BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Depreciation for Partial Years Suppose a calendar-year business purchases a building on April 1 for $500,000 with an estimated life of 20 years and an estimated residual value of $80,000. What is the current year’s depreciation using the straight-line method?

Partial-year depreciation: $21,000 × 9/12 = $15,750 Depreciation for Partial Years Full-year depreciation: ($500,000 – $80,000) ÷ 20 = $21,000

Assume an asset cost of $40,000, an eight- year useful life with no residual value, and the straight-line method. $40,000 ÷ 8 = $5,000 depreciation per year Changing the Useful Life of a Depreciable Asset What is the carrying amount after two years? NBV = $40,000 – $10,000 = $30,000

Management believes the asset will remain useful for an additional ten years. Changing the Useful Life of a Depreciable Asset Current NBV / Estimated Remaining Useful Life $30,000 ÷ 10 = $3,000 (new depreciation per year)

Disposal of Property, Plant, and Equipment Voluntary disposals: Sale Trade-in Retirement Involuntary disposals: Fire Accident

Disposal of Property, Plant, and Equipment 1.Update amortization to the date of disposal 2.Record cash received (debit) 3.Write off accumulated amortization (debit) 4.Write off the asset cost (credit) 5.Record a gain (credit) or loss (debit)

If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. Disposal of Property, Plant, and Equipment

At the end of 2011 WestJet Airlines sold an aircraft for $1,600,000 cash original cost of the aircraft was $2,600,000 accumulated amortization (after updating amortization) was $595,000 Disposal of Property, Plant, and Equipment Prepare the journal entry to record the disposal

Disposal of Property, Plant, and Equipment Cash 1,600,000 Acc. Amort – Aircraft 595,000 Loss on sale 405,000 Aircraft 2,600,000 Recognize the cash received and the removal of the asset accounts. The difference is the gain or loss.

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.

Asset Impairment A loss should be recognized when an asset suffers a permanent impairment. impairment loss = net book value – fair value

Revaluation Model Under the revaluation model, the asset is recorded at cost when purchased but then measured at its fair value less any accumulated depreciation less any accumulated losses. Fair Value the price at which the asset could be sold

Intangible Assets Goodwill Trademarks Patents Copyrights Franchises Technology Licencing Rights Leaseholds Record at current cash equivalent cost, including purchase price, legal fees, and filing fees.

Intangible Assets Definite Life  Amortize over shorter of economic life or legal life, subject to rules specified by GAAP.  Use straight-line method. Indefinite Life Not amortized. Tested at least annually for possible impairment, and book value is reduced to fair value if impaired.

Intangible Assets – Goodwill Arpec Company paid $2,000,000 to purchase all of Utek Company’s assets and assumed liabilities of $400,000. The acquired assets were appraised at a fair value of $1,800,000.

Intangible Assets - Goodwill Purchase Price $2,000,000 FMV of Net Assets* 1,400,000 Goodwill $600,000 *FMV of Net Assets = FMV Assets – Debt Assumed =$1,800,000 - $400,000

Intangible Assets – Trademarks A symbol, design, or logo associated with a business. Purchased trademarks are recorded at cost. Internally developed trademarks have no recorded asset cost.

Intangible Assets – Patents Exclusive right granted by federal government to sell or manufacture an invention. Cost = purchase price + legal costs Amortize = shorter of useful life or 20 years

Intangible Assets – Copyrights Exclusive right granted by the federal government to protect artistic or intellectual properties. Legal life is life of creator plus 50 years Amortize cost over the period benefited.

Intangible Assets – Franchises Legally protected right to sell products or provide services purchased by franchisee from franchisor. Purchase price of the franchise is recorded as an intangible asset that is amortized.

Intangible Assets – Licencing Rights Limited permissions to use a product or service according to specific terms and conditions. You may be using computer software that is made available to you through a campus licencing agreement.

Research & Development Expenses If an intangible asset is developed internally, the cost of development normally is recorded as research and development expense. Under specific circumstances, development costs can be deferred to future accounting periods, recorded as assets, and then amortized over time, if the company can meet specific criteria for deferral.