Fixed Assets and Intangible Assets - Instructure

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11

Fixed Assets and Fixed Assets and Intangible AssetsIntangible Assets

10

1

Intangible AssetsIntangible Assets


22

1. Define, classify, and account for the

cost of fixed assets.

2. Compute depreciation, using the

After studying this chapter, you should

be able to:

2

2. Compute depreciation, using the

following methods: straight-line

method, units-of-production method,

and double-declining-balance

method.


33

3. Journalize entries for the disposal of

fixed assets.

4. Compute depletion and journalize the


be able to:

3

4. Compute depletion and journalize the

entry for depletion.

5. Describe the accounting for

intangible assets, such as patents,

copyrights, and goodwill.


44

6. Describe how depreciation expense is

reported in an income statement, and

prepare a balance sheet that includes


be able to:

4

prepare a balance sheet that includes

fixed assets and intangible assets.


55

Define, classify,

Objective 1Objective 1

10-1

5

and account for the

cost of fixed assets.


66

Nature of Fixed Assets

Fixed assets are long-term or

relatively permanent assets. They are

tangible assets because they exist

10-1

6

tangible assets because they exist

physically. They are owned and used

by the business and are not offered for

sale as part of normal operations.


77

Fixed Assets as a Percent of Total Assets—

Selected Companies10-1Fixed Assets as a Percent

of Total Assets—Selected

Companies

10-1

77


88

Is the purchased

item long-lived?

yes no

Classifying Costs 10-1

88

Is the asset used in a

productive purpose?

Expense

yes

Fixed Assets

no

Investment


99

� Purchase price

� Sales taxes

� Permits from government agencies

� Broker’s commissions

� Title fees

LAND

Cost of Acquiring Fixed Assets 10-1

99

� Title fees

� Surveying fees

� Delinquent real estate taxes

� Razing or removing unwanted

buildings, less any salvage

� Grading and leveling

� Paving a public street bordering the

land


1010

� Architects’ fees

� Engineers’ fees

� Insurance costs incurred during construction

� Interest on money borrowed to finance

construction

BUILDING

Cost of Acquiring Fixed Assets 10-1

1010

construction

� Walkways to and around the building

� Sales taxes

� Repairs (purchase of existing building)

� Reconditioning (purchase of existing

building)

� Modifying for use

� Permits from government agencies


1111

� Sales taxes

� Freight

� Installation

Cost of Acquiring Fixed Assets

MACHINERY AND

EQUIPMENT

LAND

� Modification for user

� Testing for use

� Permits from government

agencies

10-1

1111

� Repairs (purchase of used

equipment)

� Reconditioning (purchase

of used equipment)

� Insurance while in transit

� Assembly

� Trees and shrubs

� Fences

� Outdoor lighting

� Paved parking areas

LAND

IMPROVEMENT


1212

Cost of Acquiring Fixed Assets Excludes:

� Vandalism

� Mistakes in installation

� Uninsured theft

� Damage during unpacking

10-1

12

� Damage during unpacking

and installing

� Fines for not obtaining proper

permits from government

agencies


1313

Expenditures that benefit only the

current period are called revenue

expenditures. Expenditures that

Capital and Revenue Expenditures 10-1

13

expenditures. Expenditures that

improve the asset or extend its useful

life are capital expenditures.


1414

CAPITAL

EXPENDITURES

1) AdditionsNormal and

REVENUE REVENUE

EXPENDITURESEXPENDITURES

10-1

1414

1) Additions

2) Improvements

3) Extraordinary

repairs

ordinary repairs

and maintenance


1515

Ordinary Maintenance and Repairs

On April 9, the firm paid $300 for a

tune-up of a delivery truck.

Apr. 9 Repairs and Maintenance Exp. 300 00

10-1

1515

Apr. 9 Repairs and Maintenance Exp. 300 00

Cash 300 00

This is a revenue expenditureThis is a revenue expenditureThis is a revenue expenditureThis is a revenue expenditure


1616

Asset Improvements

On May 4, a $5,500 hydraulic lift was installed on

the delivery truck to allow for easier and quicker

loading of heavy cargo.

May 4 Delivery Truck 5 500 00

10-1

1616

May 4 Delivery Truck 5 500 00

Cash 5 500 00

This is a capital expenditureThis is a capital expenditureThis is a capital expenditureThis is a capital expenditure


1717

Extraordinary Repairs

The engine of a forklift that is near the end of its

useful life is overhauled at a cost of $4,500, which

extends its useful life eight years. Work on the

forklift was completed on Oct. 14.

10-1

1717

Oct. 14 Accum. Depreciation—Forklift 4 500 00

Cash 4 500 00

This is a capital expenditureThis is a capital expenditureThis is a capital expenditureThis is a capital expenditure


1818

10-1Capital or Revenue Expenditure

1818


1919

10-1

Example Exercise 10-1

On June 18 GTS Co. paid $1,200 to upgrade a

hydraulic lift and $45 for an oil change for one of

its delivery trucks. Journalize the entries for the

hydraulic lift upgrade and oil change expenditures.

19

hydraulic lift upgrade and oil change expenditures.

19

Follow My Example 10-1

June 18 Delivery Truck 1,200

Cash 1,200

18 Repairs and Maintenance Exp. 45

Cash 45

For Practice: PE 10-1A, PE 10-1B


2020

Leasing Fixed Assets

A capital lease is accounted

for as if the lessee has, in fact,

purchased the asset. The

10-1

20

purchased the asset. The

asset is then amortized over

the life of the capital lease.


2121

Leasing Fixed Assets

A lease that is not

classified as a capital

lease for accounting

purposes is classified as

10-1

21

purposes is classified as

an operating lease (an

operating leases is treated

as an expense).


2222

Compute depreciation using the



10-2

22


method, units-of-production method,

double-declining-balance method.


2323

Over time, fixed assets such as

equipment, buildings, and land

improvements lose their ability to

10-2Accounting for Depreciation

23

improvements lose their ability to

provide services. The periodic

transfer of the cost of fixed assets to

expense is called depreciation.


2424

Physical depreciation occurs from wear

and tear while in use and from the

action of the weather Functional

10-2Physical and Functional

Depreciation

24

action of the weather Functional

depreciation occurs when a fixed asset

is no longer able to provide services at

the level for which it was intended.


2525

Factors in Computing Depreciation

The three factors in determining the

amount of depreciation expense to be

recognized each period are: (a) the fixed

10-2

25

recognized each period are: (a) the fixed

asset’s initial cost, (b) its expected useful

life, and (c) its estimated value at the end

of the useful life.


2626

The fixed asset’s estimated value at

the end of its useful life is called the

residual value, scrap value, salvage

10-2Residual Value

26

residual value, scrap value, salvage

value, or trade-in value. A fixed

asset’s residual value and its expected

useful life must be estimated at the

time the asset is placed in service.


2727

10-2

2727


2828

2%

7% 3%

Exhibit 5: Use of Depreciation

Methods

Straight-line

Units-of-production

Double-declining-

10-2

2828

88%

Source: Accounting Trends & Techniques, 59th ed., American

Institute of Certified Public Accountants, New York, 2005.

Double-declining-

balance

Other


2929

Straight-Line Method 10-2

The straight-line method provides

for the same amount of

depreciation expense for each year

of the asset’s useful life.

29

of the asset’s useful life.

Annual depreciation =Cost – estimated residual value

Estimated life

29


3030

A depreciable asset cost $24,000. Its

estimated residual value is $2,000 and

its estimated life is 5 years.


10-2

3030


Estimated life

Annual depreciation =$24,000 – $2,000

5 years

Annual depreciation = $4,400


3131

The straight-line method is

widely used by firms because it

is simple and it provides a

reasonable transfer of cost to

10-2

31

reasonable transfer of cost to

periodic expenses if the asset is

used about the same from

period to period.


3232

10-2


Equipment that was acquired at the beginning of the year

at a cost of $125,000 has an estimated residual value of

$5,000 and an estimated useful life of 10 years.

Determine the (a) depreciable cost, (b) straight-line rate,

and (c) annual straight-line depreciation.

32

and (c) annual straight-line depreciation.

32


(a) $120,000 ($125,000 – $5,000)

(b) 10% = (1/10)

(c) $12,000 ($120,000 x 10%) or ($120,000 ÷ 10 years)



3333

Units-of-Production Method 10-2

The units-of-production method provides

for the same amount of depreciation

expense for each unit produced or each

3333

expense for each unit produced or each

unit of capacity used by the asset.

Unit depreciation =Cost – estimated residual value

Estimated hours, units, etc.


3434

10-2

A depreciable asset cost $24,000. Its

estimated residual value is $2,000 and

its expected to have an estimated life

of 10,000 operating hours.

Cost – estimated residual value

3434

Hourly depreciation =$24,000 – $2,000

10,000 estimated hours

Hourly depreciation = $2.20 hourly depreciation

Hourly depreciation =Cost – estimated residual value

Estimated hours


3535

The units-of-production method

is more appropriate than the

straight-line method when the

10-2

35

straight-line method when the

amount of use of a fixed asset

varies from year to year.


3636

10-2


Equipment acquired at a cost of $180,000 has an

estimated residual value of $10,000, an estimated useful

life of 40,000 hours, and was operated 3,600 hours

during the year. Determine the (a) depreciable cost, (b)

depreciation rate, and (c) the units-of-production

depreciation for the year.

36

depreciation for the year.

36


(a) $170,000 ($180,000 – $10,000)

(b) $4.25 per hour ($170,000/40,000 hours)

(c) $15,300 (3,600 hours x $4.25)



3737

Double-Declining-Balance Method

The double-declining-

balance method provides

for a declining periodic

10-2

37

for a declining periodic

expense over the estimated

useful life of the asset.


3838

A double-declining balance rate is

determined by doubling the straight-

line rate. A shortcut to determining

the straight-line rate is to divide one

10-2

38

the straight-line rate is to divide one

by the number of years (1/5 = .20).

Hence, using the double-declining-

balance method, a five-year life

results in a 40 percent rate (.20 x 2).


3939

For the first year, the cost of the asset

is multiplied by 40 percent. After the

first year, the declining book value of

the asset is multiplied 40 percent.

Continuing with the example where

10-2

39

Continuing with the example where

the fixed asset cost $24,000 and has

an expected residual value of $2,000,

a table can be built.


4040

Book Value Accum.

Beginning Annual Deprec. Book Value

Year of Year Rate Deprec. Year-End Year-End

1 $24,000 40% $9,600

10-2

4040

$24,000 x .40


4141

1 $24,000 40% $9,600 $9,600 $14,400

2 14,400 40% 5,760

Book Value Accum.



10-2

4141

$14,400 x .40


4242

1 $24,000 40% $9,600 $9,600 $14,400

2 14,400 40% 5,760 15,360 8,640

Book Value Accum.



10-2

4242


4343

1 $24,000 40% $9,600 $9,600 $14,400

2 14,400 40% 5,760 15,360 8,640

3 8,640 40% 3,456 18,816 5,184

Book Value Accum.



10-2

4343

3 8,640 40% 3,456 18,816 5,184


4444

1 $24,000 40% $9,600 $9,600 $14,400

2 14,400 40% 5,760 15,360 8,640

3 8,640 40% 3,456 18,816 5,184

Book Value Accum.



10-2

4444

3 8,640 40% 3,456 18,816 5,184

4 5,184 40% 2,074 20,890 3,110


4545

1 $24,000 40% $9,600 $9,600 $14,400

2 14,400 40% 5,760 15,360 8,640

3 8,640 40% 3,456 18,816 5,184

Book Value Accum.



10-2

4545

3 8,640 40% 3,456 18,816 5,184

4 5,184 40% 2,074 20,890 3,110

5 3,110 40% 1,244 22,134 1,866

STOPSTOPDEPRECIATION STOPS WHEN

BOOK VALUE EQUALS

RESIDUAL VALUE!


4646

1 $24,000 40% $9,600 $9,600 $14,400

2 14,400 40% 5,760 15,360 8,640

3 8,640 40% 3,456 18,816 5,184

Book Value Accum.



10-2

4646

3 8,640 40% 3,456 18,816 5,184

4 5,184 40% 2,074 20,890 3,110

5 3,110 – $2,000 1,110 22,000 2,000

Desired

ending book

value

“Forced”

annual

depreciation


4747

10-2


Equipment that was acquired at the beginning of the year

at a cost of $125,000 has an estimated residual value of

$5,000 and an estimated useful life of 10 years.

Determine the (a) depreciable cost, (b) double-

declining-balance rate, and (c) double-declining balance

depreciation for the first year.

47

depreciation for the first year.

47


(a) $120,000 ($125,000 – $5,000)

(b) 20% [(1/10) x2]

(c) $25,000 ($125,000 x 20%)



4848

Summary of

Depreciation Methods10-2

4848


4949

10-2Comparing

Depreciation Methods

4949


5050

Depreciation for Federal Income Tax

The Internal Revenue Code

specifies the Modified Accelerated

Cost Recovery System (MACRS)

10-2

50

Cost Recovery System (MACRS)

for use by businesses in computing

depreciation for tax purposes.


5151

MACRS specifies eight classes of

useful life and depreciation rates for

each class. The two most common

classes are the 5-year class (includes

10-2

51

classes are the 5-year class (includes

automobiles and light duty trucks)

and the 7-year class (includes most

machinery and equipment).


5252

A machine purchased for $140,000 was

originally estimated to have a useful life of five

years and a residual value of $10,000. The

asset has been depreciated for two years using

Revising Depreciation Estimates 10-2

5252

the straight-line method.

$140,000 – $10,000

5 years

Annual

Depreciation (S/L) =

$26,000 per yearAnnual

Depreciation (S/L) =


5353

At the end of two years, the asset’s book value

is $88,000, determined as follows:

10-2

5353

Asset cost $140,000

Less accumulated depreciation

($26,000 per year x 2 years) 52,000

Book value, end of second year $ 88,000


5454

During the third year, the company estimates

that the remaining useful life is eight years

(instead of three) and that the residual value is

$8,000 (instead of $10,000). Depreciation

expense for each of the remaining eight year is

determined as follows:

10-2

5454

determined as follows:

Book value, end of second year $88,000

Less revised estimated residual value 8,000

Revised remaining depreciation cost $80,000

Revised annual depreciation expense

($80,000 ÷ 8 years) $10,000


5555


A warehouse with a cost of $500,000 has an estimated

residual value of $120,000, an estimated useful life of

40 years, and is depreciated by the straight-line method.

(a) Determine the amount of annual depreciation. (b)

10-2

55

(a) Determine the amount of annual depreciation. (b)

Determine the book value at the end of the 20th year of

use. (c) If at the start of the 21st year it is estimated that

the remaining life is 25 years and that the residual value

is $150,000, determine the depreciation expense for

each of the remaining 25 years.

55


5656


a. $9,500 [($500,000 – $120,000)/40]

b. $310,000 [$500,000 – ($9,500 x 20)]

10-2

56For Practice: PE 10-5A, PE 10-5B 56

b. $310,000 [$500,000 – ($9,500 x 20)]

c. $6,400 [310,000 – $150,000)/25]


5757

Journalize entries


10-3

57

for the disposal of

fixed assets.


5858

Discarding Fixed Assets

A piece of equipment acquired at a cost of

$25,000 is fully depreciation. On February

14, the equipment is discarded.

10-3

58

Feb. 14 Accumulated Depr.—Equipment 25 000 00

Equipment 25 000 00

To write off equipment

discarded.

58


5959

Equipment costing $6,000 is depreciated at an

annual straight-line rate of 10%. After the

adjusting entry, Accumulated Depreciation—

Equipment had a $4,750 balance. The

equipment was discarded on March 24.

10-3

5959

equipment was discarded on March 24.

Mar. 24 Depreciation Expense—Equipment 150 00

Accum. Depr.—Equipment 150 00

To record current

depreciation on

equipment discarded.

$600 x 3/12


6060

The discarding of the equipment is then

recorded by the following entry:

10-3

6060

Mar. 24 Accum. Depreciation—Equipment 4 900 00

Loss on Disposal of Fixed Assets 1 100 00

Equipment 6 000 00

To write off equipment

discarded.


6161

Equipment costing $10,000 is depreciated at an

annual straight-line rate of 10%. The equipment is

sold for cash on October 12. Accumulated

Depreciation (last adjusted December 31) has a

balance of $7,000 and needs to be updated.

Selling Fixed Assets 10-3

6161

balance of $7,000 and needs to be updated.

Oct. 12 Depreciation Expense—Equipment 750 00

Accum. Depr.—Equipment 750 00

To record current

depreciation on

equipment sold.

$10,000 x ¾ $10,000 x ¾

x10%x10%


6262

The equipment is sold on October

12 for $2,250. No gain or loss.

Oct. 12 Cash 2 250 00

10-3Assumption 1

6262

Oct. 12 Cash 2 250 00

Accum. Depreciation—Equipment 7 750 00

Equipment 10 000 00

Sold equipment at book

value.


6363

Oct. 12 Cash 1 000 00

The equipment is sold on October 12

for $1,000; a loss of $1,250.

10-3Assumption 2

63

Oct. 12 Cash 1 000 00


Loss on Disposal of Fixed Assets 1 250 00

Equipment 10 000 00

Sold equipment at a loss.

63


6464

Oct. 12 Cash 2 800 00

The equipment is sold on October 12

for $2,800; a gain of $550.

10-3Assumption 3

64

Oct. 12 Cash 2 800 00


Equipment 10 000 00

Sold equipment at a gain.

64

Gain on Disp. of Fixed Assets 550 00


6565

10-3


Equipment was acquired at the beginning of year at a

cost of $91,000. The equipment was depreciated using

the straight-line method based upon an estimated useful

life of 9 years and an estimated residual value of

65

life of 9 years and an estimated residual value of

$10,000.

65

a. What was the depreciation for the first year?

b. Assuming the equipment was sold at the end of the

second year for $78,000, determine the gain or loss on

sale of the equipment.

c. Journalize the entry to record the sale.


6666


a. $9,000 [($91,000 – $10,000)/9]

b. $5,000 gain; $78,000 – [$91,000 – ($9,000 x 2)]

10-3

66For Practice: PE 10-6A, PE 10-6B 66

c. Cash 78,000

Accum. Depreciation—Equipment 18,000

Equipment 91,000

Gain on Disposal of Fixed Assets 5,000


6767

Exchanging Fixed Assets

When old equipment is traded for new

equipment, the seller often allows the buyer

a trade-in allowance for the old equipment

10-3

67

a trade-in allowance for the old equipment

traded. The remainder, the boot, is either

paid in cash or recorded as a liability.


6868

10-3

Gains on exchanges of similar

IMPORTANT!

68

Gains on exchanges of similar

fixed assets are not recognized

for financial reporting purposes.


6969

On June 19, assume that new

equipment being purchased has a list

price of $5,000. The dealer allows a

trade-in allowance of $1,100 on the

10-3

69

trade-in allowance of $1,100 on the

old, similar equipment. The old

equipment cost $4,000 and has a

book value of $800.


7070

Two Methods of Determining Cost

Method One

List price of new equipment $5,000

Trade-in allowance $1,100

10-3

7070

Book value of old equipment 800

Unrecognized gain on exchange (300)

Cost of new equipment $4,700


7171

Method Two

Book value of old equipment $ 800

Cash paid at date of exchange 3,900

10-3

7171

Cost of new equipment $4,700

Note that either method provides the same

cost for the new equipment.


7272

On June 19, equipment was

exchanged at a gain of $300.

June 19 Accum. Depreciation—Equipment 3 200 00

10-3

7272

June 19 Accum. Depreciation—Equipment 3 200 00

Equipment (old equipment) 4 000 00

To record exchange of

equipment.

Cash 3 900 00

Equipment (new equipment) 4 700 00


7373

Losses on Exchanges

For financial reporting purposes, losses are

recognized on exchange of similar fixed

assets if the trade-in allowance is less than

the book value of the old equipment. On

10-3

73

the book value of the old equipment. On

September 7, new equipment was acquired

by trading in old equipment with a cost of

$7,000 and a book value of $2,400, and

giving a cash payment of $8,000.


7474

Cost of old equipment $7,000

Accumulated depreciation at date of exchange 4,600

Book value at September 7, date of exchange $2,400

Trade-in allowance on old equipment 2,000

Loss on exchange $ 400

Sept 7 Accum. Depreciation—Equipment 4 600 00

10-3

7474

Sept 7 Accum. Depreciation—Equipment 4 600 00

Equipment 10 000 00

Loss on Disposal of Fixed Assets 400 00

Equipment 7 000 00

Cash 8 000 00

To record exchange of

equipment with loss.


7575

10-3


On the first day of the fiscal year, a delivery truck with a

list price of $75,000 was acquired in exchange for an

old delivery truck and $63,000 cash. The old truck had

a cost of $50,000 and accumulated depreciation of

75

a cost of $50,000 and accumulated depreciation of

$39,500.

75

a. Determine the cost of the new truck for financial

reporting purposes.

b. Journalize the entry to record the exchange.


7676


a. $73,500

List price of new truck $75,000

Trade-in allowance on old truck

($75,000 – $63,000) $12,000

10-3

7676

($75,000 – $63,000) $12,000

Book value of old truck

($50,000 – $39,500) 10,500

Unrecognized gain on exchange (1,500)

Cost of new truck $73,500

(Continued)

or


7777


Book value of old truck ($50,000 –

$39,5000) $10,500

Plus cash paid at date of exchange 63,000


10-3

77

For Practice: PE 10-7A, PE 10-7B77


b. Truck (new) 73,500

Accumulated Depreciation—

Truck (old) 39,500

Truck (old) 50,000

Cash 63,000


7878

Compute depletion


10-4

78

and journalize the

entry for depletion.


7979

The process of

transferring the cost of

natural resources to an

Natural Resources 10-4

79

natural resources to an

expense account is called

depletion.


8080

Recording Depletion 10-4

A business paid $400,000 for the

mining rights to a mineral deposit

estimated at 1,000,000 tons of ore.

80

estimated at 1,000,000 tons of ore.

The depletion rate is $0.40 per ton

($400,000/1,000,000 tons).


8181

10-4

If 90,000 tons are mined during the

year, an adjusting entry is required

at the end of the accounting period.

8181

Dec. 31 Depletion Expense 36 000 00

Accumulated Depletion 36 000 00

Depletion of mineral

deposit.

Adjusting Entry


8282

10-4


Earth’s Treasures Mining Co. acquired mineral rights for

$45,000,000. The mineral deposit is estimated at

50,000,000 tons. During the current year, 12,600,000

tons were mined and sold.

82

tons were mined and sold.

82

a. Determine the depletion rate.

b. Determine the amount of depletion expense for the

current year.

c. Journalize the adjusting entry on December 31 to

recognize the depletion expense.


8383


a. $0.90 per ton = $45,000,000/50,000,000 tons

b. $11,340,000 – (12,600,000 tons x $0.90 per ton)

10-4

c. Dec. 31Depletion Expense 11,340,000

83


c. Dec. 31Depletion Expense 11,340,000

Accumulated Depletion 11,340,000

Depletion of

mineral deposit.


8484

Describe the accounting


10-5

84

for intangible assets,

such patents, copyrights,

and goodwill.


8585

Intangible Assets

Patents, copyrights, trademarks, and

goodwill are long-lived assets that

are useful in the operations of a

10-5

85

are useful in the operations of a

business and not held for sale. These

assets are called intangible assets

because they do not exist physically.


8686

The exclusive right granted by the

federal government to

manufacturers to produce and sell

10-5

86

goods with one or more unique

features is a patent. These rights

continue in effect for 20 years.


8787

At the beginning of its fiscal year, a business

acquires a patent right for $100,000. Its

remaining useful life is estimated at 5 years.

10-5Journalizing Amortization of a

Patent

87

Dec. 31 Amortization Expense—Patents 20 000 00

Patents 20 000 00

Patent amortization

($100,000/5).

Adjusting Entry

87


8888

10-5

Dec. 31 Amortization Expense—Patents 20 000 00

Patents 20 000 00

Patent amortization

($100,000/5).

Adjusting Entry

88

($100,000/5).

Because a patent (and other intangible assets) does not

exist physically, it is acceptable to credit the asset. This

approach is different from physical fixed assets that

require the use of a contra asset account.

88


8989

The exclusive right granted by the

federal government to publish and

sell a literary, artistic, or musical

10-5Copyright

89

sell a literary, artistic, or musical

composition is a copyright. A

copyright extends for 70 years

beyond the author’s death.


9090

A trademark is a unique name, term, or

symbol used to identify a business and its

products. Most businesses identify their

trademarks with ® in their advertisements

10-5Trademark

90

trademarks with ® in their advertisements

and on their products. Trademarks can be

registered for 10 years and can be

renewed every 10 year period thereafter.


9191

In business, goodwill refers to an

intangible asset of a business that is

created from such favorable factors

10-5Goodwill

91

created from such favorable factors

as location, product quality,

reputation, and managerial skill.


9292

Generally accepted accounting principles

permit goodwill to be recorded in the

accounts only if it is objectively

10-5

92

accounts only if it is objectively

determined by a transaction.


9393

Impaired Goodwill 10-5

A loss should be recorded if the business

prospects of the acquired firm (and the acquired

goodwill) become significantly impaired.

93

Mar. 19 Loss from Impaired Goodwill 50 000 00

Goodwill 50 000 00

Impaired goodwill.

93


9494

10-5


On December 31 it was estimated that goodwill of

$40,000 was impaired. In addition, a patent with an

estimated useful economic life of 12 years was acquired

for $484,000 on July 1.

94

a. Journalize the adjusting entry on December 31,

for the impaired goodwill.

b. Journalize the adjusting entry on December 31

for the amortization of the patent rights.

94


9595


a. Dec. 31 Loss from Impaired Goodwill 40,000

Goodwill 40,000

Impaired goodwill.

10-5

b. Dec. 31 Amortization Expense—Patents 3,500

95


b. Dec. 31 Amortization Expense—Patents 3,500

Patents 3,500

Amortized patent rights

[($84,000/12) x (6/12)].


9696

Describe how depreciation

expense is reported in an


10-6

96

expense is reported in an

income statement, and

prepare a balance sheet

that includes fixed assets

and intangible assets.


9797

10-6

� The fixed assets may be shown at their net

� The amount of each major class of fixed

assets should be disclosed in the balance

sheet or in notes.

97

� The fixed assets may be shown at their net

amount.

Office equipment $125,750

Less accumulated depreciation 86,300

Net book value $ 39,450


9898

10-6

� The cost of mineral rights or ore deposits is

normally shown as part of the fixed asset

section of the balance sheet. The related

accumulated depletion should also be

disclosed.

98

disclosed.

� Intangible assets are usually reported (net of

amortization) in the balance sheet in a

separate section immediately following fixed

assets.


9999

10-6Fixed Assets and Intangible Assets in the Balance Sheet

9999


100100

10-6Fixed Asset Turnover Ratio

One measure of the revenue-generating

efficiency of fixed assets is the fixed asset

turnover ratio. It measures the number of

dollars of revenue earned per dollar of fixed

assets and is computed as follows:

100100

assets and is computed as follows:

Fixed Asset

Turnover Ratio

Revenue

Average Book Value of

Fixed Assets

=


101101

10-6Financial Analysis and Interpretation

For Marriott International, Inc. (in millions)

Fixed Asset

Turnover Ratio

Revenue

Average Book Value of

Fixed Assets

=

Fixed Asset $11,550

101101

Fixed Asset

Turnover Ratio

$11,550

($2,341 + 2,389)/2 =

Fixed Asset

Turnover Ratio= 4.88

Conclusion: For every dollar of fixed assets,

Marriott earns $4.88 of revenue.

Fixed Assets and Intangible Assets - Instructure

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