Acct 230 1st Edition Lecture 20Outline of Last Lecture I. Long-Term Assetsa. Acquisition and ImprovementsOutline of Current Lecture II. Long-Term Assetsa. Asset DispositionCurrent LectureIII. Asset Dispositiona. Disposal of Long-Term Assetsi. Long-term assets can be sold, retired, or exchanged for other assets. ii. A sale is the most likely. Selling a long-term asset can result in either a gain or a loss. iii. When a long-term asset is no longer useful but cannot be sold, we have a retirement. For example, Little King Sandwiches might physically remove a baking oven that no longer works and also remove it from the accounting records through a retirement entry.iv. An exchange occurs when two companies trade assets. In a trade, we often use cash to make up for any difference in fair value between theassets.v. Recording Long-Term Asset Disposals1. To illustrate the recording of disposals, let’s return to our delivery truck example for Little King Sandwiches. Assume Little King uses straight-line depreciation in all cases (sale, retirement and exchange). 2. Little King Sandwiches, a local submarine sandwich restaurant,purchased a new delivery truck. Here are the specific details:a. Cost of the new truck $40,000b. Estimated residual value $5,000c. Estimated service life 5 years These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.vi. Sale1. If we assume that Little King sells the delivery truck at the end of year 3 for $22,000, we can calculate the gain as $3,000. Note that both the delivery truck and the related accumulated depreciation account are removed. vii. Retirement1. If we assume that the delivery truck is totaled in an accident atthe end of year 3, we have a $19,000 loss on retirement. The above entry assumes Little King did not have collision insurance coverage. viii. Exchange1. Assume that Little King exchanges the delivery truck at the endof year 3 for a new truck valued at $45,000. The dealership gives Little King a trade-in allowance of $23,000 on the exchange, with the remaining $22,000 payable in cash. We have a $4,000 gain. b. Asset Analysisi. Now, lets consider how to use actual financial statement information to analyze the profitability of a company’s assets. ii. A more comparable measure of profitability than net income is returnon assets, which equals net income divided by average total assets. It indicates the amount of net income generated for each dollar invested in assets.iii. Profit margin is net income divided by net sales. This ratio provides anindication of the earnings per dollar of sales. iv. Asset turnover is net sales divided by average total assets. In contrast to profit margin, this ratio measures the sales per dollar of assets invested.v. Analyze the relation between these three ratios. To maximize profitability, a company ideally strives to increase both net income perdollar of sales (profit margin) and sales per dollar of assets invested (asset turnover), which will ultimately result in an increase in return on assets.c. Asset Impairmenti. Impairment occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation). If estimated future cash flows from the asset are below the book value, we record an impairment loss. The impairment loss is equal to the difference between the asset’s book value and its fair value.ii. Reporting for impairment losses is a two-step process:1. Step 1: Test for impairment: The long-term asset is impaired if future cash flows are less than book value.2. Step 2: If impaired, record impairment loss: The impairment loss is the amount by which book value exceeds fair