ACCT 209 1nd Edition Lecture 8 Outline of Last Lecture I. The Accounting CycleII. Closing EntriesIII. Financial StatementsIV. Using the Financial StatementsV. Types of companiesVI. Inventory systemsVII. Purchasing Inventorya. ExampleVIII. Calculating Costs of goods solda. ExampleIX. Inventory Cost Flow methodsa. Example of Inventory Cost Flowb. Comparing inventory Cost Flow MethodsX. Other Inventory Issuesa. Example of Inventory ErrorsXI. Estimating ending inventory Outline of Current Lecture XII. Long- lived assetsa. AcquisitionI. Exampleb. Use over multiple yearsI. MethodsII. ExampleCurrent LectureChapter 9 LONG-TERM (FIXED) ASSETSLong – lived assets o major assets acquired for use in the continuing operations of a business (operating assets)o help produce revenues over many periodso includes: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.(1) Property, Plant, and Equipment – includes land, buildings, equipment, furniture(2) Natural Resources – includes oil deposits, coal deposits, timber(3) Intangible Assets – includes copyrights, patents, trademarks, trade names, franchises, goodwill(4) Other Assets(5) InvestmentsAccounting for Long-term assets includes three issues:1. Acquisition2. Use over multiple years3. DisposalPROPERTY, PLANT, AND EQUIPMENTAcquisitionCost principle: acquisition cost includes all normal and reasonable costs incurred to acquire asset and prepare it for intended useLand: includes costs such as title fees, real estate commissions, survey fees, attorney and legal fees, costs to prepare land for use (such as leveling, tearing down old structures less any salvage recovered) , delinquent taxes paid (Taxes from a prior period)Land is NOT depreciated, since it does not have finite life. However, land improvements,such as paving, fencing, outdoor lighting, etc, can be depreciated.Note: Land cannot be expensed but improvements can be expensedBuildings: if purchased, includes purchase price, taxes, costs to repair and repurpose prior to occupancy, if constructed costs includes architects’ and engineers’ fees, construction costs and insurance and interest paid to finance during construction Note: Buy building and finance purchase; Interest not includedEquipment: includes taxes, transportation costs, installation costs (including testing), repairs needed to prepare used equipment for use, assembly costs, permitsUnnecessary costs that do not increase the asset’s usefulness, such as damage during deliveryor installation, vandalism, fines for not obtaining required permits, etc, are NOT included in the cost, but are expensed as incurred.Example: Asset purchase1. Montana Manufacturing Company purchased land for $60,000. Back taxes paid by Montana were $1,200, costs to clear and grade the land were $1,500, fencing costs were $2,500, and lighting costs were $500. Clearing the land included razing an old shed; materials salvaged from the shed were later sold for $300. What amount should be recorded as the cost of the land?Note: back taxes are unpaid taxes from prior period.60,000 Land1,200 62,0001,500 1,200(300) 1,50062,400 300Both are equivalent2. On August 20, Montana Manufacturing Company purchased a new drill press. The new equipment had an invoice price of $15,000. The seller offered a cash discount of $300. Other costs associated with the purchase of the press included sales tax of $375, freight charges of $1,000, and installation and connection costs of $500. Montana also paid $240 in insurance for the first six months of the equipment’s use.Determine the amount to be reported as the cost of the equipment.Note: The first 6 months of insurance for equipment use is not an asset cost; It is a usage cost15,000(300)3751,00050016,5753. Montana Manufacturing purchased a building, its surrounding land, and some equipment in a lump-sum purchase (AKA basket purchase) for $230,000. An appraisal showed the following values for each item:Building $180,000 -> 180/360 = 50%Land 126,000 -> 126/360 = 35%Equipment 54,000 -> 54/360 = 15% 360,000How should Montana record the acquisition of these assets?Building: .5 * 230,000 = 115,000Land: .35 * 230,000 = 80,500Equipment: .15 * 230,000 = 34,500 230,000Assets:Cash Land Building Equipment (230,000) 80,500 115,000 34,500How to record Long term Assets and Accumulated depreciation:Assets = L + SECash LT Asset Accum. Depr.Buy (100) 100Adj. (25) (25)Entry 75 = Book Value or carrying Value(Cost – AD)Recording Use over productive lifematching principle – cost of asset should be matched against revenue that it helps generate; if unable to match cost directly against revenue, then expense in period incurred or expense in a rational and systematic wayDepreciation is a process of cost allocation. That is, the purpose of depreciation is to expense the cost of the asset over the years the asset is used to help generate revenues. Depreciation is NOT an attempt to show the asset’s current market value. Effect of recording depreciation on financial statements:Increase Depreciation Expense => Lower net IncomeIncrease Accumulated Depreciation => Lower Total assetsNote: Accumulated Depreciation is a contra-assetDepreciation expense is based cost of asset and two estimates:Useful life – cost must be allocated over the periods benefiting from use of assetSalvage value (or residual value) – the amount expected to be obtained at disposal of assetMethods of calculating depreciation expense1. Straight line method, allocates expense evenly over useful lifeExpense each year = Cost – salvage valueUseful Life2. Units of activity method (also called units of production, units of activity) – expense related to actual usage rather than time; life of asset expressed in terms of number of units asset will produce Expense* = cost – salvage value X units produced useful life in units in current period* Asset cannot be depreciated to an amount less than its expected salvage value3. Accelerated method (i.e. double declining balance method), records more expense in early yearsof useExpense = 2/life x book value**** Since book value changes each year, expense changes each yearAnd again, asset cannot be depreciated to an amount less than expected salvage value4. MACRS (and ACRS) – method usually required by IRS for tax