Accounting for Long-Term Assets

Long-Term Assets (L-T Assets)

• Types of Assets:

  • Tangible assets are physical items like buildings, equipment, and land.
  • Intangible assets are non-physical rights or privileges such as patents, trademarks, and goodwill.

• Accounting Treatment at Acquisition:

  • Capitalized items benefit future periods (e.g., purchase price, installation).
  • Expensed items only benefit the current period (e.g., maintenance).

• Accounting Treatment After Acquisition:

  • Capitalize if the benefit extends to current or future periods.
  • Expense if the benefit is solely for the current period.
  • Example: Equipment is capitalized, while maintenance is expensed.

• Journal Entries:

  • Dr. (Debit) Asset account for increase; Cr. (Credit) Cash or Payable account (decrease) for payment.
  • Example: Dr. Equipment, Cr. Cash represents an equipment purchase.

Allocation of Costs After Acquisition

• Depreciation (Straight-Line Method):
  • Formula: (Cost - Residual Value)/Useful Life = Depreciation Expense.

Asset Disposition

• Methods:
  • Sale, Retirement, Exchange.
• Process:
  • Record proceeds.
  • Remove asset's book value.
  • Calculate gain or loss.
  • Example: Dr. Cash, Dr. Acc. Depreciation, Cr. Asset, Cr. Gain (or Dr. Loss).

Current Liabilities

• Characteristics:

  • Obligations arising from past transactions.
  • Current liabilities are payable within one year.
  • Long-term liabilities have a payment period exceeding one year.

• Notes Payable and Interest Expense:

  • Interest = Principal × Rate × Time.

• Payroll Withholdings and Employer Liabilities:

  • Employee withholdings for taxes (e.g., income tax, social security).
  • Employer expenses: Employer's share of taxes and benefits (e.g., FICA, unemployment).

• Contingencies:

  • Record if losses are probable and estimable.
  • Disclose if losses are probable but not estimable.
  • Never record contingent gains

Long-Term Liabilities

• Financing Alternatives:

  • Notes/Bonds at face value: fixed repayment terms.
  • Leases: lower upfront costs, tax benefits.

• Bond Characteristics:

  • Face value: Amount repaid at maturity.
  • Interest payments: Regular cash payments.
  • Market rate vs. stated rate: Determines bond issuance (premium, discount, or face value).

Stockholders' Equity

• Corporate Form of Ownership:

  • Advantages: Limited liability, transferrable ownership, raise capital.
  • Disadvantages: Double taxation, regulatory requirements.

• Shares:

  • Authorized: Maximum issuable shares.
  • Issued: Shares sold.
  • Outstanding: Shares currently held by investors.

• Invested Capital:

  • Issuance of stock: Recorded as stock account and additional paid-in-capital.
  • Example entry: Dr. Cash, Cr. Common Stock, Cr. Additional Paid-In-Capital

• Preferred Stock:

  • Priority over common stock in dividends and liquidation.

• Retained Earnings:

  • Increased by net income, decreased by net loss and dividends.
  • Declaration and payment reduce retained earnings.

• Financial Reporting:

  • Balance Sheet: Stockholder's equity section.
  • Statement of Stockholder's Equity: Changes in equity accounts (e.g., increased by net income, decreased by dividends).

Statement of Cash Flows

• Activities:

  • Operating: Day-to-day activities (e.g., net income adjustments).
  • Investing: Asset purchases or sales.
  • Financing: Borrowing and equity transactions.

• Warranty Liabilities:

  • Estimate and record anticipated costs during sale.

• Contingent Losses:Record if loss probable and estimable