Long-Lived Assets

An Asset that will provide benefits for more than one year
Tangible Assets: Property, Plant, and Equipment
Intangible Assets: Goodwill, Brand Names, Patents, Customer Lists

Accounting issues
Acquisition cost
Depreciation and amortization
Ongoing costs
Disposals
Impairments

KNOWLEDGE FOR ACTION

Capitalizing vs. Expensing

Capitalizing
When costs incurred (yr 1)
Dr. Asset

100

Cr. Cash or payable

Dr. Expense
100

Future entries (yr 1 yr 10)

Dr. Expense
Cr. Asset

Expensing
When costs incurred (yr 1)

10

100

Cr. Cash or payable 100

Future entries (yr 1 yr 10)

No entry

10

Total expense over 10 years = 100

KNOWLEDGE FOR ACTION

Total expense over 10 years = 100

Acquisition Costs for Long-Lived Assets

Capitalize all costs necessary to get an asset ready for its intended
use (e.g., purchase price, delivery charges, installation costs, etc.)
For self-constructed assets, also capitalize interest on debt that is
incurred to finance the assets construction
In this case, interest expense on the income statement does not reflect all of the
interest costs incurred by the firm

If acquisition costs include multiple classes of assets (e.g. land,

building, and machinery), the cost must be allocated into separate
asset classes

KNOWLEDGE FOR ACTION

Example
Bott Inc. builds a new piece of equipment to put grips on golf clubs.
Bott spends $4,500 cash on raw materials and $3,000 cash on labor.
Bott incurs $500 of interest costs (interest payable) to finance the
building of the equipment
(1) Dr. Equipment (+A)
Cr. Cash (-A)
Cr. Interest Payable (+L)
Equipment (A)
(1)

8000

KNOWLEDGE FOR ACTION

8000
7500
500

Depreciation and Amortization

Terminology
Tangible assets (Buildings and equipment) are depreciated
Intangible assets (Patents, Software) are amortized

Elements of depreciation calculations

Depreciable basis (acquisition cost salvage value)
Useful life (years or units)
Depreciation pattern (straight-line or accelerated)

All of these elements are chosen by management

KNOWLEDGE FOR ACTION

Depreciation Methods
Straight line (most common in financial statements)
Depreciation Expense = (Acquisition Cost Salvage Value) / Useful life

Accelerated (almost never used in financial statements)

Double declining balance
Depreciation exp = (Cost Acm. Depr.) * (2 / Useful life)
Sum-of-the-Years digits
Depreciation exp = (Cost Salvage) * (Remaining life / Sum-of-the-Years Digits)
MACRS (required in U.S. tax returns)
Call your tax accountant for details

Firms can use different methods for taxes and financial statements
Total depreciation expense is the same over the life of the asset,
regardless of method used

KNOWLEDGE FOR ACTION

Depreciation Patterns

Net Book Value

Acquisition Cost

Salvage Value

Acquisition
Year

KNOWLEDGE FOR ACTION

Years

End of
Useful Life

Example
Bott management decides that the equipment will have a useful life of
six years with a $2,000 salvage value. Bott must recognize one year
of depreciation using the straight-line method
Annual Depreciation = (Acquisition Cost Salvage Value) / Useful Life
Annual Depreciation = (8000 2000) / 6
Annual Depreciation = 1000

KNOWLEDGE FOR ACTION

Example
Bott management estimates that 3/4 of the time the equipment was
used to produce golf club inventory; the rest of the time it was used
for the personal clubs of the sales force and top management (which
is a perk that Bott provides these employees)
(2) Dr. Work-in-Process (+A)

750

Dr. Depreciation Expense (+E)

250
Cr. Accumulated Depreciation (+XA)
Equipment (A)
(1)

8000

KNOWLEDGE FOR ACTION

1000

Acm Depreciation (XA)

1000

(2)