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# 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.

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
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

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.

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.

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.

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.

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: