LESSON FOUR LONG TERM ASSETSLESSON FOUR LONG TERM ASSETS? 2001 Prentice Hall Business Publishing Financial Accounting, 84/e Harrison and HorngrenAims:14. To explain the importance of long term assets.2. To discuss the fixed assets and the accounting treatment3. To discuss the intangible assets and the accounting treatment4. To apply the straight-line and accelerate methods of depreciation.5. To apply the units-of-production depreciation method 6. To apply Sum-of-the-Years-Digits Method 7. To explain the nature of intangible assets.8. To understand the process of amortization.? 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren4.1 Introduction to Long Term AssetsLong term assets are defined as the recourses a business possesses and uses to bring forth or yield revenue and can be divided into two categories: plant assets and intangible assets. long term assets are those whose economic life (the period of their being used by a company) is longer than a year.? 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren4.2 The Cost of Long Term AssetsThe cost of long term assets is recognized as an expense in the accounting periods in which they are used. So, if a computer is bought and expected to have an economic life of 5 years, then the cost of the table will be allocation over this five-year period. ? 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren4.3 Tangible AssetsTangible assets are those which one can touch and include natural recourses, machinery, tolls, etc.Tangible assets in their term are divided into three categories.(1) Property, plant, and equipment (2) Natural recourses (3) Land ? 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren4.4 Intangible AssetsIntangible assets may be represented by a piece of paper, a document, etc., but the real value of such assets is the rights and privileges extended to its owners. Intangible assets also fall into a few categories.(1) Specifically identifiable intangible assets can be acquired individually. (2) Goodwill represents the second group of intangible assets ? 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren4.5 Historical Cost of Long Term AssetsAll assets are recorded at their historical cost.Historical cost usually includes the purchase price, plus whatever additional costs necessary to get the asset and to prepare it for intended use. Additional costs (costs besides the purchase price) may be transportation costs, insurance while delivering the asset, etc. ? 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren4.6 A Basket Purchase A Basket Purchase happens that a company purchases a few assets and pays a single sum for it; however, the total of market values of single assets included in the purchase is greater than the total price paid by the company. ? 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and HorngrenAssume Kings Company acquired a machine and a separate tool to it paying totally $1,200. The real market values of such assets provided they are bought separately are $1,400 and $600 respectively. So, the total of two fair market values is $2,000 (i.e., $1,400 +$600). We can see now that the machine is worth 70% (i.e., $1,400/$2,000) of the total value, and the tool - 30% (i.e., $600/$2,000). Using these percentages, we can calculate the actual price in the following scheme:?Machine 70% $1,200 = $840? Tool 30% $1,200 = $360? 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren4.7 Depreciation: The Straight-Line Methods and the Accelerated Depreciation Methodsthe straight-line method to allocate the cost of an asset. is appropriate when an asset is used evenly over its life. However, some assets can be used more extensively during their first years of operations when they are still new. Other assets are used more during one year, but less within the following year, and so on. This kind of assets requires accelerated depreciation methods, which charge more of the costs of the assets in the early years of the assets useful life.? 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren4.8 Straight-Line DepreciationProvided that the revenue will remain the same in each year of the computer use, it is reasonable to employ straight-line depreciation method.The firs