Chp. 9: Long-Lived Tangible and Intangible Assets

Pick up at LO 9-5...probably before that...

Long-Lived Assets

Tangible and intangible resources owned by a business and used in its operations over several years.

Long-lived assets are not intended for resale. Instead, they are considered “______” assets in the sense they produce the goods or services the business then sells to customers.

productive

Long-lived assets are not intended for resale. Instead, they are considered “productive” assets in the sense they produce:

the goods or services the business then sells to customers.

Examples of tangible assets

fixtures, furniture, office equipment, vehicles, machinery, buildings, land

Examples of intangible assets

brand names, trademarks, licensing rights

The general rule for tangible assets under the cost principle is that all reasonable and necessary costs to __________ should be recorded as a cost of the asset.

acquire and prepare an asset for use

Capitalize

To record a cost as an asset, rather than an expense (think tangible assets & their association acquisition costs according to the cost principle)

Examples of costs that would be capitalized if a piece of land were bought

purchase cost, legal fees, survey fees, title search fees

Examples of costs that would be capitalized if a building were bought

purchase/construction cost, legal fees, appraisal fees, architect fees

Examples of costs that would be capitalized if a piece of equipment were bought

purchase/construction cost, sales taxes, transportation costs, installation costs

If a company buys land, a building, or piece of used equipment and incurs demolition, renovation, or repair costs before it can be used, these additional costs are capitalized as a cost of the land, building, or equipment. These costs are capitalized because:

they are needed to prepare the asset for use.

Ordinary Repairs and Maintenance

Expenditures for the normal operating upkeep of long-lived assets, recorded as expenses

Extraordinary Repairs

Infrequent expenditures that increase an asset’s economic usefulness in the future and that are capitalized.

Depreciation

Process of allocating the cost of buildings, equipment, and other similar long-lived “productive” assets over their productive lives using a systematic and rational method of allocation.

Book Value

The acquisition cost of an asset less accumulated depreciation. Also called Carrying Value or Net Book Value

Useful Life

The expected service life of an asset to the present owner.

Useful life can be expressed in terms of years or units of capacity, such as:

the number of units it can produce or the number of miles it will travel.

Land is the only tangible asset that is:

assumed to have an unlimited (indefinite) useful life.

Land is the only tangible asset that’s assumed to have an unlimited (indefinite) useful life. Because of this, land is not:

depreciated.

Residual (or Salvage) Value

Estimated amount to be recovered, less disposal costs, at the end of the company’s estimated useful life of an asset.

Depreciable Cost

The portion of the asset’s cost that will be used up during its life. it is calculated as asset cost minus residual value and allocated to depreciation expense throughout the asset’s life.

A company should record depreciation each year of an asset’s useful life until its total accumulated depreciation equals its depreciable cost. After that, the company should report:

no additional depreciation expense, even if the company continues to use the asset.

There are three types of Depreciation Methods:

straight-line, units-of-production, and declining-balance

Straight-Line Depreciation Method Formula

(Cost - Residual Value) x (1/Useful Life) = Depreciation Expense

Depreciable Cost formula

Cost - Residual Value

Units-of-Production Depreciation Method Formula

(Cost - Residual Value) x (Actual Production This Period/Estimated Total Production) = Depreciation Expense

Units-of-Production Depreciation Method

Allocates the depreciable cost of an asset over its useful life based on its output during the period in relation to its total estimated output.

Straight-Line Depreciation Method

Allocates the depreciable cost of an asset in equal periodic amounts over its useful life.

Declining-Balance Depreciation Method

Allocates the cost of an asset over its useful life based on a multiple of (often two times) the straight-line rate.

Because the Declining-Balance Method speeds up depreciation reporting, it is sometimes called:

an accelerated method.

The most common declining depreciation rate is:

2/Useful Life

(Double) Declining-Balance Formula

(Cost- Accumulated Depreciation) x (2/Useful Life)

The straight-line method is the most _____ used method because it is easy to use and understand, and it does a good job of matching depreciation expense to revenues, especially when assets are used evenly over their useful lives.

commonly

The units-of-production method is the typical choice when asset use:

fluctuates significantly from period to period, as is often the case in extractive resource industries.

Declining-balance methods apply best to assets that are:

most productive when they are new but quickly lose their usefulness as they get older.

Under the straight-line and declining-balance methods, the annual depreciation is multiplied by the:

fraction of the year for which depreciation is being calculated.

Under the straight-line and declining-balance methods, annual depreciation is multiplied by the fraction of the year for which depreciation is being calculated. These partial year-modifications are not required in the units-of-production method because that method is:

based on actual production for the period.

The least and latest rule

Taxpayers want to pay the least tax that is legally permitted and at the least possible date.

Impairment

Occurs when the cash to be generated by an asset is estimated to be less than the carrying value of that asset and requires that the carrying value of the asset be written down.

Examples of impairment as it relates to Cedar Fair amusement parks & hotels

COVID-19 crisis of 2020 (company-wide), broken VertiGo slingshot ride

An asset impairment is accounted for in two steps: 1) eliminate the asset’s Accumulated Depreciation against the asset account and 2):

write down the asset to its fair value (what it is worth)

An asset impairment is accounted for in two steps: 1) __________ and 2) write down the asset to its fair value (what it is worth)

eliminate the asset’s Accumulated Depreciation against the asset account

Why are impairment adjustments necessary?

Because the asset is unused for a period of time and therefore has not generated revenue or depreciated for that period (you must reverse depreciation and replenish the book value of the asset)

The disposal of a depreciable asset usually requires two accounting adjustments: 1) ___________ and 2) record the disposal.

update the depreciation expense and accumulated depreciation accounts

The disposal of a depreciable asset usually requires two accounting adjustments: 1) update the depreciation expense and accumulated depreciation accounts and 2):

record the disposal.

All disposals of long-lived assets require that you account for 1) __________, 2) the value of the items received on disposal, and 3) any difference between these two accounts, which reflects a gain or loss on the disposal to be reported on the income statement.

the book value of the items given up

All disposals of long-lived assets require that you account for 1) the book value of the items given up, 2) __________, and 3) any difference between these two accounts, which reflects a gain or loss on the disposal to be reported on the income statement.

the value of the items received on disposal

All disposals of long-lived assets require that you account for 1) the book value of the items given up, 2) the value of the items received on disposal, and 3):

any difference between these two accounts, which reflects a gain or loss on the disposal to be reported on the income statement.

A gain (or loss) on disposal represents the difference between:

the proceeds from selling the asset and the asset’s book value (BV).

Trademark

An exclusive legal right to use a special name, image, or slogan.

Copyright

A form of protection provided to the original authors of literary, musical, artistic, dramatic, and other works of authorship for a period not exceeding 70 years after the author’s death.

Patent

A right to exclude others from making, using, selling, or importing an invention for 20 years.

Technology assets

Capitalized computer software and web development costs; an intangible asset.

Licensing Right

The limited permission to use property according to specific terms and condition set out in a contract.

Franchise

A contractual right to sell certain products or services, use certain trademarks, or perform activities in a certain geographical region.

Goodwill (Cost in Excess of Net Assets Acquired)

For accounting purposes, the excess of the purchase price of a business over the market value of the business’s assets and liabilities.

Intangible assets are long-lived assets that lack physical substance. Their existence is indicated by:

legal documents.

Goodwill tops the charts as the most frequently reported intangible asset. It encompasses lots of good stuff like:

a favorable location, an established customer base, a great reputation, and successful business operations.

trademark -

special name, image, or slogan

copyright -

literary, musical, artistic, or dramatic work

patent - 

item

Research and Development Expenses

Expenditures that may someday lead to patents, copyrights, or other intangible assets, but the uncertainty about their future benefits requires they be expensed.

The costs of intangible assets are recorded as:

assets (“capitalized”) if they have been purchased.