Long-Lived Assets Long-Lived Assets Presentations for Chapter 9 by Glenn Owen
Dec 25, 2015
Long-Lived AssetsLong-Lived Assets
Presentations for Chapter 9 by Glenn Owen
Key PointsKey Points How the matching principle underlies the methods used to
account for long-lived assets. Major questions that are addressed when accounting for
long-lived assets and how the financial statements are affected.
Major economic consequences associated with the methods used to account for long-lived assets.
Costs that should be included in the capitalized cost of a long-lived asset.
Accounting treatment of post acquisition expenditures. How the cost of a long-lived asset is allocated over its
useful life and the alternative allocation methods. Disposition of long-lived assets.
Property, Plant, Equipment, and Property, Plant, Equipment, and Intangibles as a Percentage Intangibles as a Percentage
of Total Assetsof Total Assets
Company (Industry) PPE + Intangibles
/Total Assets General Electric (Manufacturing) .15
Chevron Oil (Oil drilling and refining) .58
Super Value (Grocery) .57
Tommy Hilfiger (Clothing) .63
Yahoo (Internet search engine) .16
Cisco (Internet systems) .16
SBC Communications (Telcom services) .49
Wendy’s (Restaurant services) .78
Bank of America (Banking services) .03
Merrill Lynch (Investment services) .03
Overview of Long-Lived Overview of Long-Lived Asset AccountingAsset Accounting
1. What costs to capitalize?General ruleSpecific issues
LandLump-sum purchases
Construction
AcquisitionUse
1. Post acquisition expendituresBettermentsMaintenance
2. Cost allocationEstimate useful lifeEstimate salvage valueChoose allocation method
Straight-lineAcceleratedActivity
Allocation for tax purposes
Disposal1. Retirement2. Sale – exchange asset
for cash or receivable3. Trade-in – exchange of
long-lived assets
Acquisition: Acquisition: What Costs to Capitalize?What Costs to Capitalize?
Land– Purchase price, closing costs, costs to get land in
condition for its intended purpose, assumptions of back taxes, liens, or mortgages, and permanent land improvements.
Lump-sum purchases– Allocate based on FMV
Construction of long-lived assets– Costs required to get the assets into
operating condition– Interest on funds borrowed to finance
construction
Post Acquisition Expenditures:Post Acquisition Expenditures:Betterments or Maintenance?Betterments or Maintenance?
Betterments:– Increase asset’s useful life– Improve quality of asset’s output– Increase quantity of asset’s output– Reduce asset’s operating costs
Accounting treatment– Betterments are capitalized– Maintenance expenditures
are expensed
Cost Allocation:Cost Allocation:Amortizing Capitalized CostsAmortizing Capitalized Costs
Estimating useful life and salvage value Revising useful life estimate Depreciation methods
– Straight-line– Double-declining balance– Activity (units-of-production)
The matching principle Choosing a method Income tax depreciation methods
Depreciation Method:Depreciation Method:Straight LineStraight Line
Equal benefits across each year of useful life Simple and easy to apply Higher net income and book values in the early
years of life Formula:
(Cost – Salvage Value) Estimated Useful Life
Depreciation Method:Depreciation Method:Double-Declining-BalanceDouble-Declining-Balance
Accelerated method since greater amounts of cost are allocated to the earlier periods of the asset’s life than to later periods
Formula:
2 x Book Value *
Estimated Useful Life
*Book Value =
Cost – Accumulated Depreciation
Effects of Depreciation Effects of Depreciation Methods on Net IncomeMethods on Net Income
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
1996 1997 1998 1999 2000
Years
Net
In
com
e
SL DDB
Disposal: Retirements, Sales, Disposal: Retirements, Sales, and Trade-insand Trade-ins
Retirement– Obsolescence– Lack of a market– Closure
Sales Trade-ins
– Two or more long-lived assets are exchanged
– Similar– Dissimilar
Intangible Assets Intangible Assets and Deferred Costsand Deferred Costs
Copyrights, patents, and trademarksDeveloping computer softwareGoodwillOrganizational costsResearch and development
C O P Y R I G H T
C o p y r i g h t © 2 0 0 3 , J o h n W i l e y & S o n s , I n c . A l l r i g h t s r e s e r v e d .R e p r o d u c t i o n o r t r a n s l a t i o n o f t h i s w o r k b e y o n d t h a t p e r m i t t e d i n S e c t i o n 1 1 7 o f t h e 1 9 7 6 U n i t e d S t a t e s C o p y r i g h t A c t w i t h o u t t h ee x p r e s s w r i t t e n p e r m i s s i o n o f t h e c o p y r i g h t o w n e r i s u n l a w f u l . R e q u e s t f o r f u r t h e r i n f o r m a t i o n s h o u l d b e a d d r e s s e d t o t h e P e r m i s s i o n s D e p a r t m e n t , J o h n W i l e y & S o n s , I n c . T h e p u r c h a s e r m a y m a k e b a c k - u p c o p i e s f o r h i s / h e r o w n u s e o n l y a n d n o t f o r d i s t r i b u t i o n o r r e s a l e . T h e P u b l i s h e r a s s u m e s n o r e s p o n s i b i l i t yf o r e r r o r s , o m i s s i o n s , o r d a m a g e s , c a u s e d b y t h e u s e o f t h e s e p r o g r a m s o r f r o m t h e u s e o f t h e i n f o r m a t i o n c o n t a i n e d h e r e i n .