Long Term Assets
Practice As You Learn
Introduction to Accounting
Long Term Assets
Practice As You Learn
There are 5 things you will be asked to do:
1) Determine if costs should be added to the cost of the asset or expensed
2) Compute and record depreciation expense using all methods
3) Compute and record amortization expense using straight-line
4) Revise the depreciation expense estimate
5) Record the sale of an asset
1) Determine if costs should be added to the purchase price of the asset or expensed: Follow these rules:
Capitalize –
debit the asset name for these costs:
All costs related to the asset before you begin using it (except for damage)
All costs related to the asset after you are using it that
1) extend the useful life
2) increase productivity, efficiency or quality
Expense –
debit the name of the expense and add expense to the name
routine maintenance or repairs
all costs that do not add future benefit
2) Compute and record depreciation expense using all methods
Memorize the formulas.
Always expense over the time you expect to use the asset
Straight-line:
Cost – Residual Value / Useful life
Double Declining Balance:
100% / life X 2 X Book Value
Units of Production:
Total estimated costs
Total estimated units
= $ cost per unit
then:
$ Cost per unit
x units produced this period
= depletion expense
Use this journal entry for all methods of depreciation:
Depreciation Expense $XXX
Accumulated depreciation $XXX
3) Compute and record amortization expense using straight-line
Only costs paid outside the company are recorded as an asset
Cost
Useful life = Amortization expense
Useful life is limited to legal life
Amortization Expense $XXX
Asset or Accumulated Amortization $XXX
4) Revise the depreciation expense estimate, follow these steps:
1) Add the additional cost to the original cost, if it is a subsequent expenditure
2) Determine the current book value: total cost – accumulated depreciation
3) Compute annual depreciation:
Current book value – new residual value
Number of years left to use
5) Record the sale of an asset
1) Record the cash you receive
2) Credit the asset you are selling for the original 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 year
4) Record a gain or a loss for the amount that will make the journal entry balance
Realized Loss on Sale **
Cash
Accumulated Depreciation
Asset
Realized Gain on Sale **
You will either have a Realized Loss or a Realized Gain (you will not have both) for the amount that makes the entry balance.
Long Term Assets – Practice Problem 1 – Capitalize or Expense
A company had the following expenditures:
| Purchase price of a building | $250,000 |
| Purchase price of land | $125,000 |
| Purchase price of equipment | $65,000 |
| Legal fees for a trademark to outside attorneys | $12,000 |
| Excess paid for a company above net value of assets | $100,000 |
| Routine maintenance for the equipment | $8,000 |
| Prior year property taxes on the building | $22,000 |
| Real estate commission on the land | $10,000 |
| Shipping expense for the equipment | $3,200 |
| Survey costs related to the land | $2,800 |
| Training on the equipment during the year in use | $5,200 |
| Salaries of employees working on the trademark | $7,400 |
| Installation of the equipment | $6,500 |
| Real estate commission on the building | $18,000 |
| Bulldozing costs related to the land | $7,200 |
| Architect fees related to the building | $2,900 |
| Insurance for the building for the first month used | $800 |
| Remodel of the building before use | $13,400 |
| Removal of a building on the land purchased | $8,300 |
| Engine upgrade on the equipment- extends life 5 years | $9,200 |
| Training on the equipment prior to use | $1,200 |
| Property tax on the land for this year | $4,400 |
Determine the cost of the building, land, equipment, and trademark
Record the acquisition of the assets.
Check Your Answer
1st – sort the expenditure according to the asset it is related to:
| Building | |
| Purchase price of a building | $250,000 |
| Prior year property taxes on the building | $22,000 |
| Real estate commission on the land | $10,000 |
| Architect fees related to the building | $2,900 |
| Insurance for the building for the first month used | $800 |
| Remodel of the building before use | $13,400 |
| Land | |
| Purchase price of land | $125,000 |
| Real estate commission on the land | $10,000 |
| Survey costs related to the land | $2,800 |
| Bulldozing costs related to the land | $7,200 |
| Removal of a building on the land purchased | $8,300 |
| Property tax on the land for this year | $4,400 |
| Equipment | |
| Purchase price of equipment | $65,000 |
| Routine maintenance for the equipment | $8,000 |
| Shipping expense for the equipment | $3,200 |
| Training on the equipment during the year in use | $5,200 |
| Installation of the equipment | $6,500 |
| Engine upgrade on the equipment- extends life | $9,200 |
| Training on the equipment prior to use | $1,200 |
| Trademark | |
| Legal fees for a trademark paid to outside attorneys | $12,000 |
| Salaries of employees working on the trademark | $7,400 |
| Goodwill | |
| Excess paid for a company above net value of assets | $100,000 |
2nd – For each item on the list apply the rule and determine if it is capitalized (C) or expensed (E):
Property/Plant/Equipment:
Capitalize – costs before using the asset
Capitalize: costs to extends the life or improves efficiency
Expense costs during use of the asset
Intangible Assets:
Capitalize: Paid outside the company
Expense: Internal workers
| Building | ||
| Purchase price of a building | $250,000 | (C) |
| Prior year property taxes on the building | $22,000 | (C) |
| Real estate commission on the land | $10,000 | (C) |
| Architect fees related to the building | $2,900 | (C) |
| Insurance for the building for the first month used | $800 | (E) |
| Remodel of the building before use | $13,400 | (C) |
| Land | ||
| Purchase price of land | $125,000 | (C) |
| Real estate commission on the land | $10,000 | (C) |
| Survey costs related to the land | $2,800 | (C) |
| Bulldozing costs related to the land | $7,200 | (C) |
| Removal of a building on the land purchased | $8,300 | (C) |
| Property tax on the land for this year | $4,400 | (E) |
| Equipment | ||
| Purchase price of equipment | $65,000 | (C) |
| Routine maintenance for the equipment | $8,000 | (E) |
| Shipping expense for the equipment | $3,200 | (C) |
| Training on the equipment during the year in use | $5,200 | (E) |
| Installation of the equipment | $6,500 | (C) |
| Engine upgrade on the equipment- extends life | $9,200 | (C) |
| Training on the equipment prior to use | $1,200 | (C) |
| Trademark | ||
| Legal fees for a trademark paid to outside attorneys | $12,000 | (C) |
| Salaries of employees working on the trademark | $7,400 | (E) |
| Goodwill | ||
| Excess paid for a company above net value of assets | $100,000 | (C) |
3rd – Add up all the amounts that are capitalized to get the total cost of the asset. This total cost will be the amount that is used to get depreciation expense for the building and the equipment and amortization expense for the trademark.
Building $306,300
Land $153,300
Equipment $85,100
Trademark $12,000
Goodwill $100,000
4th – Record the journal entries related to the cost of the asset:
Building $306,300
Cash $306,300
Land $153,300
Cash $153,300
Equipment $85,100
Cash $85,100
Trademark $12,000
Cash $12,000
Goodwill $100,000
Cash $100,000
Important: All costs that are capitalized are recorded directly to the asset.
Long Term Assets – Practice Problem 2 – Calculate depreciation expense
A company purchased a new machine at the beginning of the year at a cost of $260,000. The machine is expected to have a 10 year life and a $20,000 residual value. The company expects to use the new machine for a period of 8 years and then sell it for $25,000. The machine is expected to produce 300,000 total units. Calculate depreciation expense for the first 3 years using the following methods:
A. Straight-line
B. Double Declining Balance
C. Units of Production, 35,000 units the first year and 42,000 the second year, and 28,000 units the third year.
Check Your Answer
The asset is depreciated over the amount of time the company expects to USE it and the expected residual value when they are finished using it, regardless of how long the asset will last.
The life used will be 8 years and the residual value used is $25,000.
A. Straight-line:
$260,000 – 25,000
8 years
= $29,375 each year
Straight-line gives equal expense every year
B. Double Declining Balance:
1st year
100% / 8 = 12.5% x 2 = 25% x $260,000 = $65,000
In the first year, there is no accumulated depreciation.
Book value is Cost – A/D ($260,000 – $0)
2nd year
100% / 8 = 12.5% x 2 = 25% x $195,000 = $48,750
Book value is $260,000 – $65,000 = $195,000
3rd year
100% / 8 = 12.5% x 2 = 25% x $146,250 = $36,563
Book value is $260,000 – $65,000 – $48,750 = $146,250
Notice:
The amount of depreciation expense is lower each year because the book value is lower each year
The total accumulated depreciation cannot be higher than cost less residual value (even if you have not reached the end of the useful life)
C. Units of Production
$260,000 – $25,000 = $235,000/300,000 units = 0.783 per unit
1st year: 0.783 per unit x 35,000 units = $27,405 depreciation expense
2nd year: 0.783 per unit x 42,000 units = $32,886 depreciation expense
3rd year: 0.783 per unit x 28,000 units = $21,924 depreciation expense
Important to notice for all methods:
Depreciation expense is for one year only
If the asset was not purchased at the beginning of the year, the expense for the first year is calculated the same way and then multiplied by the number of months used during the year / 12 to get partial year expense
Accumulated depreciation is depreciation expense for all of the years combined
The journal entry to record the expense for this year only is:
Depreciation expense $XX,XXX
Accumulated Depreciation $XX,XXX
Long Term Assets – Practice Problem 3 – Intangibles and Amortization Expense
A company has two intangible assets they acquired this year:
| Description | Date Acquired | Cost | Legal Life | Future Benefit Life |
| Franchise | January 1 | $125,000 | 10 years | 10 years |
| Patent | March 1 | $75,000 | 17 years | 12 years |
A. Compute and record amortization expense for the first two years.
B. Show what would be reported on the balance sheet at the end of the 1st year.
Check Your Answer
A. Intangible assets are expensed using the straight-line method
Franchise
$125,000/10 years = $12,500 each year, 1st and 2nd
Patent
$75,000/12 years = $6,250 x 10/12 = $5,208
1st year – 10 months only
$75,000 / 12 years = $6,250
2nd year (full year)
A.
1st year journal entry:
Amortization Expense $17,708
Franchise $12,500
Patent $5,208
B.
1st year – on the balance sheet:
Intangible Assets:
Franchise, net of amortization $112,500
Patents, net of amortization $ 69,792
Notice:
When you use the asset for only a part of the year, multiply the amount x # months/12
Always use the life the company will get benefit over, which is sometimes different than the legal life or the life the asset could possibly be used.
Long Term Assets – Practice Problem 4 – Revise depreciation estimate
A company purchased a new machine at the beginning of the year at a cost of 200,000. The machine is expected to have a 10 year life and a $20,000 residual value. At beginning of the 4th year, the company did an overhaul on the machine which cost $45,000 and extended the life of the machine by 5 years. The residual value is revised to be $10,000. Calculate depreciation expense for year 4 using straight-line.
Check Your Answer
1st – Calculate the original depreciation expense for the first 3 years:
Cost – RV / Life
$ 200,000 – $20,000 / 10 years = $18,000 each year
At the end of year 3, accumulated depreciation is $54,000
($18,000 x 3 years = $54,000)
2nd – Recognize that the overhaul extended the useful life and the cost is capitalized and added to the cost of the asset.
Original Cost $200,000
+ Overhaul cost $45,000
= Total cost now $245,000
3rd – Revise the estimate for depreciation expense for future years to include the additional years, the additional cost, and the new estimate for residual value.
New Cost – New Residual Value
New Life
= Depreciation Expense
$245,000 – $10,000 / 12 years ** = $19,583
each year for the next 12 yrs
New life = 10 original – 3 already +
5 more from overhaul = 12 yrs
Long Term Assets – Practice Problem 5 – Record the sale of an asset
A company purchased an automobile for its salesman for $35,000 on January 1st. The auto was expected to be used for 5 years and sold for $8,000. The car was used for 3 years and depreciation expense was recorded using straight-line. On June 1st of the 4th year, the auto was sold for $12,000. Record the sale of the car.
Check Your Answer
1) Record the cash you receive – debit cash for $12,000
2) Credit the asset you are selling for the cost – the original cost was $35,000, so credit the automobile for this amount
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 the part of the year the asset was used.
Compute depreciation expense the first three years
$35,000 – 8,000
5 years
= $5,400 each year for 3 years
For the 4th year – $5,400 x 5/12 = $2,250
You must record depreciation for the 5 months of the year the asset was used
Determine total accumulated depreciation up to the time it is sold:
first 3 years $5,400 x 3 = $16,200
part of 4th year $ 2,200
Total Accumulated Deprecation $18,400
Remove this amount. It is a credit account, so it takes a debit to remove it for the total amount
4) Record a realized gain or a loss for the amount that will make the journal entry balance (debits equal credits)
Realized Loss on Sale $4,600 (4) plug
Cash $12,000 (1)
Accumulated Depreciation $18,400 (3)
Automobile $35,000 (2)
Re-compute the loss:
Cash received $12,000
Compared to Book Value
$35,000 – $18,400= $16,600
Difference = loss $4,600
This is a loss because you received less than Book Value
When you receive more than book value it is a gain.