Long Term Assets
Key Things To Know
Introduction to Accounting
Long Term Assets
Key Things To Know
Long-term Tangible Assets
Called “property plant and equipment” or “fixed assets”
Physical substance, you can touch them
3 kinds of L/T tangible assets
1) Land – not depreciated
2) Buildings, fixtures, equipment, autos, computers – depreciated
3) Natural resources – metals, timber, oil – depleted
Intangible –
Grants a right to the owner
Have no physical substance, cannot touch or see them
Copyrights, patents, franchises, licenses, trademarks, goodwill
Money spent is either capitalized or expensed
Capitalize means “call it an asset” and report it on the balance sheet.
Put an asset on the balance sheet and expense it over the time used
The expenditure is expected to benefit future periods
Expense: Used to produce revenue this period or future benefit is unpredictable
General rules:
Capitalize all costs necessary to get the asset to the point it can be used to produce revenues
Capitalize all costs incurred before you begin using to produce revenues
Capitalize costs to extend the useful life or increase productivity or increase the quality after you are using the asset (often called subsequent expenditures)
Expense – routine repairs and maintenance (these have to be repeated)
Expense – all costs that benefit this period only or no probable future benefit
Property, Plant, Equipment: Assets used long term to produce revenues
Common items that are added to purchase price that become part of the cost of the asset
Land –
sales tax, title search and transfer cost, attorney’s fees, real estate commission, remove old buildings from land, bulldozing, survey fees, back taxes
Buildings –
sales tax, title search and transfer costs, real estate commission, attorneys fees, remodel before using, architect fees, back taxes
Equipment –
sales tax, delivery costs/ freight-in/ shipping, installation, training
The cost of an asset does not include damages or fines that could have been avoided
Depreciation:
Expense the cost of the property, plant, equipment over the period the asset is used to produce revenues (follows the matching concept)
Residual/Salvage Value:
What you estimate you will sell it for when you are done using it
Depreciable Cost/Base:
Cost – Residual Value
Estimated Useful Life:
The number of years you expect to USE the asset
Methods of Depreciation:
Straight-line:
Cost – Residual Value / Useful life in years
Double Declining Balance:
100% / life X 2 X Book Value
Book Value = Cost – Accumulated Depreciation (changes each year)
Units of Production:
Total estimated costs
Total estimated units = $ cost per unit
then:
$ Cost per unit
x units produced this period
= expense this period
Use this journal entry for all methods of depreciation:
Depreciation Expense $XXXX
Accumulated depreciation $XXXX
Intangible Assets
Capitalize the cost associated with securing the asset if purchased – you paid someone outside the company
Expense the cost if you do it yourself (ex. salaries to develop a patent)
Some intangible assets have indefinite life; others do not have indefinite life:
Definite life means there is a set amount of years benefit is expected to occur
Patents – 17 year life
Trademarks – Indefinite life
Copyrights – 50 year life
Franchises – life is the amount of time purchased
Goodwill – Indefinite life
Goodwill:
Occurs only when you purchase another company
Goodwill has indefinite life.
Price paid for the company
– FMV of the assets and liabilities purchased
= Goodwill
Intangible assets with indefinite useful life must be tested for “impairment”
Impairment means the cost is more than the future benefit
When the benefit is lower, the asset must be reduced to the future benefit
Impairment Loss $XXXX
Goodwill or Trademark $XXXX
Intangible assets with a defined useful life must be expensed over the useful life the benefit is received. The straight-line method is used.
This expense is called “amortization expense”
Amortization Expense $XXXX
Asset or Accumulated Amortization $XXXX
Natural Resources: Long term inventories
Associated costs that are also part of the asset cost are geographic surveys and exploration costs
Depletion: Units of production method is used:
Total estimated costs / total estimated units = $ cost per unit
$ Cost per unit
x units produced this period
= depletion expense
The expense will vary with the actual units produced
Depletion Expense $XXXX
Asset name $XXXX
Changes in estimated useful life or costs added to the asset (subsequent expenditures) after you are using the asset
You must change your depreciation calculation in order to expense the total cost over estimated total time you will use it
Get the book value at time of the change and re-compute depreciation expense for future years:
Total Cost (include additional costs)
– Accumulated depreciation to date
= Book value
then
Book Value – New Residual Value
New useful life from here on
= new depreciation expense each year going forward
Change in fair market value of Assets:
Impairment: Lost value – company will never recover the cost of the asset
Estimate future net cash flow, if not more than cost, reduce the asset.
Loss on Impairment $XXX
Asset $XXX
Never increase the asset above historical cost
Retirement and Sale of the Assets
Follow these steps to record the sale of any long term asset:
1) Record the cash you receive
2) Credit the asset you are selling for the original total cost
3) Debit accumulated depreciation for the total up to the date you sell it
If you sell it in the middle of the year, you will need to expense that part of the first year
4) Record a realized gain or a loss for the amount that will make the journal entry balance – debits equal credits
Journal Entry
Realized Loss on Sale **
Cash
Accumulated Depreciation
Asset
Realized Gain on Sale **
** Plug to gain (need credit) or loss (need debit) to balance the journal entry
(You will not use both the gain and loss accounts, only use one of them)