Chapter 10 Long Lived Assets Long lives assets assets that are expected to yield economic benefit for longer than one year Tangible Property Buildings property plant and equipment Intangible Goodwill patents trademarks Assets can be valued according to an output market where assets are sold This is called the expected benefit approach Expected cash inflows generated Or they can be valued according to the input market where assets are purchased this is the economic sacrifice approach GAAP uses the historical cost economic sacrifice approach o Initial capitalized costs All costs necessary to acquire and make it ready we include in the asset account o Joint costs incurred when acquiring more than one asset and allocated rationally Depreciation For intangible assets it is called amortization For mineral deposits and other wasting assets it is called depletion Straight line cost salvage expected useful life Double declining balance Double the S L rate Do not deduct salvage value in the 1st step Multiply the year end book value by double S L rate If depreciation expense is less that straight line amount then switch to straight line using the year end book balance less salvage number of remaining years Units of production similar to straight line Unit price cost salvage total number of units Unit rate x number of units produced that period depreciation Sum of years digits similar to units of production for 5 years we would add 5 4 3 2 1 15 use 15 as the devisor Cost salvage 15 x 5 first year next year x4 and so on Verifiability numbers are based on objective facts rather than subjective ones Ch 11 Financial Instruments as Liabilities Hints Bonds a formal promise to repay the principle also known as par face and maturity issue value as well as interest on the amount borrowed The precise terms of the bond are contained in the bond indenture agreement Debenture the most common type of corporate bond backed only by the company s credit Mortgage bond Used as collateral on a real estate loan Serial bond require periodic payment of interest as well as a portion of the principle Effective yield the rate of return that takes into consideration the discount premium as well as coupon rate Discount amortization the process of spreading out the discount on bonds to increase interest payment Stated rate vs market rate market value of debt is much lower than the book value Payment at maturity Bonds pay interest for the life of the bond than at end of bond life pays the 1 000 increment Cash interest payment the additional cash paid at maturity for bonds that were issued at a discount The discount amount is essentially the cash interest payment Cash payment interest expense amortization which is either added or subtracted from bond carrying amount Ch 12 Leases Hints Lesee the person receiving the right to use an asset Lessor the person who holds title to the asset which the lesee is leasing Residual Value the value of the asset at the end of the lease The lessee uses the effective interest method remember bonds amortization to record payment on portion of the principle amount of the obligation Mutually unperformed contract basically means that the contract is incomplete until the end of the lease at which point both parties will have fulfilled their sides to the agreement Off balance sheet financing possible financial liabilities that exist but do not show up on the balance sheet Operating lease method preferred by the lesee this method leaves off of the balance sheet the future liabilities that are will be owed as a result of the lease Liabilities are accrued over time Capital lease a lease that transfers virtually all the benefits and risk of ownership Recognition on the balance sheet is eliminated for the lessor Criteria for capital lease treatment only needs to satisfy one lesee by the end of the lease term o The lease transfers ownership of the asset to the o The lease contains a bargain purchase option o The noncancelable lease term is 75 or more of the estimated economic life of the leased asset o The present value of the minimum lease payments equals or exceeds 90 of the current market fair value of the leased asset Executory costs costs associated with using an asset such as maintenance taxes or insurance Residual value guarantee if the fair market value of the asset is less than the residual value guarantee the lesee must pay the difference Chapter 15 Owners Equity Hints This chapter defines exotic securities which have both equity and debt components Stock repurchases The most common is an open market repurchase Fixed price tender offer management says how many shares they want to buy and at what price Dutch auction management specifies how many shares they want to buy at a price range and sellers can offer their shares at a chosen price Motives o Management may feel it is undervalues o Boost EPS o Offset share dilution Stock Issuances To raise capital a company can sell stock There is a related par value which is determined by the state statutes from the state in which the company is incorporated The par value has nothing to do with its market value It is an arbitrary amount say 1 cent 1 dollar or 5 dollars to arbitrarily name a few amounts Par Par value is important when recording the sale of the stock The par value identifies how much the company records as stock sold with the remaining amount recorded as Paid in Capital In Excess of Par So sell one share for 5 00 Par 1 00 then Paid in capital in excess of Par is 4 00 Treasury stock not a corporate asset it is a reduction of owner s equity No gain or loss is recorded with the purchase or sale of the stock Preferred Stock Relative to common stock it confers on investors certain preferences to dividend payments and the distribution of corporate assets Preferred stockholders must be paid their dividends in full before any cash distribution can be made to common shareholders If the company is liquidated preferred stockholders must receive cash or other assets at least equal to the stated par value of their shares before any assets are distributed to common shareholders Preferred dividends are declared quarterly and can be omitted Dividends Stock dividends usually paid from retained earnings but some states allow a corporation to pay from retained earnings and also paid in capital in excess of par Earnings Per Share Basic Mandatorily convertible securities and basic EPS Complex capital structure involves securities that are potentially
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