Acct 230 1st Edition Lecture 21 Outline of Last Lecture I Inventory and Cost of Goods Sold a Lower of cost or market method Outline of Current Lecture II Long Term Assets a Acquisition and Improvements Current Lecture III Acquisition and Improvements a Identify and record the major types of Property plant and equipment i We record a long term asset at its cost plus all expenditures necessary to get the asset ready for use ii When we make an expenditure we have the choice of recording it as an expense of the current period or recording it as an asset and then expensing it over future periods We use the term capitalize to describe recording an expenditure as an asset iii This choice depends on when the company benefits from having the asset in the current period or over future periods Determining which costs to record as expenses and which to record as long term assets is crucial iv Land and Land Improvements 1 Land represents property a company is using in its operations 2 Capitalize costs all expenditures necessary to get the land ready for its intended use a includes the purchase price of the land plus closing costs such as attorney fees real estate commissions etc 3 Any additional amount spent to improve the land by adding a parking lot paving temporary landscaping lighting systems fences sprinklers etc are recorded separately as land improvements which are subject to depreciation 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 v Buildings 1 Include offices retail stores storage warehouses and manufacturing facilities 2 Cost of acquiring a building usually includes a the purchase price realtor commissions legal fees other costs incurred to remodel the building 3 Cost of constructing a building usually includes a architect fees material costs construction labor officer supervision 4 Overhead and capitalized interest vi Equipment 1 Includes machinery used in manufacturing computers and other office equipment vehicles furniture and fixtures 2 Cost of equipment includes a actual purchase price sales tax shipping delivery insurance assembly installation testing legal fees incurred to establish title 3 Recurring costs such as insurance and property taxes are expensed as they are incurred in order to properly match them with revenues vii Basket Purchase 1 Purchasing more than one asset at the same time for one purchase price 2 Often the estimated fair values of the individual assets exceed the total purchase price 3 Total purchase price is allocated to each asset s separate account based on their relative fair value of the asset viii Natural Resources 1 We can physically use up or deplete natural resources 2 For example Exxon Mobil s oil reserves are a natural resource that decreases as the firm extracts oil b Identify and record the major types of intangible assets i Despite their lack of physical substance intangible assets can be very valuable indeed ii Companies can either 1 purchase intangible assets like patents copyrights trademarks or franchise rights from other entities or 2 create intangible assets internally by developing a new product or process and obtaining a protective patent Reporting purchased intangibles is similar to reporting purchased property plant and equipment We record purchased intangible assets at their original iii iv v vi cost plus all other costs such as legal and filing fees necessary to get the asset ready for use Reporting intangible assets developed internally is quite different Rather than recording these as an intangible asset on the balance sheet we expense most of the costs for internally developed intangible assets to the income statement as we incur them For example the research and development costs incurred in developing a patent internally are not recorded as an intangible asset in the balance sheet but rather are expensed directly in the income statement Patents 1 An exclusive right to manufacture a product or to use a process normally granted for a period of 20 years 2 Cost of a patent includes 3 When it is purchased purchase price legal and filing fees to secure the patent any attorney fees and other costs of successfully defending the patent in court 4 When it is internally developed research and development costs expensed as incurred legal and filing fees to secure the patent recorded in the patent asset account Copyrights 1 An exclusive right of protection given by the U S Copyright Office to the creator of a published work such as a song film painting photograph book or computer software 2 Gives the creator and his or her heirs the exclusive right to reproduce and sell the work for the life of the creator plus 70 years 3 Accounting for the costs of copyrights is virtually identical to that of patents Trademarks 1 A word slogan or symbol that distinctively identifies a company product or service 2 Can be registered for a period of 10 years 3 Registration can be renewed for an indefinite number of 10year periods useful life can be indefinite 4 Firms often acquire trademarks through acquisition 5 When a firm develops a trademark internally through advertising it records the advertising costs as expenses in the income statement 6 The firm can record attorney fees registration fees design costs successful legal defense and other costs directly related to securing the trademark as an intangible asset in the trademark asset account vii Franchises 1 Local outlets that pay for the exclusive right to use the franchisor company s name and to sell its products within a specified geographical area 2 Many franchisors provide other benefits to the franchisee such as participating in the construction of the retail outlet training employees and purchasing national advertising 3 The franchisee records the initial fee as an intangible asset and then expenses it over the life of the franchise agreement 4 Additional periodic payments by the franchisee usually are for services the franchisor provides on a continuing basis These are expensed by the franchisee as incurred viii Goodwill 1 Represents the value of a company as a whole over and above the value of its identifiable net assets 2 Recorded as an intangible asset in the balance sheet only when purchased as part of the acquisition of another company 3 Goodwill is equal to the purchase price minus the fair value of the net assets acquired c The accounting treatment of expenditures after acquisition