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Long Term Assets

1) Key Things To Know 5) Medium Test
2) Self Test 6) Hard Test
3) Practice as You Learn 7) On Your Test
4) Easy Test 8) Quick Study Sheet

Key Things to Know

  Tangible -     Physical substance – you can touch them
                        Called “property plant and equipment” or “fixed assets”
            3 kinds of tangible assets
                        1) Land – not depreciated
                        2) Buildings, fixtures, equipment, autos, computers - depreciated
                        3) Natural resources – metals, timber, oil - depleted
Intangible -   Grant a right to the owner
                       Have no physical substance, they can not be touched
                           Copyrights, patents, franchises, licenses, trademarks, goodwill
When money is spent, you must either capitalize or expense the benefit
    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
            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, attorneys 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
Depreciation:  Expense the cost of the property, plant, equipment over the period
                                it 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:
            Straight-line:             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: Cost - Estimated Residual Value / total estimated units = $ cost per unit
                        then:  $ 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 will occur
                        Patents – 17 year life
                        Trademarks – Indefinite life
                        Copyrights – 50 year life
                        Franchises – life is the amount of time purchased
                        Goodwill – Indefinite life
                        Goodwill:       Occurs only when you purchase another company
                                                  This asset 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 new costs added
                                    - 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 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 – see practice problem
                        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  **
                                    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)







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