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Chapter 9 Reporting and Interpreting Long-Lived Tangible and Intangible Assets PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Fred Phillips, Ph.D., CA

Tangible Physical Substance Intangible No Physical Substance Will not be used up within the next year Actively Used in Operations Definition and Classification Land Assets subject to depreciation Buildings and equipment Furniture and fixtures Examples Value represented by rights that produce benefits. Intangibles with a limited life, such as patents and copyrights, are subject to amortization. Intangibles with an unlimited (or indefinite) life, such as goodwill and trademarks, are not amortized. 9-3

Acquisition of Tangible Assets Purchase cost Purchase cost Legal fees Legal fees Surveying fees Surveying fees Broker’s commissions Broker’s commissions Purchase cost Purchase cost Legal fees Legal fees Surveying fees Surveying fees Broker’s commissions Broker’s commissions LandLand Purchase/construction cost Purchase/construction cost Sales taxes Sales taxes Transportation costs Transportation costs Installation costs Installation costs Purchase/construction cost Purchase/construction cost Sales taxes Sales taxes Transportation costs Transportation costs Installation costs Installation costs Equipment Purchase/construction cost Purchase/construction cost Legal fees Legal fees Appraisal fees Appraisal fees Architectural fees Architectural fees Purchase/construction cost Purchase/construction cost Legal fees Legal fees Appraisal fees Appraisal fees Architectural fees Architectural fees BuildingsBuildings 9-4

Maintenance Costs Incurred during Use 9-5

Depreciation is a cost allocation process that matches costs of operational assets with periods benefited by their use. Cost Allocaton Balance Sheet Income Statement Expense Acquisition Cost Depreciation Expense Income Statement Depreciation for the current year Balance Sheet Accumulated Depreciation Total of depreciation to date for an asset 9-6

Depreciation Expense 2008 Depreciation Includes $130 for 2008 Book value

Summary of Depreciation Methods 9-8

 Update depreciation to date of disposal.  Record the disposal. dr Cash (+A) dr Accumulated Depreciation (-xA) cr Equipment (-A) Book value Disposal of Tangible Assets cr Gain on Disposal (+R, +SE) Gain if cash received is greater than asset’s book value 9-9

dr Cash (+A) dr Accumulated Depreciation (-xA) cr Equipment (-A) Book value Disposal of Tangible Assets  Update depreciation to date of disposal.  Record the disposal. dr Loss on Disposal (+E, -SE) Loss if cash received is less than asset’s book value 9-10

Noncurrent assets without physical substance. Useful life is often difficult to determine. Usually acquired for operational use. Often provide exclusive rights or privileges. Intangible Assets 9-11

Intangible Assets Record at current cash equivalent cost, including purchase price, legal fees, and filing fees. Amortize intangibles with limited lives over the shorter of their economic lives or legal lives using the straight-line method. 9-12

Trademarks and Copyrights A trademark is a symbol, design, or logo associated with a business. Internally developed trademarks have no recorded asset cost. Purchased trademarks are recorded at cost. Amortize cost over the period benefited. Legal life is life of creator plus 70 years. A copyright is an exclusive right granted by the federal government to protect artistic or intellectual properties. 9-13

Cost is purchase price plus legal cost to defend. Amortize cost over the shorter of useful life or 20 years. Patents and Licensing Rights A patent is an exclusive right granted by the federal government to sell or manufacture an invention. You may be using computer software that is made available to you through a campus licensing agreement. Licensing rights grant limited permission to use a product or service according to specific terms and conditions. 9-14

Franchises A franchise provides legally protected rights to sell products or provide services purchased by a franchisee from the franchisor. 9-15

Goodwill Occurs when one company buys another company. Purchase Price > Fair Market Value of Net Assets Acquired Only purchased goodwill is an intangible asset. Is not amortized. Is impairment tested and may be written down. 9-16

Summary of Accounting Rules for Long-Lived Assets 9-17

Impact of Depreciation Differences Accelerated depreciation, in the early years of an asset’s useful life, results in higher depreciation expense, lower net income, and lower book value than would result using straight-line depreciation. Selling an asset with a low book value, resulting from accelerated depreciation, might result in a gain. Selling the same asset with a higher book value, resulting from straight-line depreciation, might result in a loss. 9-18

Total depletion cost Inventory for sale Unsold Inventory Cost of goods sold Natural Resources Depletion is the process of allocating a natural resource’s cost over the period of its extraction. Depletion is similar in concept to depreciation. Depletion that is computed for a period is first added to inventory and then expensed when the inventory is sold. 9-19

estimate So depreciation is an estimate. residual value Predicted residual value useful life Predicted useful life Over the life of an asset, new information may come to light that indicates the original estimates need to be revised. Changes in Depreciation Estimates 9-20

End of Chapter 9