Accounting for Long-Lived and Intangible Assets

Overview of Long-Lived Assets

  • Long-lived assets benefit the company for over one year.

  • Categories (remember PIN):

    • Plant assets (PPE): tangible items used in operations (buildings, equipment, vehicles).

    • Intangible assets: non-physical items (patents, copyrights).

    • Natural resources: provided by nature (timber, coal, oil).

Tip: Knowing the categories helps classify future transactions correctly.

  • Initial recording at historical cost includes all acquisition costs.

    • Land is not depreciated; improvements are.

Depreciation Concepts

  • Depreciation allocates a plant asset's cost over useful life.

  • Inputs:

    • Cost

    • Useful life

    • Residual value

Tip: These three values are essential for all depreciation calculations.

  • Depreciable cost = Cost - Residual value.

  • Main methods:

    1. Straight-line (SL): \text{Expense per year} = \frac{\text{Cost - Residual}}{\text{Useful life}}

    2. Units-of-production (UOP): \text{Expense} = \text{Depreciation per unit} \times \text{units used}

    3. Double-declining-balance (DDB): \text{DDB rate} = \frac{1}{\text{useful life}} \times 2

  • Journal entry for depreciation (always the same!):

    • Dr Depreciation Expense

    • Cr Accumulated Depreciation

Tip: This entry increases an expense (Dr) and a contra-asset account (Cr), indirectly reducing the asset's book value.

  • Carrying value = Cost - Accumulated Depreciation.

Revenue vs Capital Expenditures

  • Capital expenditures improve assets and are recorded as assets.

  • Revenue expenditures maintain assets and are expensed immediately.

  • Examples:

    • Capital: major improvements, engine overhaul.

    • Revenue: routine maintenance, small repairs.

Disposal of Plant Assets

  • Steps for Disposal (Think 'UCRC' - Update, Remove, Cash, Record Gain/Loss):

    1. Update depreciation: Ensure depreciation is recorded up to the disposal date.

    2. Remove asset & accumulated depreciation: Debit Accumulated Depreciation to clear its balance, Credit the original asset cost to remove it.

    3. Cash consideration: Record cash received (Debit) or cash paid (Credit).

    4. Record gain/loss: Calculate \text{gain/loss} = \text{proceeds - book value} and record accordingly (Losses are Debits, Gains are Credits).

Tip: Always update depreciation first as it affects the book value, which is crucial for gain/loss calculation.

  • Entry example for selling an asset:

    • Dr Cash

    • Dr Accumulated Depreciation

    • Cr Equipment

    • Cr Gain on Sale of Equipment

Balance Sheet Presentation

  • Long-term assets section:

    • Property, plant, and equipment

    • Less: Accumulated depreciation

    • Equals: Property, plant, and equipment, net

Key Calculations and Journal Entries

  • Calculate depreciation using methods discussed.

  • Calculate carrying (book) value.

  • Allocate lump-sum costs based on relative fair value.

  • Journal entries for depreciation and asset disposal.