Chapter 9 Long Lived Tangible Intangible Assets PDF

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Notes taken from the Introduction to Financial Accounting textbook at the University of Iowa in 2018....

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❖ Long lived assets: assets for use over one or more years, owned by business that enable it to produce the goods or services that are sold to customers (balance sheet) ➢ Tangible assets: physical items; land, machines, equipment, vehicles ➢ Intangible assets: brand names, trademarks, license rights ❖ Capitalize: to record a cost as an asset, rather than an expense ❖ All reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset ❖ When a tangible asset is acquired land, buildings, and equipment should be capitalized ❖ Land is NEVER used up ❖ Basket purchase allocation: cost of land and buildings and equipment are split ➢ Appraised price/added up prices x original total price ❖ Debit equipment, credit cash, credit note payable ❖ Depreciation: the allocation of the depreciable cost of long-lived tangible assets over their productive lives using a systematic and rational method ➢ Debit depreciation expense, credit accumulated depreciation ❖ Maintenance ➢ 1. Ordinary repairs and maintenance: expenditures for the routine maintenance and upkeep of long-lived assets (recurring, ie oil change in car), recorded as expenses ➢ 2. Extraordinary repairs, replacements, and additions: large expenditures, increase asset usefulness, recorded as assets ❖ Book (carrying) value: the acquisition cost of an asset less accumulated depreciation ❖ Depreciation methods ➢ 1. Straight line: when usage is the same each period, when an asset is expected to be used up in equal amounts each period of the asset’s estimated useful life ■ (cost-residual value) x (1/useful life) ➢ 2. Units of production: when usage varies each period ■ (cost-residual value) x (actual production this period/estimated total production) ➢ 3. Declining balance: when the asset is more efficient (generates more revenues) in early years but less so over time; also used for tax ■ (cost-accumulated depreciation) x (2/useful life) ❖ Involuntary disposal of an asset: asset is seriously damaged ❖ A higher residual value will result in a lower depreciation expense per year and a higher net income ❖ Fixed asset turnover ratio: net revenue/average net fixed assets ❖ Residual (salvage) value: the estimated amount to be recovered at the end of the company’s estimated useful life of the asset ❖ Amortization: the process of allocating the cost of intangible assets over their limited useful lives...