Chapter 9: Reporting and Chapter 9: Reporting and Interpreting Long-Lived Interpreting Long-Lived Tangible and Intangible Tangible and Intangible AssetsAssets

Learning Objective 1Learning Objective 1

Define, classify, and explain the nature of long-lived assets.

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Tangible

PhysicalSubstance

Intangible

No PhysicalSubstance

Will not be used up within the next year

Actively Used in Operations

Definition and ClassificationDefinition and Classification

Land Assets subject to depreciation

Buildings and equipmentFurniture and fixtures

Examples

Value represented by rights that produce benefits. Intangibles with a limited life, such as patents and copyrights, are subject to amortization. Intangibles with an unlimited (or indefinite) life, such as goodwill and trademarks, are not amortized.

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Learning Objective 2Learning Objective 2

Apply the cost principle tothe acquisition of long-lived

assets.

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Acquisition of Tangible AssetsAcquisition of Tangible Assets

Recording costs as Recording costs as assets is calledassets is called

capitalizingcapitalizing the costs. the costs.

Acquisition cost includes:

1. purchase price, and

2. all expenditures needed to prepare the asset for its intended use.

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Acquisition of Tangible AssetsAcquisition of Tangible Assets

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The total cost of a combined purchase of land and building is allocated in proportion to their

relative market values.

The total cost of a combined purchase of land and building is allocated in proportion to their

relative market values.

Acquisition of Tangible Assets Acquisition of Tangible Assets ((Basket Purchase)Basket Purchase)

On January 1, Jones purchased land and On January 1, Jones purchased land and building for $400,000 cash. The appraised building for $400,000 cash. The appraised

values are building, $325,000, and land, values are building, $325,000, and land, $175,000. $175,000.

How much of the $400,000 purchase price will be How much of the $400,000 purchase price will be charged to the building and land accounts?charged to the building and land accounts?

On January 1, Jones purchased land and On January 1, Jones purchased land and building for $400,000 cash. The appraised building for $400,000 cash. The appraised

values are building, $325,000, and land, values are building, $325,000, and land, $175,000. $175,000.

How much of the $400,000 purchase price will be How much of the $400,000 purchase price will be charged to the building and land accounts?charged to the building and land accounts?

Appraised % of Purchase ApportionedAsset Value Value Price Cost

a b* c b × c

Land 175,000$ 35% × 400,000$ = 140,000$ Building 325,000 65% × 400,000 = 260,000 Total 500,000$ 100% 400,000$

* $175,000 ÷ $500,000 = 35%

$325,000 ÷ $500,000 = 65%

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Cash PurchaseCash Purchase

Cedar Fair purchased a new ride for $26,000,000 less a $1,000,000 discount. Cedar Fair paid $125,000 for

transportation and $625,000 for installation of the ride.

Prepare the journal entry for the acquisition assuming Cedar Fair paid cash for the new ride.

2 Record

1 Analyze

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Credit PurchaseCredit Purchase

Instead of paying cash, assume that Cedar Fair issued a note for the new ride, but paid cash for the transportation and

installation of the ride.

Prepare the journal entry for the acquisition.

1 Analyze

2 Record

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Type of AccountingExpenditure Identifying Characteristics Treatment

Ordinary 1. Relatively small, recurring expenditures Expenserepairs and that maintain normal operating condition

maintenance 2. Do not increase productivity3. Do not extend life beyond original estimate

Extraordinary 1. Relatively large, infrequent expenditures Capitalizerepairs, such as major overhauls or replacements

replacements, of major componentsand additions 2. May extend useful life

3. May increase productivity or efficiency

Maintenance Costs Incurred during Maintenance Costs Incurred during UseUse

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Depreciation is a cost allocation process that matches costs of operational assets with periods benefited by their use.

Cost Allocaton

Balance Sheet Income Statement

ExpenseAcquisition

Cost

Depreciation ExpenseDepreciation Expense

DepreciationExpense

IncomeStatement

Depreciation forthe current year

BalanceSheet

AccumulatedDepreciation

Total of depreciationto date for an asset

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Depreciation ExpenseDepreciation Expense

Depreciation calculations require three amounts: Acquisition cost. Estimated useful life. Estimated residual value.

The effects of $130 of depreciation on the accounting equation and the journal entry to record them follow:

1 Analyze

2 Record

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Depreciation ExpenseDepreciation Expense

2008 Depreciation

Includes $130 for 2008Book value 2008

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Learning Objective 3Learning Objective 3

Apply various depreciation methods as economic benefits

are used up over time.

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Depreciation MethodsDepreciation Methods

Straight-line Units-of-production Declining balance

At the beginning of the year, Cedar Fair purchased a At the beginning of the year, Cedar Fair purchased a new Go-Cart Ride for $62,500 cash. The ride has an new Go-Cart Ride for $62,500 cash. The ride has an

estimated useful life of 3 years and an estimated estimated useful life of 3 years and an estimated residual value of $2,500.residual value of $2,500.

We will use the following information to illustratethe three methods of depreciation:

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Straight-Line MethodStraight-Line Method

= $20,000 per year ($62,500 - $2,500) × 13

Depreciation Accumulated Accumulated UndepreciatedExpense Depreciation Depreciation Balance

Year (debit) (credit) (credit balance) (book value)62,500$

1 20,000$ 20,000$ 20,000$ 42,500 2 20,000 20,000 40,000 22,500 3 20,000 20,000 60,000 2,500

60,000$ 60,000$

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Units-of-Production MethodUnits-of-Production Method

= $18,000 ($62,500 - $2,500) × 30,000

100,000

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Depreciation Accumulated UndepreciatedExpense Depreciation Balance

Year Miles (debit) (credit balance) (book value)62,500$

1 30,000 18,000$ 18,000$ 44,500 2 50,000 30,000 48,000 14,500 3 20,000 12,000 60,000 2,500

100,000 60,000$

Declining-Balance MethodDeclining-Balance Method

= $41,667($62,500 - $0) × 23First Year

Second Year = $13,889($62,500 - $41,667) × 23

What is the amount of amount of depreciationfor each of the first two years?

Cost – Accumulated Depreciation

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Depreciation Accumulated UndepreciatedExpense Depreciation Balance

Year (debit) Balance (book value)62,500$

1 41,667$ 41,667$ 20,833 2 13,889 55,556 6,944 3 4,629 60,185 2,315

60,185$

Below residual value

Double-Declining-Balance MethodDouble-Declining-Balance Method

Depreciation Accumulated UndepreciatedExpense Depreciation Balance

Year (debit) (credit balance) (book value)62,500$

1 41,667$ 41,667$ 20,833 2 13,889 55,556 6,944 3 4,444 60,000 2,500

60,000$

Third Year = $4,629($62,500 - $55,556) × 23

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Partial Year Depreciation Partial Year Depreciation CalculationsCalculations

When a plant asset is acquired during When a plant asset is acquired during the year, depreciation is calculated the year, depreciation is calculated for the fraction of the year the asset for the fraction of the year the asset

is owned.is owned.

When a plant asset is acquired during When a plant asset is acquired during the year, depreciation is calculated the year, depreciation is calculated for the fraction of the year the asset for the fraction of the year the asset

is owned.is owned.

June 30

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Summary of Depreciation Summary of Depreciation MethodsMethods

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Learning Objective 5Learning Objective 5

Analyze the disposal of long-lived tangible assets.

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Update depreciation to date of disposal.

Record the disposal.

dr Cash (+A)

dr Accumulated Depreciation (-xA) cr Equipment (-A)

Book value

Disposal of Tangible Assets

cr Gain on Disposal (+R, +SE)

Gain if cash received is greater than asset’s book value

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dr Cash (+A)

dr Accumulated Depreciation (-xA) cr Equipment (-A)

Book value

Disposal of Tangible Assets Update depreciation to date of disposal.

Record the disposal.

dr Loss on Disposal (+E, -SE)

Loss if cash received is less than asset’s book value

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The amount of depreciation per year is:

a. $0.

b. $500,000.

c. $1,000,000.

d. $2,000,000.

Disposal of Tangible Assets

The amount of depreciation per year is:

a. $0.b. $500,000.c. $1,000,000.d. $2,000,000.

Annual Depreciation:

($20,000,000 - $0) ÷ 20 Years

= $1,000,000 per year

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The equipment’s book value at date of sale is:

a. $4,000,000.

b. $3,000,000.

c. $17,000,000.

d. $16,500,000.

Disposal of Tangible Assets

The equipment’s book value at date of sale is:

a. $4,000,000.b. $3,000,000.c. $17,000,000.d. $16,500,000.

Accumulated Depreciation =

(16 yrs. × $1,000,000) = $16,000,000

BV = Cost - Accumulated Depreciation

BV = $20,000,000 - $16,000,000 = $4,000,000

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The equipment’s sale resulted in:

a. a loss of $1,000,000.

b. a gain of $3,000,000.

c. a gain of $1,000,000.

d. a loss of $5,000,000.

Disposal of Tangible Assets

The equipment’s sale resulted in:

a. a loss of $1,000,000.b. a gain of $3,000,000.c. a gain of $1,000,000.d. a loss of $5,000,000.

Loss = Cash Received - Book ValueLoss = $3,000,000 - $4,000,000 = $1,000,000

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Analyze and prepare the journal entry to record Cedar Fair’s sale of the hotel.

Disposal of Tangible Assets

2 Record

1 Analyze

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Learning Objective 6Learning Objective 6

Analyze the acquisition, use, and disposal of long-lived

intangible assets.

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Noncurrent assetswithout physical

substance.

Useful life isoften difficultto determine.

Usually acquired for operational

use.

Often provideexclusive rights

or privileges.

Intangible AssetsIntangible Assets

IntangibleAssets

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Record at current cash Record at current cash equivalent cost, including equivalent cost, including purchase price, legal fees, purchase price, legal fees,

and filing fees.and filing fees.

Record at current cash Record at current cash equivalent cost, including equivalent cost, including purchase price, legal fees, purchase price, legal fees,

and filing fees.and filing fees.

Amortize intangibles with limited Amortize intangibles with limited lives over the shorter of their lives over the shorter of their

economic lives or legal lives using economic lives or legal lives using the straight-line method.the straight-line method.

Amortize intangibles with limited Amortize intangibles with limited lives over the shorter of their lives over the shorter of their

economic lives or legal lives using economic lives or legal lives using the straight-line method.the straight-line method.

Trademarks and CopyrightsTrademarks and Copyrights A trademark is a symbol, design,or logo associated with a business.

Internally developedtrademarks have norecorded asset cost.

Purchased trademarksare recorded at cost.

Amortize costover the period

benefited.

Legal life islife of creatorplus 70 years.

A copyright is an exclusive right granted by the federalA copyright is an exclusive right granted by the federalgovernment to protect artistic or intellectual properties.government to protect artistic or intellectual properties.

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Cost is purchaseprice plus legalcost to defend.

Amortize costover the shorter of

useful life or 20 years.

Patents and Licensing RightsPatents and Licensing Rights

A patent is an exclusive right granted by the federalgovernment to sell or manufacture an invention.

You may be using computersoftware that is made

available to you through acampus licensing agreement.

Licensing rights grant limited permission to use a productor service according to specific terms and conditions.

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GoodwillGoodwill

Occurs when one company Buys another company.

Purchase Price > Fair Market Value of Net Assets Acquired

Only purchased goodwill is an intangible asset.

Is not amortized. Is impairment tested and may be written down.

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FranchisesFranchisesA franchise provides legally protected

rights to sell products or provide services purchased by a franchisee from the

franchisor.

Amortization of Limited Life Amortization of Limited Life Intangible AssetIntangible Asset

Assets = Liabilities + Stockholders' EquityPatent (-A) $40,000 Amortization Expense

(+E, -SE) -40,000

1 Analyze

2 Recorddr Amortization Expense (+E, -SE) 40,000

cr Patent (-A) 40,000

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Summary of Accounting RulesSummary of Accounting Rulesfor Long-Lived Assetsfor Long-Lived Assets

Stage Subject Tangible Assets Intangible AssetsAcquisition Purchased Asset Capitalize all related costs Capitalize all related costs

Use Repairs/maintenance Ordinary Expense related costs Not applicable Extraordinary Capitalize related costs Not applicable

Depreciation/ amortization Limited life straight-line Typically use straight line only

units-of-productiondeclining-balance

Unlimited life Do not depreciate land Do not amortize

Impairment test Write-down if necessary Write-down if necessary

Disposal Report gain or (loss) when . . . Receive more (less) on Receive more (less) on disposal than book value disposal than book value

Stage Subject Tangible Assets Intangible AssetsAcquisition Purchased Asset Capitalize all related costs Capitalize all related costs

Use Repairs/maintenance Ordinary Expense related costs Not applicable Extraordinary Capitalize related costs Not applicable

Depreciation/ amortization Limited life straight-line Typically use straight line only

units-of-productiondeclining-balance

Unlimited life Do not depreciate land Do not amortize

Impairment test Write-down if necessary Write-down if necessary

Disposal Report gain or (loss) when . . . Receive more (less) on Receive more (less) on disposal than book value disposal than book value

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Learning Objective 7Learning Objective 7

Interpret the fixed asset turnover ratio.

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This ratio measures the sales dollars generated by each dollar

invested in fixed assets.

For the year 2008, Cedar Fair had $1,000,000 of revenue. End-of-year fixed assets were $1,800,000 and beginning-of-year

fixed assets were $1,940,000. (All numbers in millions.)

Turnover AnalysisTurnover Analysis

FixedAsset

Turnover

Net Sales RevenueAverage Net Fixed Assets

=

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FixedAsset

Turnover

$1,000,000($1,800,000 + $1,940,000) ÷ 2

= = 0.53

Yahoo! Six Flags Cedar Fair5.68 0.64 0.53

2008 Fixed Asset Turnover Comparisons