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Unformatted text preview: Longterm Assets Longterm Types of LongTerm Assets Types
Property, plant, and equipment – Longterm assets acquired for use in Longterm operations operations s Natural resources – Longterm assets with a value that Longterm decreases through use or sale decreases
s Types of LongTerm Assets Types
s Intangible assets – Longterm assets that do not have Longterm 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
Straightline – 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 Decliningbalance – apply a uniform rate to a declining apply amount (book value) amount s SumoftheYears’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 StraightLine Method StraightLine Cost  Est. Residual Value Est. Useful Life Depreciation = Expense StraightLine Method StraightLine
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 DoubleDeclining Balance DoubleDeclining
Calculate a straightline rate › 1 divided by estimated useful life s Multiply straightline rate by 2 s Multiply previous asset book value by Multiply doubled rate doubled
s DoubleDeclining Balance DoubleDeclining
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 DoubleDeclining Balance DoubleDeclining
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 DoubleDeclining Balance DoubleDeclining
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 SumoftheYears’Digits SumoftheYears’Digits Individual Year (reverse order) (Cost  Est. Residual Value) x Sum of Years’ Digits SumoftheYears’Digits SumoftheYears’Digits
Calculating sum of years’ digits s Add the numeric digits in useful life s Example › 1 + 2 + 3 + 4 = 10
s SumoftheYears’Digits SumoftheYears’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
Straightline – 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 SumoftheYear’sDigits – Amount is decreasing by constant Amount amount amount
s Comparison of Depreciation Comparison
Straightline
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
Doubledeclining Doubledeclining balance balance
12000 10000 8000 6000 4000 2000 0 1 2 3 4 SumoftheYears’ SumoftheYears’ 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
Longterm 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 ...
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This note was uploaded on 02/11/2011 for the course ACG 2021 taught by Professor Mcdonald during the Spring '08 term at University of Florida.
 Spring '08
 McDonald

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