Chapter 9 Reporting and Interpreting.docx

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University of Waterloo
Accounting & Financial Management
AFM 123
Robert Sproule

Chapter 9 Reporting and Interpreting: Long-Lived Tangible and Intangible Assets  Challenge with long lived assets – right amount to invest  Accounting reports provide information to evaluate company’s investment in long lived assets  Assets enable companies to produce and sell goods and services Long-Lived Assets are the resources owned by a business that enable it to produce the goods or services that are sold to customers. • They are not intended for resale. • Over one or more years • Referred to as productive assets example and oven Tangible Assets physical substance Land/building/equipment 1 line on balance sheet as property/plan/equipment Fixed assets Intangible Assets special rights no physical substance Brand names/ trademarks/ licensing rights. 3 category (Supplement) long term assets depleted over time Natural resource industries example gold/ oil Balance Sheet Presentation Acquisition of Tangible Assets • All reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset. • Typical costs: To capitalize is to record a cost as an asset, rather than an expense. Cash Purchase Cedar Fair paid cash for a roller coaster ($25,000,000) and related transportation ($125,000) and installation ($625,000)costs. Credit Purchase Cedar Fair signed a note payable for a roller coaster ($25,000,000), and paid cash for the related transportation ($125,000) and installation ($625,000)costs. Use of Tangible Assets Two types of maintenance costs can be incurred: 1. Ordinary repairs and maintenance for routine upkeep of long-lived assets. • These costs are expensed. 2. Extraordinary repairs increase a tangible asset’s economic usefulness in the future. • These costs are capitalized. Amortization Amortization is the allocation of the cost of long-lived tangible assets over their productive lives using a systematic and rational method. • Amortization is $130. Reporting Amortization on the Balance Sheet and Income Statement Accumulated Amortization is the total The current year’s Amortization amortization, and is a contra-asset Expense is deducted on the shown on the balance sheet. income statement. Book Value or Carrying Value is the acquisition cost of an asset less accumulated amortization. Straight-Line Method A systematic and rational allocation of the cost of the asset in equal periodic amounts over its useful life. (Cost – Residual Value) x = Amortization Expense ___1___ Useful Life ($62,500 – 2,500) x 1/3 = $20,000 per year Amortization Expense is cons Atantmulated Amortization increases Bbook Value decreases by the same each year an equal amount each year. equal amount each year. Units-of-Production Method Allocates the cost of an asset based on the relationship of its periodic output to its total estimated output. Actual Production This Period (Cost – Residual Estimated Total Production Value) x = Amortization Expense ($62,500 – 2,500) x 30,000/100,000 = $18,000 in year 1 ($62,500 – 2,500) x 50,000/100,000 = $30,000 in year 2 ($62,500 – 2,500) x 20,000/100,000 = $12,000 in year 3 Amortization Expense, Accumulated Amortization and Book Value vary from period to period, depending on the number of units produced. *Straight line ex. A building better example- use the same amount Units of production method: Declining-Balance Method Assigns more amortization to early years of an asset’s life and less amortization to later years. (Cost – Accumulated Amortization) x = Amortization Expense ___2___ Useful Life ($62,500 – 0 ) x 2/3 = $41,667 in year 1 ($62,500 – 41,667) x 2/3 = $13,889 in year 2 ($62,500 – 55,556) x 2/3 = $ 4,629 in year 3 Amortization Expense is higher in the early years of an asset’s life The calculated Amortization Expense of $4,629 would not be recorded because the Book Value would fall below the Residual Value. The maximum amortization expense Summary of Amortization Methods • The amount of amortization expense recorded each year depends on the method of amortization used. • Depending upon the amortization method used, Net Income can vary. • Different amortization methods can be used for different assets, provided they are used consistently. Partial-Year Amortization • When an asset is acquired during the year, amortization is calcu
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