Kế toán, kiểm toán - Chapter 9: Long - Lived assets

2Chapter 9:Long-Lived Assets3Learning Objective 1Explain the difference between capitalizing costs and expensing costs, and compare how these two accounting treatments affect net income across time. 4Long – Lived AssetsLandThe cost of real estate used in operationFixed Assets Buildings, machinery, and equipment which are often located on the ‘land’ real estateNatural Resource CostsThe costs of acquiring the rights to extract natural resourcesIntangible AssetsRights, privileges, and benefits of possession rather than physical existenceDeferred CostsIntangible assets often including prepaid expenses that provide benefits for a length of time extending beyond the current period5Long – Lived AssetsCategorizations are firm specificLand is inventory for a real estate firm, but is a long-lived asset for a retailerLong-lived assets represent the company’s capacity to produce and sell goods and/or services in the futurePlanning and executing major capital expenditures are some of management’s most important concerns 6The Relative Size of Long-Lived Assets7Long-Lived Asset Accounting: General Issues and Financial Statement EffectsMatching Principle states that expenses must be matched against revenues Accordingly, the cost of acquiring a long-lived asset which will benefit the company over time is capitalized (booked as an asset)As revenues are recognized, the costs are amortized8Long-Lived Asset Accounting: General Issues and Financial Statement EffectsThree basic questionsWhat dollar amount should be included in the capitalized cost of the long-lived asset?Over what time period should this cost be amortized?At what rate should this cost be amortized?9Long-Lived Asset Accounting: General Issues and Financial Statement Effects10Long-Lived Asset Accounting: General Issues and Financial Statement Effects11The purpose of recording depreciation expense is to:a. provide cash necessary to replace plant assets when they are used up.b. record the balance sheet amount of plant assets at replacement value.c. match expenses with revenues using a reasonable systematic method.d. gain a better understanding of estimating the extraction of natural resources.12Learning Objective 2State the general rule that determines when an expenditure should be included in the capitalized cost of a long-lived asset.13Overview of Accounting for Property, Plant, and Equipment Figure 9-4 Accounting for long-lived assets14Acquisition: What Costs to Capitalize?Acquisition cost is the fair market value (FMV) of the acquired asset or the FMV of what was given up to acquire the asset. FMV of what is given up is typically used as this is frequently cash.General Rule:Capitalize (add to an asset account) the costs to acquire the asset and bring it to its serviceable or usable condition and location.Dr. Asset (purchase price, sales tax, delivery, installation, etc.)Cr. Cash, Notes Payable, etc.15The Acquisition of LandLandHas indefinite life and therefore is not depreciatedHistorical Cost includes:Purchase price, Closing costs, Cost to get ready for intended use, assumption of back taxes, land improvements only when assumed to be permanent16Construction of Long-Lived AssetsWhen companies construct their own long-lived assets, all costs to get the assets into operating condition are allocated to the long-lived asset accountHistorical Cost includes:Cost of materials, labor, overhead of the construction process, and interest on funds borrowed to finance construction.17Concept Practice 2 18Concept Practice 2 (cont.) 19Learning Objective 3Explain the rule determining whether postacquisition expenditures should be treated as betterments or maintenance and how these treatments affect net income. 20Postacquisition Expenditures: Betterments or Maintenance? Maintain current level of productivityRepairs and maintenanceExpensed as incurredBetterments – one of the following must applyIncrease useful life beyond the initial estimateImprove quality of outputIncrease quantity of outputReduce costs of operating the assetThese costs are typically rare and of higher dollar value. They should be capitalized when they occur. 21The following items represent common post acquisition expenditures incurred on equipment.An overhaul to increase useful life of the equipmentCost of a muffler to reduce equipment noiseLubrication serviceCosts of redesign to increase outputIdentify which of these items are considered to be betterments.a. A onlyb. A, B and Dc. A and Dd. A and B22Learning Objective 4List the three primary ways to allocate the cost of a long-lived asset over its useful life, and compare how they each affect net income. 23Cost Allocation: Amortizing Capitalized CostsThe costs are to be matched against the benefits produced by the assetEstimate the Useful Life – based on physical obsolescenceEstimate a Salvage Value – based on amount that can be recovered on the assetChoose a cost allocation (depreciation) method.24Cost Allocation: Amortizing Capitalized CostsPhysical Obsolescence is another challenge that must be overcome in estimating useful life and salvage value.Changes in estimates related to depreciation are treated prospectively – determine current book value and recalculate depreciation going forward.Remaining Book Value - New Est. Salvage Remaining Estimated Life25Cost Allocation (Depreciation) MethodsThere are a variety of depreciation methods utilized. The more common methods are covered in this text.The Straight-Line Method of Amortization Depreciation)(Cost – Salvage Value)/Estimated Useful LifeDouble Declining Balance Method (accelerated)(2XBook Value)/Estimated Useful LifeThe Activity (Units-of-Production) Method Cost - Salvage Value x Current Activity Total expected activityNatural Resource Depletion Cost - Salvage Value x Current Activity Total expected activity26How does Management Choose an Acceptable Cost Allocation MethodEffect on the Financial StatementsEffect on Income TaxesManagement may use a different depreciation method for financial statements and income taxesIRS tax rules effect allowable depreciation methodologies27Concept Practice 4 28Class Problem: Problem 9-6(a) Book Value at 1/1/17: First: annual depr. expense = (180,000-30,000)/10 = 15,000/yr. Then Accumulated Depr. to 1/1/17: 15,000 x 5 yrs. = $75,000 So BV = 180,000 - 75,000 = 105,00029Class Problem: Problem 9-6(b) Estimate for 2017, assuming revised useful life: BV - SV = 105,000 - 30,000 = $9,375 per yr.Remaining life (10 – 5) +3 Journal entry: Depreciation Expense 9,375 Accum. Depreciation 9,37530Learning Objective 5List the ways long-lived assets are disposed of, summarize how they are accounted for, and describe impairments. 31Disposal: Retirement, Impairments Sales and Trade-InsWhen property is sold or retired the cost of the property along with associated accumulated depreciation are removed from the balance sheet along with any gain or loss on the sale.Retirement : Dr. Loss (if not fully depreciated) Dr. Accum. Dep. Cr. AssetSale: Dr. Cash Dr. Accum. Dep. Cr. AssetDr. Loss if BV > Cash or Cr. Gain if BV < Cash32Trade-ins (for dissimilar assets): asset received should be valued at The fair market value of assets given up, orThe fair market value of the asset received,Whichever is more evident and objectively determinedDisposal: Retirement, Impairments Sales and Trade-Ins33Class Exercise: Exercise 9-15 First calculate depreciation:DDB % = (2xBV)/Useful Life Depr. BookDate Calculation Expense Value 1/1/15 25,00012/31/15 (2x25,000)/5 = 10,000 15,00012/31/16 (2x15,000)/5 = 6,000 9,00012/31/17 (2x9,000) / 5 = 3,600 5,40012/31/18 400* 5,000=SV12/31/19 -0- 5,000*formula will exceed salvage value limit in 2018; just depreciate $400, to salvage of $5,000.34Exercise 9-15 (cont’d)(a) JE to scrap after 3 years, at 12/31/17, assumes that no cash is received: Dr. Loss on Disposal 5,400 Dr. Accum. Dep. 19,600 Cr. Equipment 25,000(b) JE to scrap after 5 years, assumes that no cash is received: Dr. Loss on Disposal 5,000 Dr. Accum. Dep. 20,000 Cr. Equipment 25,00035Exercise 9-15 (cont’d)(c) JE to sell for $8,000 after 3 years: Dr. Cash 8,000 Dr. Accum. Dep. 19,600 Cr. Equipment 25,000 Cr. Gain 2,600(d) JE if, after 5 years, the equipment and $28,000 traded for a dissimilar asset with a fair market value of $30,000: Dr. Asset (new) 30,000 Dr. Accum. Dep. 20,000 Dr. Loss 3,000 Cr. Equipment (old) 25,000 Cr. Cash 28,00036Intangible AssetsIntangible assets are characterized by Lack of physical substance, and Higher uncertainty about future benefits.Cost is amortized over useful life (or legal life, if less). Straight line amortization is common.Goodwill is not amortized – indefinite lifeSome other assets have an indefinite life and are not amortized (permanent franchise rights)37Copyrights, Patents and TrademarksCopyrightsExclusive rights to control literary, musical, or artistic worksGranted for the life of the creator plus 70 years.PatentsExclusive rights to use, manufacture, or sell a product or processGranted for 20 years (though useful life can be less)Trademarks and Trade NamesWord phrase or symbol that identifies an enterprise or product.Granted for 10 years with indefinite renewals.38The Costs of Developing Computer SoftwareSoftware Development Costs (SFAS 86)Capitalize the costs of developing software for sale or lease.Prior to SFAS 86 all of the costs were expensed which was a significant change to the financial statements of those companies involved in software development.Expense software development costs if for internal use.39GoodwillGoodwill (also discussed in Chapter 8)Recognized when one company purchases another company in an arm’s-length transaction.Causes include reputation, good customer relations, superior product development, etc.To calculate:Purchase price paid for the company versus the fair market value of the net assets acquired = Goodwill (the excess amount paid)89% of U.S. companies have goodwill on their balance sheets40Research and Development CostsR&D costs are incurred to generate revenue in future periodsNew productsNew processesVery significant for many companies and industriesSFAS No. 2 requires the expensing of most types of R&D as incurredPromotes uniformityDoes not allow manipulation of the financials through capitalization of and amortization decisions related to R&DInconsistent with the matching principle41Organizational CostsOrganizational Costs Costs related to the creation of a company including underwriting fees, legal and accounting, licenses, titles, etc.Treatment similar to R&D costs; even though there may be some future benefit, costs are expensed in the period incurred.42When a plant asset is sold, its original cost and its:a. market value must be removed from the accounting records.b. accumulated depreciation must be removed from the accounting records.c. salvage value must be expensed immediately.d. related maintenance costs must be transferred to the income statement immediately.43Intangible assets differ from plant assets in that they:a. are consumed in the accounting period.b. include prepaid expenses that extend beyond the current accounting period.c. have no physical substance.d. are matched against revenue in the period the related revenue is recognized.44Learning Objective 6Compare the accounting for asset revaluations under U.S. GAAP and IFRS. 45IFRS vs. US GAAP: Revaluations to Fair Market ValueOne very important way in which IFRS differs from US GAAP involves the use of fair market value as a basis for valuation on the balance sheet.Under US GAAP, long-lived assets must be accounted for at original cost less accumulated depreciation. Under IFRS, companies can either follow the US GAAP method or they can periodically revalue their long-lived assets to fair market value.In essence, US GAAP tends to follow a conservative “lower-of-cost-or-market” valuation principle, whereas IFRS allows managers the option to more closely follow a pure market valuation principle.46Concept Practice 647Concept Practice 6 (cont.)48Concept Practice 6 (cont.)49Wiley © 2018