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Chapter 7: Long Term Assets (LTA) (Amortization of intangible assets…
Chapter 7: Long Term Assets (LTA)
2 major categories of ltas
tangible assets-
assets with physical substance
property, plant & equipment(PP&E)-
Consist of land, land improvements buildings, equipment, and natural resources
Land
-represents land a company is using in its operations
NOT held as investments
Land improvement-
additional costs of improving land, such as adding a parking lot, sidewalks, driveways, landscaping, lighting systems, fences, sprinklers, etc.
Recorded separate from land itself
Buildings-
represents buildings a company is using in its operations
NOT held as investments
Includes administrative offices, retail stores, manufacturing facilities, and storage warehouses
Equipment-
Includes machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures
Natural resources-
oil, natural gas, timber, & salt
Distinguished from other PP&E because we can physically use up, or deplete, natural resources
intangible asset-
assets that lack physical substance
Acquired in 2 ways:
Purchase from Other Companies
Patents-
an exclusive right to manufacture a product or to use a process
U.S. Patent and Trademark Office grants patents for a period of 20 years
Trademark 10 yrs
Copyright-
an exclusive right of protection given by the U.S. Copyright Office to the creator of a published work such as a song, film, painting, photograph, book, or computer software
protected by law and give the creator & his or her heirs the exclusive right to reproduce and sell the artistic or published work for the life of the creator + 70 yrs
Trademarks-
a word, slogan, or symbol that distinctively identifies a company, product, or service
registration can be renewed for an indefinite number of 10-year periods, making its potential useful life indefinite
Rights for franchise-
local outlets that pay for the exclusive right to use the franchisor company’s name and to sell its products within a specific geographical area
Goodwill-
the amount that the purchase price exceeds the fair value of the acquired company’s identifiable net assets
Only occurs when one company acquires another company
Develop internally
Patent to protect new product or process
Research & Development Costs (R&D) incurred in developing a patent internally are not recorded as an asset on the balance sheet. Instead, they are expensed directly in the income statement
Acquisition of ltas & expenditures
Ltas are recorded at cost
+
expenditures necessary to get the asset ready for use.
Capitalize-
to include as part of the cost of a long-term asset
In other words, we debit the asset account instead of an expense account
Examples of expenditures capitalized as part of asset:
Taxes
Transportation
Assembly
Installation
Cost of Removal of Existing Asset
any cash received from the sale of salvaged materials will be shown as a reduction to the overall cost of removal
Sales commission
Legal and professional fees
Basket Purchases-
when a company purchase more than one asset at the same time for one purchase price, the cost is allocated to each asset based on its estimated fair value
Refer to example chart in chapter summary
The difference between “Capitalize” and “Expense” is
TIMING
. Costs treated as expenses are recorded to their appropriate
EXPENSE
account when incurred. Capitalized costs are recorded as part of a Long-Term ASSET
NOW
and become EXPENSES
LATER
(through Depreciation Expense).
materially-
whether something is likely to influence a decision, based on its size
Materiality is an important consideration in deciding whether to capitalize or expense certain costs
Depreciation methods
Depreciation of tangible assets
Pp&e
Depreciation-
allocating the cost of a Ltas over its service life
Book value-
also referred to as Carrying Value; equals the original cost of the asset minus the current balance in accumulated depreciation
Residual value-
also referred to as Salvage Value; the amount the company expects to receive from selling or disposing of the asset at the end of its service life
Most common
Straight line
Takes an = amount of depreciation each year
Service life-
also referred to as Useful Life; how long the company expects to receive benefits from the asset before disposing of it
Can be measured in units of time or units of activity
By far the most common depreciation method used in financial accounting
Declining balance
Accelerated method (more depreciation expense is taken in the early years than in the later years
The concepts behind declining-balance are also used in calculating depreciation for tax purposes
Activity based
Calculates depreciation based on the use of the asset rather than time
Most commonly used to allocate the cost of natural resources
Comparing methods
Depletion-
allocating the cost of natural resources in a rational and systematic manner over the resource’s useful life
Companies usually use the units-of-activity method to compute depletion, since depletion generally is a function of the units extracted during the year.
Amortization of intangible assets
The service life of an intangible asset is usually limited by legal, regulatory, or contractual provisions
The estimated useful life of an intangible asset may be less than the service life if the benefits are not expected to continue for the entire service life
The expected residual value of most intangible assets is zero
Most companies use straight-line amortization
Intangible Assets not Subject to Amortization:
Goodwill-
the most common intangible asset with an indefinite useful life.
Trademarks w/ indefinite life
impairment-
Management must review long-term assets for a potential write-down when events or changes in circumstances indicate the asset’s “recoverable amount” is less than its “recorded amount” in the accounting records.
The recoverable amount is the cash expected to be received from using the asset over its remaining useful life.
Sale or disposition of ltas
Selling or disposing of a long-term asset can result in either a gain or a loss.
GAIN is recorded when the asset is sold for more than its book value. A LOSS is recorded when the asset is sold for less than its book value.
Gains and Losses are reported on the income statement as non-operating income and expenses.
Asset analysis
Return on Assets (ROA)-
indicates the amount of net income generated for each dollar invested in assets
Net Income / Average Total Assets
(Beginning Total Assets + Ending Total Assets) / 2