ACCT 2113 1st Edition Lecture 7 Outline of Last Lecture II Understanding Inventory and Cost of Goods Sold A Inventory B Merchandising company C Manufacturing company D Calculating Cost of goods E Inventory Cost Methods F Example III Recording Inventory Transactions A Perpetual vs Periodic Inventory Systems B Examples C Freight charges D Purchase discounts E Purchase returns F Multiple step income statement IV Other Inventory Reporting Issues A Lower of cost or market Method LCM B Calculating the lower of cost or market C Inventory turnover ratio D Gross profit ratio E Examples F Period end adjustment G Inventory errors H Inventory amounts Outline of Current Lecture II Long term Assets A Categories B Land equipment buildings basket purchase natural resources III Intangible Assets A Patents B Copyrights C Trademarks D Franchises E Goodwill 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 IV Acquisition Improvements A Repairs and Maintenance B Additions C Improvements D Legal defense of intangible assets V Cost Allocation VI Depreciation A Example B Terminology C Methods D Tax depreciation VII Amortization of Intangible Assets A Example B Assets not subject VIII Asset Disposition A Disposal of Long term assets B Recording Disposals C Sale retirement exchange D Asset Analysis Current Lecture Chapter 7 Long term Assets Property plant and equipment Assets in this category include land land improvements buildings equipment and natural resources More of a physical substance 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 Part A Acquisition and Improvements We record a long term asset at its cost plus all expenditures necessary to get the asset ready for use 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 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 are crucial The Land account represents land a company is using in its operations In contrast land purchased for investment purposes is recorded in a separate investment account We capitalize to land all expenditures necessary to get the land ready for its intended use Capitalized costs include the purchase price of the land plus closing costs such as fees for the attorney real estate agent commissions title title search and recording fees In fact any additional expenditure such as clearing filling and draining the land or even removing old buildings to prepare the land for its intended use become part of the land s capitalized cost Beyond the cost of the land a company likely will spend additional amounts to improve the land by adding a parking lot paving temporary landscaping lighting systems fences sprinkler systems and similar additions These are Land improvements We record them separately from the land itself because unlike land these assets are subject to depreciation Buildings include administrative offices retail stores storage warehouses and manufacturing facilities The cost of acquiring a building usually includes realtor commissions and legal fees in addition to the purchase price The new owner sometimes needs to remodel or otherwise modify the building to suit its needs These additional costs are part of the building s acquisition cost Unique accounting issues arise when a firm constructs a building rather than purchasing it The cost of construction includes architect fees material costs and construction labor Besides these new building construction likely also includes costs such as officer supervision overhead costs indirectly related to the construction and capitalized interest Capitalized interest refers to interest costs we add to the asset account rather than recording them as interest expense Equipment is a broad term that includes machinery used in manufacturing computers and other office equipment vehicles furniture and fixtures The cost of equipment is the actual purchase price plus all other costs necessary to prepare the asset for use These can be any of a variety of other costs including sales tax shipping delivery insurance assembly installation testing and even legal fees incurred to establish title Rather than including recurring costs such as annual property insurance and annual property taxes as part of the cost of the equipment we expense them as we incur them in order to properly match them with revenues Sometimes companies purchase more than one asset at the same time for one purchase price This is known as a basket purchase How much should we record in the separate accounts for each asset The simple answer is that we allocate the total purchase price based on the estimated fair values of each of the individual assets The difficulty though is that the estimated fair values of the individual assets often exceed the total purchase price In such cases total purchase price is allocated to the separate accounts based on their relative fair values In addition to land buildings and equipment many companies depend heavily on natural resources such as oil natural gas timber and even salt ExxonMobil for example maintains oil and natural gas deposits on six of the world s seven continents We can distinguish natural resources from other property plant and equipment by the fact that we can physically use up or deplete natural resources A primary concern with regard to natural resources is sustainability A common definition of sustainability is meeting the needs of the present without compromising the ability of future generations to meet their own needs Intangible AssetsCompanies 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 cost plus all other costs such as legal and filing fees necessary to