Study Notes on Long-Term Assets (LTA), Property, Plant, and Equipment (PPE), and Intangibles

Overview of Long-lived Assets (LTA)

• Long-lived assets, also referred to as long-term assets (LTA), are significant economic resources that a company uses over a long period.

• Major categories of long-lived assets include:
    - Long-Term Investments
    - Property, Plant, and Equipment (PPE)
    - Intangibles

Property, Plant, and Equipment (PPE)

• Despite being called Property, Plant, and Equipment, PPE has four main sub-categories:
    1. Land
       - Not depreciable.
    2. Land Improvements
       - Includes enhancements such as:
         - Fences
         - Sidewalks
         - Parking lots
         - Driveways
         - Sprinkler systems
    3. Buildings
       - Includes structures such as:
         - Factories
         - Office buildings
    4. Equipment
       - Can include:
         - Machinery
         - Vehicles (cars/trucks)
         - Computers
         - Telephones

Intangible Assets

• Intangible assets are long-term assets that do not possess physical substance and are included on the Balance Sheet.

• Definitions and characteristics:
    - Defined as rights, privileges, and competitive advantages resulting from ownership, often evidenced by contracts and licenses.

• Classification into two sub-categories:
    - Limited-life Intangibles: These assets expire after a certain period.
    - Indefinite-life Intangibles: These do not expire, generally amortized on a straight-line basis.

• Examples of Intangibles:
    - Limited-life Intangibles: Patents, Copyrights
    - Indefinite-life Intangibles: Trademarks & trade names (e.g., golden arches, swoosh check mark), Franchises, Goodwill.

Definitions of Intangible Assets

• Patent: An exclusive right that enables the recipient to manufacture, sell, or control an invention for a period of 20 years from the grant date.

• Copyright: An exclusive right granted by the federal government to reproduce and sell an artistic or published work, typically active for the life of the author plus 70 years.

• Trademark: A word, phrase, jingle, or symbol distinguishing a particular enterprise or product (e.g., "Just do it!").

• Franchise: A contractual arrangement where the franchisor grants the franchisee the right to sell specific products/services or use trademarks within a designated area.

• Goodwill: Represents the value of all favorable attributes related to a company not attributable to any specific asset, recorded only when a company is purchased.

• Amortization: The allocation of an intangible asset’s cost over its useful life.

• Research and Development Costs: Costs that often lead to patents or new products, expensed as incurred.

Accounting Treatment of Expenditures After Acquisition

• Two overarching concepts:
    1. Revenue vs. Capital Expenditures
       - Revenue Expenditures: Costs that are expensed immediately, not included in PPE.
       - Capital Expenditures: Costs included in PPE, effectively capitalized and added to the asset account on the Balance Sheet.
    2. Repairs & Maintenance vs. Additions & Improvements
       - Ordinary Repairs & Maintenance: Expenditures aimed at maintaining efficiency and productive life of the asset.
       - Additions & Improvements: Costs incurring to enhance efficiency, productive capacity, or useful life, regarded as capital expenditures.

Historical Cost Considerations

Historical Cost of Land

• To determine the historical cost of land, include all related costs incurred:
    - Cash purchase price.
    - Closing costs (e.g., title and attorney fees).
    - Real estate brokers’ commissions.
    - Accrued property taxes and other liens assumed by the purchaser.
    - Costs for clearing, grading, irrigation, or removing old structures.

• Example:
    - If Hayes Company acquires real estate at $100,000, removes an old warehouse costing $6,000 net, pays an attorney’s fee of $1,000, and a broker’s commission of $8,000, the total cost of land can be computed as:
  
      $ext{Cost of land} = 100,000 + 6,000 + 1,000 + 8,000 = 115,000$

Historical Cost of Equipment

• To calculate the historical cost of equipment, consider:
    - Cash purchase price.
    - Sales taxes.
    - Freight charges (if applicable).
    - Insurance during transit.
    - Costs of assembly, installation, and testing.

• Example:
    - For Giacomo’s Pizzeria:
      
      - Delivery van purchase price: $22,000
      - Additional costs include sales taxes ($1,320), painting ($500), licensing ($80), and insurance ($1,600).
      - Thus, the total equipment cost can be calculated as:
        
        $ext{Cost of van} = 22,000 + 1,320 + 500 + 80 + 1,600 = 25,500$

Depreciation of Property, Plant, and Equipment

• The three main methods for depreciation include:
    1. Straight-line Method (SL)
    2. Activity-Based Method
    3. [Third method not provided in transcript]

• Example Calculation of Depreciation Expense:
    - For a vehicle purchased at a historical cost of $13,000 with a salvage value of $1,000 and a useful life of 5 years:
      - Straight-Line Depreciation (SL):
        - Annual Depreciation Expense =
        
        $ext{Depreciation Expense} = rac{ ext{Historical Cost} - ext{Salvage Value}}{ ext{Useful Life}}$
        
        $= rac{13,000 - 1,000}{5} = 2,400 ext{ per year}$

  - Activity-Based Method: Depreciation varies based on units of activity.

Summary of Depreciation Calculation

• To recap the calculations:

• Prepare a table detailing:
    - Year, Depreciable Cost/Basis, Annual Expense, Partial Year Depreciation, Accumulated Depreciation (A/D).

• Example from Blue Ventures:
    - Cost of jet skis: $75,000 with a salvage value of $7,000 and a 5-year life:
    - Following the straight-line method:
      - Annual Depreciable Cost =
      
      $ext{Depreciable Cost} = ext{Cost} - ext{Salvage Value} = 75,000 - 7,000 = 68,000$
      - Annual Expense =
      
      $ext{Annual Expense} = rac{68,000}{5} = 13,600$

  - The table illustrates the depreciation over the years, noting accumulated depreciation and any partial year calculations as necessary.