D’Amore-McKim School of Business

Classifying Long-Lived Assets

______________________________

______________________________

Tangible Intangible
Physical No Physical
Substance Substance
8-1
 D’Amore-McKim School of Business

Classifying Long-Lived Assets

Tangible
Definite-Lived
__________________________________ _________________________
__________________________________ _________________________
Indefinite-Lived
__________________________________ _________________________
Intangible
Definite-Lived
______________________________ _________________________
Indefinite-Lived
______________________________ _________________________
 D’Amore-McKim School of Business

Acquisition Costs
• Purchase price plus any expenditure needed to ___________
___________________________

Financing/interest costs are not considered acquisition costs

except for in the case of ___________________________
 D’Amore-McKim School of Business

Self-Constructed Assets

• When constructing an asset (rather than

buying it from a manufacturer) the following
costs are capitalizable:
– Materials and labor directly associated with the
construction
– A reasonable amount of _________________
– Interest of debt incurred __________________
 D’Amore-McKim School of Business

Example
• TDF Enterprises had the following transactions:
– Paid $20,500 for the basic truck to the dealer.
– Paid $700 to have the company name and logo painted on the
side of the truck.
– Paid $200 annual license fee on the truck.
– Paid $1,450 sales tax on the purchase of the truck.
– Paid $500 for annual parking permit for the truck to park near
the university.
– Paid $800 for 6 months insurance on the truck.
– Paid $2,500 for custom designed shelf unit permanently
attached to the inside of the truck.
 D’Amore-McKim School of Business

Repairs, Maintenance, & Improvements

 D’Amore-McKim School of Business

Repairs, Maintenance, & Improvements

To aid with the capitalize/expense decision, many companies

record all expenditures below a certain dollar amount as
expenses.
 D’Amore-McKim School of Business

Depreciation
• The process of cost allocation which matches the
acquisition cost with the periods benefitted by its use
– ________________________  Current Year amount
• Presented on the ____________________________
– ________________________  Total depreciation to date
• Presented on the ____________________________
• Three commonly-accepted methods
– Straight line
– Units-of-production
– Declining Balance
 D’Amore-McKim School of Business

Straight Line Depreciation

Depreciation
=
Expense per Year
 D’Amore-McKim School of Business

Units-of-Production Depreciation
Step 1:
Depreciation = ______ - ___________
Rate ______________________
Step 2:
Number of Units
Depreciation Depreciation
= × Produced
Expense Rate
for the Year
 D’Amore-McKim School of Business

Accelerated Depreciation
Accelerated depreciation matches higher depreciation
expense with higher revenues in the early years of an
asset’s useful life when the asset is more efficient.

Depreciation Repair
Expense Expense
Early Years High Low
Later Years Low High
 D’Amore-McKim School of Business

Declining-Balance Method

Declining balance rate

of _ is double-declining-
Cost – Accumulated Depreciation balance (DDB) rate.
Annual _
Depreciation
expense
= × ( Useful Life in Years )
Annual
Annual computation
computation ignores
ignores residual
residual value.
value.
 D’Amore-McKim School of Business

Changes in Useful Life or Residual Value

ESTIMATED
ESTIMATED service
service ESTIMATED
ESTIMATED residual
residual
life
life value
value

Changes in estimates are accounted for _______________.

• The book value less any residual value at the date of change
is depreciated ________________________.
• A disclosure note should describe the effect of a change.
 D’Amore-McKim School of Business

Asset Dispositions
• Can be voluntary or involuntary
• Requires two journal entries:
– Update accumulated depreciation (and
depreciation expense) through the disposition
date
– Record the disposition
• ______________________________________
• ______________________________________
 D’Amore-McKim School of Business

Asset Impairment
• Companies must review long lived assets for
possible impairment.
– Impairment: The loss of a significant portion of the
utility of the asset which cannot be recovered due to:
• _______________________________
• _______________________________
• _______________________________
• Impairment = ___________________________
– Presented as a loss on the Income Statement
 D’Amore-McKim School of Business

Intangible Assets
• Must be purchased to capitalize
– Internal research and development is _______
______________________
• Definite-lived intangible assets
– Copyrights, patents and franchises
– Amortization calculated in a manner similar to
______________________________
 D’Amore-McKim School of Business

Goodwill

Occurs when one Only purchased

company buys goodwill is an
another company. intangible asset.

Equals _____________ less

the _______________ of net assets acquired.

Goodwill
Goodwill isis ________________,
________________, but
but rather
rather tested
tested
at
at least
least annually
annually for
for possible
possible impairment.
impairment.
 D’Amore-McKim School of Business

Fixed Asset Turnover Ratio

• Measures the sales dollars generated by each dollar
of fixed assets used.
– A high rate normally suggests effective management.
– When comparing two companies in the same industry, the
one with the higher asset turnover ratio is operating more
efficiently
 D’Amore-McKim School of Business

Example
• The Wilson Company has provided the following information:
– Net sales, $100,000;
– Net operating income, $40,000;
– Net income, $20,000;
– Average total assets, $120,000;
– Average net fixed assets; $80,000.

What is Wilson's fixed asset turnover ratio? 

a. 0.83
b. 1.25
c. 0.25
d. 0.50