Long-term Assets - Long-term Assets Types of Long-Term...

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Unformatted text preview: Long-term Assets Types of Long-Term Assets Property, plant, and equipment Long-term assets acquired for use in operations s Natural resources Long-term assets with a value that decreases through use or sale s Types of Long-Term Assets s Intangible assets Long-term assets that do not have physical substance Plant Asset Cost Purchase price (less cash discount) Plant Asset Cost Purchase price (less cash discount) plus all other reasonable and necessary expenditures Plant Asset Cost Purchase price (less cash discount) plus all other reasonable and necessary expenditures to prepare the asset for use Examples of Items Included Purchase price less any cash discount s Shipping costs s Installation costs s Cost of modifications s Interest cost during construction s Depreciation Allocation of the cost of an asset to the periods the asset benefits s Not a valuation process s Factors in Estimating Depreciation Initial cost s Estimated residual value s Estimated Useful Life s Depreciation Methods Straight-line allocate an equal amount to each period s Production unit depreciation based on volume of output s Accelerated Depreciation Methods Double Declining-balance apply a uniform rate to a declining amount (book value) s Sum-of-the-Years'-Digits annual amount the decreases by a constant amount s Example Data Depreciable Asset - Truck s Invoice price $20,000 s Cash discount 2% s Modifications $3,400 s Estimated residual value $2,000 s Useful life - 4 years or 200,000 miles s Acquisition date - January 8, 19X1 s Cost of Truck Invoice price s Less: Cash discount s subtotal s Modification s Cost s $20,000 400 $19,600 3,400 $23,000 Straight-Line Method Cost - Est. Residual Value Est. Useful Life Depreciation = Expense Straight-Line Method Expense 19X1: ($23,000 - $2,000) / 4 $5,250 19X2: ($23,000 - $2,000) / 4 19X3: ($23,000 - $2,000) / 4 19X4: ($23,000 - $2,000) / 4 $5,250 $5,250 $5,250 Accum $5,250 $10,500 $15,750 $21,000 Production Units Method Cost - Est. Residual Value Est. Useful Life in Units Depreciation Expense per Unit Depreciation = Expense per Unit X Units Depreciation = Produced Expense Production Units Method Exp Accum ($23,000 - $2,000) / 200,000 = $0.105 per mile 19X1: 50,000 miles X $0.105 $5,250 $5,250 19X2: 40,000 miles x $0.105 $4,200 $9,450 19X3: 60,000 miles x $0.105 $6,300 $15,750 19X4: 10,000 miles x $0.105 $1,050 $16,800 19X5: 20,000 miles x $0.105 $2,100 $18,900 19X6: 20,000 miles x $0.105 $2,100 $21,000 Double-Declining Balance Calculate a straight-line rate > 1 divided by estimated useful life s Multiply straight-line rate by 2 s Multiply previous asset book value by doubled rate s Double-Declining Balance 19X1: 19X2: 19X3: 19X4: ($23,000 - $0) x (2)(1/4) ($23,000 - $11,500) x .5 ($23,000 - $17,250) x .5 ($23,000 - $20,125) x .5 Exp $11,500 $5,750 $2,875 $1,438 Accum $11,500 $17,250 $20,125 $21,623 overdepreciated Double-Declining Balance 19X1: 19X2: 19X3: 19X4: ($23,000 - $0) x (2)(1/4) ($23,000 - $11,500) x .5 ($23,000 - $17,250) x .5 ($23,000 - $20,125) x .5 Exp $11,500 $5,750 $2,875 $1,438 Accum $11,500 $17,250 $20,125 $21,623 overdepreciated 19X4: ($23,000 - $2,000) - $20,125 $875 $21,000 Double-Declining Balance 19X1: 19X2: 19X3: 19X4: Exp ($23,000 - $0) x (2)(1/4) $11,500 ($23,000 - $11,500) x .5 $5,750 ($23,000 - $17,250) x .5 $2,875 ($23,000 - $2,000) - $20,125 $875 Accum $11,500 $17,250 $20,125 $21,000 Sum-of-the-Years'-Digits Individual Year (reverse order) (Cost - Est. Residual Value) x Sum of Years' Digits Sum-of-the-Years'-Digits Calculating sum of years' digits s Add the numeric digits in useful life s Example > 1 + 2 + 3 + 4 = 10 s Sum-of-the-Years'-Digits 19X1: 19X2: 19X3: 19X4: ($23,000 - $2,000) x 4/10 ($23,000 - $2,000) x 3/10 ($23,000 - $2,000) x 2/10 ($23,000 - $2,000) x 1/10 Exp $8,400 $6,300 $4,200 $2,100 Accum $ 8,400 $14,700 $18,900 $21,000 Pattern of depreciation expense Straight-line Amount is constant and equal s Production Amount varies depending on usage s Pattern of depreciation expense Double declining Amount is decreasing by decreasing amounts s Sum-of-the-Year's-Digits Amount is decreasing by constant amount s Comparison of Depreciation Straight-line 6000 5000 4000 3000 2000 1000 0 1 2 3 4 Production 7000 6000 5000 4000 3000 2000 1000 0 1 2 3 4 5 6 Comparison of Depreciation Double-declining balance 12000 10000 8000 6000 4000 2000 0 1 2 3 4 Sum-of-the-Years' Digits 10000 8000 6000 4000 2000 0 1 2 3 4 Modified Accelerated Cost Recovery System - MACRS Income tax reporting method s Applies to tangible property placed in service after 1986 s Eight cost recovery classes with rates for each year s Tax deduction equals cost times appropriate rate for each year s Revenue and Capital Expenditures Revenue expenditure Benefits only the current accounting period s Capital expenditure Significant costs that benefit two more accounting periods s Capital Expenditures Additions Enhance usefulness by enlarging asset Debited to asset s Betterments Increase or improve services Debited to asset s Capital Expenditures Extraordinary repairs Significant expenditures that extend useful life or change residual value Debited to accumulated depreciation s In all capital expenditures Depreciate increased book value over remaining useful life s Disposal of Plant Assets Sale s Retirement s Exchange s Accounting for Disposal Remove asset cost and related accumulated depreciation from the records s Book value is cost - accum deprec s Determine gain or loss on disposal s Gain Received more than book value s Loss Received less than book value s Sales or Retirements s Always recognize any gain or loss Exchanges Always recognize loss s Recognize gain only if exchange of dissimilar assets s If gain on exchange of similar assets Reduce cost of new asset by gain s Natural Resources Mineral deposits, oil reserves, timber tracts s Consumption has a cost Recognize depletion by production method s Intangible Assets Long-term rights that have future value s Patents, R&D, Goodwill s Consumption has a cost Recognize amortization by straightline method s Analyzing Information Are methods, asset lives, and residual values used reasonable? s If methods, lives, or residual values are changed during year, what is impact on net income? s If some interest cost was capitalized, what is total interest cost for period? How would this change ratio "Times Interest Earned"? s Times Interest Earned Net income + Income Tax Expense + Total Interest Cost s divided by s Total Interest Cost s ...
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This note was uploaded on 06/01/2010 for the course ACC 1000 taught by Professor Lee during the Spring '10 term at École Normale Supérieure.

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