1. PowerPoint® presentation by
Fundamental Financial Accounting Concepts Fourth Edition by Edmonds, McNair, Milam, Olds
PowerPoint® presentation by
J. Lawrence Bergin

2. Long-Term Operational Assets
Chapter 9
Long-Term
Operational Assets 1

3. Classification of Operational Assets
Operational assets are used by a business to generate revenue.
Tangible operational assets have physical substance.
Land, buildings, fixtures, and equipment
Natural resources 2

4. Long-term Operational Assets...
Long-term assets will be used more than one year.
Tangible operational assets are reported on the balance sheet in a classification called Property, Plant, and Equipment. 3

5. Classification of Operational Assets
Intangible operational assets lack physical substance and confer specific use rights on the owner.
Patents
Copyrights
Franchises
Licenses
Trademarks
Burger Queen
Franchise 4

6. Measuring and Recording Acquisition Cost
Purchased operational assets are recorded at cost, an amount that includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.
Invoice price
Sales taxes
Transportation costs
Installation costs
Renovation and repair cost incurred prior to use. 5

7. Measuring Acquisition Cost
Acquisition cost is the net cash equivalent amount paid for the asset.
Financing charges are excluded from the acquisition cost but should be reported as interest expense. 6

8. Measuring Acquisition Cost
The cost of land includes:
Acquisition price
Real estate commissions
Title search and transfer fees
Title insurance premiums
Delinquent taxes
Surveying fees
Land is not depreciated. 7

9. Basket Purchases of Assets
When land and building are purchased together, the land cost and the building cost are placed in separate accounts.
The total cost of the purchase is separated on the basis of relative market values. 8

10. Basket Purchases of Assets
Example: On March 1, Arco Co. purchased land and building for $100,000 cash. The appraised value of the building was $90,000 and the land was appraised at $30,000.
How much of the $100,000
purchase price will be
allocated to each account?
Land = ? Building = ? 9

11. Basket Purchases of Assets
Fair Market Values:
Building $ 90,000
Land $ 30,000
Total market value $120,000
Allocation of cost:
Building * $100,000 =
Land * $100,000 = 10

12. Basket Purchases of Assets
Fair Market Values:
Fraction
Building $ 90,000
Land $ 30,000
Total market value $120,000
Allocation of cost:
Building * $100,000 =
Land * $100,000 = 10

13. Basket Purchases of Assets
Fair Market Values:
Fraction
Building $ 90, /12
Land $ 30, /12
Total market value $120, /12
Allocation of cost:
Building * $100,000 =
Land * $100,000 = 10

14. Basket Purchases of Assets
Fair Market Values:
Fraction
Building $ 90, /12
Land $ 30, /12
Total market value $120, /12
Allocation of cost:
Building 9/12 * $100,000 =
Land 3/12 * $100,000 = 10

15. Basket Purchases of Assets
Fair Market Values:
Building $ 90,000
Land $ 30,000
Total market value $120,000
Allocation of cost:
Building 9/12 * $100,000 = $75,000
Land 3/12 * $100,000 = $25,000 12

16. Basket Purchases of Assets
General Journal entry:
Building $ 75,000
Land $ 25,000
Cash $100,000
Allocation of cost:
Building 9/12 * $100,000 = $75,000
Land 3/12 * $100,000 = $25,000 12

17. Nature of Depreciation, Depletion, and Amortization
The matching principle requires that part of the acquisition cost be expensed in periods when the future revenues are earned.
...as the asset
is used.....
Cost of asset on Balance
Sheet
Expense on
Income Statement
[capitalize]
[expense] 13

18. Terminology: Write-off….amortize
Depreciation:
Property, plant, equipment
Amortization:
Intangible assets
franchise
Depletion:
Natural resources

19. Depreciation Methods For Financial Accounting (books) Straight-line
Production method
(Double) Declining balance
For Tax Returns
Modified Accelerated Cost Recovery System (MACRS) 15

20. Cost - Residual Value Life in Years
Straight-Line Method
Depreciation
Expense per Year
Cost - Residual Value Life in Years = 16

21. Straight-Line Method: Example
On January 1, 2004, equipment was purchased for $55,000 cash. The equipment has an estimated useful life of 5 years and an estimated residual value of $10,000.
What is the annual straight-line depreciation expense? 17

22. Straight-Line Method: Example
Depreciation
Expense per Year
Cost - Residual Value Life in Years =
Depreciation
Expense per Year =
Depreciation
Expense per Year = 18

23. Straight-Line Method: Example
Depreciation
Expense per Year
Cost - Residual Value Life in Years =
55, ,000
Depreciation
Expense per Year = 5
Depreciation
Expense per Year = 19

24. Straight-Line Method: Example
Depreciation
Expense per Year
Cost - Residual Value Life in Years =
55, ,000
Depreciation
Expense per Year = 5
Depreciation
Expense per Year =
9,000 20

25. Straight-Line Method: Example
Calculate depreciation expense for the second year of the asset’s life.
9,000
Depreciation expense is the same amount each year of the asset’s life using the straight-line method. 21

26. Units-of-Production Method
Step 1:
Depreciation
Rate =
Cost - Residual Value
Estimated units of useful life 22

27. Units-of-Production Method
Step 1:
Depreciation
Rate =
Cost - Residual Value
Estimated units of useful life
Step 2:
Number of Units Produced for the Year
Depreciation
Expense =
Rate × 23

28. Example of Units of Production Method
Given the same information [asset cost $55,000, has a residual value of $10,000, has a useful life of five years] plus the fact that the asset is estimated to have a total productive capacity of 100,000 units during the useful life: If 22,000 units were produced this year, what is the amount of depreciation expense? 24

29. Example of Production Method
Step 1:
Cost - salvage value
$45,000
Depreciation
Rate = =
$.45 =
Productive output
100,000
Per unit
Step 2:
Dep. rate x units produced
Depreciation
Expense =
$ .45/unit x 22, = $9,900 27

30. Example of Production Method
If 15,000 units are produced during the second year of the asset’s life, what is the amount of depreciation expense?
$0.45 x 15,000 = $6,750
What is the Accumulated Depreciation at the end of the second year?
$9,900 + $6,750 = $16,650
What is the 12/31/05 Equip. Book Value?
$55,000 cost - $16,650 Accum. Dep. = $38,350 28

31. Accelerated Depreciation
Accelerated depreciation methods result in more depreciation expense in the early years of an asset’s useful life and less depreciation expense in later years of the an asset’s useful life. 1

32. Double-Declining Balance Method
Declining-balance depreciation is based on the straight-line rate multiplied by an acceleration factor.
For example, when the acceleration factor is 200 percent, the method is referred to as double-declining balance depreciation.
Declining-balance depreciation computations ignore residual value. 2

33. Double-Declining Balance Method
Annual Depreciation is calculated with the following formula:
Book Value × (2 × Straight-Line Rate) 3

34. Double-Declining-Balance Method
Annual Depreciation is calculated with the following formula:
Book Value × (2 × Straight-Line Rate)
Book Value × 2 ×
Useful Life in Years
100% ( ) 4

35. Double-Declining-Balance Example
Using the same information from our earlier example [asset cost $55,000, residual value is $10,000, and useful life is 5 years]:
Calculate the depreciation expense for the first two years of the asset’s life. 5

36. Double-Declining-Balance Example( )
Book Value × 2 ×
Useful Life in Years
100%
First year’s depreciation:
Second year’s depreciation: 6

37. Double-Declining-Balance Example( )
Book Value × 2 ×
Useful Life in Years
100%
First year’s depreciation expense:
55,000 * [2 * 1.00/5] = 55,000 * .40 = $22,000
Second year’s depreciation expense:
(Cost Accum. Dep) x .40
($55, $22,000) x .40 = $13,200 D.Exp. 7

38. Double-Declining-Balance Example( )
Book Value × 2 ×
Useful Life in Years
100%
What is the ACCUMULATED depreciation after Yr. 2?
Dep. Exp, Yr Dep. Exp. Yr. 2 = Accumulated Dep. At end of yr. 2
$22, $13,200 = $35,200 Accum.Dep.
Third year’s depreciation expense:
(Cost Accum. Dep) x .40
($55, $35,200) x .40 = $ 7,920 D.Exp. 7

39. Comparison of Depreciation Methods
Straight-line Production* Double-Declining Bal.
Dep. Accum. Dep. Accum Dep. Accum.
Year Exp. Dep. Exp. Dep Exp Dep.
, ,000
, ,200
, ,120
, ,000
,000
Before comparing these methods, let’s look at a problem in the later years of life when using Double-declining balance.
Since we cannot write off the $10,000 salvage value, total depreciation of $45,000 ($55,000 Cost - $10,000 Sal. Val.) must be written-off over the life of the asset. The DDB formula would result in too much Dep. Exp. in year 4. Here’s why….
40%x (Cost - Accum. Yr. 3 end)
= .40x ($55, ,120) = $4,752 D.Exp.
But, after Year 3 there is only $1,880 ($45, ,120) left to depreciate to accumulate $45,000 of depreciation.
Solution: Depreciate the final $1,880 in Yr. 4 and $0 Dep. Exp in Yr. 5.
*Units produced were Yr 1= 22,000; Yr 2=15,000; Yrs 3&4=25,000 each; Yr. 5=13,000. [1 In yr. 4, didn’t use DDB formula. Wrote-off last 1,880.] 9

40. Comparison of Depreciation Methods
Straight-line Production* Double-Declining Bal.
Dep. Accum. Dep. Accum Dep. Accum.
Year Exp. Dep. Exp. Dep Exp Dep.
, ,000
, ,200
, ,120
, ,000
,000
*Units produced were Yr 1= 22,000; Yr 2=15,000; Yrs 3&4=25,000 each; Yr. 5=13,000. [1 In yr. 4, didn’t use DDB formula. Wrote-off last 1,880.] 9

41. Comparison of Depreciation Methods
The total amount of depreciation recorded over the useful life of an asset is the same regardless of the method used.
Depreciation expense recorded in any one period will vary according to method used.
The straight-line method is used for financial accounting purposes (“the books”) by about 95 percent of companies because it is easy to use and to explain to financial statement users. 9

42. Horizontal Model Transactions Depreciation and Disposal
1. Jan. 1, 2004, the owner invested $70,000 cash to start the business.
2. Jan. 1, 2004 the Co. purchased equipment paying $55,000 cash.
3. During 2004 the Co. earned $30,000 of cash revenue.
4. Dec. 31, ‘04 adjustment for straight-line depreciation was recorded.
(Estimated life = 5 years with $10,000 residual value.)
4B. Calculate the balances at the end of 2004 which will be carried
over to begin 2005.
5. Dec. 31, ‘05 adjustment for straight-line depreciation was recorded.
5B. Calculate the 2005 ending balances to carry over to start 2006.
Sept. 1, 2006 the equipment was sold for $26,000 cash.
6. Update the depreciation accounts to the disposal date.
7. Record the disposal, including any gain or loss. 22

43. Horizontal Model Transaction Analysis
Balance Sheet Income Statement Cashflow
Assets = Liab Equity Rev./ Exp Statem’t
Cash + Equip.- Acc.D.= A/P + C.C.+ R.E. Gains - Loss= N.I. OA,IA,FA
1 70, , ,000 FA
2 (55,000) 55, (55,000) IA
3 30, , ,000 30,000 OA
(9000) 9,000 (9000)
B 45, , , Closed out ,000 B

44. What’s the result? - End of Year 1
How much depreciation expense is on the 2004 income Statement? $
How much Accumulated Deprec. is on the 12/31/04 Bal. Sheet?
What is the equipment’s Book Value
(or Carrying Value) at the end of 2004?
Equip, cost $
Less: Accum.Dep.
Equip, (net BV) $ 28

45. Horizontal Model Transaction Analysis
Balance Sheet Income Statement Cashflow
Assets = Liab Equity Rev./ Exp Statem’t
Cash + Equip.- Acc.D.= A/P + C.C.+ R.E. Gains - Loss= N.I. OA,IA,FA
1 70, , ,000 FA
2 (55,000) 55, (55,000) IA
3 30, , ,000 30,000 OA
(9000) 9,000 (9000)
B 45, , , Closed out ,000 B .

46. What’s the result? - End of Year 1
How much depreciation expense is on the 2004 income Statement?
How much Accumulated Deprec. is on the 12/31/04 Bal. Sheet?
What is the equipment’s Book Value
(or Carrying Value) at the end of 2004?
Equip, cost
Less: Accum.Dep.
Equip, (net BV)
$9,000
$9,000
$55,000
9,000
$46,000 28

47. Horizontal Model Transactions Depreciation and Disposal
1. Jan. 1, 2004, the owner invested $70,000 cash to start the business.
2. Jan. 1, 2004 the Co. purchased equipment paying $55,000 cash.
3. During 2004 the Co. earned $30,000 of cash revenue.
4. Dec. 31, 2004 adjustment for depreciation was recorded.
(Estimated life = 5 years with $10,000 residual value.)
4B. Calculate the balances at the end of 2004 which will be carried
over to begin 2005.
5. Dec. 31, 2005 adjustment for depreciation was recorded.
5B. Calculate the 2005 ending balances to carry over to start 2006.
Sept. 1, 2006 the equipment was sold for $26,000 cash.
6. Update the depreciation accounts to the disposal date.
7. Record the disposal, including any gain or loss. 22

48. Horizontal Model Transaction Analysis
Balance Sheet Income Statement Cashflow
Assets = Liab Equity Rev./ Exp Statem’t
Cash + Equip.- Acc.D.= A/P + C.C.+ R.E. Gains - Loss= N.I. OA,IA,FA
1 70, , ,000 FA
2 (55,000) 55, (55,000) IA
3 30, , ,000 30,000 OA
(9000) 9,000 (9000)
B 45, , , Closed out ,000 B
(9000) ,000 (9000)
B 45, , , ,000 12, Closed out ,000 B .

49. What’s the result? - End of Year 2
How much depreciation expense is on the 2005 income Statement?
How much Accumulated Deprec. is on the 12/31/05 Bal. Sheet?
What is the equipment’s Book Value
(or Carrying Value) at the end of 2005?
Equip, cost
Less: Accum.Dep.
Equip, (net BV) $ $ $ 28

50. Horizontal Model Transaction Analysis
Balance Sheet Income Statement Cashflow
Assets = Liab Equity Rev./ Exp Statem’t
Cash + Equip.- Acc.D.= A/P + C.C.+ R.E. Gains - Loss= N.I. OA,IA,FA
1 70, , ,000 FA
2 (55,000) 55, (55,000) IA
3 30, , ,000 30,000 OA
(9000) 9,000 (9000)
B 45, , , Closed out ,000 B
(9000) 9,000 (9000)
B 45, , , ,00012, Closed out ,000 B

51. What’s the result? - End of Year 2
How much depreciation expense is on the 2005 income Statement?
How much Accumulated Deprec. is on the 12/31/05 Bal. Sheet?
What is the equipment’s Book Value
(or Carrying Value) at the end of 2005?
Equip, cost
Less: Accum.Dep.
Equip, (net BV)
$ 9,000
$18,000
$55,000
18,000
$37,000 28

52. Disposal of Operational Assets1

53. Horizontal Model Transactions Depreciation and Disposal
1. Jan. 1, 2004, the owner invested $70,000 cash to start the business.
2. Jan. 1, 2004 the Co. purchased equipment paying $55,000 cash.
3. During 2004 the Co. earned $30,000 of cash revenue.
4. Dec. 31, 2004 adjustment for depreciation was recorded.
(Estimated life = 5 years with $10,000 residual value.)
4B. Calculate the balances at the end of 2004 which will be carried
over to begin 2005.
5. Dec. 31, 2005 adjustment for depreciation was recorded.
5B. Calculate the 2005 ending balances to carry over to start 2006.
Sept. 1, 2006 the equipment was sold for $26,000 cash.
6. Update the depreciation accounts to the disposal date.
7. Record the disposal, including any gain or loss. 22

54. Disposal of Operational Assets
Voluntary disposal refers to situations where a business gives up ownership of an asset by:
Sale
Trade-in
Retirement
Involuntary disposal results because of a casualty such as a fire or an accident. 14

55. Disposal of Operational Assets
1. Update the depreciation on the asset to the date of disposal. (Jan.1-Sept 1 = 8 mo.) 15

56. Horizontal Model Transaction Analysis
Balance Sheet Income Statement Cashflow
Assets = Liab Equity Rev./ Exp Statem’t
Cash + Equip.- Acc.D. = A/P + C.C.+ R.E. Gains - Loss= N.I. OA,IA,FA
1 70, , ,000 FA
2 (55,000) 55, (55,000) IA
3 30, , ,000 30,000 OA
(9000) 9,000 (9000)
B 45, , , Closed out ,000 B
(9000) 9,000 (9000)
B 45, , , ,00012, Closed out ,000 B .
, (6000) ,000 (6000)

57. Disposal of Operational Assets
1. Update the depreciation on the asset to the date of disposal.
2. Record the disposal by . . .
Removing the asset cost (credit).
Removing the Accumulated Depreciation (debit).
Recording cash received (debit) or cash paid (credit).
Recording a loss (debit) or gain (credit). 15

58. Gain or Loss on Disposal?
How do we know if there is a Loss or Gain on the disposal?
Compare cash received for the asset with the asset’s book value (BV).
If cash greater than BV, record a gain (credit).
If cash less than BV, record a loss (debit).
If cash equals BV, no gain or loss.
asset for sale 36

59. Disposal of Operational Assets
How do we know if there is a Loss or Gain on the disposal?
Compare cash received for the asset with the asset’s book value (BV). .
- 5000
Cash received
Equipment, cost
Less: Accum. Dep.
Equip, Book Value
Gain (Loss)
$26,000
$55,000
24,000
31,000
$ (5,000) 36

60. Horizontal Model Transaction Analysis
Balance Sheet Income Statement Cashflow
Assets = Liab Equity Rev./ Exp Statem’t
Cash + Equip.- Acc.D.= A/P + C.C.+ R.E. Gains - Loss= N.I. OA,IA,FA
1 70, , ,000 FA
2 (55,000) 55, (55,000) IA
3 30, , ,000 30,000 OA
(9000) 9,000 (9000)
B 45, , , Closed out ,000 B
(9000) 9,000 (9000)
B 45, , , ,00012, Closed out ,000 B
, (6000) ,000 (6000)
7 26,000 (55,000) (24,000) (5000) ,000 (5000) 26,000 IA

61. Journalize the Disposal
Cash
Accumulated Depreciation (to remove)
Loss on Disposal of Equipment
Equipment (original cost)
$26,000
24,000
5,000
55,000
What if there had been a GAIN on disposal?
The GAIN would be a CREDIT in the journal entry above (and there would be more cash). 28

62. Horizontal Model Transaction Analysis
Balance Sheet Income Statement Cashflow
Assets = Liab Equity Rev./ Exp Statem’t
Cash + Equip.- Acc.D. = A/P + C.C.+ R.E. Gains - Loss= N.I. OA,IA,FA
1 70, , ,000 FA
2 (55,000) 55, (55,000) IA
3 30, , ,000 30,000 OA
(9000) 9,000 (9000)
B 45, , , Closed out ,000 B
(9000) 9,000 (9000)
B 45, , , ,00012, Closed out ,000 B
,000 (6000) 6,000 (6000)
7 26,000 (55,000) (24,000) (5000) ,000 (5000) 26,000 IA .
B 71, ,000 1, Closed out ,000 B

63. What’s the result? - For Year 3
How much depreciation expense is on the 2006 Income Statement?
$6,000
How much Gain or Loss is on the 2006 Income Statement?
$5,000 Loss on Disposal
How much Accumulated Deprec. is on the 12/31/06 Bal. Sheet?
$0 (We don’t have the equipment anymore.)
What is the equipment’s Book Value
(or Carrying Value) at the end of 2006? 28

64. Depreciation and Federal Income Tax
Most corporations use the Modified Accelerated Cost Recovery System (MACRS) for tax purposes. (Could use straight-line depreciation.)
MACRS provides for rapid write-off of an asset’s cost in order to stimulate investment in modern facilities.
MACRS uses half-year convention and assumes no residual value. 10

65. Depreciation and Federal Income Tax MACRS example
Same purchase recorded previously:
On Jan. 1, 2004 equipment costing $55,000 was purchased. Estimated life = 5 yrs. Estimated residual value = $10,000.
Calculate the depreciation tax
deduction assuming the equipment
is classified as “5 year property.”
Note: See tax tables in your text for 5-Yr. and 7-Yr. properties. 10

66. Depreciation and Federal Income Tax MACRS example
IRS Table
yr. %
Equipm’t
Cost
x $55,000 =
x 55,000 =
Depreciation
Deduction
$11,000
17,600
10,560
6,336
3,168
$55,000 10

67. Revising Estimates of Salvage Value or of Useful Life
When an estimate is revised, no changes are made to amounts reported in the past.
The new estimates are incorporated into the present and future calculations only.
Depreciation amounts are revised using the book value, estimated useful life and salvage value at beginning of the year of the revision.

68. Revising Estimates of Salvage Value or of Useful Life - Example
On Jan. 1, 2004 the Goodview Co. purchased Equipment costing $55,000. It was estimated to last 5 years and have a $10,000 residual value. Straight-line depreciation ($9,000) has been used.
On Jan. 1, 2006 management determined
that the equipment would last 4 years from
this date, but would only be worth $5,000 at
the end of that time.
How much depreciation expense should be recorded each year starting on Dec. 31, 2006?

69. Revising Estimates of Salvage Value or of Useful Life - Example
The equipment has already been depreciated two years (‘04 and ‘05) at $9,000 per year. So, Accumulated Depreciation has an $18,000 balance at the beginning of 2006.
Original Cost $55,000
Less: Accum. Dep ,000
= Book value, Jan. 1, ‘ ,000
Less: Revised Residual Value 5,000
= Remainder to be depreciated ,000
Divided by Remaining life yrs.
= New annual Depreciation expense $ 8,000
Starting in 2006

70. Continuing Expenditures for Plant Assets
Expenditures made to keep an asset in good working order are expensed in the period in which they are incurred. (normally expected repairs & maintenance)
Substantial costs spent to improve the quality or extend the life of an asset are capitalized.

71. Accounting for capital expenditures:
Extraordinary Repairs
Ex: Overhaul
Extend the life?
viewed as canceling some of the previous depreciation
journal entry to reduce (debit) accumulated depreciation
new depreciation amount will be calculated using the revision approach.
Betterments
Ex: Attach snowplow to truck owned for 2 years.
Improve the quality?
viewed as an additional cost of the equipment
journal entry to increase (debit) the cost of the asset
new depreciation amount will be calculated using the revision approach.

72. Natural Resources Assets supplied by nature
Examples: gold, oil, and coal
Presented on balance sheet as non-current assets at cost minus all depletion to date.
Total cost of the asset is the cost of acquisition, exploration and development.
Cost is “written-off” as “Depletion Expense” over periods that related revenues are earned. (Usually, units-of-production method.) 37

73. Natural Resources
A depletion rate is calculated using the units-of-production method.
Depletion Cost Per Unit Is Calculated As Follows:
Total Cost of Natural Resource
Estimated Number of Available Units
of Natural Resource 39

74. Intangible Assets
Noncurrent assets without physical substance that confer certain rights and privileges on the owner of the asset.
Examples: patents, copyrights, franchises and licenses, leaseholds, leasehold improvements, trademarks, and goodwill.
Purchased intangible assets are recorded at cost. 40

75. Two Categories of Intangible Assets
Intangible assets with IDENTIFIABLE useful lives.
e.g. Patents and Copyrights
They have a legal life, BUT they MAY become
obsolete or worthless before their legal live is over.
Intangible assets with INDEFINITE useful lives.
e.g. Goodwill, Franchise, Trademark
How long will the “name” of a restaurant keep attracting customers if new owners don’t serve good food and provide good service? 40

76. Intangible Assets with IDENTIFIABLE Useful Lives
Amortize (write-off) over the shorter of their useful life or legal life.
Normally the straight-line method is used and the asset is reported on the balance sheet at book value without a related accumulated amortization account. 41

77. Intangible Assets: Patents
A patent is an exclusive right granted by the federal government to sell or manufacture an invention.
A patent is amortized over the shorter of its useful life or 17-year legal life. 42

78. Intangible Assets with IDENTIFIABLE Useful Lives
Example: (1) A patent is purchased from a company for $20,000. (2) When purchased, there were 15 years remaining of the 17 year legal life, but management estimates that new technology will make this patent obsolete in 4 years. ($20,000/4=$5,000)
Patent 20, Amortization Expense 5,000
Cash Patent 41

79. Intangible Assets with INDEFINITE Useful Lives
Must be tested for IMPAIRMENT each year.
If the fair market value of the intangible asset is less than its book value, the value has been IMPAIRED (reduced).
To reduce the intangible asset to its new lower fair value an IMPAIRMENT LOSS is recorded and reported on the Income Statement. The intangible asset is reduced by the same amount. 41

80. Intangible Assets: Goodwill
Goodwill is the added value of a business that is attributable to favorable factors such as a good reputation, location, and superior products.
Goodwill must be PURCHASED by acquiring an existing business at a cost that is higher than the Fair Market Value of its physical assets (minus any liabilities assumed by the buying company).
Goodwill has an INDEFINITE useful life, so it must be tested for IMPAIRMENT each year. 42

81. Intangible Assets: Goodwill (Example)
Winona Co. purchased Rushford Co. by paying $1,500 cash for all of its assets, but also agreeing to assume its liabilities.
Individual company balance sheets before purchase:
Rushford Co Winona Co.
Assets: Liab.-A/P 200 Assets: Liab.-A/P 1000
Eq.,net C.Cap Cash C.Cap
Ret.Earn Eq.,net Ret.Earn 5000
T. Assets T. L&Eq.1000 T.Assets T. L&Eq. 9000
An appraiser says the Fair Market Value of Rushford’s assets is $1,300. 42

82. Intangible Assets: Goodwill (example)
Calculation of Goodwill
Cash Paid
+ Liab. Assumed
= Total cost
- FMV of Assets Acquired
= Goodwill purchased
$1,500
200
1,700
1,300
$ 400 42

83. Horizontal Model Transaction Analysis
Record the Goodwill related transactions in the Horizontal Model of the Winona Company, the purchasing company.
1. Purchase of the Rushford Company.
After one year, many of the former Rushford customers have taken their business elsewhere. As a result management concluded Goodwill has been impaired by $100.
Balance Sheet Income Statement Cashflow
Assets = Liab Equity Rev./ Exp Statem’t
Cash + Equip.+Gdwill = A/P.+ C.C.+ R.E. Gains - Loss= N.I. OA,IA,FA
B 2, , ,000 3, , ,000 bal
1 (1,500) 1, (1,500) IA
(100) (100) (100)
B , ,200 3, , (100) bal
Equipment
Goodwill
Acct. Pay
Cash 1500
Impairment Loss 100
Goodwill

84. Chapter 9
The End