Natural Resources

Cost – Salvage valueTotal estimated units recoverable

=Depletion rate per unitof resource

Depletion rate per unitof resource

×Number of units extracted and sold this period

=PeriodicDepletion Expense

(Identical to “Units of Production” Depreciation)

Natural ResourcesMartin Mining Company paid $10,000,000 cash to

purchase land that is expected to yield 5,000,000 tons of coal. After all coal is extracted the land is not expected to

have any salvage value. During 2006, the company extracted and sold 500,000 tons of coal.

$10,000,000 – $05,000,000 tons

= $2.00 per ton extracted and sold

Natural ResourcesMartin Mining Company paid $10,000,000 cash to

purchase land that is expected to yield 5,000,000 tons of coal. After all coal is extracted the land is not expected to

have any salvage value. During 2006, the company extracted and sold 500,000 tons of coal.

Account Title Debit CreditCoal Mine 10,000,000 Cash 10,000,000

Depletion Expense 1,000,000 Accum. Depletion 1,000,000

Intangible Assets (Indefinite lives)

TrademarksA name or symbol that

identifies a company or a product. The ‘cost’ of a trademark may include design, purchase, or

defense of the trademark.

(What about the ‘value’ of the trademark Coca Cola?)

TrademarksA name or symbol that

identifies a company or a product. The ‘cost’ of a trademark may include design, purchase, or

defense of the trademark.

(What about the ‘value’ of the trademark Coca Cola?)

GoodwillGoodwillThe excess of cost over fair value of net tangible

assets acquired in a business acquisition.

GoodwillGoodwillThe excess of cost over fair value of net tangible

assets acquired in a business acquisition.

Intangible Assets

GoodwillGoodwillThe excess of cost over fair The excess of cost over fair value of net tangible assets value of net tangible assets

acquired in a business acquired in a business acquisition.acquisition.

GoodwillGoodwillThe excess of cost over fair The excess of cost over fair value of net tangible assets value of net tangible assets

acquired in a business acquired in a business acquisition.acquisition.

Assets 500,000$

Liabilities 100,000$ Stockholders' Equity 400,000

Total 500,000$

Seller CompanyBalance Sheet

At December 31, 2006

Assume that your company is willing to pay $450,000 cash to acquire

Seller Company. Let’s look at the accounting.

Goodwill

Assets 500,000$

Liabilities 100,000$ Stockholders' Equity 400,000

Total 500,000$

Seller CompanyBalance Sheet

At December 31, 2006

.

Goodwill

Assets 500,000$

Liabilities 100,000$ Stockholders' Equity 400,000

Total 500,000$

Seller CompanyBalance Sheet

At December 31, 2006

Account Title Debit CreditSeller Assets 500,000 Goodwill 50,000 Seller Liabilities 100,000 Cash 450,000

Impairment of Intangible Asset

Intangible assets with indefinite useful lives must be tested for Intangible assets with indefinite useful lives must be tested for impairment annually. If the fair value of the intangible asset is impairment annually. If the fair value of the intangible asset is

less than its book value, an impairment loss is recognized.less than its book value, an impairment loss is recognized.

Intangible assets with indefinite useful lives must be tested for Intangible assets with indefinite useful lives must be tested for impairment annually. If the fair value of the intangible asset is impairment annually. If the fair value of the intangible asset is

less than its book value, an impairment loss is recognized.less than its book value, an impairment loss is recognized.

Assume that at the end of 2006, we determine that goodwill has suffered a $10,000 impairment in value.

Account Title Debit CreditImpairment Loss 10,000 Goodwill 10,000

(AOL/Time Warner = $54 BILLION Loss from Goodwill Impairment)

Intangible Assets (Definitive lives)

PatentsThe exclusive legal right to produce and sell a product

that has one or more unique features. The legal life of a patent is 20 years.

PatentsThe exclusive legal right to produce and sell a product

that has one or more unique features. The legal life of a patent is 20 years.

FranchiseThe exclusive right to sell

products or perform services in certain geographic areas for a certain fixed period of

time.

FranchiseThe exclusive right to sell

products or perform services in certain geographic areas for a certain fixed period of

time.

Expensing Intangible Assets

An intangible asset with a definitive useful life is amortized using the straight-line method over the

intangible’s legal life or its useful life.

Assume we purchased a patent that has a 20-year legal and useful life for $20,000 cash.

Account Title Debit CreditPatent 20,000 Cash 20,000

Amortization Expense - Patent 1,000 Patent 1,000

Balance Sheet Presentation

Long-Term AssetsPlant and Equipment Building 4,000,000$ Accumulated Depreciation (2,500,000) 1,500,000$ Equipment 1,750,000 Accumulated Depreciation (1,200,000) 550,000 Total Plant and Equipment 2,050,000$ Land 850,000

Natural Resources Coal Mine (Less: $1,000,000 Depletion) 9,000,000

Intangibles Patents 19,000 Goodwill 40,000 Total Intangibles 59,000 Total Long-Term Assets 11,959,000$

Dorey CompanyPartial Balance SheetAt December 31, 2006

Class Assignment Questions

Questions 4, 7, 10, 13, 14, 16, 19, 20 and 22 (Page 431 in textbook)

Chapter 9

The End