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UT Knoxville ACCT 200 - Ch7 (Fall 15)-4

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Slide 1Slide 2Capitalize costs vs. Expense costs: Why does it matter?Ch. 7: Long-Term Assets (Fixed, Investment, and Intangible)Slide 5Ch. 7: Accounting for Fixed AssetsCh. 7: Accounting for Fixed AssetsSlide 8Accounting for Fixed AssetsSlide 10Depreciation of Fixed AssetsDepreciation of Fixed AssetsDepreciation of Fixed AssetsSlide 14Ch. 7: Depreciation of Fixed AssetsCh. 7: Depreciation of Fixed AssetsCh. 7: Disposal of Fixed AssetsSlide 18Slide 19Slide 20Ch. 7: Long-Term Assets on the balance sheetLong-Term Assets: Fixed, Investment, and IntangibleChapter 7 A200 - Survey of AccountingUniversity of TennesseeFall 20152Ch. 7: Business Expenditures (Costs) All expenditures are recorded as either: Asset on Balance SheetCapitalize the cost as an asset onthe balance sheet if the item willbe used in the future to generaterevenue.Current assets Long-term Assets Fixed (PPE) Investment Intangible Expense on Income Statement Expense the cost on the income statement if the item is used up in the current period to help generate revenue.3Capitalize costs vs. Expense costs: Why does it matter?•The 2001 fraud at WorldCom ultimately topped $11 billion and led to the country's biggestbankruptcy filing in July 2002. Nearly 17,000 employees lost their jobs as a result of the schemeto bury expenses and inflate revenue. •The accounting fraud at WorldCom amounted to a decision by its chief financial officer, ScotSullivan, to categorize as long-term investments [long-term assets] money paid to local phonecompanies to complete phone calls [which should have been expenses]. •All told, Sullivan capitalized costs from $540 million to $797 million per quarter over five quarters. Sullivan, and the former controller, David Myers were fired for claiming $3.8 billion in regularexpenses as capital investments in 2001. Charged with securities fraud, conspiracy and othercharges, they face 65 years in prison. •A federal judge sentenced former WorldCom Inc. chief executive Bernard J. Ebbers to 25 yearsbehind bars for his role in the nation's largest accounting fraud, the harshest prison term yet toflow from corporate scandals that rocked the stock market in 1999-2002. - Forbes.com- Cheatingculture.com4Ch. 7: Long-Term Assets (Fixed, Investment, and Intangible) Fixed (PPE) Investment Intangible Physical substance? Yes Yes/No No Held for resale? No Yes NoUsed by business for productive purposes? Yes No Yes Used by business to generate operating revenue? Yes No YesCh. 7: Accounting for Long-Term Assets Transaction #1: Long Corporation began business on 1-01-15. It purchased for cash a plot of land to be used for a business building. The land cost $85,000. It also used $50,000 of cash to purchase an investment in the stock of Wind Corporation and $40,000 for a business patent. STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityCash Investment in Wind Corp. stockLand Patent(175,000) Cash outInvesting(175,000) 50,000 85,000 40,0005 Land is a tangible fixed asset (not depreciable). Patent is an intangible asset (we will not study amortization of intangibles). Investing in the stock of another corporation creates an investment asset (not depreciable)6Ch. 7: Accounting for Fixed AssetsAt date of acquisition:1. What is the asset’s cost? Over the asset’s useful life:2. How do we classify subsequent expenditures related to the asset? 3. What is the annual depreciation expense on the asset (using straightline method or double-declining balance method) 4. What is the accumulated depreciation on the asset at any point in time? 5. What is the book value of the asset at any point in time? At date of disposition:6. What is the gain or loss when we dispose of the asset?7Ch. 7: Accounting for Fixed AssetsCapitalized Asset Cost : All expenditures necessary to acquire an asset and put it to its intended use.(see pg. 254 of textbook for examples of costs that are properly capitalized)“Necessary”: Do not capitalize as assets the costs of repairing damage, fines, etc. These costs are expensed on the income statement. Example: Long Corporation made the following expenditures to acquire a piece of equipment and put it to use: Purchase price of equipment $315,400Sales tax on purchase 2,500Freight costs 1,700Insurance 4,100Installation and testing 800Repair of damage incurred during installation 1,000Cost of Equipment = $324,500Ch. 7: Accounting for Fixed Assets Transaction #2: Long Corporation paid the freight and damage costs with cash and gave a note payable for the rest STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityCash Equipment Note Payable Retained Earnings(2,700)Cash out Investing(2,700) 324,500 = 322,800 + (1,000) (1,000) Repairs Expense89Accounting for Fixed AssetsExpenditures made subsequent to asset acquisitionCapital Expenditures Revenue ExpendituresCapitalize on the balance sheet if: Expense on the income statement if:1. The cost improves the asset 1. The cost maintains the asset (increase Asset cost) (increase Maintenance expense)2. The cost extends the asset’s 2. The cost is an ordinary repair useful life: an extraordinary repair (increase Repairs expense) (decrease Accumulated Depreciation on the asset)Accounting for Fixed Assets Transaction #3: After acquisition, Long Corporation made the followingexpenditures related to the equipment: regularly scheduled maintenance, $2,000; added a new element to the equipment, $5,500. Long paid for both expenditures with cash STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityCash Equipment Note PayableRetained Earnings(5,500)Cash outInvesting(5,500) 5,500 =(2,000)Cash out Operating(2,000) = (2,000) (2,000)Maint. Expense1011Depreciation of Fixed AssetsDepreciation: 1. Periodic expensing of fixed asset cost (other than cost of land), reflecting use of the asset during the period Caused by physical depreciation = wear and tear on the asset Caused by functional depreciation = obsolescence of the asset2. Does not reflect decline in


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UT Knoxville ACCT 200 - Ch7 (Fall 15)-4

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