Chapter Six Accounting for Long-Term Operational Assets © 2015 McGraw-Hill Education.

Chapter Six

Accounting for Long-Term Operational

Assets

© 2015 McGraw-Hill Education.

Intangible Assets1. Intangible Assets with Identifiable Useful Lives

– These intangibles include patents and copyrights. We amortize the cost of each over its useful life.

2. Intangible Assets with Indefinite Useful Lives - These intangibles include renewable franchises, trademarks, and goodwill. The cost of these assets is not expensed unless it can be shown that there has been an impairment in value.

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Cost of Long-Term Assets

Buildings –• Purchase price,• Sales taxes,• Title search and transfer

document costs,• Realtor’s and attorney’s fees,

and• Remodeling costs.

Buildings –• Purchase price,• Sales taxes,• Title search and transfer

document costs,• Realtor’s and attorney’s fees,

and• Remodeling costs.

Equipment –• Purchase price (less

discounts),• Sales taxes,• Delivery costs,• Installation costs, and• Costs to adapt to

intended use.

Equipment –• Purchase price (less

discounts),• Sales taxes,• Delivery costs,• Installation costs, and• Costs to adapt to

intended use. 6-3

Cost of Long-Term Assets

Land –• Purchase price,• Sales taxes,• Title search and transfer

document costs,• Realtor’s and attorney’s fees, • Costs of removal of old

buildings, and• Grading costs.

Land –• Purchase price,• Sales taxes,• Title search and transfer

document costs,• Realtor’s and attorney’s fees, • Costs of removal of old

buildings, and• Grading costs.

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Basket Purchase Allocation

Beatty Company paid $240,000 for land and a building. An independent appraiser provided these fair value estimates: land $90,000, and building $270,000.

The $240,000 cost paid is separately assigned based on % of total fair value. Amount %

Fair market value of building 270,000$ 75%Fair market value of land 90,000 25%Total fair market value 360,000$ 100%

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Basket Purchase Allocation

The land and building that Beatty Company are assigned their own allocation of the $240,000 paid based on the individual % of total fair value. The “Allocation” is the amount recorded in the accounting records.

Cost % AllocationAssign to building 240,000$ 75% 180,000$ Assign to land 240,000 25% 60,000

100% 240,000$

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Life Cycle of Operational Assets

AcquireFunding

BuyAsset

UseAsset

RetireAsset

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Depreciation Method1. Straight-line method - the same

amount of depreciation is taken each accounting period.

2. Double-declining-balance – produces more depreciation expense in the early years of an asset’s life, with a declining amount of expense in later years.

3. Units-of-Production – produces varying amounts of depreciation in different accounting periods depending upon the number of units produced.

1. Straight-line method - the same amount of depreciation is taken each accounting period.

2. Double-declining-balance – produces more depreciation expense in the early years of an asset’s life, with a declining amount of expense in later years.

3. Units-of-Production – produces varying amounts of depreciation in different accounting periods depending upon the number of units produced. 6-8

Revision of EstimatesEstimates are frequently revised when new information surfaces. Assume we purchased equipment on January 1, 2016, for $50,000 cash and estimated salvage value was $3,000. The equipment has an estimated useful life

of eight years, and the company uses straight-line depreciation.

($50,000 – $3,000) ÷ 8 = $5,875 depreciation per year($50,000 – $3,000) ÷ 8 = $5,875 depreciation per year

On January 1, 2020, after four years of depreciation, it was determined that the machine has a remaining

useful life of ten more years for a total estimated useful life of fourteen years.

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Revision of Life EstimatesYear

Annual Depreciation

Accumulated Depreciation Book Value

2016 5,875$ 5,875$ 44,125$ 2017 5,875 11,750 38,250 2018 5,875 17,625 32,375

2019 5,875 23,500 26,500 2020202120222023

We determine the remaining annual depreciation like this:

$26,500 – $3,000 = $23,500 ÷ 10 years = $2,350 per year for years 2020 through 2029

Year

Annual

Depreciation

Accumulated

Depreciation Book Value

2016 5,875$ 5,875$ 44,125$ 2017 5,875 11,750 38,250 2018 5,875 17,625 32,375

2019 5,875 23,500 26,500 2020 2,350 25,850 24,150

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Revision of Salvage Estimates

We determine the remaining annual depreciation like this:

$26,500 – $6,000 = $20,500 ÷ 4 years = $5,125 per year

Year

Annual

Depreciation

Accumulated

Depreciation

Book

Value

2016 5,875$ 5,875$ 44,125$ 2017 5,875 11,750 38,250 2018 5,875 17,625 32,375 2019 5,875 23,500 26,500 2020

75,125 28,625 21,375

2021 5,125 33,750 16,250 2022 5,125 38,875 11,125 2023 5,125 44,000 6,000

YearAnnual

DepreciationAccumulated Depreciation Book Value

2016 5,875$ 5,875$ 44,125$ 2017 5,875 11,750 38,250 2018 5,875 17,625 32,375

2019 5,875 23,500 26,500 2020202120222023

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Continuing Expenditures for Plant Assets

Costs that Are ExpensedThe cost of routine maintenance and minor repairs that are incurred to keep an asset in good working order are

expensed as incurred.Assume McGraw spent $500 cash for routine lubrication

and minor parts on machinery.

Assets =

Cash = Com. Stk. +

Ret. Earn. Rev. - Exp. =

Net Income

Cash Flow

(500) = n/a + (500) n/a - 500 = (500) (500) OA

Equity

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Continuing Expenditures for Plant Assets

Costs that Are CapitalizedExpenditures that improve the quality of an asset are

capitalized as part of the cost of that asset.Assume McGraw spent $4,000 cash for a major overhaul

of equipment to improve efficiency.

=

Cash + Mach. - Acc. Dep. =

Com. Stk. + Ret. Earn. Rev. - Exp. =

Net Income

Cash Flow

(4,000) + 4,000 - n/a = n/a + n/a n/a - n/a = n/a (4,000) IA

Assets Equity

6-13

Continuing Expenditures for Plant Assets

Costs that Extend the Life of an AssetThe amount of the expenditure should reduce the balance in the accumulated depreciation account.

Assume McGraw spent $4,000 cash for improvements that extended the life of machine two years.

=

Cash + Mach. - Acc. Dep. =

Com. Stk. + Ret. Earn. Rev. - Exp. =

Net Income

Cash Flow

(4,000) + n/a - (4,000) = n/a + n/a n/a - n/a = n/a (4,000) IA

Assets Equity

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Natural Resources

Cost – Salvage valueTotal estimated units recoverable

=Depletion charge per unitof resource

Depletion charge per unitof resource

×Number of units extracted and sold this period

=PeriodicDepletion Expense

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Intangible AssetsTrademarks

A name or symbol that identifies a company or a

product. The cost of a trademark may include design, purchase, or

defense of the trademark.

TrademarksA name or symbol that

identifies a company or a product. The cost of a trademark may include design, purchase, or

defense of the trademark. PatentsThe exclusive legal right to produce and sell a product

that has one or more unique features. The legal life of a patent is 20 years.

PatentsThe exclusive legal right to produce and sell a product

that has one or more unique features. The legal life of a patent is 20 years.

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Intangible AssetsCopyrights

Protection of writings, musical composition, work of art, or other intellectual property. The protection extends for the life of the

creator plus 70 years.

CopyrightsProtection of writings,

musical composition, work of art, or other intellectual property. The protection extends for the life of the

creator plus 70 years.

FranchiseThe exclusive right to sell

products or perform services in certain geographic areas.

FranchiseThe exclusive right to sell

products or perform services in certain geographic areas.

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GoodwillASSUME: Your company is willing to pay

$350,000 ($300,000 cash and assumption of $50,000 liabilities) to acquire Seller Company.

= Liab. + Equity

Cash + Rest. Assets + Goodwill = Rev. - Exp. =

Net Income Cash Flow

(300,000) + 280,000 + 70,000 = 50,000 + n/a n/a - n/a = n/a (300,000) IA

Assets

Assets 280,000$

Liabilities 50,000$ Stockholders' Equity 230,000 Total 280,000$

Seller CompanyBalance Sheet

At December 31, 20XX

GoodwillThe excess of cost over fair value of net

tangible assets acquired in a

business acquisition.

GoodwillThe excess of cost over fair value of net

tangible assets acquired in a

business acquisition.

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Impairment of Intangible Asset

Intangible assets with indefinite useful lives must be tested for impairment annually. If the fair value of the intangible asset is

less than its book value, an impairment loss is recognized.

Intangible assets with indefinite useful lives must be tested for impairment annually. If the fair value of the intangible asset is

less than its book value, an impairment loss is recognized.

Assume that the asset goodwill is determined to be impaired and a decline in value of $30,000, The effects

on the financial statements would be:

Assets = Liab. + Equity

Goodwill = +

Ret. Earn. Rev. - Exp. =

Net Income

Cash Flow

(30,000) = n/a + (30,000) n/a - 30,000 = (30,000) n/a

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Balance Sheet Presentation

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End of Chapter Six

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