Long Term Assets: Depreciation, Costing, and Handling Methods

School: Colorado State University, Fort Collins - Course: BUS 614 - Subject: Accounting

Video 1 This video covers long term assets; how to depreciate them as well as costing.Tangible assets are something that can be physically touched (property, plant, equipment, natural resources and land) whereas intangible items are not - they are invisible (identifiable useful lives, indefinite useful lives).They both have different ways to handle long term assets. Property, plant, equipment you would depreciate the cost, natural resources you would deplete the cost, and land you would neither deplete nor depreciate.With identifiable useful lives, you would amortize cost over useful life, with indefinite useful lives, the cost is not expensed until value impaired. For long term assets, you can capitalize (record in the books) at cost plus whatever you paid to get that asset ready to use.Some examples of that would be if you have to install something or deliver something you can capitalize that. If you buy a bunch of assets in a group, this is known as a basket purchase.You would have to allocate the total cost you paid based upon the fair market value percentages.There are four stages to the life cycle of an operation asset: acquiring funds to buy asset, purchase the asset, use the asset, and retire (dispose of) the asset.As items are used, they suffer from wear and tear called depreciation.You are using this asset to gain a profit.Salvage value is the expected marked value of a fully depreciated asset.Depreciation expense is the amount of an asset's cost that is allocated to the expense during the account period.Depreciable cost is the total amount of depreciation a company recognizes for an asset - it is the difference between the original cost and the salvage value of the asset.Book value (BV) is equal to the cost minus the accumulated depreciation. There are three different ways to recognize the depreciation expense: straight-line, double- declining-balance, and units-of-production.It is an accountant's fiduciary duty to exercise judgement when estimating the depreciation expense each period.Straight-line is the easiest and most used method.It is (asset cost minus salvage value) divided by the service life.Or divide the depreciable cost by the service life.Straight line is the same value each period. Land is not depreciated buy land improvements are depreciated (parking lots, sidewalks, lighting, fences, etc.).All three methods can be used for land improvements.Accelerated depreciation (double-declining-balance depreciation) has higher depreciation in the earlier years and less in later years.Units-of-production is based on how many hours or miles the unit has used, rental car companies use this method.Double-declining balance is beginning book value multiplied by the DDB rate to get the depreciation expense.You cannot depreciate the salvage value.Units of production: depreciation rate is equal to the depreciable cost divided by the total units expected to be produced. At the end of the useful life of the long-term asset, it is time to retire it.Example, if the company had a truck that they bought and rented that out, in four years when the asset is ready to be sold, if the truck is sold for a higher price than the book value of the truck, the company would recognize a gain.

Video 2 Revisions to our estimates, additional capital expenditures and intangible assets and how they affect the financial statements. Estimates are used in accounting all the time but sometimes we need to make revisions to those estimates.We get new information, so it is necessary to make revisions.Look at what the book value is at the time of revision and roll forward with the new number. For capital improvements - if the costs improve quality, the asset cost will increase; if the costs extend the life, you will reduce accumulated depreciation.Both instances will increase the book value.Businesses do this all the time.In order to keep an asset in good working condition, maintenance costs might be needed for routine maintenance and minor repairs (oil changes, new tires).These are expensed in the same period that they were incurred.If the cost improves the quality (install fuel efficient engine) that amount is added to the historical cost of the asset, which is expensed through higher depreciation charges over the asset's remaining useful life.If we extended the life of that asset as opposed to the quality of service, this expenditure is viewed as canceling some of the depreciation previously charged to expense. Intangible assets with identifiable useful lives - patents (20 year legal life), copyrights (creator plus 70 years) you would amortize the cost over the useful life using straight-line.With intangible assets with unidentifiable useful lives - trademarks, goodwill, - you check for impairment of value only.