©CourseCollege.com 1 20 Other Assets Learning Objectives 1.Account for natural resources 2.Account for specifically identifiable intangible assets 3.Explain accounting issues involving purchased goodwill 4.Analysis: Compute and explain pledged assets to secured liabilities Other assets, including natural resources and intangibles

©CourseCollege.com 2 Objective 20.1: Account for natural resources O20.1 Natural resource assets such as timber, petroleum and minerals are also called wasting assets. They can be replaced only by an act of nature and they are consumed by the firm by removal from their natural location.

©CourseCollege.com 3 Account for natural resources O20.1 Accounting for natural assets is similar to the accounting for fixed assets. For both types, fixed and natural assets, we ask the same questions:.What was the total cost to acquire the asset?.How should this cost be allocated to the generation of income or other assets?

©CourseCollege.com 4 Account for natural resources O20.1 Allocation of fixed assets is called depreciation, allocation of natural assets is called depletion. The total cost of acquiring natural resources can be considerable and take some time to complete. Costs can include initial costs to acquire the resource, engineering costs, development costs and cost of restoration –for example

©CourseCollege.com 5 Account for natural resources O20.1 Total costs minus salvage value = depletion base

©CourseCollege.com 6 Depletion rate per unit O10.2 Depletion rate per unit extracted = Cost – Salvage Value (depletion base) Unit size of resource

©CourseCollege.com 7 Depletion rate per unit O20.1 Here, the size of the mineral deposit is 1,250,000 tons.

©CourseCollege.com 8 Depletion rate per unit O10.2 Depletion per unit extracted = $1,525,000 (depletion base) 1,250,000 tons (Unit size of resource) = $1.22 per ton of ore extracted

©CourseCollege.com 9 Depletion rate per unit O20.1 Total costs minus salvage value divided by size of deposit = depletion rate per unit.

©CourseCollege.com 10 Account for natural resources O20.1 The journal entry to record the acquisition of the deposit follows...

©CourseCollege.com 11 Account for natural resources O20.1 The total cost of the acquisition The restoration estimate will be payable when the deposit is fully depleted

©CourseCollege.com 12 Accumulated depletion (In practice, direct reductions to the asset account are also used.) O20.1 (15) Accumulated Depletion Mineral Deposits 120 Net Mineral Deposits 105

©CourseCollege.com 13 Account for natural resources O20.1 For the first year, ConPro mined 300,000 tons of mineral ore. The depletion calculation is: 300,000 tons x $1.22 = $366,000 This will be expensed when the ore is sold This reduces the value of the mineral deposit on the balance sheet

©CourseCollege.com 14 Account for natural resources O20.1 Over the life of the asset, extraction activity causes depletion to be recorded... No extraction means no depletion

©CourseCollege.com 15 Objective 20.2: Account for specifically identifiable intangible assets O20.2 Intangible assets lack a physical presence and exhibit a high degree of uncertainty as to their future economic benefit. Specifically identifiable assets include:

©CourseCollege.com 16 Account for specifically identifiable intangible assets O20.2 Patents Copyrights Specificall y Identifiabl e Intangible s Franchises & Licenses Trademarks Leaseholds

©CourseCollege.com 17 Account for specifically identifiable intangible assets O20.2 The process of allocation of the costs of intangibles is called amortization. (This can be compared to both depreciation of fixed assets and depletion of natural resource assets) A contra asset account, accumulated amortization, can be used to record amortization although is common to simple credit the intangible asset account itself with the recorded amortization.

©CourseCollege.com 18 Account for specifically identifiable intangible assets Example –Conpro Minerals purchased a patent for a process to extract precious metals from mined ore. Total cost of patent acquisition was $600,000. The useful economic life is 5 years. The first year’s amortization Patents O20.2

©CourseCollege.com 19 The first year’s amortization Account for specifically identifiable intangible assets Example –Consider the purchase of a copyright for $150,000 with a useful life of 4 years. Below are the journal entries for capitalizing the copyright purchase and the first year amortization. Copyrights O20.2

©CourseCollege.com 20 Account for specifically identifiable intangible assets O20.2 Trademarks A trademark or service mark is a word, phrase, symbol or design that identifies the source of goods or services or the enterprise providing them Trademarks are registered for an indefinite number of renewals for periods of 10 years each Trademarks may be purchased from original or subsequent owners and are recorded at cost to acquire plus any direct costs Trademarks costs should be amortized over the useful life of the intangible, when the useful life is not determinable, they are not amortized.

©CourseCollege.com 21 Account for specifically identifiable intangible assets O20.2 Franchises & Licenses A franchise or license is a contractual right to sell certain products and services and/or to use certain trademarks and trade names The cost of acquiring the franchise or license is debited to the asset account for franchises and licenses as are any direct costs of securing the license such as legal and filing fees. Franchise and license costs should be amortized over the life of the agreement. Should the life be indefinite by agreement, the cost is not amortized. Franchise Franchisor Franchisee (Firm) Franchise

©CourseCollege.com 22 Account for specifically identifiable intangible assets O20.2 Leaseholds 450,000 cost divided by 15 years = 30,000 ConPro signed a 30 year lease for an industrial land parcel with annual lease payments of $5,500 required. They constructed a special purpose machine shop with an estimated useful of 15 years at a cost of $450,000 with no salvage value.

©CourseCollege.com 23 Objective 20.3: Explain accounting issues involving purchased goodwill O20.3 Goodwill is an intangible that arises when one business buys another (entire) business. It is defined as the excess of the purchase price paid over the net fair value of the assets purchased. Only purchased goodwill is allowed to be recorded under accounting rules. Internal goodwill exists as evidenced by the commonly observed excess of market capitalization over book values in the stock market.

©CourseCollege.com 24 Explain accounting issues involving purchased goodwill O20.3 In the following example, goodwill is recorded in the purchase transaction Purchase price for the net assets was $1,250,000 Fair value of net assets $948,640 Goodwill recorded $1,250,000—$948,640 = $301,360

©CourseCollege.com 25 Explain accounting issues involving purchased goodwill O20.3 Purchase price $1,250,000—$948,640 net assets at fair value = $301,360 Goodwill

©CourseCollege.com 26 Journal entry for purchased goodwill O20.3 Fair values of acquired accounts are recorded Goodwill balances the journal entry

©CourseCollege.com 27 Amortization?? for purchased goodwill O New FASB rule -Goodwill is no longer amortized 2.It must be tested each year for impairment 3.Fair values of net assets are recomputed and implied goodwill is calculated 4.Fair value of the goodwill is determined by analysis 5.If the recorded value of the goodwill is greater than the fair value calculation, the recorded value is written down (never up) due to impairment and the impaired amount is expensed. Here a $50,000 impairment to Goodwill has been recorded. The firm would also report a $50,000 expense from impairment

©CourseCollege.com 28 Objective 20.4: Analysis: Compute and explain pledged assets to secured liabilities O20.4 This ratio compares pledged assets to the liabilities that are secured by the pledge of those assets Pledged assets to secured liabilities = Book value of pledged assets Book value of secured liabilities A ratio greater than 1 would be expected for most loan relationships, however, these are book values and may not reflect the actual market values that the lender relied on in making the loan

©CourseCollege.com 29 O20.4 Example –Pledged assets to secured liabilities Note the drop in coverage for 2010.

©CourseCollege.com 30 End Unit 20