Chapter 7 Long Term Assets 11 23 15 2 08 PM v Online Textbook Tangible assets assets in this category include land land improvements buildings equipment and natural resources Intangible assets Assets in this category include patents trademarks copyrights franchises and goodwill We distinguish these assets from property plant and equipment by their lack of physical substance The evidence of their existence often is based on a legal contract Depreciation the allocation of the cost of a tangible asset over its service life Buildings include administrative offices retail stores manufacturing facilities and storage warehouses The cost of acquiring a building usually includes realtor commissions and legal fees in addition to the purchase price Equipment a broad term that includes machinery used in manufacturing computers and other office equipment vehicles furniture and fixtures Basket purchase when companies purchase more than one asset at the same time for one purchase price Patent an exclusive right to manufacture a product or to use a process The US patent and trademark office grants this right for a period of 20 years When a firm purchases a patent it records the patent as its purchase price plus other costs such as legal and filing fees to secure the patent Copyright Trademark Franchises local outlets that pay for the exclusive right ot use the franchisor company s name and to sell its products within a specified geographical area To record the cost of a franchise the franchisee records the initial fee as an intangible asset Additional periodic payments to the franchisor usually are for services the franchisor provides on a continuing basis and the franchisee with expense them as incurred Goodwill represents the value of a company as a whole over and above the bvalue of tis identifiable net assets That value can emerge from a company s reputation its trained employees and management team its favorable business location and any other unique features of the company that we are unable to associate with a specific asset We record goodwill as an intangible asset in the balance sheet only when we purchase it as part of the acquisition of another rcompany Repairs and maintenance they maintain a given level of benefits in Addition occurs when we add a new major component to an existing the period incurred asset Residual value salvage value the amount the company expects to receive from selling the asset at the end of its service life Straight line method we allocate an equal amount of the depreciable cost to each year of the asset s service life The depreciable cost is the asset s cost minus its estimated residual value Amortization allocating the cost of intangible assets to expense Depreciation allocating the cost of property plant and equipment to Return on Assets ROA equals net imcome divided by average total expense assets v Long Term Assets Tangible assets Land Land improvements Buildings Equipment Natural resources Intangible assets Patents Trademarks Copyrights Franchises Goodwill v Property Plant and Equipment Capitalize recording an expenditure as an asset Recorded at cost of asset all expenditures necessary to get it ready for use v Land and land improvements Land includes land used for operations Land improvements include parking lots sidewalks driveways landscaping lighting systems fences sprinklers etc Depreciation the allocation of the cost of a tangible asset over its Administrative offices retail stores manufacturing facilities and service life v Buildings storage warehouses v Equipment Machinery used in manufacturing computers and other office equipment vahicles furniture and fixtures Recurring costs not part of the cost of equipment v Basket Purchases Purchase of more than one asset for one purchase price Allocate total purchase price based on individual fair values Example v Natural Resources Oil natural gas timber and salt Physically use up or deplete Depletion allocation of the cost of a natural resource over its service Identical to the activity based method of recording depreciation life v Intangible Assets No physical substance Can be very valuable Acquired in two ways Purchase Create internally v Patents Exclusive right to manufacture a product or to use a process Granted for a period of 20 years When purchased Capitalized for purchase price plus legal and filing fees When internally developed Capitalized for legal and filing fees v Copyrights Exclusive right of protection given to the creator of a published work Granted for the life of the creator plus 70 years Legal action against anyone who attempts to infringe the copyright Accounting is virtually identical to that of patents v Trademarks Word slogan or symbol that distinctively identifies a company product or service Renewed for an indefinite number of 10 year periods Capitalized for legal registration and design fees Advertising costs are recorded as advertising expense v Franchises Local outlets that pay for the exclusive right to use the franchisor s name and to sell its products Within a specified geographical area May include other benefits Capitalized for initial fee Additional periodic payments usually expensed as incurred v Goodwill Represents the value of a company as a whole over and above the value of its identifiable net assets Recorded at purchase price fair value of the net assets acquired v Business Acquisition with Goodwill v Expenditures after acquisition Repairs and maintenance Additions Improvements Legal defense of intangible assets Capitalize if it increases future benefits Expense if it benefits only the current period v Materiality decision v Depreciation service life An item is said to be material if it is large enough to influence a Immaterial costs expensed under a certain dollar amount The process of allocating to an expense the cost of an asset over it v Recording Depreciation A local starbucks pays 1200 for equipment say an espresso machine The machine is expected to have a useful life of four years v Common Terms Accumulated depreciation contra asset account to record the total depreciation taken to date Book value original cost current balance in accumulated depreciation Service life how long the company expects to receive benefits from the asset before disposing of it Residual value salvage value or the amount the company expects to receive from selling the asset at the end of its service life v Depreciation methods Straight line method Declining balance method Activity