biological assets?

Impacts fair value due to fire, drought, disease, floods, temperature changes

What is an impairment loss?

Loss recorded if carrying amount > recoverable amount

Impairment loss formula

Impairment Loss = Carrying Amount − max(Future Cash Flows, Fair Value − Selling Costs)

Indicators of impairment

Physical damage, obsolescence, market decline, regulatory change, reduced demand

Journal entry for impairment

Debit Impairment Loss / Credit Accumulated Impairment Losses

Can employee training costs be capitalized for PP&E?

Yes, if necessary to bring the asset to operational condition

Can software needed to operate equipment be capitalized?

Yes, included in initial cost if required for asset functionality

How are basket/lump-sum purchases allocated?

Based on relative fair values of each asset

Example: Renfro Corp. allocation of land, warehouse, office building ($765,000)

Land = $259,975; Warehouse = $170,000; Office = $339,966

Cost vs. Revaluation model

Cost model: Carrying amount = Cost − Depreciation − Impairment; Revaluation model: Asset recorded at fair value (usually intangibles)

Partial-year depreciation formula

Full-year depreciation × (Number of months ÷ 12)

Straight-line depreciation example

Machine $2,700, residual $200, useful life 5 yrs → $500/year

Units-of-production depreciation example

Depreciable amount $2,500; total units 10,000; units produced 1,200 → $300

Double-declining balance example

Year 1: $2,700 × 40% = $1,080; Year 2: ($2,700 − $1,080) × 40% = $648

What is residual value?

Estimated value at the end of an asset’s useful life

Is land depreciated?

No, land has indefinite useful life

How are changes in depreciation estimates handled?

New Depreciation = (Carrying Amount − Revised Residual Value) ÷ Remaining Useful Life

Can impairment reversals occur under IFRS?

Yes, if recoverable amount increases

Can impairment reversals occur under ASPE?

No, reversal not allowed

Average age % formula

(Accumulated Depreciation ÷ Total PP&E excluding land) × 100

Fixed Asset Turnover formula

Sales Revenue ÷ Average Net PP&E; High = efficient, Low = underused

Return on Assets (ROA) formula

Net Income ÷ Average Total Assets

Cash flow impact of depreciation/amortization

Added back to net income in operating activities

Cash flow impact of acquisition of long-lived assets

Cash outflow in investing activities

Cash flow impact of sale of long-lived assets

Cash inflow in investing activities

Can post-purchase capital expenditures (CapEx) be expensed?

No, only operational expenditures (OpEx) like routine repairs/maintenance are expensed immediately