Chapter 7: Accounting for Long-Term Assets

When companies acquire multiple assets through a single transaction, the total cost must be allocated proportionally based on the relative fair market value of each asset. The chapter distinguishes between capital expenditures that enhance an asset's productive capacity or useful life and are capitalized on the balance sheet, versus maintenance expenses incurred to preserve current operating conditions and recognized immediately as period costs. Three primary depreciation methodologies are presented to systematically allocate plant asset costs: the straight-line method distributes equal expense amounts annually, the units-of-production method ties depreciation to actual asset utilization, and the double-declining balance method applies accelerated depreciation in earlier years before declining in subsequent periods. When companies dispose of assets through sale, abandonment, or trade, accountants calculate the resulting gain or loss by comparing the asset's book value to its realization proceeds. Natural resources are accounted for through depletion, a mechanism that transfers resource costs into inventory as extraction occurs. Intangible assets including patents, copyrights, franchises, and goodwill require amortization over their finite useful lives, while indefinite-life intangibles must be evaluated periodically for impairment when fair value declines below carrying amount. The impairment assessment process under GAAP involves a two-step test comparing book value to recoverable amount, whereas IFRS permits reversal of previously recognized impairments under specific circumstances. Asset-related transactions flow through the cash flow statement as investing activities for purchases and disposals, while depreciation and amortization serve as non-cash reconciling adjustments in operating activities. The chapter concludes by introducing return on assets as a profitability measure demonstrating how effectively management deploys total assets, decomposed through DuPont analysis into the product of net profit margin and asset turnover ratios.