Long Term Assets

Long Term Assets

Quick Study Sheet

Tangible –   

has physical substance, you can touch it

 Intangible –  

no physical substance
grants a right to the owner

Capitalize or Expense 

Capitalize means “call the cost an asset” and expense it over the time used
The cost is expected to benefit future periods

Expense:
Used to produce revenue this period or future benefit is not probable

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 (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 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, attorney’s fees, remodel before using, architect fees, back taxes

Equipment –

sales tax, delivery costs/ freight-in/ shipping, installation, training

Depreciation: 

Expense the cost of using property, plant, equipment over period used 

Residual/Salvage Value: 

What you estimate you will sell it for when you are done 

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

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

Journal entry for all methods of depreciation: 

Depreciation Expense                  $XXXX
        Accumulated depreciation         $XXXX

Intangible Assets

Capitalize the cost paid outside the company

Expense the cost if you do it yourself (ex. salaries to develop a patent)

Patents – 17 -20 years (check your book)
Trademarks – Indefinite
Copyrights – 50 year
Franchises – time purchased
Goodwill – Indefinite life

Intangible assets with indefinite useful life must be tested for “impairment”
When the benefit is lower, the asset must be reduced to the future benefit
Intangible assets with a defined useful life must be expensed over the life

Changes in estimated useful life or costs added to the asset (subsequent expenditures) after you are using the asset

Get the book value at time of the change and re-compute depreciation expense, going forward only for the amount of future useful life from this point forward

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 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 the part of the year it was used

4)  Record a gain or a loss for the amount that will make the journal entry
A debit is a realized loss, a credit is a realized gain