acct2101

• Property, Plant, and Equipment (PPE)


  Fixed Assets, Capital Assets, Long-lived Assets - They all refer to the same thing
• Tangible


  • Physical, Substance
• Intangible


  • No Physical Substance
• Classifying Long-Lived Assets


  • Land
  • Buildings, fixtures, and equipment
  • Natural resources
  • Patents
  • Copyrights
  • Franchises
  • Licenses
  • Trademarks
  • Goodwill
• Fixed Asset Turnover


  Net Sales (or Operating Revenues) / Average Net Fixed Assets - This ratio measures the sales dollars generated by each dollar of fixed assets used. A high rate suggests effective management.
• Acquisition Costs


  Purchase price, Sales taxes, Legal fees, Transportation costs, Installation and preparation costs - All reasonable and necessary expenditures made in acquiring and preparing an asset for use (or sale, as in the case of inventory) should be recorded as the cost of the asset. Interest charges associated with the purchase are recorded as expenses as incurred.
• Measuring and Recording Acquisition Cost (Acquisition for Cash)

  Debit Aircraft (+A), Credit Cash (-A)
• Measuring and Recording Acquisition Cost (Acquisition for Debt)


  Debit Aircraft (+A), Credit Cash (-A), Credit Note Payable (+L)
• Measuring and Recording Acquisition Cost (Acquisition for Equity)


  Debit Aircraft (+A), Credit Common Stock (+SE), Credit Additional paid-in capital (+SE), Credit Cash (-A)
• Measuring and Recording Acquisition Cost (Acquisition by Construction)


  Asset cost includes: All materials and labor traceable to the construction, A reasonable amount of overhead, Interest on debt incurred during the construction
• Repairs, Maintenance, and Improvements

  Companies may record all expenditures below a certain dollar amount as expenses to avoid spending too much time classifying additions and improvements and repair expenses. Such policies are acceptable because immaterial amounts will not affect users' decisions when analyzing financial statements.
• Depreciation


  The process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method.
• Depreciation Concepts


  • Depreciation is a process of cost allocation, not a process of determining market value. The remaining balance sheet amount probably does not represent the asset's current market value. The undepreciated cost is not measured on a market or fair value basis. Land is considered to have an unlimited useful life and is not depreciated.
• Adjusting for Depreciation


  Debit Depreciation expense (+E, -SE), Credit Accumulated depreciation (+XA, -A)
• Net Book Value


  The amount on the balance sheet after subtracting accumulated depreciation from the asset's cost.
• Depreciation Methods


  Straight-line, Units-of-production, Declining-balance
• Differences in estimated lives and residual values of assets can have a significant impact on a comparison of the profitability of competing companies.
• Straight-Line Method


  Depreciation expense is a constant amount each year, Accumulated depreciation increases by an equal amount each year, Net book value decreases by the same amount each year until it equals the estimated residual value.
• Units-of-Production Method


  Divide the depreciable cost (cost minus residual value) by the estimated total production or activity level to determine the depreciation unit rate.
• Declining-Balance Method

  An accelerated depreciation method where depreciation expense is higher in the early years and lower in the later years to match higher revenues in the early years and lower revenues in the later years.
• Double Declining-Balance Method


  The double-declining rate is applied to a lower net book value each year, resulting in a decline in depreciation expense over time. The net book value should not be depreciated below the residual value.
• Accelerated depreciation methods report higher depreciation and, therefore, lower net income during the early years of an asset's life. As the age of the asset increases, this effect reverses.
• Asset Impairment


  There are three steps to test for impairment: 1) Consider whether indicators of impairment are present, 2) Test the recoverability of the long-lived assets, 3) Measure the impairment of the long-lived assets.
• Indicators of Asset Impairment

  • Significant pattern of decline of market price of the assets, Lower demand due to global economic conditions, Change in the manner or expected duration of use of an asset, Significant physical damage to an asset, Significant adverse change in legal factors or in the business climate, Accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset
• Differences in depreciation methods rather than real economic differences can cause significant variation in reported net incomes.
• Steps to test for impairment

  1. Consider whether indicators of impairment are present

  2. Test the recoverability of the long-lived assets

  3. Measure the impairment of the long-lived assets
• Indicators of impairment


  • Significant pattern of decline of market price of the assets
  • Lower demand due to global economic conditions
  • Change in economic or legal factors (e.g., regulatory or technology changes)
  • Obsolescence or physical damage to the asset
  • Asset is held for disposal or is part of a restructuring
• Impaired asset


  When net book value (NBV) > Estimated future cash flows (FCF)
• Impairment loss


  Net book value (NBV) - Fair Value (FV)
• The asset is written down to fair value and the fair value becomes the new book value. The asset is not written back up if conditions change in the future.
• Steps to record disposal of property, plant, and equipment

  1. Recording cash received (debit) or paid (credit)

  2. Writing off the asset cost (credit) and any accumulated depreciation (debit)

  3. Recording a gain (credit) or loss (debit)

  4. Update depreciation expense through the date of disposal
• Businesses dispose of assets involuntarily (the result of a casualty such as a storm, fire, theft, or accident) or voluntarily (sales, trade-ins, and retirements).
• FedEx sold an aircraft

  • Originally cost $30 million, depreciated using straight-line method with zero residual value and 25 year useful life, sold for $11 million cash at end of 17th year
• The amount of depreciation expense recorded at the end of the 17th year to bring depreciation up to date is $1.2 million.
• After updating the depreciation, the equipment's book value at the end of the 17th year is $9.6 million.
• The equipment's sale resulted in a gain of $1.4 million.
• Intangible assets


  • Increasingly important resources for organizations
  • Have value because of certain rights and privileges often conferred by law on its owner
  • Have no material or physical substance
  • Usually evidenced by a legal document
  • Recorded at historical cost only if purchased, expensed if developed internally
• Definite life intangible assets


  • Cost is allocated (amortized) over useful life
  • Straight-line method used to calculate amortization expense
  • Most companies do not estimate a residual value
• Indefinite life intangible assets

  • Not amortized
  • Asset must be reviewed at least annually for possible impairment of value
• Goodwill


  • Only recorded as an asset when one company buys another business
  • Internally developed goodwill is not reported as an asset
  • Amount equals purchase price less fair market value of net assets
  • Not amortized but reviewed annually for impairment