Remove the cost the disposed asset from the balance sheet asset account

Reporting and Analyzing Long-Term Operating
Assets

Two common characteristics:

 Acquired for the purpose of producing and delivering

Tangible Assets
 Have physical substance
 Usually include land, buildings, machinery, fixtures and equipment

Intangible Assets
 Have no physical substance
 Provide the owner with specific rights and privileges Include trademarks, patents, copyrights

Property and equipment:

Determine which costs to
capitalize and report as assets and which costs to expense.

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 Characteristics that expenditures must possess to be capitalized:

1. The asset must be owned or controlled by the company.

Constructed Assets

When assets are constructed by a company for its own use, capitalized costs should include:

 Improvement or betterment
 Consist of outlays that enhance the usefulness of the asset or extend the asset’s useful life beyond the original expectation  Costs should be capitalized

 Routine repairs and maintenance  Expensed in the period incurred

Plant Assets on the Balance Sheet

Apply different depreciation
methods to allocate the cost of assets over time.

Residual Value
 The expected realizable value of the asset at the end of its useful life
 Also known as salvage value
 Can represent the scrap, disposal, or resale value

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 Equal expense each year

 Double-declining-balance method

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Straight-Line Depreciation—Example

Depreciation expense = Depreciation base x

Double-Declining-Balance Depreciation—Example

Tanner Enterprises purchased a delivery truck for $80,000, and

Comparing Depreciation Methods Because double-declining-balance is an accelerated method, the

expense in the early years’ of life is larger than in its latter

methods.

Depreciation expense = Actual units of service x

Changes in Accounting Estimates

 Estimates of useful lives and residual value are made when assets are acquired
 When necessary, companies can change estimates Changes are applied prospectively
 i.e., only to future accounting periods

Tanner Enterprises decided to extend the useful life of the truck from 5 to 7 years after completing 4 years of service. Straight-line depreciation is used. (Note that the residual value estimate does not change.)

Step 1:Determine the book value at the date of estimate change.

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Gains and Losses on Asset Sales

3. Record the proceeds as an increase in cash (i.e., debit the cash account).

4. Record the gain (credit) or a loss (debit) on the income statement.

Asset Impairments

Impairment Analysis of Long-Term Assets

Recording an Asset Impairment

The impairment write-down reduces assets by the amount of the write-down and a loss is recognized on the income statement.

Analysis of asset write-downs present two potential challenges:

Insufficient Write-Down

IFRS Reporting Insight

A Single-step process is used.

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Walmart’s Footnote Disclosure

PPE Turnover (PPET)
Measures how efficient management utilized its plant

Applying the PPE Turnover ratio to Procter & Gamble:

Comparison of PPE Turnover PPE Turnover at P&G and a Competitor:

Percent Depreciated
Measures the percent of a company’s operating

assets that have been depreciated.

2016: $20,481 / $36,391 = 56.3%

Percent Depreciated

Percent Depreciated for Procter & Gamble and a

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Percent Depreciated
Percent Depreciated for companies in different

Cash Flow Effects

 Acquisition of plant or equipment
 Reported as a use of cash in the investment section of the statement of cash flows
 Cash received from asset sales
 Reported as a source of cash in the investment section of the statement of cash flows

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Intangible Assets

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Accounting for Intangible Assets

 Benefits provided by intangibles are uncertain and difficult to quantify

 Useful life often impossible to estimate with confidence

 Accounting for costs of patents
 If purchased from another company
 Capitalized and amortized
 If developed internally
 Only legal costs and registration fees are capitalized and amortized

 Can be acquired

 Cost is capitalized and amortized over the expected remaining economic life

slogan that is associated with a product

 Accounting for costs of trademarks

The NIKE Trademark

®

 What is a franchise right?

 A contractual agreement that gives the right to operate a

*Source: http://www.thefranchisemall.com/franchises/details/11138-0-moes_southwest_grill.htm

 Straight-line method used most often

 Amortization expense reported on the income statement as part of operating income

the year to purchase a patent. The patent has a remaining

legal life of 10 years, but the management at Moe’s believe

the year to purchase a patent. The patent has a remaining

legal life of 10 years, but the management at Moe’s believe

 Considered to be impaired if the book value of the asset exceeds its fair value

 Write-down equal to:

Management determined the trademark’s fair value was $40,000 and its book value was $62,000.

$80,000 ÷ 5 years = $16,000

Goodwill

	Purchase of
	the net assets
Company A

 Subject to impairment of value

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Analysis Implications

 Hidden assets

 Makes comparison of companies difficult for users

Publishers

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