Class 14 Chapter 8 Long-lived assetsPlanExpectationsLong-lived assetsClassification of Long-Lived AssetsSlide 6Slide 7Measuring and Recording Acquisition CostAcquisition Cost - BuildingsAcquisition Cost - EquipmentPowerPoint PresentationAcquisition for CashSlide 13Acquisition for DebtSlide 15Acquisition by ConstructionSlide 17DepreciationSlide 19Slide 20Depreciation ConceptsAlternative Depreciation MethodsStraight-Line MethodSlide 24Slide 25Units-of-Production MethodSlide 27Accelerated DepreciationSlide 29Slide 30Slide 31Double-Declining-Balance MethodSlide 33Slide 34Slide 35Slide 36Slide 37Slide 38SummarySummary of the 3 methodsPractice Problem 1Practice Problem 2Practice Problem 2, cont.Next class1Class 14Chapter 8 Long-lived assetsAccounting 2610Xiumin Martin2/28/20132PlanClassificationAcquisitionCostLife of assetDepreciationDisposalVoluntaryInvoluntaryExpectationsKnow two types of long-lived assetsKnow how to compute depreciation using three methodsKnow how to record asset disposal34Long-lived assetsRecall from chapter 2Assets: Probable future economic benefits resulting from past transactions.Long-lived: Benefits expected to last for a long time (more than one reporting period).Assets are like “prepayments” of future expenses5Classification of Long-Lived AssetsTangiblePhysicalSubstanceIntangibleNo PhysicalSubstanceExpected to Benefit Future PeriodsActively Used in Operations6Classification of Long-Lived AssetsTangiblePhysicalSubstanceIntangibleNo PhysicalSubstanceExpected to Benefit Future PeriodsActively Used in Operations Land Assets subject to depreciationBuildings and equipmentFurniture and fixtures Natural resource assets subject to depletionMineral deposits and timberExamples7Classification of Long-Lived AssetsTangiblePhysicalSubstanceIntangibleNo PhysicalSubstanceExpected to Benefit Future PeriodsActively Used in Operations Value represented by rights that produce benefitsPatentsCopyrightsTrademarksFranchisesGoodwill Subject to amortizationExamples8Measuring and Recording Acquisition CostAcquisition cost includes the purchase price and all expenditures needed to prepare the asset for its intended use. Acquisition cost does not includefinancing charges and cash discounts.Acquisition cost includes the purchase price and all expenditures needed to prepare the asset for its intended use. Acquisition cost does not includefinancing charges and cash discounts.9Purchase priceArchitectural feesCost of permitsExcavation costsConstruction costsPurchase priceArchitectural feesCost of permitsExcavation costsConstruction costsAcquisition Cost - Buildings10Purchase priceInstallation costsModification to buildingnecessary to install equipmentTransportation costsPurchase priceInstallation costsModification to buildingnecessary to install equipmentTransportation costsAcquisition Cost - Equipment11Purchase priceReal estate commissionsTitle insurance premiumsDelinquent taxesSurveying feesTitle search and transfer feesPurchase priceReal estate commissionsTitle insurance premiumsDelinquent taxesSurveying feesTitle search and transfer feesLand is not depreciable.Acquisition Cost - Land12Acquisition for CashOn June 1, Delta Air Lines purchased aircraft for $60,000,000 cash. GENERAL JOURNALPage 8Date Description Debit CreditJune 113Acquisition for Cash GENERAL JOURNALPage 8Date Description Debit CreditJune 1 Flight equipment 60,000,000 Cash 60,000,000On June 1, Delta Air Lines purchased aircraft for $60,000,000 cash.14Acquisition for DebtOn June 14, Delta Air Lines purchased aircraft for $1,000,000 cash and a $59,000,000 note payable. GENERAL JOURNALPage 9Date Description Debit CreditJune 1415 GENERAL JOURNALPage 9Date Description Debit CreditJune 14 Flight equipment 60,000,000Cash 1,000,000Note payable 59,000,000Acquisition for DebtOn June 14, Delta Air Lines purchased aircraft for $1,000,000 cash and a $59,000,000 note payable.16Acquisition by ConstructionAsset cost includes:Asset cost includes:All materials andlabor traceable tothe construction.A reasonableamount ofoverhead.Interest on debtincurred duringthe construction.17Long-lived assetsClassificationAcquisition CostLife of assetMaintenanceDepreciationStraight-lineUnits-of-productionAccelerated depreciationDouble-declining methodDisposal18Depreciation is a cost allocation process that systematically and rationally matches acquisition costs (“prepaid expenses”) of operational assets with periods benefited by their use.Depreciation is a cost allocation process that systematically and rationally matches acquisition costs (“prepaid expenses”) of operational assets with periods benefited by their use. CostAllocation(Unused)Balance Sheet(Used)Income StatementExpenseDepreciationAcquisitionCost19DepreciationDepreciationExpenseAccumulatedDepreciationDepreciation forthe current yearTotal of depreciationto date on an assetBalance SheetIncomeStatement20DepreciationAC=300NV=200NV =100AD = 100AD = 200AD=300Assets = L + SEEquipment - AD NP -Depr. ExpAcquisition300 3002001 ADJ100 1002002 ADJ100 1002001 2002 200321The calculation of depreciation requires three amounts for each asset: Acquisition cost. Estimated useful life. Estimated residual value.The calculation of depreciation requires three amounts for each asset: Acquisition cost. Estimated useful life. Estimated residual value.Depreciation Concepts22Alternative Depreciation Methods Straight-line Units-of-production Accelerated Method: Declining balance Straight-line Units-of-production Accelerated Method: Declining balance23 At the beginning of the year, Delta purchased equipment for $62,500 cash. The equipment has an estimated useful life of 3 years and an estimatedresidual value of $2,500.Cost - Residual ValueLife in Years DepreciationExpense per Year=Straight-Line Method24 DepreciationExpense per Year= DepreciationExpense per Year= $20,000 $62,500 - $2,5003 yearsStraight-Line MethodCost - Residual ValueLife in Years DepreciationExpense per Year=25Depreciation Accumulated Accumulated UndepreciatedExpense Depreciation Depreciation BalanceYear (debit) (credit) Balance (book value)62,500$ 1 20,000$ 20,000$ 20,000$ 42,500 2 20,000
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