Land
-shown on a balance sheet as original cost
-includes purchase price of the land, title fees, legal fees, and other costs related to the acquisition
-"capitalized"
-land under development = inventory
-development costs = assets carrying value
-lots sold, costs transferred form inventory to cost of goods sold
Buildings and Equipment
-recorded at original cost (purchase price and all the ordinary and necessary costs incurred to get the
building or equipment ready to use)
-interest costs associated with loans = capitalized
-installation and shakedown costs (costs associated with adjusting and preparing equipment to be used in production) = capitalized
-two or more noncurrent asset on one transaction should be measured and recorded
separately
Depreciation
-an application of the matching concept
involves an allocation of the cost of an asset to the years in which the benefits of the asset are expected to be
received
recorded each fiscal period
Accumulated depreciation = contra asset
-balance in this account = total all depreciation expense that has been recorded over the life of the asset up to the balance sheet date
-subtraction from cost of asset
-cost of asset and accumulated depreciation = net book value
CASH IS NOT INVOLVED in the depreciation expense entry
-Accelerated depreciation methods
-Stockholders use straight-line depreciation methods
-early years of asset's life results in lower depreciation expense and hence higher reported net income than accelerated depreciation
Depreciation Calculation Methods
Straight-line:
Straight line
Units of production
Accelerated
sum-of-the-years' digits
declining balance
-depreciating calculations using the straight-line, units-of-production, and sum-of-the-years' digits methods involve determining the amount to be depreciated by subtracting the estimated salvage value from the cost of the asset
-salvage value is considered in the declining-balance method only near the end of the asset's life when
salvage value becomes the target for net book value
a. straight-line depreciation
Annual depreciation expense=
or
Straight-line depreciation rate=
Annual depreciation expense=
b. Units-of-production depreciation:
depreciation expense per unit produced=
c. Sum-of-the-years' digits depreciation
Annual depreciation expense = (Cost - Estimated Salvage value) x
d. Declining-balance depreciation
Annual depreciation expense = double the straight-line depreciation rate x Asset's net book value at beginning of year
Maintenance and Repair Expenditures
-if a maintenance expenditure will extend the useful life or increase the salvage value of an asset beyond that used in the usual depreciation calculation, it is
appropriate that the expenditure be capitalized and the remaining depreciable cost of the asset be depreciated over the asset's remaining useful life.
Disposal of Depreciable Assets
-when depreciable asset is sold/scrapped, must be removed
from the books -when asset had a positive net book value, a gain or loss on the
disposal will result unless the asset is sold for a price that is equal to the
net book value
Sales price (of the fixed asset)
-Net book value (i.e. original cost-accumulated depreciation)
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=gain (if the difference is positive) or loss (if negative)
-if salvage value and useful life estimates had been correct, the net book value of the asset would be equal to the proceeds
received from it's sale or disposal
Assets Acquired by Capital Lease
-operating lease- ordinary, frequently, short-term lease for the use of an asset that does not involve
any attributes of ownership
-reported in the income statement as an operating expense
-capital lease- results in the lessee (renter) assuming virtually all of the benefits and risks of
ownership of the leased asset
LEASE IS CAPITAL IF:
1. It transfers ownership of the asset to the
lessee
2. It permits the lessee to purchase the asset for a nominee sum at the end of the lease period
3.The lease term is at least 75 percent pf the economic life of the asset
4. The present value of the lease payments is at least 90 percent of the fair value of the asset
-asset and related liability be reflected in the lessee's balance sheet
-in lessee's income statement, cost of the leased asset will be reflected as a depreciation expense rather than rent expense, and the financing cost will be shown as interest expense
-off-balance-sheep financing- prior to FASB, not recording assets acquired under a capital lease because they did not want to reflect the related lease liability in their balance sheets
-assets acquired by capital lease- included with purchased assets on the balance sheet
-amount recorded as the cost of the asset involved in a capital lease and as the related lease liability = present value of the lease payments to be made
-based on the interest rate used by the
lesser to determine the periodic lease payments
-Principal portion of the lease payment will reduce the capital lease liability
-then interest portion will be recognized as expense
Intangible Assets
-intangible assets- long-lived assets that differ from property, plant, and equipment that has been purchased outright or acquired under a capital/lease- either because the asset is represented by a contractual right or because the asset results from a purchase transaction but is not physically identifiable
example: 1st intangible = leaseholds, patents, trademarks
example: 2nd intangible = goodwill
-cost of most intangible is also expensed over time
-Amortization- spreading an amount over time
-describes process of allocating the cost of an intangible asset from the balance sheet to the income statement as an expense
-cost of tangible is depreciated
-cost of intangible is amortized
-Amortization expense usually with depreciation expense in the income statement
-neither depreciation expense nor amortization expense involves cash disbursement
Leasehold Improvements
-leasehold improvements - an amortizable intangible asset represented by the cost of improvements made to a leasehold by the lessee
Patents, Trademarks, and Copyrights
-patent- monopoly license granted by the government giving the owner control of the use or sale of an invention for a period of 20 years
-trademark- used only by the entity that owns it or by another entity that has
secured permission from the owner
-unlimited life
-terminated by lack of use
-copyright- protection granted to writers and artists that is designed to prevent unauthorized copying of printed or recorded material
-period of time = to life of writer or artist plus 50 years
-costs in obtaining one of these three should be capitalized and amortized over its estimated life
-license fees or royalties earned from an intangible asset owned by a firm are reported as operating revenues in the income statement
-operating expenses
Goodwill
-goodwill- results from the purchase of one firm by another for a price that is greater than the fair market value of the net assets acquired
-purchasing firm sees the transaction as the purchase of profits
-when one firm purchases another, purchase price is 1st assigned to the physical net assets acquired
-cost recorded is fair market value, determined by appraisal
-this cost then is basis for depreciating plant and equipment or for determining cost of goods sold if inventory is involved
-excess recorded as goodwill
-intangible asset
-not amortized
-tested annually for impairment
-critics say goodwill is fictitious asset and should be written off against the firm's retained earnings
Q. What does it mean to say that depreciation expense does not
affect cash? Cash is not paid out for depreciation expense. This results
from spreading the cost of an asset to expense over the useful life to the
entity of the asset.
02/18/2004