Chapter 9 Notes: Reporting and Analyzing Long-Lived Assets

Learning Objectives

  • LO 1: Explain the accounting for plant asset expenditures.
  • LO 2: Apply depreciation methods to plant assets.
  • LO 3: Explain how to account for the disposal of plant assets.
  • LO 4: Identify the basic issues related to reporting intangible assets.
  • LO 5: Discuss how long-lived assets are reported and analyzed.

Plant Asset Expenditures

  • Characteristics of Plant Assets:
    • Have physical substance.
    • Used in business operations.
    • Not intended for sale to customers.
    • Expected to provide utility for multiple years.
    • Also known as property, plant, and equipment (PP&E), fixed assets.
    • Decline in service potential over time, excluding land.

Determining Cost of Plant Assets

  • Historical Cost Principle:
    • Record plant assets at cost (all expenditures necessary for acquisition and preparation).
    • Once established, cost remains as the basis for accounting throughout the useful life.
Specific Costs
  • Cost of Land: Includes:
    • Cash purchase price.
    • Closing costs (title, attorney's fees).
    • Real estate commissions.
    • Property taxes and liens assumed.
    • Costs for clearing, draining, filling, grading, and demolition costs less salvage proceeds.
  • Cost of Buildings:
    • Includes purchase costs, remodeling, repairs, and all necessary expenditures to prepare the building for use.
  • Cost of Equipment:
    • Cash price, taxes, freight charges, insurance, and costs for assembling/installation.

Accounting for Land Improvements

  • Structural additions (driveways, parking lots, etc.).
  • Have limited useful lives and are depreciated over time.

Depreciation Methods Overview

  • Depreciation:
    • Allocation of asset costs over its useful life.
    • Not a valuation process, but cost allocation.
Factors in Computing Depreciation:
  • Cost: Total expenditures for acquisition.
  • Useful Life: Estimated asset life considering repairs and obsolescence.
  • Salvage Value: Estimated value at the end of useful life.
Common Depreciation Methods

  1. Straight-Line Method:

    • Equal expense each year.
    • Depreciable cost = Cost - Salvage Value.
    • Example: If cost is $13,000, salvage value is $1,000, useful life is 5 years:
      ext{Annual Depreciation} = rac{13,000 - 1,000}{5} = 2,400

  2. Declining-Balance Method:

    • Accelerated depreciation method.
    • Higher depreciation in early years.
    • Example: For a $13,000 asset, if using double-declining balance:
      ext{Rate} = rac{1}{5} imes 2 = 40 ext{%.}

  3. Units-of-Activity Method:

    • Based on usage.
    • Example calculation for a truck with a cost of $13,000 and expected life of 100,000 miles:
      ext{Depreciable Cost per Mile} = rac{13,000 - 1,000}{100,000} = 0.12.

Accounting for Disposal of Plant Assets

  • Different disposal methods include:
    • Retirement: Scrapping or discarding.
    • Exchange: Trading in for new equipment.
    • Sale: Selling to another party.
Steps for Accounting:
  1. Determine book value at disposal.
  2. Record depreciation up to date of disposal.
  3. Eliminate the asset's book value by recording depreciation and crediting the asset account.
  4. Record any cash received and recognize gain/loss.

Reporting Intangible Assets

  • Types:
    • Patents, copyrights, trademarks, franchises, goodwill.
  • Accounting:
    • Recorded at cost; not all development costs included.
    • Limited-life intangibles amortized; indefinite-life intangibles not amortized.
Examples**
  • Patents: 20-year exclusive rights amortized based on legal or useful life.
  • Goodwill: Value not attributable to any asset, recorded only upon buying a business.