Long Term Assets

Key Things To Know

Introduction to Accounting

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


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:

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

$ 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

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


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  **
Accumulated Depreciation
       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)