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LessonFour:LongTermAssetsAims:1.Toexplaintheimportanceoflongtermassets.2.Todiscussthefixedassetsandtheaccountingtreatment.3.Todiscusstheintangibleassetsandtheaccountingtreatment.4.Toapplythestraight-lineandacceleratemethodsofdepreciation.5.Toapplytheunits-of-productiondepreciationmethod.6.Toapplysum-of-the-years-digitsmethod.7.Toexplainthenatureofintangibleassets.8.Tounderstandtheprocessofamortization.4.1
IntroductiontoLongTermAssetsLongtermassetsaredefinedastherecoursesabusinesspossessesandusestobringforthoryieldrevenueandcanbedividedintotwocategories:plantassetsandintangibleassets.4.2
TheCostofLongTermAssetsThecostoflongtermassetsisrecognizedasanexpenseintheaccountingperiodsinwhichtheyareused.So,ifacomputerisboughtandexpectedtohaveaneconomiclifeof5years,thenthecostofthecomputerwillbeallocationoverthisfive-yearperiod.4.3
TangibleAssetsTangibleassetsarethosewhichonecantouch.Tangibleassetsintheirtermaredividedintothreecategories:
Property,plant,andequipment;Naturalrecoursesand
Land.4.4
IntangibleAssetsIntangibleassetsmayberepresentedbyapieceofpaper,adocument,etc.,buttherealvalueofsuchassetsistherightsandprivilegesextendedtoitsowners.Examplesofintangibleassetscanbepatents,franchise,goodwill,etc..4.5
HistoricalCostofLongTermAssetsAllassetsarerecordedattheirhistoricalcost.Historicalcostusuallyincludesthepurchaseprice,pluswhateveradditionalcostsnecessarytogettheassetandtoprepareitforintendeduse.[2]Additionalcosts(costsbesidesthepurchaseprice)maybetransportationcosts,insurancewhiledeliveringtheasset,etc.4.7
DepreciationWhenanassetiscometohave,itscostisnotexpensedatonceatthemomentofobtainingit.Sincetheassetisusuallyusedforlongperiodoftime,itscostisallocatedovertheusefullife.Thestraight-linemethodsandtheaccelerateddepreciationmethods.4.8
Straight-lineDepreciationProvidedthattherevenuewillremainthesameineachyearoftheassetsuse,itisreasonabletoemploystraight-linedepreciationmethod.4.9
TheEffectsonFinancialStatementsoftheRecognizingofDepreciationExpenseTherecognitionofdepreciationexpenseaffectsthebalancesheetandtheincomestatement,butdoesnotmakeanychangestoTheCashFlowStatements.4.10
TheRetirementandRemovaloftheComputersThefinalstageintheassetusefullifeisitsretirementandremovalfromthecompany’srecords.4.11
TheEffectsonFinancialStatementsunderStraight-lineDepreciationMethodIncome
Statement
2012
2013
2014
2015Revenue$18
000$18
000$18
000$18
000Depreciation
Expense(10
000)(10
000)(10
000)(10
000)Operating
Income$8
000$8
000$8
000$8
000Gain0002
000Net
Income
$8
000
$8
000
$8
000
$10
000
Balance
SheetAssets
Cash$22
000$40
000$58
000$84
000
Computer$46
000$46
000$46
0000
Accumulated
Depreciation(10
000)(20
000)(30
000)0Total
Assets
$58
000
$66
000
$74
000
$84
000
Equity
Contributed
Capital$50
000$50
000$50
000$50
000
Retained
Earnings8
00016
00024
000
34
000Total
Equity
$58
000
$66
000
$74
000
$84
000
Statement
of
Cash
FlowsOperating
ActivitiesInflow
from
Clients
$18
000
$18
000
$18
000
$18
000
Investing
Activities
Outflow
to
Purchase
Computers(46
000)$0$0$0
Inflow
from
Disposal
of
Computers
0
0
0
8
000
Financing
Activities
Inflow
from
Capital
Acquisition
$50
000
0
0
0
Net
Change
in
Cash$22
000$18
000$18
000$26
000Beginning
Cash
Balance$0$22
000$40
000$58
000Ending
Balance
$22
000
$40
000
$58
000
$84
000
4.13
Double-decliningBalanceDepreciationDouble-decliningmethodiscreatedtoreflectrecognitionoflageramountsofdepreciationexpenseintheearlierstagesofanasset’slifeandrespectivelylowerlevelsofexpenseastheassetages.Themethodissometimescalledaccelerateddepreciationmethod.
(1)Figureoutthestraight-linerate.Itisachievedbydividing100%bythenumberofyearstheassetisexpectedtobeinuse.(2)Calculatethedouble-decliningbalanceratebymultiplyingalreadydeterminedstraight-lineratebytwo.(3)Applythedouble-decliningbalanceratetothebook(carrying)valueoftheasset.4.14
AnExampleofDouble-declining
BalanceDepreciationTheschemebelowwillshowthecomputationsofdepreciationexpenseunderdouble-decliningbalancemethod:YearBook
Value
atBeginning
of
Period×Double
theStraight-line
Rate=Annual
Depreciation
ExpenseReal
AnnualDepreciation
Expense2012(46
000-0)×50%=$23
000$23
0002013(46
000-23
000)×50%=$11
500$11
5002014(46
000-34
500)×50%=$5
750$5
5002015(46
000-40
000)×50%=$3
00004.15
TheEffectsonFinancialStatementsunderDouble-decliningBalanceDepreciationMethodLetuspresumethattherevenuealsochangesduringthe4-yearusefullifeandamountsto$31000in2012,$19500in2013,$13500in2014,and$8000in2015.Financialstatementsarepresentedbelow.IncomeStatement
2012
2013
2014
2015Revenue$31
000$19
500$13
500$8
000Depreciation
Expense(23
000)(11
500)(5
500)(0)Operating
Income$8
000$8
000$8
000$8
000Gain
0
0
0
2
000
Net
Income
$8
000
$8
000
$8
000
$10
000
Balance
SheetAssets
Cash$35
000$54
500$68
000$84
000
Computer$46
000$46
000$46
0000
Accumulated
Depreciation(23
000)(34
500)(40
000)0Total
Assets
$58
000
$66
000
$74
000
$84
000
Equity
Contributed
Capital$50
000$50
000$50
000$50
000
Retained
Earnings8
00016
00024
000
34
000Total
Equity
$58
000
$66
000
$74
000
$84
000
Statement
of
Cash
FlowsOperating
ActivitiesInflow
from
Clients
$31
000
$19
500
$13
500
$8
000
Investing
Activities
Outflow
to
Purchase
Computers(46
000)$0$0$0
Inflow
from
Disposal
of
Computers
0
0
0
8
000
Financing
Activities
Inflow
from
Capital
Acquisition
$50
000
0
0
0
Net
Change
in
Cash$35
000$19
500$13
500$16
000Beginning
Cash
Balance$0$35
000$54
500$68
000Ending
Balance
$35
000
$54
500
$68
000
$84
000
4.16
Units-of-ProductionDepreciationThismethodwasdesignedtobettermatchexpenseswithrevenueswhentheformerchangesfromoneyeartoanothergreatly.4.18
Sum-of-the-Years-DigitsDepreciationThismethodisanoptionalonefordouble-decliningmethod,sinceitalsoassumesthatanassetisusedmoreextensivelyduringitsfirstyearsofoperations.Inthismethodaveryimportantplaceisdevotedtothenumberofyearsanassetisexpectedtobeinuse.4.21
WhenaRevisionTakesPlaceSometimesithappensthatarevisionofsalvagevalue,usefullife,ortotalproductiontakeplace.Thenewinformationis
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