©coursecollege.com 1 20 other assets learning objectives 1.account for natural resources 2.account...

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20 Other Assets

ProfitDebit Credit or

Loss

Expenses

BALANCE SHEET INCOME STATEMENT

Assets Liabilities Revenue

Equity

Learning Objectives

1. Account for natural resources

2. Account for specifically identifiable intangible assets

3. Explain accounting issues involving purchased goodwill

4. Analysis: Compute and explain pledged assets to secured liabilities

Other assets, including natural

resources and intangibles

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Objective 20.1: Account for natural resources

O20.1

Natural resource assets such as timber, petroleum and minerals are also called wasting assets.

They can be replaced only by an act of nature and they are consumed by the firm by removal from their natural location.

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Account for natural resources

O20.1

Accounting for natural assets is similar to the accounting for fixed assets. For both types, fixed and natural assets, we ask the same questions:

.What was the total cost to acquire the asset?

.How should this cost be allocated to the generation of income or other assets?

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O20.1

Allocation of fixed assets is called depreciation, allocation of natural assets is called depletion.

The total cost of acquiring natural resources can be considerable and take some time to complete. Costs can include initial costs to acquire the resource, engineering costs, development costs and cost of restoration –for example

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O20.1

Land and mineral rights $1,135,000Engineering costs $109,000Development costs $371,000Restoration cost (estimated) $410,000Salvage value ($500,000)Total depletion base $1,525,000

June 30, 2010

ConPro MineralsAquisition Summary -Silver Bow Deposit

Total costs minus salvage value = depletion base

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Depletion rate per unit

O10.2

Depletion rate per unit extracted =

Cost – Salvage Value (depletion base)

Unit size of resource

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O20.1

Land and mineral rights $1,135,000Engineering costs $109,000Development costs $371,000Restoration cost (estimated) $410,000Salvage value ($500,000)Total depletion base $1,525,000Size of mineral deposit (tons) 1,250,000

June 30, 2010


Here, the size of the mineral deposit is 1,250,000 tons.

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O10.2

Depletion per unit extracted =

$1,525,000 (depletion base)

1,250,000 tons (Unit size of resource)

= $1.22 per ton of ore extracted

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O20.1

Land and mineral rights $1,135,000Engineering costs $109,000Development costs $371,000Restoration cost (estimated) $410,000Salvage value ($500,000)Total depletion base $1,525,000Size of mineral deposit (tons) 1,250,000Depletion rate per ton $1.22

June 30, 2010


Total costs minus salvage value divided by

size of deposit =

depletion rate per unit.

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O20.1

Land and mineral rights $1,135,000Engineering costs $109,000Development costs $371,000Restoration cost (estimated) $410,000Salvage value ($500,000)Total depletion base $1,525,000Size of mineral deposit (tons) 1,250,000Depletion rate per ton $1.22

June 30, 2010


The journal entry to record the acquisition of the deposit follows. . .

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O20.1

Page 19

Date Description PR Debit Credit

1-Jul Mineral Deposits -Silver Bow 185 2,025,000

Accounts Payable 200 1,615,000

Restoration Payable 213 410,000

GENERAL JOURNAL

The total cost of the acquisition

The restoration

estimate will be payable when the deposit is

fully depleted

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Accumulated depletion (In practice, direct reductions to the asset account are also used.)

O20.1

(15)Accumulated Depletion

Mineral Deposits 120

Net Mineral Deposits

105

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O20.1

For the first year, ConPro mined 300,000 tons of mineral ore. The depletion calculation is:

300,000 tons x $1.22 = $366,000

Page 20


30-Jun Inventory -Minerals 155 366,000

Accumulated Depletion -Silver Bow 188 366,000

GENERAL JOURNAL

This will be

expensed when the ore is sold

This reduces

the value of the

mineral deposit on

the balance sheet

Cost of Deposits 2,025,000

Less: Accumulated Depletion (366,000)

Net Mineral deposits 1,659,000

Silver Bow Value6/30/2011

Cost of Deposits 2,025,000

Less: Accumulated Depletion (366,000)

Net Mineral deposits 1,659,000

Silver Bow Value6/30/2011

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O20.1

Over the life of the asset, extraction activity causes depletion to be recorded. . .

Acquisition Salvage Annual Annual Accumulated Ending

Year Cost Value Extraction Depletion Depletion Book Value

1 $2,025,000 $500,000 300,000 $366,000 $366,000 $1,659,000

2 $2,025,000 500,000 225,000 $274,500 $640,500 $1,384,500

3 $2,025,000 500,000 0 $0 $640,500 $1,384,500

4 $2,025,000 500,000 500,000 $610,000 $1,250,500 $774,500

5 $2,025,000 500,000 25,000 $30,500 $1,281,000 $744,000

6 $2,025,000 500,000 120,000 $146,400 $1,427,400 $597,600

7 $2,025,000 $500,000 80,000 $97,600 $1,525,000 $500,000

Size of mineral deposit 1,250,000 tons

Acquisition Salvage Annual Annual Accumulated Ending

Year Cost Value Extraction Depletion Depletion Book Value

1 $2,025,000 $500,000 300,000 $366,000 $366,000 $1,659,000

2 $2,025,000 500,000 225,000 $274,500 $640,500 $1,384,500

3 $2,025,000 500,000 0 $0 $640,500 $1,384,500

4 $2,025,000 500,000 500,000 $610,000 $1,250,500 $774,500

5 $2,025,000 500,000 25,000 $30,500 $1,281,000 $744,000

6 $2,025,000 500,000 120,000 $146,400 $1,427,400 $597,600

7 $2,025,000 $500,000 80,000 $97,600 $1,525,000 $500,000

Size of mineral deposit 1,250,000 tons

No extraction means no depletion

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Objective 20.2: Account for specifically identifiable intangible assets

O20.2

Intangible assets lack a physical presence and exhibit a high degree of uncertainty as to their future economic

benefit.

Specifically identifiable assets include:

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Account for specifically identifiable intangible assets

O20.2

Patents

CopyrightsSpecifical

ly Identifiab

le Intangibl

es

Specifically

Identifiable

Intangibles Franchises &

LicensesTrademarks

Leaseholds

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O20.2

The process of allocation of the costs of intangibles is called amortization.(This can be compared to both depreciation of fixed assets and depletion of natural resource assets)

A contra asset account, accumulated amortization, can be used to record amortization although is common to simple credit the intangible asset account itself with the recorded amortization.

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Example –Conpro Minerals purchased a patent for a process to extract precious metals from mined ore. Total cost of patent acquisition was $600,000. The useful economic life is 5 years.

Page 28


1/1/10 Patents 178 600,000

Cash 100 600,000

12/31/10 Patent Amortization Expense 565 120,000

Accumulated Amortization -Patents 179 120,000

GENERAL JOURNAL


Loss

Expenses



Equity

The first year’s

amortization

Cost of Patents 600,000

Less: Accumulated

Amortization -Patents (120,000)

Net Patents 480,000

ConPro Patents12/31/2010

Cost of Patents 600,000

Less: Accumulated

Amortization -Patents (120,000)

Net Patents 480,000

ConPro Patents12/31/2010

Patents

O20.2

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Page 28


1/1/10 Copyrights 176 150,000

Cash 100 150,000

12/31/10 Copyright Amortization Expense 567 37,500

Copyrights 176 37,500

GENERAL JOURNAL


Loss

Expenses



Equity

The first year’s

amortization

Cost of Copyrights 150,000

Less: Amortization to date (37,500)

Net Copyrights 112,500

Copyrights12/31/2010

Cost of Copyrights 150,000

Less: Amortization to date (37,500)

Net Copyrights 112,500

Copyrights12/31/2010


Example –Consider the purchase of a copyright for $150,000 with a useful life of 4 years. Below are the journal entries for capitalizing the copyright purchase and the first year amortization.

Copyrights

O20.2

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O20.2

Trademarks

A trademark or service mark is a word, phrase, symbol or design that identifies the source of goods or services or the enterprise providing them

Trademarks are registered for an indefinite number of renewals for periods of 10 years each

Trademarks may be purchased from original or subsequent owners and are recorded at cost to acquire plus any direct costs

Trademarks costs should be amortized over the useful life of the intangible, when the useful life is not determinable, they are not amortized.

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21Account for specifically identifiable intangible

assets

O20.2

Franchises & Licenses

A franchise or license is a contractual right to sell certain products and services and/or to use certain trademarks and trade names

The cost of acquiring the franchise or license is debited to the asset account for franchises and licenses as are any direct costs of securing the license such as legal and filing fees.

Franchise and license costs should be amortized over the life of the agreement.

Should the life be indefinite by agreement, the cost is not amortized.

Franchise

FranchisorFranchise

e(Firm)

Franchise

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O20.2

Leaseholds

Page 31


7/1/10 Leasehold Improvements 190 450,000

Cash 100 450,000

6/30/11 Depreciation Expense -Leaseholds 567 30,000

Accumulated Depr.-Leaseholds 192 30,000

GENERAL JOURNAL


Loss

Expenses



Equity

450,000 cost

divided by 15

years = 30,000

Cost of Leasehold Impr. 450,000

Less: Depreciation to date (30,000)

Net Leasehold Improvements 420,000

Lesasehold Improvements6/30/2011

Cost of Leasehold Impr. 450,000

Less: Depreciation to date (30,000)

Net Leasehold Improvements 420,000

Lesasehold Improvements6/30/2011

ConPro signed a 30 year lease for an industrial land parcel with annual lease payments of $5,500 required.

They constructed a special purpose machine shop with an estimated useful of 15 years at a cost of $450,000 with no

salvage value.

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Objective 20.3: Explain accounting issues involving purchased

goodwill

O20.3

Goodwill is an intangible that arises when one business buys another (entire) business. It is defined as the excess of the purchase price paid over the net fair value of the assets purchased. Only purchased goodwill is allowed to be recorded under accounting rules. Internal goodwill exists as evidenced by the commonly observed excess of market capitalization over book values in the stock market.

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Explain accounting issues involving purchased goodwill

O20.3

In the following example, goodwill is recorded in the purchase transaction

•Purchase price for the net assets was $1,250,000

• Fair value of net assets $948,640

•Goodwill recorded $1,250,000—$948,640 = $301,360

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25Explain accounting issues involving purchased

goodwill

O20.3

Assets Historic Fair Values Liabilities Historic Fair ValuesCash 34,300 34,300 Accounts Payable 312,400 312,400Accounts receivable 188,500 188,500 Long term debt 410,200 410,200Inventory 262,340 262,340Prop, plant, equip 560,325 1,036,100 Total liabilities 722,600 722,600

Investments 150,000 150,000 Equity Total assets 1,195,465 1,671,240 "NET ASSETS" 472,865 948,640

Assets Historic Combined Liabilities Historic CombinedCash 1,500,000 284,300 Accounts Payable 250,700 563,100Accounts receivable 245,670 434,170 Long term debt 12,500 422,700Inventory 476,850 739,190Prop, plant, equip 85,640 1,121,740Investments 0 150,000 Total liabilities 263,200 985,800

GOODWILL 301,360 Equity Total assets 2,308,160 3,030,760 Owner, Capital 2,044,960 2,044,960

Balance Sheet -SELLERAs of date of Sale

Balance Sheet -BUYERAs of date of Purchase

Purchase price $1,250,000—$948,640 net assets atfair value = $301,360 Goodwill

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Journal entry for purchased goodwill

O20.3

Page 37


11/16/10 Cash 100 34,300

Accounts Receivable 135 188,500

Inventory 145 262,340

Property, Plant & Equipment 165 1,036,100

Investments 175 150,000

Goodwill 190 301,360

Accounts Payable 210 312,400

Long Term Debt 220 410,200

Cash 100 1,250,000

Record business acquisition

GENERAL JOURNAL

Fair values of acquired

accounts are recorded

Goodwill balances

the journal entry

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Loss

Expenses



Equity

Amortization?? for purchased goodwill

O20.3

1. New FASB rule -Goodwill is no longer amortized2. It must be tested each year for impairment3. Fair values of net assets are recomputed and

implied goodwill is calculated4. Fair value of the goodwill is determined by

analysis5. If the recorded value of the goodwill is greater

than the fair value calculation, the recorded value is written down (never up) due to impairment and the impaired amount is expensed.

301,36050,000

251,360

Purchased GoodwillHere a

$50,000 impairment to Goodwill has

been recorded. The

firm would also report a

$50,000 expense from impairment

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Objective 20.4: Analysis: Compute and explain pledged assets to secured

liabilities

O20.4

This ratio compares pledged assets to the liabilities that are secured by the pledge of those assets

Pledged assets to secured liabilities =

Book value of pledged assetsBook value of secured liabilities

A ratio greater than 1 would be expected for most loan relationships, however, these are book values and may not reflect the actual market

values that the lender relied on in making the loan

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O20.4

Example –Pledged assets to secured liabilities

Assets 2009 2010 Liabilities 2009 2010Cash 12,580 48,200 Accounts Payable 612,750 702,800Accounts receivable 264,700 304,570 Long term debt 633,200 787,500Inventory 645,200 750,370Prop, plant, equip 874,590 856,400 Total liabilities 1,245,950 1,490,300

Trademark 15,500 12,500 Equity Total assets 1,812,570 1,972,040 Owner, Capital 566,620 481,740

Sales 6,453,8002009 2010

Cost of Goods Sold 4,840,350 874,590 856,400Wages expense 295,600Selling expenses 188,500 633,200 787,500Interest expense 55,700Miscellaneous expense 1,158,530 1.4 1.1 x

Net Profit (84,880)

Balance Sheet -Dearborn DistributorsAs of 12/31 2009 and 2010

Pledged assets (All PP&E are pledged)

Secured liabilities(Long term debt is secured)

Pledged assets / Secured Liab

Income StatementFor the year ended 12/31/10

Note the drop in coverage for 2010.

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