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Lecture Financial reporting for managers: A value-creation perspective - Chapter 8

Chapter 8 - Long-term producing assets and investments in equity securities. The following will be discussed in this chapter: Investments in long-term producing assets; accounting for producing assets: an overview; acquisition: what costs to capitalize; post-acquisition expenditures; cost allocation; estimating useful life and salvage value; cost allocation methods;. | CHAPTER 8 Long-Term Producing Assets and Investments in Equity Securities Accounting for Long Lived Assets Figure 8-1 Acquisition: What Costs to Capitalize? Fair market value of the acquired asset, or Fair market value of what was given up to acquire the asset. Post Acquisition Expenditures Betterments are capitalized because they: - Increase the asset’s useful life, - Improve the quality of the asset’s output, - Increase the quantity of the asset’s output, or - Reduce the costs associated with operating the asset. Maintenance costs are treated as expenses. Cost Allocation Depreciation and amortization are methods of cost allocation. They are used to allocate the capitalized cost of productive assets over the years benefited (matching). Note: depreciation and amortization decrease the carrying values of assets, but are not a valuation techniques (i.e., book value is not market value). Land Has indefinite life and therefore is not depreciated Historical . | CHAPTER 8 Long-Term Producing Assets and Investments in Equity Securities Accounting for Long Lived Assets Figure 8-1 Acquisition: What Costs to Capitalize? Fair market value of the acquired asset, or Fair market value of what was given up to acquire the asset. Post Acquisition Expenditures Betterments are capitalized because they: - Increase the asset’s useful life, - Improve the quality of the asset’s output, - Increase the quantity of the asset’s output, or - Reduce the costs associated with operating the asset. Maintenance costs are treated as expenses. Cost Allocation Depreciation and amortization are methods of cost allocation. They are used to allocate the capitalized cost of productive assets over the years benefited (matching). Note: depreciation and amortization decrease the carrying values of assets, but are not a valuation techniques (i.e., book value is not market value). Land Has indefinite life and therefore is not depreciated Historical Cost includes: Purchase price, Closing costs, Cost to get ready for intended use (Note: Sale of salvaged materials reduces cost) Land Improvements Have definite life and therefore are depreciated Fences, walls, parking lots, driveways Buildings Have definite life and therefore are depreciated Proportionate share of purchase price, or construction cost, Closing Cost, Architect & Attorney fees Machinery, Equipment, Furniture & Fixtures Purchase price (net of cash discounts), Freight & handling, Insurance while in transit, Installation Cost Allocation Estimated useful life Estimated salvage value Depreciation methods Straight-line Double-declining balance Units-of-production (Activity) Straight-Line = $15,000 - $3,000 = $2,400 per year 5 years Cost - Salvage Estimated Life Annual depreciation = Figure 8-2 Double-Declining Balance DDB is an accelerated depreciation technique. It generates more expense in the early years and less in the later years. Annual depreciation = % (Cost - A/D) where .