CHAPTER 9
LONG-LIVED TANGIBLE AND INTANGIBLE ASSETS
Student Learning Objectives and Related Assignment Materials
Student Learning
Objectives
Mini–
Exercises
Exercises
Coached
Problems
Problems
(Groups
A & B)
Compre-
hensive
Problem
Skills
Develop–
ment
Cases
Continuing
Case
LO 9-1 Define,
classify, and
explain the nature
of long-lived
assets.
1
1
A4^, B4^
3
LO 9- 2 – Apply the
cost principle to
the acquisition of
long-lived assets.
2, 3
2, 3, 4, 5
1, 3
A1, A3,
A4^, B1,
B3, B4^
1^+
1, 2, 4
LO 9-3 – Apply
various
depreciation
methods as
economic benefits
are used up over
time.
1, 4*,
5*, 6*, 7
2, 3, 4,
5, 6*,
7*, 8, 15
1, 3
A1, A3,
A4^, B1,
B3, B4^
1^+
1, 2, 3,
5, 6, 7
1†, 2^£
LO 9-4 Explain the
effect of asset
impairment on the
financial
statements.
8
A4^, B4^
2^£
LO 9-5 Analyze the
disposal of long-
lived tangible
assets.
8, 9, 10
9*
2
A2, A4^,
B2, B4^
6
1†
LO 9-6 Analyze the
acquisition, use,
and disposal of
long-lived
intangible assets.
1, 2, 3,
11, 12
10, 11,
12, 13
3
A3, A4^,
B3, B4^
1, 2, 3
LO 9-7 Interpret the
fixed asset
turnover ratio.
13
1, 14, 15
1, 2, 3, 4
LO 9-8 Describe
factors to consider
when comparing
companies’ long–
lived assets.
2, 6
(Table continued on next page.)
Student Learning Objectives and Related Assignment Materials, continued
LO 9-S1 Analyze and
report depletion of
natural resources.
14
16
LO 9-S2 Calculate
changes in
depreciation
arising from
changes in
estimates or
capitalized cost.
15
17
* Animated solution included in the PowerPoint Slides.
^ Particularly challenging; requires students to combine multiple concepts in order to advance to the
next level of accounting knowledge.
+ Comprehensive Problem 9-1 also covers LO 3-3, LO 4-2, and LO 8-2.
† Continuing Case 9-1 builds on the story of Nicole’s Getaway Spa, introduced in earlier chapters. This
case focuses on completing a depreciation schedule for each of the depreciation methods, analyzing
and preparing the journal entry to account for the disposal of the asset under the three different
methods, and creating income statements for each of the different depreciation methods (with
consideration of the loss or gain on disposal for each method). This case will be extended in future
chapters.
£ Continuing Case 9-2 builds on the story of Wiki Art Gallery (WAG), an instructional case in Connect.
This case focuses on the methods to record bad debts, the adequacy of the allowance for bad debts,
determining write-offs given information set forth in the financial statements, and calculation and
interpretation of the number of days to collect. The case will be extended in future chapters.
Overview
An amusement park is the perfect setting for demonstrating the importance of long-lived tangible and
intangible assets, which account for more than 97 percent of its total assets.
Students learn accounting principles and practices applied when these assets are acquired, used, and
disposed, and how these accounting decisions can affect performance evaluations.
Chapter supplements explain accounting for natural resources (A) and changes in estimates (B).
Synopsis of Chapter Revisions
• Updated focus company illustrations
• Updated Spotlight on the World to include component allocation of golf course bunkers at Clublink
Enterprises
• Eliminated discussion of cash-only tangible asset purchase
• Revised depreciation formula presentations to highlight depreciation rates
• New illustration to explain calculation and journalizing of gain/loss on disposal
• Changed Spotlight on Business Decisions to a Spotlight on Financial Reporting to introduce new
option for private companies to amortize goodwill over 10 years or less
• Revised amortization presentation to show Accumulated Amortization rather than directly reducing
asset
• Updated fixed asset turnover analysis in Exhibit 9.5, involving Cedar Fair, Six Flags, and Facebook
• New illustration in Homework Helper to show common causes of changes in account balances
• Reviewed, updated, and introduced new end-of-chapter material, including new problem format that
automatically posts journal entries to T-accounts and prepares a trial balance
PowerPoint Slides
Student Learning Objective
PowerPoint® Slides
LO 9-1 Define, classify, and explain the nature of long–lived assets.
9-2 through 9-3
LO 9-2 Apply the cost principle to the acquisition of long-lived assets.
9-4 through 9-13
LO 9-3 Apply various depreciation methods as economic benefits are used up
over time.
9-14 through 9-23
LO 9-4 Explain the effect of asset impairment on the financial statements.
9-24 through 9-25
LO 9-5 Analyze the disposal of long-lived tangible assets.
9-26 through 9-32
LO 9-6 Analyze the acquisition, use, and disposal of long-lived intangible
assets.
9-33 through 9-42
LO 9-7 Interpret the fixed asset turnover ratio.
9-43 through 9-45
LO 9-8 Describe factors to consider when comparing companies’ long-lived
assets.
9-46 through 9-47
LO 9-S1 Analyze and report depletion of natural resources.
9-48 through 9-50
LO 9-S2 Calculate changes in depreciation arising from changes in estimates
or capitalized cost.
9-51 through 9-55
Animated Builds and Animated Solutions
PowerPoint® Slides
Mini-Exercise 9-4
9-57
Mini-Exercise 9-5
9-58 through 9-59
Mini-Exercise 9-6
9-60 through 9-61
Exercise 9-6
9-62 through 9-64
Exercise 9-7
9-65 through 9-70
Exercise 9-9
9-71 through 9-76
Summary of Related Video Program
Spotlight Video Series
Chapter 9 – The Biggest and Simplest Accounting Fraud (approximately 4:00)
This video describes how the simple act of capitalizing expenses enabled WorldCom to mislead financial
statement users. Students are invited to consider the judgment inherent in many seemingly simple
accounting decisions.
Chapter Summary
LO 9-1 Define, classify, and explain the nature of long-lived assets.
• Long-lived assets are those that a business retains for long periods of time for use in the course of
normal operations rather than for sale. They may be divided into tangible assets (land, buildings,
equipment) and intangible assets (including goodwill, patents, and franchises).
LO 9-2 Apply the cost principle to the acquisition of long–lived assets.
• The acquisition cost of property, plant, and equipment is the cash-equivalent purchase price plus
all reasonable and necessary expenditures made to acquire and prepare the asset for its intended
use. Expenditures made after the asset is in use are either expensed or capitalized as a cost of the
asset:
a. Expenditures are expensed if they recur frequently, involve relatively small amounts, and do
not directly lengthen the asset’s useful life. These are considered ordinary repairs and
maintenance expense.
b. Expenditures are capitalized as a cost of the asset if they provide benefits for one or more
accounting periods beyond the current period. This category includes extraordinary repairs,
replacements, and additions.
LO 9-3 Apply various depreciation methods as economic benefits are used up over time.
• In conformity with the matching principle, the cost of long-lived tangible assets (less any
estimated residual value) is allocated to depreciation expense over each period benefited by the
assets.
• Because of depreciation, the book value of an asset declines over time and net income is reduced
by the amount of the expense.
• Common depreciation methods include straight-line (a constant amount over time), units-of-
production (a variable amount over time), and double-declining-balance (a decreasing amount
over time).
LO 9-4 Explain the effect of asset impairment on the financial statements.
• When events or changes in circumstances reduce the estimated future cash flows of a long-lived
asset below its book value, the book value of the asset should be written down, with the amount of
the write-down reported as an impairment loss.
LO 9-5 Analyze the disposal of long-lived tangible assets.
When assets are disposed of through sale or abandonment,
• Record additional depreciation arising since the last adjustment was made.
• Remove the cost of the old asset and its related accumulated depreciation.
• Recognize the cash proceeds (if any).
• Recognize any gains or losses when the asset’s book value is not equal to the cash received.
Chapter Summary, continued
LO 9-6 Analyze the acquisition, use, and disposal of long-lived intangible assets.
• Intangible assets are recorded at cost, but only when purchased. The costs of most internally
developed intangible assets are expensed as research and development when incurred.
• Intangibles are reported at book value on the balance sheet.
• Amortization is calculated for intangibles with limited useful lives, using the straight-line method.
• Intangibles with unlimited useful lives, including most goodwill, are not amortized, but are
reviewed for impairment.
LO 9-7 Interpret the fixed asset turnover ratio.
• The fixed asset turnover ratio measures the company’s efficiency at using its investment in
property, plant, and equipment to generate sales. Higher turnover ratios imply greater efficiency.
LO 9-8 Describe factors to consider when comparing companies’ long-lived assets.
• Companies in different industries require different levels of investment in long-lived assets.
Beyond that, you should consider whether differences exist in depreciation methods, estimated
useful lives, and estimated residual values, which can affect the book value of long-lived assets as
well as ratios calculated using these book values and any gains or losses reported at the time of
asset disposal.
Accounting Decision Tool
Fixed Assets Turnover Ratio = Net Sales Revenue ÷ Average Fixed Assets
• It tells you dollars of sales generated for each dollar invested in (tangible) fixed assets.
• A higher ratio implies greater efficiency.
Chapter Outline
Teaching Notes
I. Understand the Business
LO 9-1 Define, classify, and explain the nature of long-lived assets.
A Definition and Classification
1. Long-lived assets––Resources owned by a business that
enable it to produce the goods on services that are sold to
customers. Long-lived assets include the following:
a. Tangible assets––Long-lived assets that have physical
substance, which simply means that you can see,
touch, or kick them.
i. Examples include are land, buildings, machinery,
vehicles, office equipment, and furniture and
fixtures; typically grouped into a single line item
on the balance sheet called Property, Plant, and
Equipment.
Cedar Fair’s fixed assets are
illustrated in Exhibit 9.1
ii. They are also known as fixed assets because they
are often fixed in place.
b. Intangible assets––Long-lived assets that have special
rights but no physical substance; the existence of most
intangible assets is indicated only by legal documents
that describe certain legal rights.
c. Natural resources––Long-lived assets that are depleted
over time, like an oil well or gold mine.
Chapter Supplement 9A
addresses natural resources.
II. Study the Accounting Methods
LO 9-2 Apply the cost principle to the acquisition of long-lived assets.
A. Acquisition of Tangible Assets
1. General rule under the cost principle is that all reasonable
and necessary costs of acquiring and preparing an asset
for use should be recorded as a cost of the asset.
❖ Video Spotlight Series –
Chapter 9
The “Spotlight on Ethics”
2. Capitalize––To record a cost as an asset (rather than an
expense).
feature addresses improper
capitalization of expenses.
3. Costs that are capitalized upon acquisition include:
a. Land
i. Purchase cost
ii. Legal fees
iii. Survey fees
iv. Title search fees
Stress that the capitalized
costs are not just the amounts
paid to purchase or construct
the assets.
b. Buildings
i. Purchase/construction cost
ii. Legal fees
iii. Appraisal fees
iv. Architect fees
Chapter Outline
Teaching Notes
c. Equipment
i. Purchase/construction cost
ii. Sales taxes
iii. Transportation costs
iv. Installation costs
d. Demolition, renovation, or repair costs incurred before
the long-lived tangible asset can be used are
capitalized because they are needed to prepare the
asset for use.
4. When a “basket purchase” occurs, the total cost is split
between each asset in proportion to the market value of
the assets as a whole.
The “Spotlight on the World”
feature addresses treatment of
basket purchase by IFRS.
5. The list price for equipment was $26 million but company
received a $1 million discount. The company paid
$125,000 to have the equipment delivered and another
$625,000 to have it assembled and prepared for use.
a. List price of $26,000,000 – Discount of $1,000,000 +
Transportation costs paid by company of $125,000 +
Installation costs paid by company of $625,000 =
Total cost of $25,750,000.
b. Analyze: Assets = Liabilities + Stockholders’ Equity
Cash (A) –750,000; Equipment (A) +25,750,000; Note
Payable (L) +25,000,000
c. Record:
Equipment
25,750,000
Cash
750,000
Note Payable
25,000,000
6. The cost of some fixed assets is such a small amount that
it’s not worth the trouble of recording them as fixed
assets; instead, they are expensed; such immaterial
amounts will not affect users’ decisions.
B. Use of Tangible Assets
1. Most tangible assets require substantial expenditures over
the course of their lives to maintain or enhance their
ability to operate.
a. Ordinary repairs and maintenance––Expenditures
for routine operating upkeep of long-lived, expensed.
Also called “revenue
expenditures” because these
i. Recurring, relatively small expenditures that do not
directly increase an asset’s usefulness.
expenses are matched to
revenues on the income
ii. Occur frequently to maintain the asset’s productive
capacity for a short time,
statement
b. Extraordinary repairs––Expenditures that extend the
useful life of a tangible asset or improve its output in
the future; recorded as increases in asset accounts.
Also called “capital
expenditures” because these
costs are capitalized in an
i. These costs increase the usefulness of tangible
assets beyond their original condition.
asset account
ii. Include additions, major overhauls, complete
reconditioning, and major replacements and
improvements.
Chapter Outline
Teaching Notes
LO 9-3 Apply various depreciation methods as economic benefits are used up over time.
2. Depreciation Expense
a. The cost of a long-lived tangible asset is essentially a
prepaid cost representing future economic benefits.
These benefits are used up when the asset is used, so
following the matching principle, a portion of the
asset’s cost is moved from the balance sheet to the
income statement as an expense in the period the asset
is used to generate revenue.
Reporting depreciation on the
balance sheet and income
statement is illustrated in
Exhibit 9.2
i. Depreciation––The allocation of the cost of long-
lived tangible assets over their productive lives
using a systematic and rational method.
✓ Supplemental
Enrichment Activity
(Activity) #1
ii. Depreciation expense––The amount of
depreciation recorded during each period is
reported on the income statement.
iii. Accumulated Depreciation––A contra-account that
accumulates the amount of depreciation since the
acquisition date; reported on the balance sheet and
deducted from the related asset’s cost.
iv. Book (or carrying) value––Acquisition cost less
the accumulated depreciation from acquisition date
to the balance sheet date.
✓ Activity #2
b. Assume that depreciation of $130,000 is recorded.
i. Analyze (rounded to nearest thousand):
Assets = Liabilities + Stockholders’ Equity
Accumulated Depreciation (xA) –130;
Depreciation Expense (E) –130
ii. Record:
Depreciation Expense
130
Accumulated Depreciation
130
c. To calculate depreciation expense, you need three
amounts:
i. Asset cost––All the costs capitalized for the asset.
ii. Useful life––Expected service life of an asset to the
present owner.
▪ Life may be expressed in terms of years or
units of asset capacity.
▪ Land is the only tangible asset that’s assumed
to have an unlimited (indefinite) useful life.
Because of this, land is not depreciated.
iii. Residual (or salvage) value––An estimate of the
amount to be recovered at the end of the
company’s estimated useful life of an asset.
Chapter Outline
Teaching Notes
d. Depreciable cost––The portion of the asset’s cost that
will be used in generating revenue; calculated as asset
cost minus residual value.
e. Companies own different assets and use them
differently, so they are allowed to choose from several
alternative depreciation methods.
i. These alternative methods produce different
depreciation amounts recorded each year.
ii. The depreciation method chosen for each asset
should reflect the pattern in which those asset’s
economic benefits are used up.
3. Straight-Line Method
a. Straight-line depreciation method––Method that
allocates the cost of an asset in equal periodic amounts
over its useful life.
b. Formula: (Cost – Residual Value) × (1 divided by the
Useful Life).
i. (Cost – Residual Value), also known as depreciable
cost, is the total amount to be depreciated (the
depreciable cost).
ii. The straight-line depreciation rate equals (1
divided by the Useful Life).
Information for examples in
text listed in Exhibit 9.3
c. As the name straight-line suggests:
i. Depreciation expense is a constant amount each
year.
ii. Accumulated depreciation increases by an equal
amount each year.
iii. Book value decreases by the same equal amount
each year.
d. At the end of the asset’s life, accumulated depreciation
equals the asset’s depreciable cost and book value
equals residual value.
4. Units-of-Production Method
a. Units-of-production depreciation method––Method
that allocates the cost of an asset over its useful life
based on the relationship of its periodic output to its
total estimated output.
b. Formula: (Cost – Residual Value) × (Actual
Production this Period divided by Estimated Total
Production).
c. Depreciation expense, accumulated depreciation, and
book value vary from period to period, depending on
the number of units produced.
Chapter Outline
Teaching Notes
5. Declining Balance Method
a. Declining-balance depreciation method––Method
that assigns more depreciation to early years of an
asset’s life and less depreciation to later years.
b. Based on applying a depreciation rate to the book
value of the asset at the beginning of the period.
c. Rate used in the formula is double the straight-line
rate and, therefore, this particular version of declining–
balance depreciation is called the double-declining–
balance method.
d. Formula: (Cost – Accumulated Depreciation) × (2
divided by the Useful Life).
i. Formula uses the accumulated depreciation balance
at the beginning of each year.
ii. In the first year of an asset’s life, the beginning
balance in accumulated depreciation will be zero.
iii. As depreciation is recorded each year, the
accumulated depreciation balance will increase,
which causes the amount of depreciation to decline
over time.
Stress that book value (cost −
accumulated depreciation) is
used rather than depreciable
cost (cost – residual value).
e. Residual value is not included in the formula for
computing depreciation expense under the declining-
balance method; however:
i. The asset’s book value cannot be depreciated
below its residual value.
ii. If the normal depreciation calculated for the year
reduces book value below residual value, a lower
amount of depreciation must be recorded, so that
book value equals residual value.
6. Summary of Depreciation Methods
a. The amount of depreciation expense in each year of an
asset’s life depends on the method used, which also
means that the amount of net income reported can
vary depending on the depreciation method used.
Differences summarized in
Exhibit 9.4
b. Different depreciation methods can be used for
different classes of assets provided they are used
consistently over time so that financial statement users
can compare results across periods.
c. At the end of an asset’s life, after it has been fully
depreciated, the total amount of depreciation will
equal the asset’s depreciable cost, regardless of the
depreciation method used.