Spiceland_FA_6e_Chap07_PPT

Long-Term Assets

• Tangible Assets: Physical items that have substance.

  • Examples:

    • Land

    • Land improvements

    • Buildings

    • Equipment

    • Natural resources

• Intangible Assets: Lacks physical substance, existence based on legal rights.

  • Examples:

    • Patents

    • Trademarks

    • Copyrights

    • Franchises

    • Goodwill

      • Has to be tested annually for impairment — to see if it’s still accurately reflecting the value attributed to it on the balance sheet.

Balance Sheet Example: Disney

• Current Assets:

  • Cash and cash equivalents: $5,418

  • Receivables: $15,481

  • Inventories: $1,649

  • Total current assets: $28,124

• Long-Term Assets:

  • Films and television costs: $22,810

  • Parks and resorts assets:

  • Attractions, buildings, and equipment: $58,589

  • Less accumulated depreciation: ($32,415)

  • Net: $26,174

  • Projects in progress: $4,264

  • Land: $1,165

  • Total long-term assets: $31,603

• Intangible Assets: $23,215

• Goodwill: $80,293

• Total Assets: $193,984

Acquiring Long-Term Assets

• Property, Plant, and Equipment (PP&E) recorded at:

  • Original cost plus all necessary expenditures to prepare the asset for use.

Land

• Costs associated with land include:

  • Real estate commissions

  • Back property taxes

  • Site preparation costs (clearing, filling, leveling)

  • Cash received from salvaged materials reduces land cost.

Cost Computation for Land

• Example:

  • Purchase price: $500,000

  • Commissions to sales agent: $30,000

  • Back property taxes: $6,000

  • Title insurance: $3,000

  • Removal of existing building: $50,000

  • Salvaged materials: ($5,000)

  • Leveling the land: $6,000

  • Total Capitalized Cost: $590,000

Land Improvements

• Costs for items improving the land:

  • Parking lots

  • Sidewalks

  • Landscaping

• Depreciated over their useful lives, separate from land account.

Buildings

• Include costs for:

  • Realtor commissions

  • Legal fees

  • Remodeling costs

• Unique accounting issues for constructed buildings (capitalized interest).

Equipment

• Includes various machinery and office equipment costs like:

  • Sales tax

  • Shipping costs

  • Installation fees

• Recurring costs (like insurance and property taxes) are treated as expenses.

Basket Purchases

• Involves purchasing multiple assets together.

  • Allocate total cost based on relative fair values.

Natural Resources

• Examples: Oil, natural gas, timber.

• Distinguished by being depleting assets.

• Recorded at cost plus all related acquisition costs.

Key Point on Tangible Assets

• Recorded at cost plus expenses to get them ready for use.

Intangible Assets

• Types:

  • Patents, trademarks, copyrights, franchises, goodwill

• Purchase:

  • Record at original cost plus necessary expending costs.

• Internally developed:

  • Generally expensed in the income statement.

Amortization of Intangible Assets

• Similar to depreciation. Allocated costs over useful lives (usually straight-line).

• Finite (e.g., patents) vs Indefinite (e.g., goodwill) useful lives.

Asset Disposal

Common Disposal Methods

1. Sale (most common)

2. Retirement (asset retired after use)

3. Exchange (trading assets)

Important Notes

• Always update depreciation before recording a disposal.

• Record Gain if sold for more than book value; record Loss if sold for less.

Gains on Sales Example

• Sold a truck for $22,000:

  • Original cost: $40,000

  • Accumulated Depreciation: $21,000

  • Gain = $3,000.

Loss on Sales Example

• Sold a truck for $17,000:

  • Book value: $19,000

  • Loss = $2,000.

Impairment of Long-Term Assets

• Impairment occurs when future cash flows are less than book value.

Two-Step Impairment Process

1. Test for impairment.

2. If impaired, record loss (book value minus fair value).

Return on Assets (ROA)

• Indicates net income generated for every dollar invested in assets.

• Formula:

  • ROA = Net Income / Average Total Assets

Components Breakdown

• Profit Margin:

  • Earnings per sales dollar.

• Asset Turnover:

  • Sales generated per dollar in assets.

Conclusion

• Long-term asset management is crucial for accurate financial reporting.

• Correct accounting treatment ensures compliance and proper insight into a company’s financial health.