bsad 221 introductory financial accounting donna gunn, ca

BSAD 221Introductory Financial

Accounting

Donna Gunn, CA

Depreciation for Partial Years

Suppose a calendar-year business purchasesa building on April 1 for $500,000 with an

estimated life of 20 years and an estimatedresidual value of $80,000.

What is the current year’s depreciationusing the straight-line method?

Partial-year depreciation:

$21,000 × 9/12 = $15,750

Depreciation for Partial Years

Full-year depreciation:

($500,000 – $80,000) ÷ 20 = $21,000

Assume an asset cost of $40,000, an eight-year useful life with no residual value, and

the straight-line method.

$40,000 ÷ 8 = $5,000 depreciation per year

Changing the Useful Lifeof a Depreciable Asset

What is the carrying amount after two years?

NBV = $40,000 – $10,000 = $30,000

Management believes the asset will remainuseful for an additional ten years.

Changing the Useful Lifeof a Depreciable Asset

Current NBV / Estimated Remaining Useful Life$30,000 ÷ 10 = $3,000

(new depreciation per year)

Disposal of Property, Plant, and Equipment

Voluntary disposals: • Sale• Trade-in• Retirement

Involuntary disposals:• Fire • Accident

Disposal of Property, Plant, and Equipment

1. Update amortization to the date of disposal

2. Record cash received (debit)

3. Write off accumulated amortization (debit)

4. Write off the asset cost (credit)

5. Record a gain (credit) or loss (debit)

If Cash > BV, record a gain (credit).

If Cash < BV, record a loss (debit).

If Cash = BV, no gain or loss.

If Cash > BV, record a gain (credit).

If Cash < BV, record a loss (debit).

If Cash = BV, no gain or loss.

Disposal of Property, Plant, and Equipment

At the end of 2011 WestJet Airlines

• sold an aircraft for $1,600,000 cash

• original cost of the aircraft was $2,600,000

• accumulated amortization (after updating amortization) was $595,000

Disposal of Property, Plant, and Equipment

Prepare the journal entry to record the disposal

Disposal of Property, Plant, and Equipment

Cash 1,600,000

Acc. Amort – Aircraft 595,000Loss on sale 405,000

Aircraft 2,600,000Recognize the cash received and the removal of the

asset accounts.

The difference is the gain or loss.

Asset Impairment

Impairment is the loss of a significant portion of the utility of an asset through . . .

• Casualty.

• Obsolescence.

• Lack of demand for the asset’s services.

Asset Impairment

A loss should be recognized when anasset suffers a permanent impairment.

impairment loss = net book value – fair value

Revaluation Model

Under the revaluation model, the asset is recorded at cost when purchased but then

measured at its fair value less any accumulated depreciation less any

accumulated losses.

Fair Valuethe price at which the asset could be sold

Intangible Assets

• Goodwill

• Trademarks

• Patents

• Copyrights

• Franchises

• Technology

• Licencing Rights

• Leaseholds

Record at current

cash equivalent cost,

including purchase

price, legal fees, and

filing fees.

Intangible AssetsDefinite Life

Amortize over shorter of economic life or legal life, subject to rules specified by GAAP.

Use straight-line method.

Indefinite Life Not amortized. Tested at least annually for possible impairment, and book

value is reduced to fair value if impaired.

Intangible Assets – Goodwill

Arpec Company paid $2,000,000 to purchase all of Utek Company’s assets and assumed

liabilities of $400,000.

The acquired assets were appraised at a fair value of $1,800,000.

Intangible Assets - Goodwill

Purchase Price $2,000,000

FMV of Net Assets* 1,400,000

Goodwill $600,000

*FMV of Net Assets = FMV Assets – Debt Assumed=$1,800,000 - $400,000

Intangible Assets – Trademarks

A symbol, design, or logo associated with a business.

Purchased trademarks are recorded at cost.

Internally developed trademarks have no recorded asset cost.

Intangible Assets – Patents

Exclusive right granted by federal government to sell or manufacture an

invention.

Cost = purchase price + legal costs

Amortize = shorter of useful life or 20 years

Intangible Assets – Copyrights

Exclusive right granted by the federal government to protect artistic or intellectual

properties.

Legal life is life of creator plus 50 years

Amortize cost over the period benefited.

Intangible Assets – Franchises

Legally protected right to sell products or provide services purchased by franchisee from franchisor.

Purchase price of the franchise is recorded as an intangible asset that is amortized.

Intangible Assets – Licencing Rights

Limited permissions to use a product or service according to specific terms and conditions.

You may be using computersoftware that is made

available to you through acampus licencing agreement.

Research & Development Expenses

If an intangible asset is developed internally, the cost of development normally is recorded

as research and development expense.

Under specific circumstances, development costs can be deferred to future accounting

periods, recorded as assets, and then amortized over time, if the company can meet

specific criteria for deferral.