1. Accounting & Financial Reporting
BUSG 503 Michael Dimond

2. Financial Statements for Sysco (SYY)

3. Financial Statements How much profit did the company make?
How much did they invest in assets?
Was the purchase of equipment an expense?
How are the assets allocated?
How did they finance their assets?
How did cash change during the period?
How did owners’ wealth (equity) change during the period?
What return did the owners get on their investment?

4. Initial questions about the balance sheet
Some companies carry high levels of cash. Why is that? Is there a cost to holding too much cash? Is it costly to carry too little cash?
The relative proportion of short-term and long-term assets is largely dictated by companies’ business models. Why is this the case? Why is the composition of assets on balance sheets for companies in the same industry similar? By what degree can a company’s asset composition safely deviate from industry norms?
What are the trade-offs in financing a company by owner versus non-owner financing? If non-owner financing is less costly, why don’t we see companies financed entirely with borrowed money?
How do shareholders influence the strategic direction of a company? How can long-term creditors influence strategic direction?
Most assets and liabilities are reported on the balance sheet at their acquisition price, called historical cost. Would reporting assets and liabilities at fair market values be more informative? What problems might fair-value reporting cause?

5. Initial questions about the income statement
Assume a company sells a product to a customer who will pay in 30 days. Should the seller recognize the sale when it is made or when cash is collected?
When a company purchases a long-term asset such as a building, its cost is reported on the balance sheet as an asset. Should a company, instead, record the cost of that building as an expense when it is acquired? If not, how should a company report the cost of that asset over the course of its useful life? Manufacturers and merchandisers report the cost of a product as an expense when the product sale is recorded. How might we measure the costs of a product that is sold by a merchandiser? By a manufacturer?
If an asset, such as a building, increases in value, that increase in value is not reported as income until the building is sold, if ever. What concerns arise if we record increases in asset values as part of income, when measurement of that increase is based on appraised values?
Employees commonly earn wages that are yet to be paid at the end of a particular period. Should their wages be recognized as an expense in the period that the work is performed, or when the wages are paid?
Companies are not allowed to report profit on transactions relating to their own stock. That is, they don’t report income when stock is sold, nor do they report an expense when dividends are paid to shareholders. Why is this the case?

6. Initial questions about the statement of cash flows
What is the usefulness of the statement of cash flows? Do the balance sheet and income statement provide sufficient cash flow information?
What types of information are disclosed in the statement of cash flows and why are they important?
What kinds of activities are reported in each of the operating, investing and financing sections of the statement of cash flows? How is this information useful?
Is it important for a company to report net cash inflows (positive amounts) relating to operating activities over the longer term? What are the implications if operating cash flows are negative for an extended period of time?
Why is it important to know the composition of a company’s investment activities? What kind of information might we look for? Are positive investing cash flows favorable?
Is it important to know the sources of a company’s financing activities? What questions might that information help us answer?
How might the composition of operating, investing and financing cash flows change over a company’s life cycle?
Is the bottom line increase in cash flow the key number? Why or why not?

7. Plant Assets Tangible in Nature Actively Used in Operations
Expected to Benefit Future Periods
Plant assets are tangible assets that are used actively in the operations of the entity. We fully expect these assets, sometimes referred to as property, plant, and equipment, to benefit future periods.
Not all companies have a high percentage of plant assets. McDonald’s, the fast food franchiser, has buildings and equipment in almost all cities in this country and major cities abroad. We would expect a company like McDonald’s to have substantial investments in property, plant, and equipment. Contrast McDonald’s with the online giant eBay. There is no need for eBay to have plant assets in many major cities. The company is basically an online service run from a central location. We do not mean to imply that eBay has no plant assets, but rather that its plant assets are concentrated in a central location and made up largely of computer equipment.
Called Property, Plant & Equipment

8. Decline in asset value over its useful life
Plant Assets
Decline in asset value over its useful life
Disposal
4. Record disposal
Acquisition
1. Compute cost
When we acquire a plant asset, it is recorded at its historical cost.
The cost of a plant asset includes the purchase price as well as all costs necessary to get the asset in place and ready for its intended use. We record the purchase price net of any cash discounts available.
Finance charges are not included in the cost of an asset. If we elect to finance the purchase over a period of time, the interest cost is charged as an expense when incurred.
Once the asset is placed in service, we will allocate a portion of the asset’s cost to depreciation expense as the asset becomes older.
Finally, at the end of the asset’s useful life, we will dispose of it and remove it from our books and records. The accounting for plant assets usually covers several accounting periods.
Use
2. Allocate cost to periods
benefited
3. Account for subsequent
expenditures

9. Land and Buildings
Land is not a depreciable asset, but land improvements are.
The cost of buildings include many costs; the purchase price plus the following:
Cost of purchase or construction
Title fees
Land is not a depreciable plant asset. In addition to the purchase price, there are many costs generally incurred in connection with the acquisition of land. Many of these costs are related to obtaining legal title to the land. Land improvements are depreciated over their useful life. Land improvements include parking lots, driveways, fences, sidewalks, landscaping, and any outdoor lighting systems.
Buildings are depreciated over their useful life. Whether we purchase or construct a building, the cost should include the purchase price plus any attorney fees or title fees. If we construct the building, the cost will include all the necessary construction costs as well as the costs we have just mentioned.
Attorney fees
Brokerage fees
Taxes

10. Machinery and Equipment
Purchase price
Taxes
Transportation
charges
Machinery and equipment is recorded at its purchase price less any available cash discount. The company may have to pay delivery charges on the truck; these costs are included in the cost of the truck. If we need to install any special parts to make the machinery or equipment ready for its intended use, we will include these costs in the price of the assets.
Installing, assembling, and testing
Insurance while in transit

11. Lump-Sum Asset Purchase
The total cost of a combined purchase of land and building is separated on the basis of their relative market values.
On January 1, Matrix, Inc. purchased land and building for $200,000 cash. The appraised values are building, $162,500, and land, $87,500.
It is not uncommon to have a lump-sum purchase of assets. The most common example may be when purchasing a building and land. Remember, the land is not depreciable but the building is. We must assign a portion of the purchase price separately to the building and to the land. When faced with this type of problem, accountants normally divide the cost between the assets on the basis of relative fair market values. Let’s see how this works.
Matrix, Incorporated purchased land with a building for $200,000 cash. The building was appraised at $162,500, and the land was appraised at $87,500.
We must determine how to divide the $200,000 purchase price between the land and building.
How much of the $200,000 purchase price will be charged to the building and land accounts?

12. Lump-Sum Asset Purchase
Begin by calculating the relative fair value as a percent of the total fair value. The total fair value is $250,000. The land has an appraised value of $87,500. So, land is valued at 35% of the total. We get the percent by dividing $87,500 by the total fair value of $250,000. We do a similar calculation for the building. Next, multiply the percentages we just calculated times the purchase price of $200,000 to determine the amount assigned to each asset. In the case of land, we multiply 35% times $200,000 and assign $70,000 to the land account. The remainder, or $130,000, is assigned to the building account.

13. Depreciation
Depreciation is the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use.
Acquisition Cost
(Unused)
Balance Sheet
(Used)
Income Statement
Expense
Cost
Allocation
Depreciation is a process of cost allocation. We allocate the cost of the asset to expense over its useful life in some rational and systematic manner. We do not want to confuse asset valuation, an economic concept, with allocation.
The unused portion of the asset’s cost appears on the balance sheet. We allocate a portion of the cost to expense on the income statement each accounting period. Let’s look at some very common methods of calculating depreciation expense.

14. Factors in Computing Depreciation
The calculation of depreciation requires three amounts for each asset:
Cost
Salvage value
Useful life
Regardless of the method used to calculate depreciation expense, we must know three variables: the asset’s cost, the estimated salvage value we expect to receive at the end of its useful life, and the estimated useful life of the asset. Once these three amounts are known, we select the depreciation method that we will use to calculate depreciation expense.

15. Straight-line Units-of-production Declining-balance
Depreciation Methods
Straight-line
Units-of-production
Declining-balance
There are three popular methods of calculating depreciation expense. The easiest and most widely used method is called straight-line depreciation. In special circumstances, we may wish to use the units-of-productions method. We would elect this method if the life of the asset is generally measured in terms of units of production. For example, airplanes keep highly detailed tracking of the number of hours the engines run. The unit of production may be the hours run by an aircraft. The third method is called the declining-balance method. Under this method, we take more depreciation expense in the early years of the asset’s life and lower amounts of depreciation in later years. Several income-tax depreciation calculations are based on the declining balance method. Let’s begin by looking at straight-line depreciation.

16. Cost - Salvage value Useful life
Straight-Line Method
Cost - Salvage value Useful life
Depreciation
expense for period =
$9,000
Depreciation
expense per year =
$50,000 - $5,000 5 years
Depreciation expense for any given period is determined by taking the asset’s cost less its estimated salvage value and dividing this amount by the asset’s estimated useful life. If we calculate annual depreciation, we would express the useful life in years. Or we may want to calculate monthly depreciation. We will see how to do this on a later slide. Here is our specific depreciation example. On January 1, 2011, a company purchased equipment for $50,000. The estimated useful life is five years and the estimated salvage value is $5,000. Can you calculate the amount of annual depreciation?
This calculation was relatively easy. Did you get the annual depreciation of $9,000? Now let’s make the journal entry on December 31, to record depreciation expense for the year. The proper adjusting journal entry is to debit, or increase, Depreciation Expense and credit, or increase, the contra account, Accumulated Depreciation - Equipment for $9,000. Now let’s look at depreciation for this asset for its five-year life.
How does this affect the accounts?

17. Straight-Line Method Salvage Value Depreciation Rate =
Notice that depreciation expense is the same amount in each of the five years. If we plot this amount on a graph, it would be a straight line. That is how we got the name of the method. Accumulated depreciation increases by $9,000 each year. The cost of the asset ($50,000) less accumulated depreciation at the end of any year is called book value. Book value decreases by $9,000 each year. The ending book value is equal to the estimated salvage value at the end of the asset’s useful life. We want this to be true regardless of the method we use. It’s easy to calculate the rate of depreciation—just divide 100% by the useful life. In this case the rate of depreciation is 20%. If we multiply the asset’s cost less its salvage value of $45,000 times 20%, we get the annual depreciation of $9,000.
Depreciation Rate =
(100% ÷ 5 years)
= 20% per year

18. Units-of-Production Method
Depreciation
per unit =
Cost - Salvage value
Total units of production
Step 1:
Step 2:
Depreciation
expense =
per unit ×
Number of units produced in the period
Under the units-of-production method, the first step is to calculate the depreciation expense per unit of production. Take the asset’s cost less its salvage value and divide this amount by the total estimated number of units that will be produced by the assets. Once we complete the first step, we may calculate depreciation expense for the period. Multiply the depreciation expense per unit that we determined in step one by the number of units produced in the current period. Let’s look at a specific example.

19. Units-of-Production Method
On December 31, 2011, equipment was purchased for $50,000 cash. The equipment is expected to produce 100,000 units during its useful life and has an estimated salvage value of $5,000.
At the end of December 2011, the company purchased equipment that had a cost of $50,000 and estimated salvage value of $5,000. The equipment is expected to produce 100,000 units during its useful life. During 2011, the equipment was used to produce 22,000 units. Let’s follow our two-step method of calculating depreciation expense for 2011.
If 22,000 units were produced in 2011, what is the amount of depreciation expense?

20. Units-of-Production Method
Step 1:
Depreciation
per unit =
$50, $5,000
100,000 units
= $.45 per unit
Step 2:
Depreciation
expense =
$.45 per unit × 22,000 units = $9,900
First we calculate the depreciation expense per unit of production of $0.45 per unit. During 2011, the company produced 22,000 units, so we determine depreciation expense of $9,900. Just multiply the 22,000 units times the $0.45 per unit depreciation charge. Let’s look at a table of depreciation expense for this equipment over its five-year life. Remember that we need to know the units produced in each year.

21. Units-of-Production Method
In the second column we show the units produced in each of the five years. In 2013, no units were produced, so there is no depreciation. The depreciation expense amounts are all determined by multiplying the units produced by $0.45 per unit. Finally, notice that the book value is equal to the estimated salvage value of $5,000 at the end of the asset’s estimated useful life. Now let’s move on to the declining-balance method.
No depreciation expense if the equipment is idle

22. Declining Balance Method
Depreciation
Repair
Expense
Early Years
High
Low
Later Years
Early years’ total expense approximates later years’ total expense.
One of the reasons to consider the declining-balance method is that it is an attempt to match depreciation expense and repairs expense to focus on the overall cost of ownership. In the early years of the asset’s life, depreciation under the declining-balance method is high and generally repair expenses are low. Conversely, in the later years of an asset’s life, we take less depreciation expense but repairs expense is usually higher. So, over the life of the asset, we attempt to smooth the total cost of ownership.

23. Double-Declining-Balance Method
Step 1:
Straight-line rate =
100 % ÷ Useful life = 100% ÷ 5 = 20%
Step 2:
Double-declining- balance rate
= 2 × Straight-line rate = 2 × 20% = 40%
Calculating depreciation expense under the double-declining-balance method is a three-step process. The first step is the calculate the straight-line depreciation rate. Recall that we do this by dividing 100% by the asset’s useful life. In our specific case we divide 100% by the five-year useful life to get a straight-line rate of 20%. The second step is to calculate the double-declining-balance rate. We do this by multiplying the straight-line rate times two. In our case that would be 20% times two, or 40%. The third, and final step is to determine depreciation expense. We multiply the double-declining rate times the book value of the asset at the beginning of the period. Under the double-declining-balance method we ignore estimated salvage value. The beginning book value (cost less accumulated depreciation), is $50,000. Depreciation expense for 2011 is $20,000, 40% times $50,000.
Don’t forget that salvage value is not used in the double-declining-balance method.
Step 3:
Depreciation expense =
Double-declining- balance rate ×
Beginning period book value
40% × $50,000 = $20,000 for 2011

24. Double-Declining-Balance Method
2011 Depreciation:
40% × $50,000 = $20,000
2012 Depreciation:
At the start of the second year the book value of the asset was $30,000 (cost of $50,000 less accumulated depreciation of $20,000). To determine depreciation expense, we multiply the book value of $30,000 times our rate of 40% to yield $12,000. Let’s look at a depreciation table for our asset.
40% × ($50, $20,000) = $12,000

25. Double-Declining-Balance Method
While we always want the book value to be equal to estimated salvage value at the end of the asset’s useful life, it just will not work properly using the double-declining-balance method. As you can see, the book value of the asset is $3,888. We need for it to be equal to $5,000, the estimated salvage value. The only way we can make this work is to force depreciation expense in the last year to be the amount needed to bring book value down to salvage value. In 2015, if we go by the table, we would record depreciation expense of $2,592. But this can’t be right since the book value can’t go below the salvage value of $5,000. Let’s look at a corrected schedule.
Below salvage value

26. Double-Declining-Balance Method
If we force depreciation expense to be $1,480 in 2015, accumulated depreciation will be $45,000, and book value will be equal to salvage value of $5,000. Let’s summarize our three depreciation methods by looking at some graphs.
We usually must force depreciation expense in the
last year so that book value equals salvage value.

27. Partial-Year Depreciation
Calculate the straight-line depreciation on December 31, 2011, for equipment purchased on June 30, The equipment cost $75,000, has a useful life of 10 years and an estimated salvage value of $5,000.
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for all 2011
Depreciation = $7,000 × 6/12 = $3,500 for months
To this point we have discussed depreciation of an asset that was purchased at the beginning of the year. Let’s see how we handle depreciation expense for partial periods, that is, assets that are purchased during the year.
In our example, a company purchased equipment for $75,000 on June 30, The equipment has a useful life of 10 years and estimated salvage value of $5,000. This company uses straight-line depreciation for all its plant assets.
Let’s calculate depreciation expense for The depreciation expense for the entire year 2011 would be $7,000. We determine this amount by taking cost less salvage value of $70,000 and dividing it by 10. The company had the equipment in service for one-half of the year, so we multiply the annual depreciation of $7,000 times one-half, or six-twelfths. We use the same procedure for other partial periods.

28. Change in Estimates for Depreciation
On January 1, 2011, equipment was purchased that cost $30,000, has a useful life of 10 years, and no salvage value. During 2014, the useful life was revised to eight years total (five years remaining).
Calculate depreciation expense for the year ended December 31, 2011, using the straight-line method.
You know that the salvage value and useful life of a plant asset are both estimates. Like all estimates, new information may come to light that will cause us to revise our previous estimate. Let’s see how accountants handle the revision of previous estimates.
In our example, a company purchased equipment on January 1, 2011 for $30,000 cash. The equipment is estimated to have a 10-year useful life and no salvage value at the end of its useful life. The company uses the straight-line method for all plant assets and begins recording depreciation on this equipment in We continue our original computations up until the point where the new information causes us to make a change. During 2014, we learn new information about the equipment. This new information causes us to revise our estimate of the equipment’s useful life. We now believe the equipment will have a total useful life of eight years. We already recorded depreciation expense for three years (2011, 2012, and 2013), so there are five years remaining in the equipment’s useful life. In this case, accountants would take the book value at the date of revision of our estimate, that is, 2014, and subtract any estimated salvage value at the time of revision. This total is to be divided by the remaining useful life of the asset at the date of revision. Let’s calculate the proper depreciation expense for 2014.
Book value at date of change
Salvage value at date of change
Remaining useful life at date of change –

29. Change in Estimates for Depreciation
The asset had a cost of $30,000 and a 10-year useful life with no salvage value. Under straight-line depreciation we record $3,000 of expense in each of the years 2011, 2012, and Accumulated Depreciation has a balance of $9,000 at the beginning of The remaining book value is $21,000 and the remaining useful life of the asset is five years, so depreciation for each of those five years will be $4,200. Let’s record depreciation expense at December 30, 2014.
We debit Depreciation Expense for $4,200 and credit Accumulated Depreciation -- Equipment for the same amount.

30. Reporting Depreciation
Often on a balance sheet, the different categories of property, plant, and equipment are totaled. Then one lump sum balance of accumulated depreciation for all of the categories of assets is subtracted from the total cost, to arrive at the net total of the property, plant, and equipment as shown in this slide. When this is done, the amount of accumulated depreciation for the different categories of assets is disclosed in the notes. Reporting both the cost and accumulated depreciation of plant assets helps users compare the assets of different companies.

31. Additional Expenditures
After a plant asset is purchased, the company may incur additional expenditures on that asset. These expenditures may be for repairs and maintenance, overhauls, upgrading the asset, and similar expenditures.
One way to handle these types of expenditures is to treat them as a capital expenditure and charge the amount to a balance sheet account like the asset or accumulated depreciation. In some cases, the expenditures may be treated as revenue expenditures and charged to current period income as an expense. For each expenditure subsequent to acquisition of a plant asset we must decide if the expenditure is to be treated as a capital or revenue expenditure.
If the amounts involved are not material, most companies expense the item.

32. Revenue and Capital Expenditures
Generally, subsequent expenditures for ordinary repairs are treated as revenue expenditures and charged to current period income as an expense. These expenditures do not materially increase the asset’s life or productive capabilities. Subsequent expenditures that are for betterments (improvements) are expenditures that do make a plant asset more efficient or productive. A betterment often involves adding a component to an asset or replacing one of its old components with a better one. These should be treated as capital expenditures and charged to the asset account. Extraordinary repairs (or replacements) are expenditures that extend the life of the asset beyond it’s original estimate. These costs can be debited to an asset account or to the accumulated depreciation account. Let’s look at the proper accounting for the disposal of plant assets.

33. Disposals of Plant Assets
Update depreciation to the date of disposal
Journalize disposal by:
Recording cash received (debit) or paid (credit)
Recording a gain (credit)
or loss (debit)
Whenever we dispose of a plant asset, the first thing we do is update depreciation to the date of disposal. After completing the update, we can begin on the journal entry. We start the journal entry by recording a debit to the Cash account, if cash was received, or credit the Cash account, if cash was paid by the company. In addition, we must determine whether a gain or loss is associated with the disposal. A gain is recorded with a credit, just like revenue, and a loss is recorded with a debit, just like an expense account.
We complete the entry by removing the plant asset’s cost from our books with a credit and remove the related accumulated depreciation with a debit. Let’s see how we calculate the gain or loss associated with the disposal.
Removing accumulated depreciation (debit)
Removing the asset cost (credit)

34. Discarding Plant Assets
If Cash > BV, record a gain (credit)
If Cash < BV, record a loss (debit)
If Cash = BV, no gain or loss
Update depreciation to the date of disposal.
Journalize disposal by:
Recording a gain (credit)
or loss (debit)
Recording cash received (debit) or paid (credit)
If the amount of cash received is greater than the book value of the asset (cost less accumulated depreciation), a gain is associated with the disposal.
If the cash received is less than the book value of the asset, a loss will be recorded. When the amount of cash is exactly equal to the book value of the asset, there will be no gain or loss in connection with the disposal. Now let’s look at a specific example of disposal of a plant asset.
Removing accumulated depreciation (debit)
Removing the asset cost (credit)

35. Disposal of Assets
On September 30, 2011, Evans Company sells a machine that originally cost $100,000 for $60,000 cash. The machine was placed in service on January 1, It was depreciated using the straight-line method with an estimated salvage value of $20,000 and a useful life of 10 years.
Annual depreciation ($100,000 - $20,000) ÷ 10 Yrs. = $8,000
Depreciation to September 30, 2011:9/12 × $8,000 = $6,000
On September 30, 2011, Evans Company sells a machine for $6,000 cash. The machine was purchased on January 1, 2009, for $100,000, had an estimated salvage value of $20,000, and a useful life of 10 years. Evans uses straight-line depreciation.
Annual depreciation is $8,000. For the nine months ending September 30, Evans will record $6,000 in depreciation.
Next, we make the journal entry to bring the depreciation up-to-date. The required journal entry is to debit Depreciation Expense and credit Accumulated Depreciation -Machine. Now we need to make the journal entry to record the disposal.

36. Determine Book Value of AssetP2
The balance in the accumulated depreciation account is $30,000 at the date of disposal. We recorded three years of depreciation at $8,000 and the partial year depreciation of $6,000. Once we determine the book value of the asset, we can calculate any gain or loss involved with the disposal.
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37. Determine Gain or Loss on Disposal
If Cash > BV, record a gain (credit)
If Cash < BV, record a loss (debit)
If Cash = BV, no gain or loss
The book value of $70,000 is less than the cash received of $60,000, so this disposal involves a loss of $10,000. Let’s record the journal entry.
How does this affect the accounts?

38. Effect on the Statement of Cash FLows

39. Natural Resources: Cost and Depletion
per unit =
Cost - Salvage value
Total units of capacity
Step 1:
Step 2:
Depletion
expense =
per unit ×
Units extracted and sold in period
Let’s change the subject away from disposals of plant assets and discuss natural resources.
Natural resources abound. We have accounting issues with oil, coal, timber, gold, gravel, and a wide variety of other natural resources. In general, natural resources can be thought of as anything extracted from our natural environment. As accountants, we report natural resources at their cost less accumulated depletion. The depletion we will study in this text is very similar to units-of-production depreciation. The cost of any natural resource must include all exploration and development costs as well as extraction costs. A portion of these total costs will be charged to income each period through the depletion expense account. Let’s see how this works.
We begin the process of calculating depletion expense by determining the depletion expense per unit of natural resource. The numerator of the equation contains the resource cost less any estimated salvage value. The denominator of the equation is our estimated total capacity of the natural resource we expect to extract. For oil we express the denominator in terms of barrels, for coal we use tons, for timber we use board feet, and the like for other resources. The current period depletion expense is determined by multiplying the depletion expense per unit, determined in the first step, by the number of extracted units sold during the period. Depletion expense is based on the number of units sold, not the number of units extracted. Let’s go over a specific example.

40. Depletion of Natural Resources
Apex Mining acquired a tract of land containing ore deposits. Total costs of acquisition and development were $1,000,000 and Apex estimates the land contained 40,000 tons of ore. During the first year of operations Apex extracted and sold 13,000 tons of ore.
Apex Mining paid $1 million cash to acquire and develop an ore site. The engineers at Apex estimate that the site will eventually produce 40,000 tons of ore. During the first year of operation, the company extracted and sold 13,000 tons of ore. Let’s start by calculating the depletion charge per ton of ore.

41. Depletion Expense Step 1: Step 2: = Depletion per unit =
$1,000, $0
40,000 tons
= $25 per ton
Step 2:
The depletion charge per ton of ore is $25. The site has no residual value so we divide $1 million by 40,000 tons to get the $25 per ton depletion charge. Depletion expense for the first year will be $325,000. We extracted and sold $13,000 tons of ore at $25 per ton.
Depletion
expense =
$25 per ton × 13,000 units = $325,000
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42. Intangible Assets Intangible Assets
Noncurrent assets without physical substance
Often provide exclusive rights or privileges
Intangible Assets
Now let’s turn to the last major subject we will cover in the presentations--intangible assets.
Intangible assets lack physical substance , which makes it difficult to determine the asset’s useful life or any residual value. Many intangible assets involve exclusive rights or privileges. We will review the major types of intangible assets and related accounting on the remaining screens.
Useful life is often difficult to determine
Usually acquired for operational use

43. Cost Determination and Amortization
Record at current cash equivalent cost, including purchase price, legal fees, and filing fees
Patents
Copyrights
Leaseholds
Leasehold improvements
Franchises & licenses
Trademarks & trade names
Goodwill
We have provided you with a list of intangible assets that will be discussed. Intangible assets are normally recorded at the purchase price plus any legal or related fees.

44. Types of Intangibles Patents
The exclusive right granted to its owner to manufacture and sell a patented item or use a process for 20 years. A patent is generally amortized, using the straight-line method, over its useful life, not to exceed 20 years.
Matrix, Inc. purchased a patent for $10,000. The patent is expected to have a useful life of 10 years.
A patent gives the holder the exclusive right to manufacture and sell an item or process for 25 years. A patent is amortized (a process just like depreciation) using the straight-line method over its useful life, but never more than 20 years. Most companies amortize patents over a very short period of time.
Part One
In our example, Matrix purchased a patent for $10,000 cash. The useful life of the patent is estimated at 10 years. Let’s prepare the journal entry to record the annual amortization expense. Part Two We will debit Amortization Expense-Patents for $1,000 (1/10 of the $10 cost), and credit Accumulated Amortization-Patents for the same amount. This entry will be made each year for the next nine years.

45. Types of Intangibles Copyrights Leaseholds
The exclusive right to publish and sell a musical, literary, or artistic work during the life of the creator plus 70 years.
Leaseholds
The rights the lessor grants to the lessee under the terms of a lease. Most leases have a determinable life.
A copyright grants to the holder the exclusive right to publish and sell musical, literary, or artistic work for the life of the creator plus 70 years. Most copyrights are amortized over a short period of time using the straight-line method. A leasehold is the right to the beneficial use of property owned by a lessor. The lessee does not own the property but gets to use it over some extended period of time.

46. Leasehold Improvements
Types of Intangibles
Leasehold Improvements
A lessee may pay for alterations or improvements to the leased property such as partitions, painting, and storefronts. These costs are usually amortized over the term of the lease.
Franchises and Licenses
The right granted by a company or the government to deliver a product or service under specified conditions.
Leasehold improvements are any alterations or improvements to leased property. Leasehold improvements are normally amortized using the straight-line method over the term of the lease. The holder of a franchise has the right to deliver a product or service under conditions granted by the franchisor. You really can’t drive down any major street without finding a number of franchise operations. The accounting for franchises can become quite complex. At this point it is sufficient to be able to define the nature of a franchise.
A trademark or trade name is any symbol, name, phrase, or jingle that is identified with a company, product, or service. No other party may use the trademark or trade name without the permission of the holder. Many trademarks are extremely valuable. The name “Mercedes-Benz” is quite valuable, or the name “Harley-Davidson.” How about the phrase, “Coke is it.” It should be noted that if the company that owns the trademark plans to renew indefinitely its right to the trademark or trade name, the cost is not amortized.
Other intangibles include such items as software, noncompete covenants, customer lists, and so forth. The accounting for them is much the same as described above.
Trademarks and Trade Names
A symbol, name, phrase, or jingle identified with a company, product, or service.

47. Goodwill Goodwill Occurs when one company buys another company
Only purchased goodwill is an intangible asset
An intangible asset called goodwill can be created when one company buys another company. If the purchase price of the company is greater than the fair value of the net assets and liabilities acquired, goodwill is associated with the transaction. Goodwill is not amortized. Each year we must test to see if there has been any impairment in the carrying value of the goodwill. If an impairment is determined to exist, we will reduce the goodwill account and recognize the loss in value.
Goodwill is not amortized. It is tested each year to determine if there has been any impairment in carrying value.

48. Provides information about a company’s efficiency in using its assets
Total Asset Turnover
Total asset
turnover =
Net sales
Average total assets
Provides information about a company’s efficiency in using its assets
Total asset turnover is equal to the net sales for the period divided by the average total assets. The average total assets is computed by taking the beginning balance of total assets, adding the ending balance, and dividing the result by two. Total asset turnover provides us with information about how efficiently a company uses its assets. The ratio should be interpreted in comparison to prior years and also to its competitors.