Chapter 8 Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Business Background Costly excess capacity reduces profits. Insufficient capacity results in lost sales. How much is enough? Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Classification of Long-Lived Assets Actively Used in Operations Expected to Benefit Future Periods Tangible Intangible Physical Substance No Physical Substance Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Classification of Long-Lived Assets Actively Used in Operations Examples ! Land ! Assets subject to depreciation "Buildings and equipment "Furniture and fixtures ! Natural resource assets Intangible subject to depletion Expected to Benefit Future Periods Tangible Physical Substance Irwin/McGraw-Hill " Physical Mineral No deposits and timber Substance © The McGraw-Hill Companies, Inc., 2001 Classification of Long-Lived Assets Actively Used in Operations Examples ! Value represented by rights Expected to Benefit Future Periods that produce benefits Patents Copyrights Trademarks Intangible Tangible Franchises Goodwill No Physical Physical ! Subject to amortization Substance Irwin/McGraw-Hill Substance © The McGraw-Hill Companies, Inc., 2001 Measuring and Recording Acquisition Cost Acquisition Acquisition cost cost includes includes the the purchase purchase price price and and all all expenditures expenditures needed needed to to prepare prepare the the asset asset for for its its intended intended use. use. Acquisition Acquisition cost cost does does not not include include financing financing charges charges and and cash cash discounts. discounts. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Acquisition Cost Buildings # #Purchase Purchase price price # #Architectural Architectural fees fees # #Cost Cost of of permits permits # #Excavation Excavation costs costs # #Construction Construction costs costs Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Acquisition Cost Equipment # #Purchase Purchase price price # #Installation Installation costs costs # #Modification Modification to to building building necessary necessary to to install install equipment equipment # #Transportation Transportation costs costs Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Acquisition Cost Land # #Purchase Purchase price price # #Real Real estate estate commissions commissions # #Title Title insurance insurance premiums premiums # #Delinquent Delinquent taxes taxes # #Surveying Surveying fees fees # #Title Title search search and and transfer transfer fees fees Land is not depreciable. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Acquisition for Cash On June 1, Delta Air Lines purchased aircraft for $60,000,000 cash. GENERAL JOURNAL Date June Description Debit Page 8 Credit 1 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Acquisition for Cash On June 1, Delta Air Lines purchased aircraft for $60,000,000 cash. GENERAL JOURNAL Date June Description 1 Flight equipment Cash Irwin/McGraw-Hill Debit Page 8 Credit 60,000,000 60,000,000 © The McGraw-Hill Companies, Inc., 2001 Acquisition for Debt On June 14, Delta Air Lines purchased aircraft for $1,000,000 cash and a $59,000,000 note payable. GENERAL JOURNAL Date Description Debit Page 9 Credit June 14 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Acquisition for Debt On June 14, Delta Air Lines purchased aircraft for $1,000,000 cash and a $59,000,000 note payable. GENERAL JOURNAL Date Description June 14 Flight equipment Cash Note payable Irwin/McGraw-Hill Debit Page 9 Credit 60,000,000 1,000,000 59,000,000 © The McGraw-Hill Companies, Inc., 2001 Acquisition for Noncash Consideration Record at the current market value of the consideration given, or the current market value of the asset acquired, whichever is more clearly evident. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Acquisition for Noncash Consideration On July 7, Delta purchased a $60,000,000 aircraft for $26,000,000 cash plus 400,000 shares of $3 par value common stock. GENERAL JOURNAL Date July Description Debit Page 10 Credit 7 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Acquisition for Noncash Consideration On July 7, Delta purchased a $60,000,000 aircraft for $26,000,000 cash plus 400,000 shares of $3 par value common stock. GENERAL JOURNAL Date July Description 7 Flight equipment Cash Common stock Additional paid-in capital Irwin/McGraw-Hill Debit Page 10 Credit 60,000,000 26,000,000 1,200,000 32,800,000 © The McGraw-Hill Companies, Inc., 2001 Acquisition by Construction Asset Asset cost cost includes: includes: All materials and labor traceable to the construction. Irwin/McGraw-Hill A reasonable amount of overhead. Interest on debt incurred during the construction. © The McGraw-Hill Companies, Inc., 2001 Acquisition as a Basket Purchase The total cost of a combined purchase of land and building is separated on the basis of their relative market values. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Acquisition as a Basket Purchase On On January January 1, 1, Delta Delta purchased purchased land land and and building building for for $300,000 $300,000 cash. cash. The The appraised appraised values values are are building, building, $189,000, $189,000, and and land, land, $126,000. $126,000. How How much much of of the the $300,000 $300,000 purchase purchase price price will will be be charged charged to to the the building building and and land land accounts? accounts? Continue Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Acquisition as a Basket Purchase Asset Appraised Value % of Value Purchase Price Assigned Cost b* c b × c Land Building Total a $ 126,000 189,000 $ 315,000 40% 60% 100% * $126,000 ÷ $315,000 = 40% Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Acquisition as a Basket Purchase Asset Appraised Value % of Value b* Land Building Total a $ 126,000 189,000 $ 315,000 Purchase Price Assigned Cost c b × c 40% × $ 300,000 = $ 120,000 60% × 300,000 = 180,000 100% $ 300,000 * $126,000 ÷ $315,000 = 40% Prepare the journal entry to record the purchase of land and building. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Acquisition as a Basket Purchase GENERAL JOURNAL Date Jan. Description 1 Land Credit 120,000 Building Cash Irwin/McGraw-Hill Debit Page 11 180,000 300,000 © The McGraw-Hill Companies, Inc., 2001 Repairs, Maintenance, and Additions Type of Ex pe nditure Ca pita l or Re ve nue Ordina ry re pa irs a nd m a inte na nce Re ve nue 1. Ma inta ins norm a l ope ra ting condition 2. Doe s not incre a se productivity 3. Doe s not e x te nd life be yond origina l e stim a te Ide ntifying Cha ra cte ristics Ex tra ordina ry re pa irs Ca pita l 1. Ma jor ove rha uls or pa rtia l re pla ce m e nts 2. Ex te nds life be yond origina l e stim a te Additions Ca pita l 1. Incre a se s productivity 2. Ma y e x te nd use ful life 3. Im prove m e nts or e x pa nsions Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Capital and Revenue Expenditures Financial Statement Effect Treatment Statement Expense Current Current Income Taxes Capital Expenditure Balance sheet account debited Deferred Higher Higher Revenue Income statement Currently Expenditure account debited recognized Low er Low er Many companies have policies expensing all expenditures below a certain amount according to the materiality constraint. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Depreciation Depreciation Depreciation is is aa cost cost allocation allocation process process that that systematically systematically and and rationally rationally matches matches acquisition acquisition costs costs of of operational operational assets assets with with periods periods benefited benefited by by their their use. use. Balance Sheet Acquisition Cost (Unused) Irwin/McGraw-Hill Income Statement Cost Allocation Expense (Used) © The McGraw-Hill Companies, Inc., 2001 Depreciation Depreciation Expense Depreciation for the current year Accumulated Depreciation Total of depreciation to date on an asset Irwin/McGraw-Hill Income Statement Balance Sheet © The McGraw-Hill Companies, Inc., 2001 Depreciation on Delta’s 1998 Balance Sheet Property and Equipment: Flight equipment Less: Accumulated depreciation $ 11,180 3,895 Flight equipment under capital lease Less: Accumulated depreciation Ground property and equipment Less: Accumulated depreciation $ $ 7,285 515 216 299 3,285 1,854 1,431 Advance payments for equipment Total property and equipment $ 306 9,321 Book Values Book value =/ Market value Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Depreciation Concepts The The calculation calculation of of depreciation depreciation requires requires three three amounts amounts for for each each asset: asset: $ $ Acquisition Acquisition cost. cost. % % Estimated Estimated useful useful life. life. & & Estimated Estimated residual residual value. value. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Alternative Depreciation Methods $ $ Straight-line Straight-line % % Units-of-production Units-of-production & & Accelerated Accelerated Method: Method: Declining Declining balance balance Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Straight-Line Method Depreciation Expense per Year = Cost - Residual Value Life in Years At the beginning of the year, Delta purchased equipment for $62,500 cash. The equipment has an estimated useful life of 3 years and an estimated residual value of $2,500. SL Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Straight-Line Method Depreciation Expense per Year = Cost - Residual Value Life in Years Depreciation Expense per Year = $62,500 - $2,500 3 years Depreciation Expense per Year = Irwin/McGraw-Hill $20,000 SL © The McGraw-Hill Companies, Inc., 2001 Straight-Line Method Depreciation Accumulated Expense Depreciation Year (debit) (credit) 1 2 3 $ 20,000 20,000 20,000 $ 60,000 $ $ 20,000 20,000 20,000 60,000 Accumulated Depreciation Balance $ 20,000 40,000 60,000 Undepreciated Balance (book value) $ 62,500 42,500 22,500 2,500 Residual Value SL Irwin/McGraw-Hill More than 95 percent of companies use the straight-line method for some or all of their assets method in financial reports. © The McGraw-Hill Companies, Inc., 2001 Units-of-Production Method Step 1: Depreciation Rate = Cost - Residual Value Life in Units of Production = Number of Depreciation × Units Produced Rate for the Year Step 2: Depreciation Expense Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Units-of-Production Method At At the the beginning beginning of of the the year, year, Delta Delta purchased purchased ground ground equipment equipment for for $62,500 $62,500 cash. cash. The The equipment equipment has has aa 100,000 100,000 mile mile useful useful life life and and an an estimated estimated residual residual value value of of $2,500. $2,500. IfIf the the equipment equipment is is used used 30,000 30,000 miles miles in in the the first first year, year, what what is is the the amount amount of of depreciation depreciation expense? expense? Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Units-of-Production Method Step 1: Depreciation = Rate $62,500 - $2,500 100,000 miles = $.60 per mile Step 2: Depreciation = $.60 per mile × 30,000 miles = $18,000 Expense Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Units-of-Production Method Year Miles 1 2 3 30,000 50,000 20,000 100,000 Irwin/McGraw-Hill Depreciation Expense Accumulated Depreciation Balance $ $ 18,000 18,000 Undepreciated Balance (book value) $ 62,500 44,500 © The McGraw-Hill Companies, Inc., 2001 Units-of-Production Method Year Miles 1 2 3 30,000 50,000 20,000 100,000 Depreciation Expense Accumulated Depreciation Balance $ $ $ 18,000 30,000 12,000 60,000 18,000 48,000 60,000 Undepreciated Balance (book value) $ 62,500 44,500 14,500 2,500 Residual Value Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Accelerated Depreciation Accelerated depreciation matches higher depreciation expense with higher revenues in the early years of an asset’s useful life when the asset is more efficient. Depreciation Expense Early Years High Later Years Irwin/McGraw-Hill Low Repair Expense Low High © The McGraw-Hill Companies, Inc., 2001 Double-Declining-Balance Method Declining balance rate of 2 is double-declining-balance (DDB) rate. Annual Depreciation = expense Net Book Value × ( 2 Useful Life in Years ) Cost – Accumulated Depreciation Annual Annualcomputation computationignores ignoresresidual residualvalue. value. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Double-Declining-Balance Method At the beginning of the year, Delta purchased equipment for $62,500 cash. The equipment has an estimated useful life of 3 years and an estimated residual value of $2,500. Calculate the depreciation expense for the first two years. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Double-Declining-Balance Method Annual Depreciation = expense Irwin/McGraw-Hill Net Book Value × ( 2 Useful Life in Years ) © The McGraw-Hill Companies, Inc., 2001 Double-Declining-Balance Method Annual Depreciation = expense Net Book Value × ( 2 Useful Life in Years ) Year 1 Depreciation: $62,500 × ( 2 3 years ) = $41,667 Year 2 Depreciation: ($62,500 – $41,667) × Irwin/McGraw-Hill ( 2 3 years ) = $13,889 © The McGraw-Hill Companies, Inc., 2001 Double-Declining-Balance Method Year 1 2 3 Depreciation Expense (debit) Accumulated Depreciation Balance $ $ $ 41,667 13,889 4,629 60,185 41,667 55,556 60,185 Undepreciated Balance (book value) $ 62,500 20,833 6,944 2,315 Below residual value ($62,500 – $55,556) × Irwin/McGraw-Hill ( 2 3 years ) = $4,629 © The McGraw-Hill Companies, Inc., 2001 Double-Declining-Balance Method Year 1 2 3 Depreciation Expense (debit) Accumulated Depreciation Balance $ $ $ 41,667 13,889 4,444 60,000 41,667 55,556 60,000 Undepreciated Balance (book value) $ 62,500 20,833 6,944 2,500 Depreciation expense is limited to the amount that reduces book value to the estimated residual value. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Depreciation and Federal Income Tax For For tax tax purposes, purposes, most most corporations corporations use use the the Modified Modified Accelerated Accelerated Cost Cost Recovery Recovery System System (MACRS). (MACRS). MACRS MACRS depreciation depreciation provides provides for for rapid rapid write-off write-off of of an an asset’s asset’s cost cost in in order order to to stimulate stimulate new new investment. investment. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Depreciation Methods in Other Countries Many countries, including Australia, Brazil, England, and Mexico, use other methods such as depreciation based on the current fair value of assets. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Changes in Depreciation Estimates Estimated residual value Estimated useful life So depreciation is an estimate. Over Over the the life life of of an an asset, asset, new new information information may may come come to to light light that that indicates indicates the the original original estimates estimates were were inaccurate. inaccurate. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Changes in Depreciation Estimates If our estimates change, depreciation is: Book value at date of change – Residual value at date of change Remaining useful life at date of change Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Changes in Depreciation Estimates After owning aircraft costing $60,000,000 for five years, Delta revised estimates of residual value and useful life: Acquisition Acquisition cost costof ofaircraft aircraft Original Original estimated estimated useful useful life life Original Original estimated estimated residual residual value value Original Original annual annual depreciation depreciation ($60,000,000 ($60,000,000--$3,000,000) $3,000,000)÷÷20 20 $$60,000,000 60,000,000 20 20years years $$ 3,000,000 3,000,000 Revised Revised estimated estimated useful useful life life Revised Revised estimated estimated residual residual value value 25 25years years 750,000 750,000 $$ 2,850,000 2,850,000 $$ What is the new annual depreciation? Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Changes in Depreciation Estimates Acquisition cost Accumulated depreciation (years 1-5) ($2,850,000 per year × 5 years) Remaining book value Less: New residual value New depreciable amount Divide by remaining life Revised annual depreciation Irwin/McGraw-Hill $ 60,000,000 14,250,000 45,750,000 750,000 45,000,000 ÷ 20 $ 2,250,000 © The McGraw-Hill Companies, Inc., 2001 Disposal of Property, Plant, and Equipment ! Voluntary disposals: Sale Trade-in Retirement ! Involuntary disposals: Fire Accident Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Disposal of Property, Plant, and Equipment $ Update depreciation to the date of disposal. % Journalize disposal by: Recording cash received (debit) or paid (credit). Recording a gain (credit) or loss (debit). Writing off accumulated depreciation (debit). Writing off the asset cost (credit). Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Disposal of Property, Plant, and Equipment If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Disposal of Property, Plant, and Equipment Delta Delta Airlines Airlines sold sold flight flight equipment equipment for for $4,000,000 $4,000,000 cash cash at at the the end end of of its its 17th 17th year year of of use. use. The The flight flight equipment equipment originally originally cost cost $20,000,000, $20,000,000, and and was was depreciated depreciated using using the the straight-line straight-line method method with with zero zero salvage salvage value value and and aa useful useful life life of of 20 20 years. years. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Disposal of Property, Plant, and Equipment The The amount amount of of depreciation depreciation recorded recorded at at the the end end of of the the 17th 17th year year to to bring bring depreciation depreciation up up to to date date is: is: a. a. b. b. c. c. d. d. Irwin/McGraw-Hill $0. $0. $1,000,000. $1,000,000. $2,000,000. $2,000,000. $4,000,000. $4,000,000. © The McGraw-Hill Companies, Inc., 2001 Disposal of Property, Plant, and Equipment The The amount amount of of depreciation depreciation recorded recorded at at the the end end of of the the 17th 17th year year to to bring bring depreciation depreciation up up to to date date is: is: a. a. b. b. c. c. d. d. Irwin/McGraw-Hill $0. $0. $1,000,000. $1,000,000. $2,000,000. $2,000,000. $4,000,000. $4,000,000. Annual Depreciation: ($20,000,000 - $0) ÷ 20 Years. = $1,000,000 © The McGraw-Hill Companies, Inc., 2001 Disposal of Property, Plant, and Equipment After After updating updating the the depreciation, depreciation, the the equipment’s equipment’s book book value value at at the the end end of of the the 17th 17th year year is: is: a. a. b. b. c. c. d. d. Irwin/McGraw-Hill $3,000,000. $3,000,000. $16,000,000. $16,000,000. $17,000,000. $17,000,000. $4,000,000. $4,000,000. © The McGraw-Hill Companies, Inc., 2001 Disposal of Property, Plant, and Equipment Accumulated Depreciation = (17yrs. ×the $1,000,000) = $17,000,000 After depreciation, After updating updating the depreciation, the book value the BV = Cost - Accumulated the equipment’s equipment’s book value at atDepreciation the end 17th is: end of of the 17th year year is: BV =the $20,000,000 - $17,000,000 = $3,000,000 a. a. b. b. c. c. d. d. Irwin/McGraw-Hill $3,000,000. $3,000,000. $16,000,000. $16,000,000. $17,000,000. $17,000,000. $4,000,000. $4,000,000. © The McGraw-Hill Companies, Inc., 2001 Disposal of Property, Plant, and Equipment The The equipment’s equipment’s sale sale resulted resulted in: in: a. a. b. b. c. c. d. d. Irwin/McGraw-Hill aa gain gain of of $1,000,000. $1,000,000. aa gain gain of of $3,000,000. $3,000,000. aa gain gain of of $4,000,000. $4,000,000. aa loss loss of of $1,000,000. $1,000,000. © The McGraw-Hill Companies, Inc., 2001 Disposal of Property, Plant, and Equipment The The equipment’s equipment’s sale sale resulted resulted in: in: a. a. b. b. c. c. d. d. aa gain gain of of $1,000,000. $1,000,000. aa gain gain of of $3,000,000. $3,000,000. aa gain gain of of $4,000,000. $4,000,000. aa loss loss of of $1,000,000. $1,000,000. Gain = Cash Received - Book Value Gain = $4,000,000 - $3,000,000 = $1,000,000 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Disposal of Property, Plant, and Equipment Prepare the journal entry to record Delta’s sale of the equipment at the end of the 17th year. GENERAL JOURNAL Date Irwin/McGraw-Hill Description Debit Page 8 Credit © The McGraw-Hill Companies, Inc., 2001 Disposal of Property, Plant, and Equipment Prepare the journal entry to record Delta’s sale of the equipment at the end of the 17th year. GENERAL JOURNAL Date Description Cash Credit 4,000,000 Accumulated Depreciation Gain on Sale Flight Equipment Irwin/McGraw-Hill Debit Page 8 17,000,000 1,000,000 20,000,000 © The McGraw-Hill Companies, Inc., 2001 Natural Resources Extracted from the natural environment. A noncurrent asset presented at cost less accumulated depletion. Examples: oil, coal, gold Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Natural Resources Total cost of asset is the cost of acquisition, exploration, and development. Total cost is allocated over periods benefited by means of depletion. Depletion is like depreciation. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Depletion of Natural Resources Depletion is calculated using the units-of-production method. Unit depletion rate is calculated as follows: Acquisition and Development Cost – Residual Value Estimated Recoverable Units Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Depletion of Natural Resources Total depletion cost for a period is: UNIT DEPLETION RATE Total depletion cost Irwin/McGraw-Hill × NUMBER OF UNITS EXTRACTED IN PERIOD Cost of goods sold Inventory for sale Unsold Inventory © The McGraw-Hill Companies, Inc., 2001 Natural Resources Specialized plant assets may be required to extract the natural resource. These assets are recorded in a separate account and depreciated. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Intangible Assets Often Oftenprovide provide exclusive exclusiverights rights or orprivileges. privileges. Noncurrent Noncurrentassets assets without withoutphysical physical substance. substance. Intangible Assets Useful Usefullife lifeis is often oftendifficult difficult to todetermine. determine. Irwin/McGraw-Hill Usually Usuallyacquired acquired for foroperational operational use. use. © The McGraw-Hill Companies, Inc., 2001 Intangible Assets Record at current cash equivalent cost, including purchase price, legal fees, and filing fees. ! ! ! ! ! ! Irwin/McGraw-Hill Goodwill Trademarks Patents Copyrights Franchises Leaseholds © The McGraw-Hill Companies, Inc., 2001 Intangible Assets ! ! Amortize Amortize over over shorter shorter of of economic economic life life or or legal legal life, life, subject subject to to rules rules specified specified by by GAAP. GAAP. ! ! Use Use straight-line straight-line method. method. ! ! Research Research and and development development costs costs are are normally normally expensed expensed as as incurred. incurred. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Intangible Assets Goodwill Goodwill Occurs when one company buys another company. Only purchased goodwill is an intangible asset. The amount by which the purchase price exceeds the fair market value of net assets acquired. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Intangible Assets Goodwill Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised at a fair value of $900,000. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Intangible Assets Goodwill What What amount amount of of goodwill goodwill should should be be recorded recorded on on Eddy Eddy Company Company books? books? a. a. b. b. c. c. d. d. Irwin/McGraw-Hill $100,000 $100,000 $200,000 $200,000 $300,000 $300,000 $400,000 $400,000 © The McGraw-Hill Companies, Inc., 2001 Intangible Assets Goodwill What What amount amount of of goodwill goodwill should should be be recorded recorded on on Eddy Eddy Company Company books? books? a. a. b. b. c. c. d. d. Irwin/McGraw-Hill $100,000 $100,000 $200,000 $200,000 $300,000 $300,000 $400,000 $400,000 FMV of Asse ts De bt Assum e d $ FMV of Ne t Asse ts Purcha se Price Goodw ill $ 900,000 200,000 700,000 1,000,000 $ 300,000 © The McGraw-Hill Companies, Inc., 2001 Intangible Assets Trademarks AA symbol, symbol, design, design, or or logo logo associated associated with with aa business. business. Internally developed trademarks have no recorded asset cost. Irwin/McGraw-Hill Purchased trademarks are recorded at cost. © The McGraw-Hill Companies, Inc., 2001 Intangible Assets Patents Exclusive Exclusive right right granted granted by by federal federal government government to to sell sell or or manufacture manufacture an an invention. invention. Cost Cost is is purchase purchase price price plus plus legal legal cost cost to to defend. defend. Irwin/McGraw-Hill Amortize Amortize cost cost over over the the shorter shorter of of useful useful life life or or 17 17 years. years. © The McGraw-Hill Companies, Inc., 2001 Intangible Assets Copyrights Exclusive Exclusive right right granted granted by by the the federal federal government government to to protect protect artistic artistic or or intellectual intellectual properties. properties. Legal Legal life life is is life life of of creator creator plus plus 50 50 years. years. Irwin/McGraw-Hill Amortize Amortize cost cost over over the the period period benefited. benefited. © The McGraw-Hill Companies, Inc., 2001 Intangible Assets Franchises Legally Legally protected protected right right to to sell sell products products or or provide provide services services purchased purchased by by franchisee franchisee from from franchisor. franchisor. Purchase Purchase price price is is an an intangible intangible asset asset which which is is amortized. amortized. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Intangible Assets Leaseholds ! !A A lease lease is is aa contract contract to to use use property property granted granted by by lessor lessor to to lessee lessee and and rights rights granted granted under under the the lease lease are are called called aa leasehold. leasehold. ! !A A leasehold leasehold is is recorded recorded only only ifif advance advance payment payment is is involved. involved. Otherwise Otherwise periodic periodic payments payments are are rent rent expense. expense. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Intangible Assets Leasehold Improvements Long-lived alterations made by lessee to leased property. Leasehold improvements are recorded at cost and amortized over their useful life. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 Asset Impairment Impairment is the loss of a significant portion of the utility of an asset through . . . ! Casualty. ! Obsolescence. ! Lack of demand for the asset’s services. A loss should be recognized when an asset suffers a permanent impairment. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 This computer is about to become fully depreciated! End of Chapter 8 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001