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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 9 1.

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2 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 9 1

3 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2 Measure the cost of a plant asset Account for depreciation Record the disposal of an asset by sale or trade Account for natural resources Account for intangible assets Describe ethical issues related to plant assets

4 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Real or tangible assets Buildings, desk, equipment Depreciation Natural resources Oil, diamonds, forest Depletion Intangible assets Software, patents, goodwill Amortization Plant assets are relatively expensive Last multiple years Allocate costs based on benefits over the years 3

5 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The cost of plant assets is the advance purchase of services. As time passes, the services are used, and the portion of the asset cost used is transferred to expense. Then we get rid of it, maybe for more or less than its book value.

6 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Measure the cost of a plant asset 5 1 1

7 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cost of an asset = Sum of actual costs incurred to purchase the asset and ready it for its intended purpose Rule for measuring an asset’s cost The Cost Principle 6

8 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 7 Land Building Not Depreciated Depreciated Record purchases to accounts based on asset behavior. These two assets behave significantly differently, so put them in different accounts.

9 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. NOT depreciated Costs included in land: Purchase price Brokerage fees Survey and legal fees Property taxes in arrears Title transfer Costs of clearing and removing unwanted elements Buildings and land improvements are not Land 8 Cost of an asset = Sum of actual costs incurred to purchase the asset and ready it for its intended purpose

10 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 9 Capitalized

11 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Subject to depreciation Examples: Fencing Paving Sprinkler systems Lighting Signs 10

12 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Constructed Building Constructed Architectural fees Building permits Contractor charges Payments for material, labor, and overhead Capitalized interest cost, if self-constructed Purchased Building Purchased Purchase price Costs to renovate the building for use Similar to construction costs 11

13 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cost includes: Net Purchase price Transportation charges Insurance while in transit Sales tax and other taxes Purchase commission Installation/assembly The cost of testing before it is used NOT Related supplies First viable production run 12

14 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Purchase a group of plant assets for a single price Also called basket purchase Assign cost to individual assets based on relative sales values Land Land Improvements Building Equipment 13

15 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 14 Obtain a market value appraisal of the pieces Compute the ratio of each asset’s market value to the total The journal entry to record the purchase:

16 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Capital Expenditure Revenue Expenditure Any material expenditure that will benefit multiple accounting periods. To capitalize an expenditure means to record it to an asset account for now. Smaller dollar amounts or consumed in one period. To expense an expenditure means to charge it to an expense account, NOW. Capitalize Expense Which is it?Purchased a new delivery truckWhich is it?Purchased 10,000 $100 scannersWhich is it?Purchased a new life-time staplerWhich is it?Purchased a Stair Master for home

17 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Tig welder purchase Welder price: $6,400 Freight in: $100 Sales tax: $500 Related supplies: $75 Total Cost: $7,000

18 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

19 If capital expenditure incorrectly recorded as expense: 18 Overstates expensesUnderstates net incomeUnderstates CapitalUnderstates assets (equipment)

20 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. This chapter lists the costs included for the acquisition of land. First is the purchase price, which is obviously included in the cost of the land. The reasons for including the other costs are not so obvious. For example, removing a building looks more like an expense. 1.State why the costs listed in the chapter are included as part of the cost of the land. 19 The other cost (for example, back property taxes, transfer taxes, removing a building, and survey fees) are included as part of the cost of the land because they are necessary to get the land ready for its intended use.

21 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. (Continued) 2. After the land is ready for use, will these costs be capitalized or expensed? 20 After the land is ready for use, subsequent land- related cost such as property taxes, ground maintenance and ordinary land related would be expensed.

22 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Rural Tech Support pays $130,000 for a group purchase of land, building, and equipment. At the time of your acquisition, the land has a market value of $70,000, the building $56,000, and the equipment $14, Journalize the lump-sum purchase of the three assets for a total cost of $130,000. You sign a note payable for this amount. 21 Market Value % of Market Value Cost of Each Asset Land$70,00050%$65,000 Building56,00040%52,000 Equipment14,00010%13,000 Total140,000$130,000

23 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 1.Journalize the lump-sum purchase of the three assets for a total cost of $130,000. You sign a note payable for this amount. 22 Journal Entry DATE ACCOUNTS AND EXPLANATIONS DEBITCREDIT Land$ 65,000 Building52,000 Equipment13,000 Notes Payable$130,000

24 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Account for depreciation

25 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Allocation of cost to expense over its useful life Matches expense against revenue generated 24 Oven $5,000 Cash $5,000 Buy it Use it for 4 years Earn pizza sales revenue Expense oven usage $1,000 $1,000 more or less Sell the old oven $1,000 Can you smell the matching principle at work here?

26 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 25 Depreciation is NOT:

27 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Allocating the portion of the cost of a plant asset used to expense in the periods in which services are received from the asset.

28 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Allocating the portion of the cost of a plant asset used to expense in the periods in which services are received from the asset.

29 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Allocating the portion of the cost of a plant asset used to expense in the periods in which services are received from the asset.

30 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Accumulated Depreciation Contra-asset Represents the portion of an asset’s cost that has already been allocated to expense. Book Value Cost - Accumulated Depreciation = book value Causes of Depreciation (incidental) Physical deterioration Obsolescence Accumulated Depreciation Contra-asset Represents the portion of an asset’s cost that has already been allocated to expense. Book Value Cost - Accumulated Depreciation = book value Causes of Depreciation (incidental) Physical deterioration Obsolescence

31 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Data ItemAmount Cost of capitalized assetAsset debit amount Estimated residual valueSalvage value Depreciable cost Cost–estimated residual value Estimated useful life–Years Length of the service–how long the company can use the asset Estimated useful life–Units 30

32 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 31 Straight- line Units-of production Declining- balance Equal amounts per period Different amounts; based upon usage Decreasing amount over time as it ages

33 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. (Cost - Residual Value) x 1/life x #/12 Depreciation Expense per Year =  An equal amount is expensed each year  The expense portrays an item equally useful in beginning & end of life

34 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. January 1, 2011, Pizzaz Pizzas bought two new pizza ovens.  Paid $12,000 for the pair including transportation and installation.  Estimate useful life of 5 years.  Expect to sell the pair for $4,000 used after the 5 years Prepare a complete Depreciation table using The Straight Line method January 1, 2011, Pizzaz Pizzas bought two new pizza ovens.  Paid $12,000 for the pair including transportation and installation.  Estimate useful life of 5 years.  Expect to sell the pair for $4,000 used after the 5 years Prepare a complete Depreciation table using The Straight Line method (Cost - Residual Value) x 1/life x #/12 Depreciation Expense per Year = ($12,000 – 4,000) x 1/5 x 12/12 = $1,600 =

35 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Residual Value (Cost - Residual Value) x 1/life x #/12 Depreciation Expense per Year = ($12,000 – 4,000) x 1/5 x 12/12 = $1,600 = Journal Entry: Income Statement impact. What is the balance sheet account entry? Total depreciation to date: Contra asset account balances The “Net” asset value on the balance sheet

36 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Full-Year convention: Record a full year’s depreciation the first year. Eg May 1 st purchase: 100% of full year’s amount Overstates the first year depreciation, Materially so? Actual Date: Record the depreciation from the actual date of purchase. Eg May 1st purchase: 8/12 (or 244/365) x full year’s amount The most precise option, requiring different calculations for each item purchased on different dates. ½ -Year convention: Record 1/2 year’s depreciation the first year. Eg May 1st purchase: 50% of full year’s amount. Extend past the final year to catch up on the other ½ year. Easy, balances error between over and understating Full-Year convention: Record a full year’s depreciation the first year. Eg May 1 st purchase: 100% of full year’s amount Overstates the first year depreciation, Materially so? Actual Date: Record the depreciation from the actual date of purchase. Eg May 1st purchase: 8/12 (or 244/365) x full year’s amount The most precise option, requiring different calculations for each item purchased on different dates. ½ -Year convention: Record 1/2 year’s depreciation the first year. Eg May 1st purchase: 50% of full year’s amount. Extend past the final year to catch up on the other ½ year. Easy, balances error between over and understating

37 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 36

38 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. An equal amount of depreciation to each year. Objective portrayal of consistent usage Simple to implement By far the most commonly used method 37

39 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 38 Straight- line Units-of production Equal amounts per period Different amounts; based upon usage

40 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Assigned depreciation rate to each unit of life Unit can be miles, units produced, hours, etc. Ideal for assets that are replaced because of wear, and that are not used at a consistent rate Annual depreciation depends on asset usage 39 (Cost - Residual Value) x 1/ life in units Depreciation expense per unit of output =

41 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 40 February 23, 2011, Pizzaz Pizza Bought a used truck to make deliveries. The truck cost $7,000 and should last for 20,000 more miles. They expect to drive the truck 2,000 miles the first year. They will double their miles driven each year until the truck dies. After that they should be able to sell the truck as-is for $1,000. Prepare a complete Depreciation table using The Units of Production method February 23, 2011, Pizzaz Pizza Bought a used truck to make deliveries. The truck cost $7,000 and should last for 20,000 more miles. They expect to drive the truck 2,000 miles the first year. They will double their miles driven each year until the truck dies. After that they should be able to sell the truck as-is for $1,000. Prepare a complete Depreciation table using The Units of Production method (Cost - Residual Value) x 1/ life in units Depreciation expense per unit of output = ($7,000 - $1,000) x 1/ 20,000 miles = = 30 cents / mile

42 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cost $7,000, residual $1,000 20,000 miles of life. Use 2,000 1 st year, double annually 41

43 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 42

44 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 43

45 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 44

46 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 45 Straight- line Units-of production Declining- balance Equal amounts per period Different amounts; based upon usage Decreasing amount over time as it ages

47 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The TOTAL amount expensed across the entire useful life is identical. What changes?

48 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. To reflect actual asset life behavior: If the asset is more productive in the early years of its life. To minimize Income taxes NOW: To show increasing profitability year to year To reflect actual asset life behavior: If the asset is more productive in the early years of its life. To minimize Income taxes NOW: To show increasing profitability year to year Straight Line 2 years Deprec. Exp. $4000 Acc. Dep. $4000 Deprec. Exp. $4000 Acc. Dep. $4000 Straight Line 2 years Deprec. Exp. $4000 Acc. Dep. $4000 Deprec. Exp. $4000 Acc. Dep. $4000 Accelerated 2 years Deprec. Exp. $6000 Acc. Dep. $6000 Deprec. Exp. $2000 Acc. Dep. $2000 Accelerated 2 years Deprec. Exp. $6000 Acc. Dep. $6000 Deprec. Exp. $2000 Acc. Dep. $2000 Year 1 Year 2

49 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Accelerated method More depreciation expense early in asset’s life Less depreciation expense as it ages Calculated as: Note: The book value is the declining part The 2 is the double part Otherwise, it looks just like straight line 48 (Cost – Accumulated Depreciation) x 2/life x #/12 Depreciation Expense = (Book Value) x 2/life x #/12 =

50 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall times straight line rate Book value declines Book value becomes period’s depreciable cost Depreciation expense declines Final year’s expense leaves book value equal to residual value, no lower & no higher

51 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 50 Optional switch to straight line: Do it when straight line would provide a higher expense than DDB This avoids undesirable increase of expense in final year ( ) x ½ = 3,928 36,072 4,928 ( ) x ½ = 3,928 40,000

52 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 51

53 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 52 Straight-line Units-of- production Double- declining- balance Assets that generate revenue over time Assets that depreciate due to wear and tear from use Assets that produce more revenue in their early years

54 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Only for methods using months Straight-line Double-declining balance 53 Period of time used changes the formula for time

55 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Changes in useful life or residual value Considered a change in estimate Must report on the reason and effect of the change Asset book value is depreciated over the remaining life 54

56 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Changes in Useful Life The asset’s remaining depreciable book value is spread over the asset’s remaining life Change in residual value 55

57 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Asset has reached the end of its estimated life If still useful, a company will continue to use it Report book value on balance sheet Record no more depreciation Asset never reported below residual value 56

58 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. S9-3: COMPUTING FIRST-YEAR DEPRECIATION AND BOOK VALUE At the beginning of the year, Alaska Freight Airlines purchased a used airplane for $43,000,000. Alaska Freight Airlines expects the plane to remain useful for five years (4,000,000 miles) and to have a residual value of $7,000,000. The company expects the plane to be flown 1,400,000 miles the first year. 1. Compute Alaska Freight Airlines’ first-year depreciation on the plane using the following methods: a. Straight-line b. Units-of-production c. Double-declining-balance 57

59 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. S9-3: COMPUTING FIRST-YEAR DEPRECIATION AND BOOK VALUES ( Continued) Compute Alaska Freight Airlines’ first-year depreciation on the plane using the following method: a. Straight-line 58 $43,000,000 – 7,000,000 / 5 years = $7,200,000

60 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. S9-3: COMPUTING FIRST-YEAR DEPRECIATION AND BOOK VALUE (Continued) Compute Alaska Freight Airlines’ first-year depreciation on the plane using the following method: b. Units-of-production 59 $43,000,000 – 7,000,000 4,000,000 miles $9 per mile X 1,400,000 miles = $12,600,000 =$9 per mile

61 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. S9-3: COMPUTING FIRST-YEAR DEPRECIATION AND BOOK VALUE (Continued) Compute Alaska Freight Airlines’ first-year depreciation on the plane using the following method: c. Double-declining-balance 60 1 st year ($43,000,000 - $0) X 2/5 X 12/12 = $17,200,000 2 nd year ($43,000,000 - $17,200,000) X 2/5 X 12/12 = $10,320,000

62 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Record the disposal of an asset by sale or trade

63 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Asset wears out or becomes obsolete. Company can: Sell the asset for cash Scrap the asset for no cash Trade the asset for another asset Non-like property exchange Like-kind exchange 62 Result in a gain or loss No gain or loss

64 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Update depreciation Remove old asset from books Zero out asset by crediting for original cost Zero out accumulated depreciation of asset by debiting for all depreciation taken Record the value of any cash paid or received If a note was signed, credit Notes payable Determine difference between total debits and total credits 63

65 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. April 1: Arriano Fabrication Sold land & building for $100,000 cash and $800,000 Note Receivable Costs: Land $50,000 Building $550,000 Accumulated depreciation, building $250,000 April 1: Arriano Fabrication Sold land & building for $100,000 cash and $800,000 Note Receivable Costs: Land $50,000 Building $550,000 Accumulated depreciation, building $250,000 Debits and credits Don’t match! $1,150,000 $600,000 Debits and credits match! $1,150,000 $1,150,000

66 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Asset traded for a like-kind asset Difference will be recorded as a debit to the new asset account Asset sold or exchanged for a dissimilar asset Gain or loss will be recorded 65 If debits > credits If debits < credits If debits = credits GAINLOSS NO GAIN OR LOSS

67 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. GPN purchased equipment on January 1, 2012, for $36,000. Depreciation taken to date amounts to $16,000 after two years use. GPN sold the equipment for $26,000 on December 31, Journalize the sale of the equipment. 66 Journal Entry DATE ACCOUNTS AND EXPLANATIONS DEBITCREDIT Dec 31 Cash26,000 Accumulated depreciation16,000 Equipment36,000 Gain on sale of asset6,000

68 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Brown’s Salvage Company purchased a computer for $2,600, debiting Computer equipment. During 2012 and 2013, Brown’s Salvage Company recorded total depreciation of $2,000 on the computer. On January 1, 2014, Brown’s Salvage Company traded in the computer for a new one, paying $2,500 cash. The fair value of the new computer is $3,100. Journalize the sale of the equipment, assuming straight-line depreciation was used. 67 Journal Entry DATE ACCOUNTS AND EXPLANATIONS DEBITCREDIT Jan 1 Computer equipment (new)3,100 Accumulated depreciation (old)2,000 Computer equipment (old)2,600 Cash2,500

69 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Account for natural resources

70 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Plant assets coming from the earth In or on the ground Examples: Iron ore, oil, natural gas, diamonds, coal, and timber Expensed through depletion Depletion expense–the portion of the cost used up Computed by the units-of-production method 69

71 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Formula Estimated total units equals amount to reasonably remove Cost–Residual value equals value to be depleted As resources sold, costs are moved to Depletion expense 70

72 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Accumulated depletion–a contra account similar to Accumulated depreciation. Reported on the balance sheet similar to other depreciable assets 71

73 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. TexAm Petroleum holds huge reserves of oil and gas assets. Assume that at the end of 2012, TexAm Petroleum’s cost of oil and gas reserves totaled $72,000,000,000, representing 8,000,000,000 barrels of oil and gas. 1.Which depreciation method does TexAm Petroleum use to compute depletion? 72 Units-of-production is the depreciation method used to compute depreciation.

74 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. (Continued) 2. Suppose TexAm Petroleum removed 400,000,000 barrels of oil during Journalize depletion expense for Journal Entry DATEACCOUNTS AND EXPLANATIONSDEBITCREDIT Dec 31 Depletion expense3,600,000,000 Accumulated depreciation3,600,000,000

75 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Account for intangible assets

76 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Non-current assets with no physical form Provide exclusive rights or privileges Expensed through amortization using the straight-line method Credit to the asset directly If intangible has indefinite life, it is not amortized 75

77 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Exclusive 20- year right to produce & sell an invention Amortized over its useful life Exclusive right to sell a book, musical work, film, art, software, or intellectual property (70 years beyond the authors life) Amortized over its useful life Represent distinctive products or services Nike - swoosh, Chevrolet – “Like a Rock” Amortized over its useful life 76 PatentCopyright Trademarks - brand names Issued by the federal government

78 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 77 Franchises & licenses Privilege to sell goods or services under specific conditions Examples: McDonalds, Holiday Inn, Dallas Cowboys Amortized over its useful life Goodwill Excess of cost to purchase another company over market value of its net assets Recorded only by an acquiring company Goodwill is not amortized, it is expensed through impairment

79 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Important to several industries Pharmaceutical companies Examples: Procter & Gamble, General Electric, Intel, and Boeing USGAAP Not an intangible Expensed as incurred IFRS Capitalize Development Amortized over product life 78

80 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The amount by which the purchase price exceeds the fair market value of net assets acquired. Occurs when one company buys another company. Only purchased goodwill is an intangible asset. Goodwill

81 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Not amortized. Subject to assessment for impairment value and may be written down. Goodwill Want a snack? Let’s buy: Not amortized. Subject to assessment for impairment value and may be written down. Not amortized. Subject to assessment for impairment value and may be written down. Not amortized. Subject to assessment for impairment value and may be written down.

82 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. When one media company buys another, goodwill is often the most costly asset. TMC Advertising paid $170,000 to acquire Seacoast Report, a weekly advertising paper. At the time of the acquisition, Seacoast Report’s balance sheet reported total assets of $130,000 and liabilities of $70,000. The fair market value of Seacoast Report’s assets was $100,000. How much goodwill did TMC Advertising purchase when acquiring Seacoast Report? Journalize the purchase. 81 $170,000 – ($100,000 – $70,000) = $140,000 Journal Entry DATEACCOUNTS AND EXPLANATIONSDEBITCREDIT Assets100,000 Goodwill140,000 Liabilities70,000 Cash170,000

83 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Describe ethical issues related to plant assets

84 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Capitalize Results in higher asset value and larger net income Looks better to investors If cost provides a future benefit, then capitalize Expense Results in lower net income Less taxes If cost does not provide a future benefit, then expense 83

85 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 84 All costs spent to ready an asset to perform its intended function are capitalized (debited to the asset account). All repairs that neither extend the asset’s life nor improve its efficiency are expensed. Depreciation recovers the cost invested in an asset over the asset’s useful life. In this section we illustrated three methods: straight-line, UOP, and double-declining- balance. Although the three methods allocate the cost differently, when the asset’s life is over, the net book value is always equal to the asset’s residual value. Asset impairments also can reduce the value recorded on the books for the asset. Impairments recognize decline in an asset’s value for issues other than normal depreciation.

86 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Asset trades or disposals are as common as asset acquisitions. The key to recording the trade/disposal is to first make sure the depreciation is current on the asset. Then, record the value of items given up or received in the trade/disposal based on whether the trade is like-kind (no gain/loss) or not (potential gain/loss). Depletion is the word we use instead of depreciation to attach to recovering the cost of natural resources. UOP is the most common method used in depletion accounting. 85

87 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Intangible assets are assets whose value is not represented by their physical form but from their original creativity. The cost invested in intangibles is recovered using amortization, usually using the straight-line method since the intangible’s life is the best measure of its decline in value. Ethical issues regarding the recording of assets should revolve around the definition of an asset. That is, does this item provide future economic benefit? If so, it’s an asset. 86

88 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 87

89 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 88


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