AFA 717 Lecture Notes - Lecture 5: Intangible Asset, Asset, Impaired Asset

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bluegnat451

6 Jun 2018

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• Long-lived assets: both tangible and intangible, produce revenue through use rather than

through resale.

• Depreciation: periodic allocation of the cost of a tangible asset over its useful life

• Amortization: periodic allocation of the cost of an intangible asset over its useful life

• Depletion: depreciation of costs of acquiring and developing natural resources

• Residual value: the estimated net recoverable amount from disposal or trade-in of the asset at

the end of its estimated useful life.

• portion of cost not consumed through use

• Depreciable amount: the total amount of depreciation to be recognized over the useful life of

the asset -

• equals capitalized asset cost minus residual value

• Net book value (carrying value): the total capitalized asset cost minus accumulated

depreciation (or amortization) to date and minus any net impairment losses and reversals

• Impairment: arises when the fair value of an asset is less than its net book value. It is a write-

down of a long-lived asset to its recoverable amount.

• The eventual decline in utility of capital assets is caused by:

• physical factors, mainly usage

• wear and tear from operations; passage of time; elements; and deterioration

and decay

• obsolescence due to new technology

• Technological change does not automatically render older equipment obsolete

• If the older equipment meets the present needs of the company, obsolescence

is not a factor

• There are six asset categories that are not depreciated or amortized:

• Land

• Investment Property

• Held-for-Sale Assets

• Biological Assets

• Intangible Long-lived Assets with an Indefinite Life

• Goodwill

• The method of depreciation or amortization, should be:

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Document Summary

Impairment: arises when the fair value of an asset is less than its net book value. It is a write- down of a long-lived asset to its recoverable amount. The eventual decline in utility of capital assets is caused by: physical factors, mainly usage, wear and tear from operations; passage of time; elements; and deterioration and decay, obsolescence due to new technology. Technological change does not automatically render older equipment obsolete. If the older equipment meets the present needs of the company, obsolescence is not a factor. There are six asset categories that are not depreciated or amortized: Investment property: held-for-sale assets, biological assets, goodwill. The method of depreciation or amortization, should be: rational and systematic, and: reflect the pattern of consumption of future economic benefits. Straight-line - equal allocation to each time period: variable charge - based on inputs or outputs; or, accelerated methods decreasing charge over time.

Related Questions

1.On August 7, Green River InflatablesCo. paid $1,675 to purchase and install a hydraulic lift, and $40for an air filter for one of its delivery trucks.

a.Journalize the entries for the newhydraulic lift and the air filter expenditure.

b.Why are expenditures on equipment andother fixed assets sometimes capitalized (treated as an asset) andother times expensed?

2.Equipment acquired at the beginningof the year at a cost of $440,000 has an estimated residual valueof $25,000 and an estimated useful life of 8 years. Straight-linedepreciation is used. Determine (a) the total amount to bedepreciated over the life of the asset, (b) the amount ofdepreciation each year, (c) the journal entry to record the firstyearâs depreciation, (d) the book value of the asset at the end ofthe first year.

3.A tractor acquired at a cost of$275,000 has an estimated residual value of $39,000, an estimateduseful life of 40,000 hours, and was operated 2,660 hours duringthe first year. Determine (a) the total amount to be depreciatedover the life of the asset, (b) the amount of depreciation for theyear, (c) the journal entry to record the yearâs depreciation, (d)the book value of the asset at the end of the first year, (e)explain why units of output may be preferred overstraight line as a method of depreciating the tractor.

4. Equipment acquired at the beginning of the year at a cost of$280,000 has an estimated residual value of $45,000 and anestimated useful life of 16 years. Determine: (a) thedouble-declining-balance rate, (b) the double-declining-balancedepreciation for the first year, (c) the journal entry to recordthe first yearâs depreciation, (d) the book value at the end of thefirst year, (e) explain the advantages double-declining-balance may have over straight line in depreciatingassets.

5. A truck with a cost of $82,000 has an estimated residualvalue of $16,000, an estimated useful life of 12 years, and isdepreciated by the straight-line method. (a) Determine the amountof the annual depreciation, (b) Assuming that at the start of theeighth year the remaining life is estimated to be six years and theresidual value is estimated to be $12,000, determine thedepreciation expense for each of the remaining six years, (c)explain why depreciation is recalculated in situations likethis.

6. Equipment was acquired at the beginning of the year at a costof $465,000. The equipment was depreciated using the straight-linemethod based on an estimated useful life of 15 years and anestimated residual value of $45,000.

What was the depreciation for the first year?

Assuming the equipment was sold at the end of the eighth yearfor $235,000, determine the gain or loss on the sale of theequipment.

Journalize the entry to record the sale.

7. Glacier Mining Co. acquired mineral rights for $494,000,000.The mineral deposit is estimated at 475,000,000 tons. During thecurrent year, 31,500,000 tons were mined and sold.

Determine the depletion rate.

Determine the amount of the depletion expense for the currentyear.

Journalize the adjusting entry on December 31 to record thedepletion expense.

Why is depletion taken on mineral rights?

8. On December 31, it was estimated that goodwill of $6,000,000was impaired. In addition, a patent with an estimated usefuleconomic life of 12 years was acquired for $1,500,000 on April1.

Journalize the adjusting entry on December 31 for the impairedgoodwill.

What is goodwill?

What does it mean for goodwill to be impaired?

Journalize the adjusting entry on December 31 for theamortization of the patent rights.

Why are patents and other intangible assets amortized?

amberseal875

Using theâ double-declining balanceâ method, calculate theannual depreciation expense that will be recorded each year for anasset that cost$18,400â,

has a useful life of fourâ years, and has an estimated salvagevalue of $3,300. Explain what accounting issueâ arises, if âany, inthe third and fourth years.

Determine the depreciable cost.

	Cost	-.	Salvage value	=	Depreciable cost
	18400	-	3300	=

Complete the depreciation schedule using theâ double-decliningbalance method. â(Complete all inputâ boxes.)

		Book	Annual	Accumulated
Year	Rate	value	depreciation	depreciation
1

Explain what accounting issueâ arises, ifâ any, in the third andfourth years.

Total depreciation charged over the life of the asset In thisâcase, the thirdâ year's depreciation â, and no depreciation ischarged the remaining depreciation is charged the same amount ofdepreciation is charged in the fourth year.

orangepanda414

1.As a company records depreciation expense for a period oftime, cash is accumulated to replace fixed assets as they wearout.

True/False

4.An asset was purchased for $110,000.00 on January 1, Year 1and originally estimated to have a useful life of 11 years with aresidual value of $9,000.00. At the beginning of the third year, itwas determined that the remaining useful life of the asset was only4 years with a residual value of $2,600.00. Calculate thethird-year depreciation expense using the revised amounts andstraight line method.

Select the correct answer.

$22,759.09

$21,259.09

$22,259.09

$23,259.09

5. Costs associated with normal research and developmentactivities should be treated as intangible assets.

True/False

7. The amount of the depreciation expense for the second fullyear of use of a fixed asset costing $100,000, with an estimatedresidual value of $5,000 and a useful life of 4 years, is $25,000by the double-declining-balance method.

True/False

9. The amount of depreciation expense for the first full year ofuse of a fixed asset costing $95,000, with an estimated residualvalue of $5,000 and a useful life of 5 years, is $19,000 by thestraight-line method.

True/False

12. The accumulated depletion of a natural resource is reportedon the:

a. balance sheet as a deduction from the cost of theresource

b. income statement as a deduction from revenues

c. balance sheet as depreciation from the cost of theresource

d. income statement as an increase in revenue

15. An exchange is said to have commercial substance if futurecash flows remain the same as a result of the exchange.

True/False

18 Equipment with a cost of $220,000 has an estimated residualvalue of $30,000 and an estimated life of 10 years or 19,000 hours.It is to be depreciated by the straight-line method. What is theamount of depreciation for the first full year, during which theequipment was used 2,100 hours?

$19,000

$22,000

$30,000

$21,000

30. When exchanging equipment, if the trade-in allowance isgreater than the book value a loss results.

True/False

38. Once the useful life of a depreciable asset has beenestimated and the amount to be depreciated each year has beendetermined, the amounts cannot be changed.

True/False

AFA 717 Lecture Notes - Lecture 5: Intangible Asset, Asset, Impaired Asset

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