Chapter 9: Long-Term Assets: Fixed and Intangible

Copyright

*Description* Exclusive right to benefit from a literary, artistic, or musical composition *Amortization Period* Estimated useful life not to exceed legal life *Periodic Expense* Amortization expense

Patent

*Description* Exclusive right to benefit from an innovation *Amortization Period* Estimated useful life not to exceed legal life *Periodic Expense* Amortization expense

Trademark

*Description* Exclusive use of a name, term, or symbol *Amortization Period* None *Periodic Expense* Impairment loss if fair value less than carrying value (impaired)

Goodwill

*Description* Excess of purchase price of a business over the fair value of its net assets (assets − liabilities) *Amortization Period* None *Periodic Expense* Impairment loss if fair value less than carrying value (impaired)

Determine the depletion rate as follows:

= Cost of Resources -------------------------- Estimated total units of resource Depletion Expense = Depletion Rate X Qty Removed

fixed asset turnover ratio

= Sales / Avg Book Value of fixed assets The number of dollars of sales that are generated from each dollar of average fixed assets during the year, computed by dividing sales by average book value of fixed assets.

accelerated depreciation method

A depreciation method that provides for a higher depreciation amount in the first year of the asset's use, followed by a gradually declining amount of depreciation.

units-of-activity method for depreciation

A method of depreciation that provides for depreciation expense based on the expected productive capacity of a fixed asset. Depreciation per unit= Cost - Residual Value ------------------------ Total Estimated units of activity Calculate depreciation expense using this equation; Depreciation Expense= Depreciation per Unit X Units of Activity for period

straight-line method for depreciation

A method of depreciation that provides for equal periodic depreciation expense over the estimated life of a fixed asset. Annual Depreciation= Cost - Residual Value _______________________________ Useful Life

double-declining-balance method

A method of depreciation that provides periodic depreciation expense based on the declining book value of a fixed asset over its estimated life. Step 1. Determine the straight-line percentage, using the expected useful life. Step 2. Determine the double-declining-balance rate by multiplying the straight-line rate (from Step 1) by 2. Step 3. Compute the depreciation expense by multiplying the double-declining-balance rate (from Step 2) times the book value of the asset. When using this method you must make sure that the value of the asset does not go below its estimated residual value

trademark

A name, term, or symbol used to identify a business and its products. Under federal law, businesses can protect their trademarks by registering them for 10 years and renewing the registration for 10-year periods. Like a copyright, the legal costs of registering a trademark are recorded as an asset. Most businesses identify their registered trademarks with ® in their advertisements and on their products. If a trademark is purchased from another business, its cost is recorded as an asset. In such cases, the cost of the trademark is considered to have an indefinite useful life. Thus, trademarks are not amortized. Instead, trademarks are reviewed periodically for impaired value. When a trademark is impaired, the trademark should be written down and a loss recognized.

copyright

An exclusive right to publish and sell a literary, artistic, or musical composition. Copyrights are issued by the federal government and extend for 70 years beyond the author's death. The costs of a copyright include all costs of creating the work plus any other costs of obtaining the copyright. A copyright that is purchased is recorded at the price paid for it. Copyrights are amortized over their estimated useful lives.

depletion expense

An expense account that includes the cost of natural resources as they are harvested and mined and then sold.

Goodwill

An intangible asset that is created from such favorable factors as location, product quality, reputation, and managerial skill. Goodwill allows a business to earn a greater rate of return than normal. Generally accepted accounting principles (GAAP) allow goodwill to be recorded only if it is objectively determined by a transaction. An example of such a transaction is the purchase of a business at a price in excess of the fair value of its net assets (assets less liabilities). The excess is recorded as goodwill and reported as an intangible asset.

Revised Depreciation Expense

Book Value - Revised Residual Value ------------------------------------------ Revised Remaining Useful Life

revenue expenditures

Costs that benefit only the current period or costs incurred for normal maintenance and repairs of fixed assets.

Two common misunderstandings that exist about depreciation as used in accounting include:

Depreciation does not measure a decline in the market value of a fixed asset. Instead, depreciation is an allocation of a fixed asset's cost to expense over the asset's useful life. Thus, the book value of a fixed asset (cost less accumulated depreciation) usually does not agree with the asset's market value. This is justified in accounting because a fixed asset is for use in a company's operations rather than for resale. Depreciation does not provide cash to replace fixed assets as they wear out. This misunderstanding may occur because depreciation, unlike most expenses, does not require an outlay of cash when it is recorded.

patents

Exclusive rights to produce and sell goods with one or more unique features.

Intangible assets Major accounting issues related to them

Long-term assets that are useful in the operations of a business, are not held for sale, and are without physical qualities. The major issues are:--Determining the initial cost. Determining the amortization, which is the amount of cost to transfer to expense.

Characteristics of natural resources

Naturally Occurring: An asset that is created through natural growth or naturally through the passage of time. For example, timber is a natural resource that naturally grows over time. Removed for Sale: The asset is consumed by removing it from its land source. For example, timber is removed for use when it is harvested, and minerals are removed when they are mined. Removed and Sold over More Than One Year: The natural resource is removed and sold over a period of more than one year.

What costs are and are not associated with fixed assets?

Only costs necessary for preparing fixed assets for use are included as cost of the asset. Unnecessary costs that do not increase the asset's usefulness are recorded as an expense

boot

The amount a buyer owes a seller when a fixed asset is traded in on a similar asset.

trade-in allowance

The amount a seller allows a buyer for a fixed asset that is traded in for a similar asset.

3 factors that determine the depreciation expense for a fixed asset

The asset's initial cost The asset's expected useful life. The asset's estimated residual value

capital expenditures

The costs of acquiring fixed assets, adding to a fixed asset, improving a fixed asset, or extending a fixed asset's useful life.

depreciable cost

The difference between a fixed asset's initial cost and its residual value.

expected useful life

The estimated length of time a fixed asset will be used in normal operations.

residual value

The estimated value of a fixed asset at the end of its useful life.

lessor vs lessee

The lessor is the party who owns the asset. The lessee is the party to whom the rights to use the asset are granted by the lessor.

initial cost

The purchase price of a fixed asset plus all costs to obtain and ready it for use.

the engine of a forklift that is near the end of its useful life may be overhauled at a cost of $4,500, extending its useful life by eight years. Such costs are capital expenditures and are recorded as a ______________________________________ account.

decrease in an accumulated depreciation

What does it mean when an exchange has commercial substance?

if future cash flows change as a result of the exchange. If an exchange of similar assets has commercial substance, a gain or loss is recognized. In such cases, the exchange is accounted for similar to that of a sale of a fixed asset. The gain or loss is determined as the difference between the fair market value (trade-in allowance) of the asset given up (exchanged) and its book value. Alternatively, the gain or loss can be determined as the difference between the fair market value of the new asset received and the assets given up in the exchange (cash and book value of the old asset).

the service value of a delivery truck might be improved by adding a $5,500 hydraulic lift to allow for easier and quicker loading of cargo. Such costs are capital expenditures and are recorded as _______________________________________________ account

increases to the fixed asset

Fixed assets

long-term or relatively permanent assets such as equipment, machinery, buildings, and land. Other descriptive titles for fixed assets are plant assets or property, plant, and equipment. Fixed assets have the following characteristics: -They exist physically and, thus, are tangible assets. -They are owned and used by the company in its normal operations. -They are not offered for sale as part of normal operations.