Overview
This lecture covered accounting for long-term operational assets, focusing on definitions, classification, cost allocation, depreciation methods, asset disposal, tax differences, estimate revisions, and treatments for expenditures and intangibles.
Classifying Long-Term Operational Assets
- Long-term operational assets are divided into tangible (physical) and intangible (non-physical) categories.
- Tangible assets include property, plant & equipment (PP&E), natural resources, and land.
- Intangible assets are rights and privileges (e.g., patents, copyrights, trademarks).
Cost Allocation of Tangible Assets
- Cost of a tangible asset includes purchase price, necessary fees, and expenses to prepare the asset for use.
- Land costs include purchase price, fees, removal of old buildings, grading, and are not depreciated (assumed infinite life).
- Basket purchase allocation splits total purchase cost among assets based on relative fair market value percentages.
Depreciation, Depletion, and Amortization Concepts
- Depreciation: Systematically allocate the cost of PP&E over its useful life.
- Depletion: Systematically allocate the cost of natural resources over use.
- Amortization: Systematically allocate the cost of intangible assets over identifiable useful life.
- Land is not depreciated; intangibles with indefinite life are not amortized unless impaired.
Depreciation Methods
- Straight-Line Method: (Cost − Salvage Value) ÷ Useful Life = Annual Depreciation Expense.
- Double Declining Balance: Accelerated method; 2 × (1/Useful Life) × Book Value each year.
- Units of Production: (Cost − Salvage Value) ÷ Estimated Total Units × Units Used = Depreciation Expense.
- Cannot depreciate below salvage value; always stop when book value = salvage value.
Asset Disposal
- Upon sale, record cash received, remove asset and accumulated depreciation, and record gain/loss as difference.
- Gain/loss = Cash received − Book value at time of sale.
Tax Depreciation (MACRS)
- Tax depreciation uses the Modified Accelerated Cost Recovery System (MACRS), not book methods.
- MACRS uses set recovery periods, half-year convention, and ignores salvage value.
Revisions and Expenditures
- Revisions to useful life or salvage value update future depreciation only and are made if significant changes occur.
- Routine maintenance is expensed as incurred.
- Improvements that enhance productivity are capitalized (added to asset).
- Expenditures extending asset life decrease accumulated depreciation.
Intangible Assets and Goodwill
- Goodwill = Purchase price paid for a business − Fair value of net tangible assets acquired.
- Intangibles with identifiable lives (e.g. patents) are amortized over useful life; indefinite life intangibles are not amortized but tested for impairment annually.
Key Terms & Definitions
- Depreciation — Systematic allocation of PP&E cost over its useful life.
- Depletion — Systematic allocation of natural resource cost over its useful life.
- Amortization — Systematic allocation of intangible asset cost over its useful life.
- Book Value — Asset cost minus accumulated depreciation/depletion/amortization.
- Impairment — Reduction in asset value due to damage or loss of utility.
- MACRS — Tax depreciation system with set asset class lives and conventions.
Action Items / Next Steps
- Read Chapter 8 thoroughly, focusing on methods and examples.
- Complete the assigned homework problems on depreciation, asset disposal, and cost allocation.
- Review and define key terms noted above for exam preparation.