f9 - Long-term Assets Long-term Types of Long-Term Assets...

Unformatted text preview: Long-term Assets Long-term Types of Long-Term Assets Types Property, plant, and equipment – Long-term assets acquired for use in Long-term operations operations s Natural resources – Long-term assets with a value that Long-term decreases through use or sale decreases s Types of Long-Term Assets Types s Intangible assets – Long-term assets that do not have Long-term physical substance physical Plant Asset Cost Plant Purchase price (less cash Purchase discount) discount) Plant Asset Cost Plant Purchase price (less cash Purchase discount) plus all other reasonable and necessary expenditures expenditures Plant Asset Cost Plant Purchase price (less cash Purchase discount) plus all other reasonable and necessary expenditures to prepare the asset for use asset Examples of Items Included Examples Purchase price less any cash discount s Shipping costs s Installation costs s Cost of modifications s Interest cost during construction s Depreciation Depreciation Allocation of the cost of an asset to the Allocation periods the asset benefits periods s Not a valuation process s Factors in Estimating Depreciation Depreciation Initial cost s Estimated residual value s Estimated Useful Life s Depreciation Methods Depreciation Straight-line – allocate an equal amount to each allocate period period s Production unit – depreciation based on volume of depreciation output output s Accelerated Depreciation Methods Depreciation Double Declining-balance – apply a uniform rate to a declining apply amount (book value) amount s Sum-of-the-Years’-Digits – annual amount the decreases by a annual constant amount constant s Example Data Example 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 Cost Invoice price s Less: Cash discount s subtotal subtotal s Modification s Cost s $20,000 400 $19,600 3,400 $23,000 Straight-Line Method Straight-Line Cost - Est. Residual Value Est. Useful Life Depreciation = Expense Straight-Line Method Straight-Line 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 Production 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 Production Exp Accum Exp ($23,000 - $2,000) / 200,000 = $0.105 per mile ($23,000 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 Double-Declining 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 Multiply doubled rate doubled s Double-Declining Balance Double-Declining 19X1: 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 Exp $11,500 $5,750 $2,875 $1,438 Accum $11,500 $17,250 $20,125 $21,623 overdepreciated Double-Declining Balance Double-Declining 19X1: 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 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 Double-Declining 19X1: 19X1: 19X2: 19X3: 19X4: 19X4: Exp 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 ($23,000 Accum $11,500 $17,250 $20,125 $21,000 Sum-of-the-Years’-Digits Sum-of-the-Years’-Digits Individual Year (reverse order) (Cost - Est. Residual Value) x Sum of Years’ Digits Sum-of-the-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 Sum-of-the-Years’-Digits 19X1: 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 Exp $8,400 $6,300 $4,200 $2,100 Accum $ 8,400 $14,700 $18,900 $21,000 Pattern of depreciation expense Pattern Straight-line – Amount is constant and equal s Production – Amount varies depending on usage s Pattern of depreciation expense Pattern Double declining – Amount is decreasing by decreasing Amount amounts amounts s Sum-of-the-Year’s-Digits – Amount is decreasing by constant Amount amount amount s Comparison of Depreciation Comparison 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 Comparison Double-declining Double-declining balance balance 12000 10000 8000 6000 4000 2000 0 1 2 3 4 Sum-of-the-Years’ Sum-of-the-Years’ Digits Digits 10000 8000 6000 4000 2000 0 1 2 3 4 Modified Accelerated Cost Recovery System - MACRS Recovery Income tax reporting method s Applies to tangible property placed in Applies service after 1986 service s Eight cost recovery classes with rates Eight for each year for s Tax deduction equals cost times Tax appropriate rate for each year appropriate s Revenue and Capital Expenditures Expenditures Revenue expenditure – Benefits only the current accounting Benefits period period s Capital expenditure – Significant costs that benefit two Significant more accounting periods more s Capital Expenditures Capital Additions – Enhance usefulness by enlarging Enhance asset asset – Debited to asset s Betterments – Increase or improve services – Debited to asset s Capital Expenditures Capital Extraordinary repairs – Significant expenditures that extend Significant useful life or change residual value useful – Debited to accumulated depreciation s In all capital expenditures – Depreciate increased book value over Depreciate remaining useful life remaining s Disposal of Plant Assets Disposal Sale s Retirement s Exchange s Accounting for Disposal Accounting Remove asset cost and related Remove accumulated depreciation from the records 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 Sales s Always recognize any gain or loss Exchanges Exchanges Always recognize loss s Recognize gain only if exchange of Recognize dissimilar assets dissimilar s If gain on exchange of similar assets – Reduce cost of new asset by gain s Natural Resources Natural Mineral deposits, oil reserves, timber Mineral tracts tracts s Consumption has a cost – Recognize depletion by production Recognize method method s Intangible Assets Intangible 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 Analyzing Are methods, asset lives, and residual Are values used reasonable? values s If methods, lives, or residual values are If changed during year, what is impact on net income? net s If some interest cost was capitalized, If what is total interest cost for period? what – How would this change ratio “Times How Interest Earned”? Interest s Times Interest Earned Times Net income + Income Tax Expense + Net Total Interest Cost Total s divided by s Total Interest Cost s ...
View Full Document