Chapter 7 Long-Term Assets  

PART 1 – ACQUISITIONS LO 1  Identify and record the major types of property, plant, and equipment.  

  1. Property, Plant, and Equipment (PPE)

    1. __________

      record at)

i. price two. All expenditures necessary to get the asset ready to use

    1. How long will asset benefit company?

i. WorldCom- Practice:  If a company initially records an expense falsely as an asset, explain how this err affects the income affirmation and the counterweight sail. This mistake will overstate _________ on the income statement and overstate ________ on the balance sheet. If a company initially records an expense falsely as an asset, expenses are understated or besides small .

  1. Land

    1. _________

    2. _____________

  Practice:  Soccer Wholesale purchased land and a warehouse for $ 800,000. In summation to the purchase price, Soccer Wholesale incurred commissions of $ 48,000 ; place taxes of $ 10,000, championship policy, $ 3,000 ; and assorted close costs, $ 8,000. The warehouse is immediately demolished at a cost of $ 80,000. The $ 10,000 in property taxes includes $ 7,000 on behalf of the seller and $ 3,000 due for the stream year after the leverage date. Determine the sum Soccer Wholesale should record as the price of the land. land Improvements

    1. Parking lot

    2. Sidewalks

    3. Driveways

    4. Landscaping

    5. Lighting

    6. Fences

    7. Underground sprinklers

    8. ____________

      limited lives

  1. Buildings

    1. Purchasing building

iodine. cost plus expenses to get it ___________

    1. New building construction

i. Unique – ___________ on construction loan is _________

  1. Equipment

    1. Cost plus expenses to get it


F. Natural resources a. _depleted_ or used up. i. Oil & accelerator two. Timber Practice:  Holiday Laboratories purchased a high speed industrial centrifuge at a cost of $ 420,000. Shipping costs totaled $ 15,000. Foundation work to family the centrifuge monetary value $ 8,000. An extra water line had to be run to the equipment at a monetary value of $ 3,000. labor and testing costs totaled $ 6,000. Materials used up in testing price $ 3,000. What is the full monetary value of the equipment ? How much of this amount should be expensed immediately ? E7-4 Practice : crimson Rock Bakery purchases domain, build, and equipment for a one leverage price of $ 400,000. crimson Rock paid cash. however, the estimated fair values of the land, building, and equipment are $ 150,000, $ 300,000, and $ 50,000, respectively, for a entire estimated fairly value of $ 500,000. Prepare the journal submission to record the leverage. LO 2  Identify and record the major types of intangible assets.  

  1. Purchased intangible assets are


    1. At their purchase price

    2. Plus all costs necessary to get the asset ready for use.

one. Legal fees two. filing fees

  1. Internally generated intangible assets, such as R&D and advertising costs, are


    as those costs are incurred

    1. IFRS differs, Appendix E-7-

  2. ____________ debit patent for cost of purchase and other fees and credit cash

  3. ___________ provides protection to creator of original work, last for life of creator plus 70 years after that_

  4. ___________ slogans, symbols, logos, must be renewed every 10 years, theoretically can be owned forever as long as renewed_

  5. ___________ run a business under someone else’s name, pay initial franchise fee which I capitalize and expense it over the life of the agreement

  6. _______

    1. Recorded only when a company


    2. ILLUSTRATION 7-6, p. 327


Practice:  On March 31, 2012, the New Harvest Bakery acquired all the outstanding common stock of Red Rock Bakery for $ 68,000 in cash. The book values and market values of Red Rock ‘s assets and liabilities were as follows :

Calculate the total paid for grace. LO 3  Discuss the accounting treatment of expenditures after acquisition.  

  1. Capitalize expenditures if they benefit



    1. Additions

    2. Improvements

    3. Legal defense of intangible assets, if successful

  2. Expense expenditures if they benefit only the



    1. Repairs and maintenance

  3. Materiality

    1. Would the item influence an investor or creditor’s decision?

    PART B – COST ALLOCATION   LO 4  Calculate depreciation of property, plant, and equipment.

  1. __________

    definition = Decrease in value (or selling price) of an asset

  2. __________

    definition = Allocation of an asset’s cost to an expense over time

    1. Applying the



  3. Adjusting entry – Chapter 3, page 116

    1. Accumulated Depreciation

i. Contra asset account

    1. ____________________________

iodine. Capitalized asset less accumulate disparagement two. Does not refer to market prize or sell price .

  1. Service life

    1. An


  2. Residual value or salvage value

    1. An


      of value when the company expects to sell the asset as the end of its service life

    2. Usually vehicles

  3. Land never depreciated!

  4. Straight-line method

    1. Most companies use straight-line depreciation for financial reporting

cost – Residual Value = _______________ Depreciable price / Service life sentence

    1. Partial years

iodine. Purchased August 16 = two. Purchased August 14 =

    1. Change in depreciation estimate allowable

    2. Read Ethical dilemma, page 334

  1. Declining-balance method

    1. An accelerated method (Greater depreciation expense in early years)

    2. _________

      most common of the declining-balance methods

cost – accumulated disparagement = Book value x ( 2 / service life ) Book value x double the straight-line share JRS real-world easy method:  (Book value / service life) x 2

    1. Have to watch last year(s).


      Cannot depreciation below the


  1. Activity-based depreciation

    1. A method based on use

cost – Residual Value = ___________________ disparagement rate per unit = Depreciable cost / Total units expected to be produced depreciation rate per unit ten # of units of activeness

    1. Natural resources depletion similar

  1. MACRS used for tax reporting

    1. An accelerated method similar to double-declining-balance method.

Practice:  Chicago Style Pizza purchases a delivery avant-garde at a cost of $ 30,000. On the date of leverage, the caller estimates the van will have a remainder rate of $ 5,000. The company expects to use the van for five years or about 100,000 miles.

Required: Prepare a depreciation schedule using each of the come methods : 1. Straight-line.
2. Double-declining-balance.
3. Activity-based. actual use per year was as follows :

year Miles Used
1 22,000
2 24,000
3 18,000
4 21,000
5 20,000
total   105,000

                  LO 5  Calculate amortization of intangible assets.  

  1. Amortization is a process, similar to depreciation, in which we allocate the cost of intangible assets over their estimated service life.

  2. Intangible assets with an indefinite useful life (goodwill and most trademarks) are not amortized.

  PART C – ASSET DISPOSITION:  SALE, RETIREMENT, OR EXCHANGE   LO 6  Account for the disposal of long-term assets.  

  1. Sale of long-term assets

    1. Update depreciation for partial year, if necessary

    2. Calculate book value

    3. Compare to sale amount

    4. If we dispose of an asset for more than book value, we record a


    5. If we dispose of an asset for less than book value, we record a


Practice:  Strawberry Fields purchased a tractor at a cost of $ 38,000 and sold it two years belated for $ 25,000. Strawberry Fields recorded depreciation using the straight-line method, a five-year military service life, and an $ 8,000 remainder value. What was the addition or loss on the sale ? Record the sale. ANALYSIS LO 7  Describe the relationship among return on assets, profit margin, and asset turnover.

  1. Return on

    assets (ROA) =


a. It shows how efficiently a ship’s company uses its assets to produce income .

  1. Return on assets can be separated to examine two important business strategies: profit margin and asset turnover.

a. net income allowance equals _______________ iodine. Shows the percentage of each sales dollar that results in net income. two. A 12.5 percentage profit margin, for example, means that 12.5 cents have been earned on each dollar of sales. b. Asset employee turnover equals ______________________________________ iodine. It shows how efficiently assets are used to produce sales. two. Profit Margin x Asset Turnover = Return on Assets Practice:  Allied Construction and Axis Construction reported the following data in their annual fiscal statements ( $ in millions ) :

1. Calculate Allied Construction ‘s return on assets, profit gross profit, and asset employee turnover proportion for 2012.
2. Calculate Axis Construction ‘s return on assets, profit margin, and asset turnover ratio for 2012.
3. Which company has the better net income margin and which ship’s company has the better asset turnover ? APPENDIX – ASSET IMPAIRMENT   LO 8  Identify impairment situations and describe the two-step impairment process.  

  1. Impairment is a two-step process.

    1. Step 1:


      The long-term asset is impaired if future cash flows are less than book value.

    2. Step 2: If impaired, record loss: The impairment loss is the amount book value exceeds fair value.

  2. IFRS see difference from GAAP,


    page 347

Practice : Northwest Catering owns and operates respective restaurant services in Oregon, Washington, and Idaho. One restaurant chain has experienced precipitously declining profits. The company ‘s management has decided to test the operational assets of the restaurants for possible disability. The relevant information for these assets is presented below :
Determine the total of the damage loss, if any. More Practice:  Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each give voice with the best terminus placing the number designating the term in the outer space provided .

1. big bath net income sales divided by average total assets ; which measures the sales per dollar of assets invested .
2. stultification net income divided by internet sales ; indicates the earnings per dollar of sales .
3. net income gross profit net income divided by median total assets ; measures the total of net income generated for each dollar invested in assets .
4. Return on assets Recording all losses in one year to make a bad class even worse .
5. Asset upset Occurs when the future cash flows ( future benefits ) generated for a long-run asset fall below its bible measure ( monetary value minus accumulated depreciation ).


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