Ch. 9 Synchronotes for
by Phillips/Libby/Libby
Chapter 9: Reporting and Interpreting Long-Lived Tangible and Intangible Assets
Definition and Classification
Actively Used in Operations → Will not be used up within the next year
Two types:
Tangible: Physical Substance
Examples: Land
Assets subject to depreciation - buildings and equipment; furniture and fixtures
Intangible: No Physical Substance

Value represented by rights that produce benefits.

Intangibles with a limited life, such as patents and copyrights, are subject to amortization.

Intangibles with an unlimited (or indefinite) life, such as goodwill and trademarks, are not amortized.
Acquisition of Tangible Assets
Acquisition cost includes: 1) purchase price, and 2) all expenditures needed to prepare the asset for its intended use.
Recording costs as assets is called capitalizing the costs.
Land: purchase cost, legal fees, surveying fees, broker’s commissions
Buildings: purchase/construction cost, legal fees, appraisal fees, architectural fees
Equipment: purchase/construction cost, sales taxes, transportation costs, installation costs
Basket Purchase: The total cost of a combined purchase of land and building is allocated in proportion to their relative market values.
On January 1, Jones purchased land and building for $400,000 cash. The appraised values are building,
$325,000, and land, $175,000. How much of the
$400,000 purchase price will be charged to the
Asset
Appraised
Value
% of
Value
Purchase Apportioned
Price Cost building and land accounts?
Cash Purchase
Land
Building
Total a
$ 175,000
325,000
$ 500,000 b *
35% ×
65% ×
100% c
$ 400,000
400,000
=
= b × c
$ 140,000
260,000
$ 400,000
Cedar Fair purchased a new ride for $26,000,000 less a $1,000,000 discount. Cedar Fair paid
* $175,000 ÷ $500,000 = 35%
$325,000 ÷ $500,000 = 65%
$125,000 for transportation and $625,000 for installation of the ride. Prepare the journal entry for the acquisition assuming Cedar Fair paid cash for the new ride.
Credit Purchase
Instead of paying cash, assume that Cedar Fair issued a note for the new ride, but paid cash for the transportation installation of the ride. Prepare the journal entry.
Ch. 9 - p. 1

Accounting
Treatment
Expense
Capitalize
Capitalize
Maintenance Costs Incurred during Use
Type of
Expenditure
Ordinary
Identifying Characteristics
1. Maintains normal operating condition repairs and 2. Does not increase productivity maintenance 3. Does not extend life beyond original
estimate
Extraordinary 1. Major overhauls or partial repairs
Additions
replacements
2. Extends life beyond original estimate
1. Increases productivity
2. May extend useful life
3. Improvements or expansions
Depreciation Expense
Depreciation is a cost allocation process that matches costs of operational assets with periods benefited by their use.
The effects of $130 of depreciation on the accounting equation and the journal entry to record them follow:
Depreciation calculations require three amounts for each asset:
1) Acquisition cost 2) Estimated useful life 3) Estimated residual value
Ch. 9 - p. 2

Depreciation Methods
 Straight-line
 Units-of-production
 Declining balance
We will use the following information to illustrate the three methods of depreciation:
At the beginning of the year, Cedar Fair purchased a new Go-Cart Ride for $62,500 cash. The ride has an estimated useful life of 3 years and an estimated residual value of $2,500.
Straight-Line Method
Depreciation Accumulated
Expense Depreciation
(credit) Year
1
2
3
(debit)
20,000
20,000
Units-of-Production Method
$ 20,000
20,000
20,000
$ 60,000
Accumulated Undepreciated
Depreciation Balance
Balance (book value)
$ 62,500
$ 20,000
40,000
60,000
42,500
22,500
2,500
The ride has a 100,000-mile estimated useful life. If the ride is used 30,000 miles in the first year, what is the amount of depreciation expense?
Year
1
2
3
Miles
30,000
50,000
20,000
100,000
Depreciation
Expense
30,000
12,000
Accumulated
Depreciation
Balance
$ 18,000
48,000
60,000
Undepreciated
Balance
(book value)
44,500
14,500
2,500
Ch. 9 - p. 3

Declining-Balance Method
What is the amount of amount of depreciation for each of the first two years?
Double-Declining-Balance Method
Partial Year Depreciation Calculations
When a plant asset is acquired during the year, depreciation is calculated for the fraction of the year the asset is owned.
Summary of Depreciation Methods
Tax Depreciation
For tax purposes, most corporations use the Modified Accelerated Cost Recovery System (MACRS).
MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate new investment.
Asset Impairment Losses
Impairment is the loss of a significant portion of the utility of an asset through . . .
1) casualty, 2) obsolescence, and 3) lack of demand for the asset’s services.
A loss should be recognized when an asset suffers a permanent impairment.
For example, Cedar Fair recorded a $3,200,000 write-down of its equipment:
Ch. 9 - p. 4

Disposal of Tangible Assets
1.
Update depreciation to the date of disposal.
2.
Record the disposal by: a.
Recording cash received (debit) or paid (credit).
Writing off accumulated depreciation (debit). b.
Recording a gain (credit) or loss (debit).
Writing off the asset cost (credit).
If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit).
Cedar Fair sold a hotel for $3,000,000 cash at the end of its 16 th year of use. The hotel originally cost
$20,000,000, and was depreciated using the straight-line method with zero residual value and a useful life of
20 years.
The amount of depreciation per year is: a) $0. b) $500,000. c) $1,000,000. d)
The equipment’s book value at date of sale is: a) $4,000,000. b) $3,000,000. c) $17,000,000.
$2,000,000. d) $16,500,000.
The equipment’s sale resulted in: a) a loss of $1,000,000. b) a gain of $3,000,000. c) a gain of $1,000,000. d) a loss of $5,000,000.
Analyze and prepare the journal entry to record Cedar Fair’s sale of the hotel.
Intangible Assets

Noncurrent assets without physical substance.

Often provide exclusive rights or privileges.

Useful life is often difficult to determine

Usually acquired for operational use.
Record at cash equivalent cost, including purchase price, legal fees, and filing fees.
Amortize intangibles with limited lives over the shorter of their economic lives or legal lives using the straightline method.
Ch. 9 - p. 5

Trademarks and Copyrights
A trademark is a symbol, design, or logo associated with a business.

Internally developed trademarks have no recorded asset cost.

Purchased trademarks are recorded at cost.
A copyright is an exclusive right granted by the federal government to protect artistic or intellectual properties.

Legal life is life of creator plus 70 years.

Amortize cost over the period benefited.
Patents and Licensing Rights
A patent is an exclusive right granted by the federal government to sell or manufacture an invention.

Cost is purchase price plus legal cost to defend.

Amortize cost over the shorter of useful life or 20 years.
Licensing rights grant limited permission to use a product or service according to specific terms and conditions.
Franchises
A franchise provides legally protected rights to sell products or provide services purchased by a franchisee from the franchisor.
Goodwill

Occurs when one company buys another company.
Purchase Price > Fair Market Value of Net Assets Acquired



Only purchased goodwill is an intangible asset.
Is not amortized.
Is impairment tested and may be written down.
Amortization of Limited Life Intangible Asset
Assume Cedar Fair purchased a patent for an uphill water-coaster for $800,000 and intends to use it for 20 years. Each year, the company would record $40,000 in Amortization Expense ($800,000 ÷ 20 years).
Summary of Accounting Rules for Long-Lived Assets
Stage
Acquisition
Subject
Purchased Asset
Repairs/maintenance
Ordinary Expense related costs
Capitalize related costs
Limited life straight-line declining-balance
Do not depreciate land disposal than book value disposal than book value
Ch. 9 - p. 6

Turnover Analysis
This ratio measures the sales dollars generated by each dollar invested in fixed assets.
For the year 2008, Cedar Fair had $1,000,000 of revenue. End-of-year fixed assets were $1,800,000 and beginning-of-year fixed assets were $1,940,000. (All numbers in millions.)
2008 Fixed Asset Turnover Comparisons
Yahoo!
5.68
Six Flags
0.64
Cedar Fair
0.53
Impact of Depreciation Differences
Accelerated depreciation methods, in the early years of an asset’s useful life, results in higher depreciation expense, lower net income, and lower book value than would result using straight-line depreciation.

Selling an asset with a low book value, resulting from an accelerated depreciation method, might result in a gain.

Selling the same asset with a higher book value, resulting from straight-line depreciation, might result in a loss.
Natural Resources
Depletion is the process of allocating a natural resource’s cost over the period of its extraction. Depletion is similar in concept to depreciation. Depletion that is computed for a period is first added to inventory and then expensed when the inventory is sold.
Changes in Depreciation Estimates
Over the life of an asset, new information may come to light that indicates the original estimates need to be revised.
Cedar Fair purchased equipment that cost $60,000,000 with an estimated useful life of 20 years and an estimated salvage value of $3,000,000. During year 5, Cedar Fair changed the estimated useful life to 25 years and lowered the estimated salvage value to $2,400,000.
Calculate depreciation expense for year 5 and thereafter using the straight-line method.
When our estimates change, the new depreciation is:
$ 60,000,000
Accumulated depreciation for 4 years
(($60,000,000 – $3,000,000) ÷ 20) × 4 years
11,400,000
$ 48,600,000
Revised annual depreciation
($48,600,000 – $2,400,000) ÷ 21 $ 2,200,000
Ch. 9 - p. 7

Exercises
M9-4 Computing Book Value (Straight-Line Depreciation)
Calculate the book value of a two-year-old machine that cost $200,000, has an estimated residual value of
$40,000, and has an estimated useful life of four years. The company uses straight-line depreciation.
Ch. 9 - p. 8

M9-5 Computing Book Value (Units-of-Production Depreciation)
Calculate the book value of a two-year-old machine that cost $200,000, has an estimated residual value of
$40,000, and has an estimated useful life of 20,000 machine hours. The company uses units-of-production depreciation and ran the machine 3,000 hours in year 1 and 8,000 hours in year 2.
Ch. 9 - p. 9

M9-6 Computing Book Value (Double-Declining-Balance Depreciation)
Calculate the book value of a two-year-old machine that cost $200,000, has an estimated residual value of
$40,000, and has an estimated useful life of four years. The company uses double-declining-balance depreciation. Round to the nearest dollar.
Ch. 9 - p. 10

E9-6 Computing Depreciation under Alternative Methods
PlasticWorks Corporation bought a machine at the beginning of the year at a cost of $12,000. The estimated useful life was five years, and the residual value was $2,000. Assume that the estimated productive life of the machine is 10,000 units. Expected annual production was: year 1, 3,000 units; year 2, 3,000 units; year 3, 2,000 units; year 4, 1,000 units; and year 5, 1,000 units.
Required:
1. Complete a depreciation schedule for each of the alternative methods.
a. Straight-line.
b. Units-of-production.
c. Double-declining-balance.
2. Which method will result in the highest net income in year 2? Does this higher
net income mean the machine was used more efficiently under this
depreciation method?
Ch. 9 - p. 11

E9-7 Computing Depreciation under Alternative Methods
Sonic Corporation purchased and installed electronic payment equipment at its drive-inn restaurants in San
Marcos, TX, at a cost of $27,000. The equipment has an estimated residual value of $1,500. The equipment is expected to process 255,000 payments over its three-year useful life. Per year, expected payment transactions are 61,200, year 1; 140,250, year 2; and 53,550, year 3.
Required:
Complete a depreciation schedule for each of the alternative methods.
1. Straight-line.
2. Units-of-production.
3. Double-declining-balance.
Ch. 9 - p. 12

E9-11 Demonstrating the Effect of Book Value on Reporting an Asset Disposal
FedEx Corporation is the world’s leading express-distribution company. In addition to the world’s largest fleet of all-cargo aircraft, the company has more than 53,700 ground vehicles that pick up and deliver packages.
Assume that FedEx sold a delivery truck for $16,000. FedEx had originally purchased the truck for $28,000, and had recorded depreciation for three years.
Required:
1. Calculate the amount of gain or loss on disposal, assuming that
Accumulated Depreciation was: (a) $12,000, (b) $10,000, and (c) $15,000.
2. Using the following structure, indicate the effects (accounts, amounts, and
+ or -) for the disposal of the truck in each of the three preceding situations.
Assets = Liabilities + Stockholders’ Equity
3. Based on the three preceding situations, explain how the amount of
depreciation recorded up to the time of disposal affects the amount of gain or
loss on disposal.
4. Prepare the journal entry to record the disposal of the truck for each situation
in requirement 1.
Ch. 9 - p. 13