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
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
1 line on balance sheet as property/plan/equipment
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)
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
• These costs are capitalized.
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
A systematic and rational allocation of the cost of the asset in equal periodic amounts over its
(Cost – Residual Value) x = Amortization Expense
($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.
Allocates the cost of an asset based on the relationship of its periodic output to its total
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:
Assigns more amortization to early years of an asset’s life and less amortization to later years.
(Cost – Accumulated Amortization) x = Amortization Expense
($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
• Depending upon the amortization method used, Net Income can vary.
• Different amortization methods can be used for different assets, provided they are used
• When an asset is acquired during the year, amortization is calcu