Long-Term Assets and Accounting Fundamentals

Long-Term Assets Overview

• Types of Assets:

  • Tangible Assets: Land, buildings, equipment, natural resources.

  • Intangible Assets: Patents, trademarks, copyrights, franchises, goodwill.

Property, Plant, and Equipment

• Recorded at original cost plus any costs necessary to prepare for use.

• Land Costs: Includes acquisition costs, real estate commissions, back taxes, land preparation costs.

Land Improvements

• Costs incurred to enhance land value (e.g., parking lots, sidewalks).

• Recorded separately; they have limited useful lives.

Buildings & Equipment

• Buildings: Include costs like realtor fees and remodeling for readiness.

• Equipment: Costs include purchase price, taxes, shipping, preparation. Ongoing costs like insurance are expensed.

Basket Purchases

• Multiple assets purchased together; total price allocated based on fair values of individual assets.

Natural Resources

• Utilized and depleted assets (e.g., oil, timber); recorded at cost plus preparation costs.

Intangible Assets

• Include patents (20 years), trademarks (indefinite), copyrights (creator life + 70 years), and goodwill.

• Purchased intangibles recorded at cost, while internally developed intangibles typically expensed.

Amortization & Depreciation

• Amortization: Allocation of intangible asset costs over their useful life. Generally uses straight-line method.

• Depreciation: Allocation of tangible asset costs over time. Methods include straight-line, declining-balance, and activity-based.

Asset Disposal

• Upon disposal of long-term assets (sale, retirement, or exchange), gain or loss is determined by comparing sale price to book value.

• Depreciation must be updated before disposal recording.

Impairment of Long-Term Assets

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

• Two-step process: 1) Test impairment, 2) Record loss if impaired.