Chapter 9
Chapter 9: Long-Lived Tangible and Intangible Assets
Page 1 - Introduction
Title: Seventh Edition FUNDAMENTALS OF FINANCIAL ACCOUNTING Chapter 9
Authors: PHILLIPS, CLOR-PROELL, LIBBY
PowerPoint Author: Brandy Mackintosh, CPA, CA
Copyright © 2016 by McGraw-Hill Education
Page 2 - Learning Objective 9-1
Objective: Define, classify, and explain the nature of long-lived assets.
Page 3 - Definition and Classification
Long-Lived Assets:
Tangible: Physical substance
Intangible: No physical substance
Duration: Will not be used up within the next year
Usage: Actively used in operations
Page 4 - Learning Objective 9-2
Objective: Apply the cost principle to the acquisition of long-lived assets.
Page 5 - Acquisition of Tangible Assets
Capitalizing Costs: Recording costs as assets.
Acquisition Cost Includes:
Purchase price
All expenditures needed to prepare the asset for its intended use.
Page 6 - Acquisition Costs by Asset Type
Land:
Purchase/construction cost
Legal fees
Survey fees
Title search fees
Buildings:
Purchase/construction cost
Legal fees
Appraisal fees
Architect fees
Equipment:
Purchase/construction cost
Sales taxes
Transportation costs
Installation costs
Page 7 - Cedar Fair Example
Transaction: Pineview purchased a new ride for $26,000,000, with a $1,000,000 discount.
Additional Costs:
Transportation: $125,000
Installation: $625,000
Journal Entry Preparation: Assuming a note payable for purchase, paid cash for other costs.
Page 8 - Journal Entry Analysis
Analyze Assets:
Cash = Liabilities + Stockholders’ Equity
Cash: -$750,000
Equipment: +$25,750,000
Note Payable: +$25,000,000
Record Entry:
Debit: Equipment $25,750,000
Credit: Cash $750,000
Credit: Note Payable $25,000,000
Page 9 - Depreciation Overview
Definition: Depreciation is a cost allocation process matching costs of operational assets with the periods benefited.
Financial Statements Impact:
Balance Sheet shows acquisition cost.
Income Statement shows depreciation expense.
Page 10 - Depreciation Process
Objective: Allocate costs of assets including buildings, vehicles, and equipment over their useful lives.
Contra-account: An account that offsets or reduces another account.
Page 11 - Depreciation Calculations
Three Required Amounts:
Acquisition cost
Estimated useful life
Estimated residual value
Effect on Accounting Equation:
Accumulated Depreciation: (+xA)
Depreciation Expense: (+E)
Journal Entry Example:
Debit: Depreciation Expense
Credit: Accumulated Depreciation
Page 12 - Example of Depreciation Expense
Income Statement Overview (2018):
Net Revenues: $1,350 million
Operating Expenses: $1,060 million (including $155 million Depreciation Expense)
Balance Sheet Overview:
Property and Equipment: $3,330 million
Accumulated Depreciation: ($1,730 million)
Book Value: $1,600 million
Page 13 - Learning Objective 9-3
Objective: Apply various depreciation methods as economic benefits are utilized over time.
Page 14 - Straight-Line Depreciation Method
Acquisition Example: Cedar Fair purchased a go-kart ride for $62,500 with a useful life of 3 years and a residual value of $2,500.
Page 15 - Straight-Line Depreciation Calculation
Formula:
Depreciation Expense = (Cost - Residual Value) / Useful Life
Example Calculation:
Depreciable cost: $62,500 - $2,500 = $60,000
Annual Depreciation: $20,000
Yearly Computations: Recorded through acquisition to Year 3.
Page 16 - Partial Year Depreciation
Note: When a plant asset is acquired during the year, calculate depreciation for the fraction of the year the asset is owned.
Page 17 - Conclusion
End of Part 1 of Chapter 9
This concludes the preliminary overview related to long-lived tangible and intangible assets.