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.