LESSON4LONGTERMASSETS4Aims:1.Toexplaintheimportanceoflongtermassets.2.Todiscussthefixedassetsandtheaccountingtreatment.3.Todiscusstheintangibleassetsandtheaccountingtreatment.4.Toapplythestraight-lineandacceleratemethodsofdepreciation.5.Toapplytheunits-ofproductiondepreciationmethod.6.Toapplysum-of-the-years-digitsmethod.7.Toexplainthenatureofintangibleassets.8.Tounderstandtheprocessofamortization.Longtermassetsaredefinedastherecoursesabusinesspossessesandusestobringforthoryieldrevenueandcanbedividedintotwocategories:plantassetsandintangibleassets.“l(fā)ongterm”referstomorethanayear.So,longtermassetsarethosewhoseeconomiclife(theperiodoftheirbeingusedbyacompany)islongerthanayear.4.1IntroductiontoLongTermAssetsThecostoflongtermassetsisrecognizedasanexpenseintheaccountingperiodsinwhichtheyareused.So,ifacomputerisboughtandexpectedtohaveaneconomiclifeof5years,thenthecostofthecomputerwillbeallocationoverthisfive-yearperiod.Theallocationistheactofdistributingbyallottingorapportioningofitseconomicvalue.4.2TheCostofLongTermAssetsAssetscanbetangibleandintangible.Tangibleassetsarethosewhichonecantouchandincludenaturalresources,machinery,etc..Tangibleassetsintheirtermaredividedintothreecategories.(1)Property,plant,andequipment；(2)Naturalrecourses；(3)Land.4.3TangibleAssetsIntangibleassetsmayberepresentedbyapieceofpaper,adocument,etc.Intangibleassetsalsofallintoafewcategories.(1)Specificallyidentifiableintangibleassetscanbeacquiredindividually.(2)Goodwill

4.4IntangibleAssetsAllassetsarerecordedattheirhistoricalcost.Historicalcostusuallyincludesthepurchaseprice,pluswhateveradditionalcostsnecessarytogettheassetandtoprepareitforintendeduse.(1)Purchaseofabuilding:purchaseprice,titlesearchandtransferdocuments,realestatefees,remodelingcosts,etc..(2)Purchaseofequipment:purchaseprice,deliverycosts,installation,costformodificationsneededforintendeduse,etc.(3)Purchaseofland:purchaseprice,removalofoldbuildings,titlesearchandtransferdocuments,realestatefees,etc.4.5HistoricalCostofLongTermAssetsSometimesithappensthatacompanypurchasesafewassetsandpaysasinglesumforit;however,thetotalofmarketvaluesofsingleassetsincludedinthepurchaseisgreaterthanthetotalpricepaidbythecompany.Suchapurchaseiscalledabasketone.Thecompanymustdeterminehowmuchofthetotalpricepaidshouldbeassignedtoeachasset.Thiscanbedonebyusingtherelativefairmarketmethod.4.6ABasketPurchaseAssumeKing‘sCompanyacquiredamachineandaseparatetooltoitpayingtotally$1200.Therealmarketvaluesofsuchassetsprovidedtheyareboughtseparatelyare$1400and$600respectively,So,thetotaloftwofairmarketvaluesis$2000(i.e.,$1400+$600.Themachineisworth70%(i.e.，$1400/$2000)ofthetotalvalue,andthetool-30(i.e.，$600/$2000).Usingthesepercentages,wecancalculatetheactualpriceinthefollowingscheme:Machine70%X$1200=$840Tool30%X$1200=$3604.6ABasketPurchaseWhenanassetisacquired,itscostisnotexpensedatonceatthemomentofobtainingit.Sincetheassetisusuallyusedforalongperiodoftime,itscostisallocatedovertheusefullife.TheStraight-lineMethodsandtheAcceleratedDepreciationMethodscanbeemployedtoallocatethecostofanasset.4.7Depreciation:TheStraight-lineMethodsandtheAcceleratedDepreciationMethodsExample:Agraduatestudentwithcomputerprogrammingmajordecidedtorunhisownbusiness.Thestudent,Mr.Kosher,willhimselfdotheentirejobthatconsistsinwritingcomputerprogramsforsmallbusinesses.Inordertohavethepossibilitytocreategoodworkingandfastproducts.Mr.Kosherin2023bought10computersthatcost$46000.Itisexpectedtohaveasalvagevalueof$6O00and4-yearusefullife.Mr.Kosherhasmadepredictionsthattherevenuestreamwillbe$18000peryear.4.7Depreciation:TheStraight-lineMethodsandtheAcceleratedDepreciationMethodsProvidedthattherevenuewillremainthesameineachyearofthecomputeruse,itisreasonabletoemploystraight-linedepreciationmethod.Thefirststepforthefounderofthebusinessbeforebuyingthecomputeristomakecapitalcontributions.Letusassumethattheownercontributes$50000cash.Theeffectofthelaterisincreaseinassets(Cash)andequity(ContributedCapital)-assetsourcetransaction.4.8Straight-lineDepreciationTheannualdepreciationexpenseunderthestraight-linemethodiscomputedasfollows:Depreciationexpense=(Cost-Estimatedresidualvalue)/Yearsofestimatedusefullife.Takingournumbers,weget$10000(($46000-$6000)/4years)ofdepreciationexpenseeachyear.TheexpenserecognitionisshowninacontraassetaccounttitledAccumulatedDepreciation.Therevenue($18000)andexpense($10000)recognitionrepeatsfor4yearsandisshownbelowviatwoentries.4.9TheEffectsonFinancialStatementsoftheRecognizingofDepreciationExpenseNotethattherecognitionofdepreciationexpenseaffectsthebalancesheetandtheincomestatement,butdoesnotmakeanychangestoTheCashFlowStatements.4.9TheEffectsonFinancialStatementsoftheRecognizingofDepreciationExpenseThefinalstageintheassetusefullifeisitsretirementandremovalfromthecompany’srecords.Supposethatthecompanysellsthesecomputersattheveryendof2026for$8000.Sincethecarryingvalueofthesecomputersis$6000,thecompanyrecognizesagainof$2000($8000-$6000).4.10TheRetirementandRemovaloftheComputers4.11TheEffectsonFinancialStatementsunderStraight-lineDepreciationMethod4.11TheEffectsonFinancialStatementsunderStraight-lineDepreciationMethod4.12TheJournalEntriesDouble-decliningmethodiscreatedtoreflectrecognitionoflargeramountsofdepreciartionexpenseintheearlierstagesofanasset'slifeandrespectivelylowerlevelsofexpenseastheassetages.Themethodissometimescalledaccelerateddepreciationmethod.Todeterminetheamountofdepreciationexpenseunderdouble-decliningmethod.4.13Double-decliningBalanceDepreciationTheschemebelowwillshowthecomputationsofdepreciationexpenseunderdouble-decliningbalancemethod(Table4-8):4.14AnExampleofDouble-decliningBalanceDepreciation

InChina,thelasttwoyearsdepreciationexpenseisthesame,whichequals$2750($5500÷2).Letuspresumethattherevenuealsochangesduringthe4-yearusefullifeandamountsto$31000in2023，$19500in2024，$13500in2025，and$8000in2026.Financialstatementsarepresentedbelow(Table4-9).4.15TheEffectsonFinancialStatementsunderDouble-decliningBalanceDepreciationMethod4.15TheEffectsonFinancialStatementsunderDouble-decliningBalanceDepreciationMethod4.15TheEffectsonFinancialStatementsunderDouble-decliningBalanceDepreciationMethodThismethodwasdesignedtobettermatchexpenseswithrevenueswhentheformerchangesfromoneyeartoanothergreatly.Supposethatduring2023thecomputerwasinusefor8000hours,in2024for12000hours,in2025-for4000hours,and2026for16000hours(total40000hours).Thefirststepindeterminingdepreciationexpenseundertheunits-of-productionmethodistocalculatethecostperunitofproduction(usage,inourexample).Thiscostcanbefiguredoutbydividingthetotaldepreciablecost(i.e.,historicalcost-salvagevalue)bythenumberofthehoursthecomputerinuse.4.16Units-of-ProductionDepreciationTherefore,thecostperhouris$1(i.e.,$40000/40000hours).Thenthedepreciationexpenseforeachyearisdeterminedbymultiplyingthecostperhourbytheappropriatenumberofhoursthecomputerbeusedeachyear.Thetablebelowshowstheresultsofcomputations(Table4-10):4.16Units-of-ProductionDepreciation4.17TheEffectsonFinancialStatementsunderUnits-of-ProductionDepreciation4.17TheEffectsonFinancialStatementsunderUnits-of-ProductionDepreciation

Thismethodisanoptionalonefordouble-decliningmethod,sinceitalsoassumesthatanassetisusedmoreextensivelyduringitsfirstyearsofoperations.Inthismethodaveryimportantplaceisdevotedtothenumberofyearsanassetisexpectedtobeinuse.4.18Sum-of-the-Years-DigitsDepreciationThefollowingstepsaretobetakentodeterminetheamountsofthedepreciationexpense:(1)Sumupthefiguresthatbeginwiththenumberofyearstheassetwillbeinuse,andgodownto1.Forexample,ifanassetistobeinusefor5years,thenthesumwillbe15(5+4+3+2+1).(2)Determinetheamountofdepreciationforeachyearbymultiplyingthedepreciablecost(historicalcost-salvagevalue)bythefractionofthefiguresfromsteponeandtheirtotalamount.Forinstance,thedepreciationexpenseforthefirstyearwillbedepreciablecostX5/15,forthesecondyearitwillbedepreciablecostX4/15,andsoontilldepreciablecostX1/15.4.18Sum-of-the-Years-DigitsDepreciationThetablebelowshowsthecomputationsofthedepreciationexpenseofthecomputersfromourexample(thetotalsumoffiguresis10(i.e.,sincethenumberofyearsthecomputersisinuseis4，then4+3+2+1))(Table4-12):4.19TheComputationsoftheDepreciationExpense

underSum-of-the-Years-DigitsMethod4.20TheEffectsonFinancialStatementsunderSum-of-the-Years-DigitsMethod4.20TheEffectsonFinancialStatementsunderSum-of-the-Years-DigitsMethodSometimesithappensthatarevisionofsalvagevalue,usefullife,ortotalproductiontakesplace.Inthissituationnothingshouldbedonetocorrectthepreviouslyreportedfigures.However,thenewinformationistakenintocalculationsofthepresentandfuturedepreciationexpenses.Supposethefollowingsituation.Acompanyboughtatoolthatcost$24000andhasthesalvagevalueof$6000.Theusefullifeisexpectedtobe3years.Therefore,depreciationexpenseforthefirstyearunderstraight-linemethodis$6000(i.e.,($24000-$6000)/3years).4.21WhenaRevisionTakesPlace?Let’sthinkthatthecompanyre-estimatedtheusefullifeofthetool,andafterthefirstyearofitsoperationsdecidedtoexpanditto6years.So,asthetoolhasalreadybeeninuseforoneyear,5moreyearsremainforchargingdepreciationexpense.Thesalvageremainsthesame,andthenewdepreciationexpenseiscomputedasfollows(Table4-14):4.22TheAccountingTreatmentforaChangeinUsefulLifeLet’sthinkthatthecompanyre-estimatedtheusefullifeofthetool,andafterthefirstyearofitsoperationsdecidedtoexpanditto6years.So,asthetoolhasalreadybeeninuseforoneyear,5moreyearsremainforchargingdepreciationexpense.Thesalvageremainsthesame,andthenewdepreciationexpenseiscomputedasfollows(Table4-14):4.22TheAccountingTreatmentforaChangeinUsefulLife

Nowlet'ssupposethatthecompanygotnewinformationaboutthesalvagevalueofthetool.Itisconsideredtobe$8000insteadof$6000.Theusefullifeisthesame(Table4-15):4.23TheAccountingTreatmentforaChangeinSalvageNaturalresourcesarerecordedinthebooksattheircostofacquisition.Theprocessofexpenserecognitionforusingnaturalresourcesiscalleddepletion.Theunits-of-productionisthemostcommonmethodusedtoallocatethecostofnaturalresources.4.24NaturalResourcesandDepletionSuppose,aminingcompanyboughtanewminein2023for$13400,plusrealestatefeesof$600,so,totalto$14000.Nosalvagevalueisexpected.Theminehasapproximately28000tonsofcoal.So,thecostpertonis$0.5(i.e.,14000tons/$28000).Ifthecompanyextracts8000tonsinthefirstyear,thedepletioncostis$4000(8000X$0.5).Thedepletionofanaturalresourcehasthesameeffectsontheaccountingequation:assets(CoalMine)andequity(byincreasingDepletionExpense)decrease.4.24NaturalResourcesandDepletionIntangibleassetsprovidetheirownerswithrights,privileges,etc.Theircostiscapitalizedinassetsaccountsathistoricalcostandisexpensedovertheirusefullife.Theexpenserecognitionprocessforintangibleassetsiscalledamortization.Theyarenormallyamortizedonastraight-linebasis.Inordertodeterminethenumberofyearsoverwhichtoallocatethecostoftheasset,acompanyshouldchoosetheshortestperiodof:(1)thelegallifeoftheintangible;(2)theusefullifeoftheintangible;(3)themaximumamortizationperiodfixedbythelawofaparticularcountry.4.25TheAccountingTreatmentforIntangibleAssetsSupposeacompanyhasacquiredatrademarkfor$10000thatisexpectedtohaveausefullifeof5years,andthelegallifeof7years.Theannualchargeistherefore$2000.sincetheshortestperiodof5and7is5yearsand$10000/5years=$2000.4.26AmortizationofIntangibleAssets:anExample

Goodwillistheaddedvalueo