| Chapter Five - Acquisitions: Purchases and Use of Business Assets |
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Type of Long-term Property:
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| Tangible (Physical) Assets – Property, Plant, and Equipment |
‘Depreciate’ the cost over life
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| Intangible (Non-Physical) Assets – Copyrights, Patents, and Goodwill |
‘Amortize’ the cost over economic
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What do you do with a cost?
Expense It:
Short-term benefit from the cost (used up during the financial period) Goes directly to the Income Statement Revenue Expenditure Examples – Salaries and Advertising
Capitalize It
Longer-term benefit from cost (usable in future financial periods) Is put on the Balance sheet – Hits Income Statements in small increments Capital Expenditure Examples – Buildings and Equipment
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How Much Cost May be Capitalized?
Purchase Cost Freight (Delivery) Cost Insurance (while being delivered) Installation and Related Costs (Training and Test Runs)
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What if I Buy a Group of Assets? (Basket Purchase Allocation)
Sum up the Fair Market Value (FMV) of Assets Divide each asset’s FMV by the total from 1.) – Gives you percentage of total Multiple percentage from 2.) by the actual amount paid = Each asset’s value
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How Can We Depreciate Assets?
Straight-line Depreciation
Subtract the Residual (Salvage) Value from the Cost Divide the Depreciable Base by the Estimated Useful Life You have calculated each FULL year’s depreciation expense
Units-of-Production Depreciation
Cost – Salvage Value = Depreciable Base Divide the Depreciable Base by the Estimated Amount of Units You have calculated each UNIT’S depreciation expense
Declining Balance Method (Accelerated Depreciation)
We are using the COST (Book Value, Carrying Value) Divide 100% by Estimated Useful Life and multiple by the accelerating factor
** Each year multiple the percentage from b.) by the REMAINING Book Value
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