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Property, Plant, and Equipment

6.Compute and record depletion of natural resources. 7.Compute and record amortization of intangible assets. 8.Recognize asset impairment and understand the general concepts of accounting for impairment. Special Topics in Long-Term Assets Section Objectives

Depletion is the term used to describe allocating the cost of the natural resource to expense over the period in which the resource provides revenue. ANSWER: QUESTION: What is depletion? Page 652

Depletion matches an asset’s costs with the benefits derived from its use. Page 652 Natural Resources: Iron ore Oil Gold Coal

Types of Depletion Page 652 Depletion for Financial Statement Purposes Depletion for Federal Income Tax Purposes

Depletion for Financial Statement Purposes Page 652 Depletion of natural resources for financial statement preparation is called cost depletion. Formula for cost depletion: Depletion per unit = Cost of natural resource Estimated units of the resource

Depletion for Federal Income Tax Purposes Page 653 Depletion for federal income tax purposes is the larger of cost depletion or percentage depletion. Formula for percentage depletion: Gross income from sale of resource X a percentage

Intangible assets are assets that lack a physical substance. ANSWER: QUESTION: What are intangible assets? Page 653

Types of Intangible Assets Page 653 Patent Copyright Franchises Trademarks, trade names, brand names Computer software Goodwill

Acquiring Intangible Assets Page 654 There are two ways to acquire intangible assets: 1. Produce or develop them. 2. Purchase them.

Amortization is the process of periodically transferring the acquisition cost of an intangible asset to an expense account. ANSWER: QUESTION: What is amortization? Page 654

Page 654 Notice the similarities: Depreciation Depletion Amortization These processes transfer the cost of assets to expense accounts over a period of time.

Amortizing the Costs of Intangible Assets Page 654 Most intangible assets have limited legal and economic lives. Intangible assets are amortized for a period not to exceed 40 years. The periodic amortization is debited to Amortization Expense and credited directly to the intangible asset account.

The intangible asset account is decreased. Contra Asset Accounts Accumulated Depreciation Accumulated Depletion Accumulated Amortization Page 654

Asset impairment occurs when the asset is determined to have a market value or a value in use less than its book value. ANSWER: QUESTION: What is asset impairment? Page 655

Impairment of Property, Plant, and Equipment Three steps to use to determine whether an asset is impaired. Step 1. Review circumstances that suggest impairment may have occurred. Step 2. Apply the recoverability test. Step 3. Compute the amount of the impairment. Page 656

The recoverability test compares the asset’s net book value with the estimated net cash flows from the asset’s useful life. ANSWER: QUESTION: What is the recoverability test? Page 656

Internal Control of Property, Plant, and Equipment Page 657 Authorize and justify the purchase of assets. Assign identification number to each asset. Maintain an asset register listing. Assign responsibility for safekeeping, maintaining, and operating each asset to a specific person. Take a physical inventory periodically. Establish procedures to authorize asset retirement, sale, or other disposition.

REVIEWREVIEW _________ is the term used to describe allocating the cost of a natural resource to expense over the period in which the resource produces revenue. Depletion of natural resources used for GAAP purposes is called _____________. _______________ are assets that lack a physical substance. Intangible assets cost depletion Depletion Complete the following sentences:

REVIEWREVIEW ___________ is the process of periodically transferring the acquisition cost of an intangible asset to an expense account. The entry to record amortization of a patent is a debit to ___________________ and a credit to ______. __________ of long-term assets occurs when the asset is determined to have a market value or a value in use less than its book value. Impairment Amortization Expense Amortization Complete the following sentences: Patent

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