Reporting and Analyzing LongLived Assets: Chapter 9

1
Reporting and Analyzing Long-Lived Assets
Chapter 9

• At the end of the chapter students will
• Account for the acquisition of plant assets using
  the cost principle
• Explain the concept of depreciation and the
  effect of using different methods
• Calculate depreciation using the straight-line
  method
• Account for the disposal of plant assets
• Use financial ratios to analyze the use of plant
  assets
• Explain the accounting issues related to
  intangible assets

2
Long-Lived Assets

• Land
• Land Improvements
• Buildings and Equipment
• Intangible Assets

3
Depreciation

• Method of allocating cost over life of asset NOT
  a method of determining decline in value
• Need to know
• Original cost
• Estimated salvage (residual) value
• Estimated useful life
• Methods
• Straight-line
• Declining balance
• Units of activity
• Depreciation is expensed and accumulated in a
  contra asset account

4
Straight-line Depreciation

• Expense is evenly spread over useful life
• Annual Depreciation Expense Depreciable Cost /
  Estimated Useful Life
• Depreciable Cost Original Cost - Estimated
  Salvage Value
• S-L Depreciation Rate 1 / Estimated Useful Life
• Expense Depreciable Cost S-L Rate

5
Declining Balance Depreciation

• Accelerated expensing of cost to years of service
• Annual Depreciation Expense Book Value Double
  Declining Balance Rate
• Book Value Cost - Accumulated Depr
• Double Declining Balance Rate 2 times
  Straight-Line Rate 2 / Useful Life
• Expense Book Value DDB Rate

6
Units of Activity

• Cost is allocated based on activity level
• Annual Depreciation Expense Current Year
  Activity Cost per Unit
• Cost per Unit Depreciable Cost
• Estimated Total
  Activity
• Depreciable Cost Original Cost - Estimated
  Salvage Value
• Expense Curr Yr Activity Cost per Unit

7
Comparison of Depreciation Methods
Annual Depr Expense in
DDB
S-L
Years
8
Subsequent Expenditures and Impairments

• Revenue
• Ordinary repairs
• Maintenance
• EXPENSE

• Capital
• Additions
• Improvements
• Extraordinary repairs
• CAPITALIZE if
• Significant
• Benefit several periods
• Increase life or capacity
• Depreciate over remaining useful life

• Impairments
• Permanent decline in market value requires
  recognition of a loss
• Due to
• Obsolescence
• Decrease in demand
• Increased competition

9
Changes in Depreciation Estimates

• Useful life and salvage value are estimates
• Prospective treatment of effects of new estimates
• Calculate your new undepreciated depreciable cost
• Allocate that cost over remaining useful life

10
Disposal of PPE

• Dont forget to update depreciation before
  recording gain (loss)
• Compare book value to proceeds from sale
• Book Value Cost - Accumulated Depr
• Record Gain or Loss on disposal
• Gain (loss) is an accounting issue, not
  necessarily an economic one

11
Analysis of Assets

• Return Net Income
• On Assets Average Total Assets
• Equals the product of
• Asset Net Sales
• Turnover Average Total Assets
• and
• Profit Net Income
• Margin Net Sales

12
Intangibles

• Defined as rights, privileges, and competitive
  advantages resulting from owning long-lived
  assets without physical substance
• Purchased Intangibles are capitalized and
  Research and Development is expensed
• Intangibles with a limited life are amortized
  over the shorter of remaining life or useful life
• Intangibles with an indefinite life are evaluated
  for impairment without amortization