Fixed/ Long Term Assets

Accounting
 LONG-TERM ASSETS
• Assets have a useful life greater than one year
• Used in operation of a business
• Are not intended for resale to customers

Information about long-term acquisitions can

be found under investing activities in the
statement of cash flows
 ACCOUNTING FOR FIXED ASSETS
• Determining the cost of acquisition of Fixed Assets
• Allocating the cost of Fixed Assets
• Accounting for disposal of Fixed Assets
LONG-TERM ASSETS AND CORRESPONDING EXPENSES
 APPLYING THE MATCHING RULE
When a company purchases an asset, it may choose
to capitalize it, thus deferring an expense to a later
period

Favorably impacts profitability for that current period

Management must use ethical judgments when

resolving two issues:
1. How much of the total cost of a long-term asset
should be allocated to expense in the current
period?
2. How much should be retained on the balance sheet
as an asset that will benefit future period?
 LONG-TERM ASSETS
1. How is the cost of the long-term asset determined?
2. How should the expired portion of the cost of the long-term asset be
allocated against revenues over time?
3. How should subsequent expenditures, such as repairs and additions,
be treated?
4. How should disposal of the long-term asset be recorded?
ISSUES IN ACCOUNTING FOR LONG-TERM ASSETS
 GENERAL APPROACH TO ACQUISITION COSTS
• Low cost items
• Betterment, repair and maintenance
• Include all expenditures reasonable and necessary to get the asset in
place and ready for use
• Include costs of installing and testing a machine; freight, insurance
while in transit, and installation
• Interest charges are not included in the acquisition cost (these are
operating expenses)
 DETERMINING COST
 On
On May
May 4,4, Heat
Heat Co.,
Co., an
an Ohio
Ohio maker
maker of
of stoves,
stoves, buys
buys aa new
new machine
machine
from
fromaaTexas
Texascompany.
company. TheThenew
newmachine
machinehas hasaaprice
priceof
of$52,000.
$52,000.
 Sales
Salestax
taxwas
wascomputed
computedat at8%.
8%.
 Heat
HeatCo.
Co.pays
pays$500
$500shipping
shippingcost
costto
toget
getthe
themachine
machinetotoOhio.
Ohio.
 After
Afterthe
themachine
machinearrives,
arrives,set-up
set-upcosts
costsofof$1,300
$1,300are
areincurred,
incurred,along
along
with $4,000 in testing costs.
with $4,000 in testing costs.
 Compute
Computethethecost
costofofHeat
HeatCo.’s
Co.’snew
newmachine.
machine.
 SPECIAL CONSIDERATIONS

Cost
Cost includes
includesrealreal estate
estate
commissions,
commissions, escrowescrow
Land
Land fees,
fees, legal
legal fees,
fees,clearing
clearing
and
andgrading
grading the theproperty.
property.

Improvements
Improvementsto to land
land
Land
Land such
such as
asdriveways,
driveways,
fences,
fences, and
andlandscaping
landscaping
Improvements
Improvements are
are recorded
recorded separately.
separately.
 SPECIAL CONSIDERATIONS

Repairs
Repairsmade
made prior
prior to
to the
the
building
building being
being put
put in
in use
use
Buildings
Buildings are
are considered
considered part
part of
of the
the
building’s
building’s cost.
cost.
 SPECIAL CONSIDERATIONS

Related
Relatedinterest,
interest,
insurance,
insurance,andandproperty
property
Equipment taxes
taxes are
are treated
treatedasas
Equipment expenses
expenses of of the
the current
current
period.
period.
COSTS OF BUILDING CONSTRUCTION
• Materials
• Labor
• Overhead and other indirect costs
• Architects’ fees
• Insurance during construction
• Interest on construction loans
• Lawyers’ fees
• Building permits
• Outside contractors
 ALLOCATION OF COST
Depreciation means the allocation of the cost of a plant asset to the
periods that benefit from the service of that asset.
• Does not refer to an asset’s
• Physical deterioration
• Decrease in market value over time
 DEPRECIATION
The
Theallocation
allocationof
ofthe
thecost
costof
ofaaplant
plantasset
assetto
toexpense
expenseininthe
theperiods
periods
in
inwhich
whichservices
servicesare
arereceived
receivedfrom
fromthe
theasset.
asset.

Balance
BalanceSheet
Sheet
Cost of Assets:
Assets:
plant assets Plant
Plantand
and
equipment
equipment

as the services are

Income
IncomeStatement
Statement received
Revenues:
Revenues:
Expenses:
Expenses:
Depreciation
Depreciation
 NOT A PROCESS OF VALUATION

• Depreciation is a process of allocation

• Accounting records are not indicators of changing price levels
• As an asset wears out or becomes obsolete, depreciation must be
recorded
 IMPAIRMENT OF ASSETS

IfIf the
the cost
cost ofof an
an asset
asset
cannot
cannot be be recovered
recovered
through
through future
future use
use or
or sale,
sale,
the
the asset
asset should
should be be written
written
down
down to to its
its net
net realizable
realizable
value.
value.
 ANOTHER EXAMPLE
• A company has two automobiles, each originally costing $20,000, of
which $15000 has been depreciated. Each has a fair value of $7000 as a
used car.
• The first car is traded for another automobile with a list price of $30,000,
and $18,000 is given in cash to the dealer in addition to the trade-in. The
cost of the new car is recorded as $23,000.
• The second car is traded for a piece of machine with a list price of
$30,000, and $18,000 is given in cash to the dealer in addition to the
trade-in. Here, the cost of the new car is recorded as $25,000.
THANK YOU