Chapter 8: Long-Term Assets

Discussion Questions: Key Points

1. Capitalization means that an asset has been debited. The key criterion is whether the expenditure provides a future economic benefit. If so the expenditure should be capitalized. If the benefit is used up before the end of the accounting period, it is expensed. 2. The cost of demolishing the old building would be debited to the land account. This is a cost of making the land ready for use. The company did not purchase the building for any purpose other than to acquire that piece of land. 3. A lump-sum purchase is one in which two or more plant assets are acquired for one purchase price. Allocation of the lump-sum purchase price will take place according to the proportion each individuals assets fair value represents of the entire groups. 4. Depreciation is the process of allocating the cost of an asset to the future periods in which the asset will help generate revenues for the business. It is used to help companies match the expenses of ownership of an asset with the revenues that the asset helps to produce. 5. Useful life and physical life are not necessarily the same, although they can be. A company may have a policy of disposing of assets well before their productive capacity is used up. Students may know of people who drive a car for three years and then trade it in for a new one. The useful life in this situation is three years because it is the best estimate of how long the car will be used. The physical life is much longer than that, however, as the car will most likely be sold in the used car market. 6. A company should select the depreciation method that most closely matches its expected use of the asset as doing so would help to provide more accurate and reliable financial statements. a. Units-of-production matches best here, as the use of the machine will vary widely depending on how much it is needed during the year. b. Double-declining balance makes the most sense in this situation, as the costs of maintenance will be higher in later years. Most of the value of the machine is associated with the early years of its physical life. c. Straight-line matches the expected costs most closely with the revenues that the machine helps to generate. 7. An extraordinary repair is not expected to recur during the life of the asset and helps the asset to become more productive for the business. An ordinary repair would be done to return the asset to its functionality before the break-down. An extraordinary repair requires capitalization of the cost of the repair while an ordinary repair is expensed. Capitalized repairs would affect the income statement slowly over time. 8. Book value is the cost of the asset minus the accumulated depreciation to date associated with that asset. A gain or loss is the market value of the asset minus the book value of the asset. 9. A $500 gain would be recognized on the sale. (book value = $4,000; market value = $4,500 ) 10. Depreciation, amortization, and depletion are all methods of allocating the cost of an asset to the accounting periods over which the asset helps a company recognize revenue. They all involve estimation of the useful lives of the assets involved and spreading the cost of the assets over the useful life (although impairment of goodwill, an intangible asset, is the exception to this rule). a. Amortization b. Depletion

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Short Exercises
(5-10 min.) S 8-1
I P P P I I I P 1. Franchises 2. Vehicles 3. Buildings 4. Furniture 5. Patents 6. Copyrights 7. Trademarks 8. Land improvements

(5-10 min.) S 8-2

A NA DR DR A A A DR DL 1. Franchises 2. Land 3. Buildings 4. Furniture 5. Patents 6. Copyrights 7. Trademarks 8. Land improvements 9. Gold ore deposits

(5-10 min.) S 8-3

L LI LI L LI 1. Survey fees 2. Fencing 3. Lighting 4. Clearing land 5. Parking lot

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(5-10 min.) S 8-4

Journal POST DATE Land Building Equipment Notes Payable Record purchase of land, a building, and equipment. ACCOUNTS REF. Dr. 60,000 48,000 12,000 120,000 Cr.

Computations: Total P u r c h a s e P r i c e $120,000 = $120,000 $120,000 = = Cost of Each Asset

Asset

Market

Land Building Equipment Total

Percentage of Total Market Value Value $ 80,000 $80,000 / $160,000 64,000 $64,000 / $160,000 16,000 $16,000 / $160,000 $160,000

= = =

50% 40% 10% 100%

X X X

$ 60,000 48,000 12,000 $120,000

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(5-10 min.) S 8-5

Req 1. Journal POST DATE ACCOUNTS Incorrect entry: Airplane Cash 600,000 600,000 REF. Dr. Cr.

Correct entry: Repair Expense Cash 600,000 600,000

Req 2. Net income would be overstated by $600,000, because the $600,000 was not included as an expense.

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(10-15 min.) S 8-6

Depreciation is the process of allocating a plant assets cost to expense over its useful life. The primary purpose of depreciation is to match the periods expenses against its revenues in order to measure net income. Lake is correct that depreciation can relate to the wear and tear of an asset. However, the depreciation of some assets is more affected by obsolescence than by physical wear and tear. Coe is wrong. Depreciation has nothing to do with a cash fund to replace an asset.

(10-15 min.) S 8-7

First-year depreciation:

a. Straight-line: ($45,000,000 $5,000,000) / 5 years b. Units-of-production: [($45,000,000 $5,000,000) / 3,000,000 miles] 750,000 miles c. Double-declining-balance: (1/ 5 years) 2 = 40%; 40% x $45,000,000 Book value, under straight-line method: Cost Less: Accumulated Book value depreciation

= $ 8,000,000 = $ 10,000,000

= $18,000,000

$45,000,000 (8,000,000) $37,000,000

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(10-15 min.) S 8-8

Second-year depreciation: a. Straight-line: ($45,000,000 $5,000,000) / 5 years = $8,000,000 b. Units-of-production: [($45,000,000 $5,000,000) /3,000,000 miles] 1,500,000 miles = $20,000,000 c. Double-declining-balance: Year 1: 40% x $45,000,000= $18,000,000 Year 2: 40% x ($45,000,000 $18,000,000) = $10,800,000

(5-10 min.) S 8-9

First-year depreciation (for a partial year): Straight-line: ($45,000,000 $5,000,000) / 5 years 9/12 = $6,000,000

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(5-10 min.) S 8-10

Journal POST DATE ACCOUNTS Depreciation Expense, Hot Dog Stand Accumulated Depreciation, Hot Dog Stand Record depreciation on hot dog stand. 10,000 REF. Dr. 10,000 Cr.

Computations: Straight-line for years 1-4: $40,000 / 8 years = $5,000 4 years = $20,000 for years 1- 4 $5,000 per year

Revised Straight-line: ($40,000 - $20,000)/2 years = $10,000 per year

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(10-15 min.) S 8-11

CAP REV CAP REV CAP CAP CAP CAP CAP

a. Purchase price b. Ordinary recurring repairs c. Lubrication before machine is placed in service d. Periodic lubrication e. Major overhaul f. Sales tax g. Transportation and insurance h. Installation i. Training of personnel

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(5-10 min.) S 8-12

Journal POST DATE 2010 Dec. 31 Cash Accumulated Depreciation, Truck Truck Gain on Sale of Truck Record the sale of the truck. 28,000 16,000 41,000 3,000 ACCOUNTS REF. Dr. Cr.

Computations: Sale price of assets Book value: Truck Less: Accumulated depreciation Gain on sale $28,000 $41,000 (16,000) 25,000 $3,000

(15-20 min.) S 8-13

Purchase price paid for The Dandy Dime Market value of The Dandy Dimes assets Less: The Dandy Dimes liabilities Market value of The Dandy Dimes net assets Goodwill $800,000 (600,000) 200,000 $500,000 $700,000

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Journal POST DATE Assets Goodwill Liabilities Cash Record purchase of The Dandy Dime. ACCOUNTS REF. Dr. 800,000 500,000 600,000 700,000 Cr.

(5-10 min.) S 8-14

Journal POST DATE Apr 1 Patent Cash Record purchase of patent. ACCOUNTS REF. Dr. 500,000 500,000 Cr.

Dec

31

Amortization Expense Patent Record amortization expense

75,000 75,000

Computations: $500,000/5 = $100,000 x 9/12 = $75,000

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(5-10 min.) S 8-15

Depletion expense per barrel of oil = $18,000,000/2,400,000 = $7.50 Journal DATE 2011 Dec. 31 ACCOUNTS Depletion Expense, Oil and Gas (800,000 x $7.50) Accumulated Depletion, Oil and Gas Record depletion. POS T REF. Dr. Cr.

6,000,000 6,000,000

(5-10 min.) S 8-16

__H_ 1. A bond that management plans on owning until it is repaid. Management does not believe it will need to sell the bond to generate cash before the bonds scheduled maturity date. __N_ 2. Land that management is holding as an investment. __T_ 3. Intel stock that company management plans on selling quickly, as soon as its price is 10% more than what the company paid at the time it purchased the stock. __A_ 4. Ford Motor Company stock. Management does not actively manage this stock and intends to sell it only if they need to generate cash. __A_ 5. A bond that management plans on owning until it is repaid. However, management believes it may have to sell the bond within the year in order to provide enough cash for operations. __N_6. Inventory that management intends to sell within the year.

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(5-10 min.) S 8-17

1 2 3 4 5 6 IS BS IS BS, SE BS, IS IS $55 $1,000 $20 $110, $20 $110, $20 $75

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Short Exercises
(10-15 min.) E 8-18A
Req 1 Cost of land: $80,000 + $120,000 + $2,100 + $2,500 + $10,400 = $215,000 Cost of building: $800,000 Cost of land improvements: Req 2 Bozeman will depreciate the building and the land improvements. $51,000 + $15,000 + $6,000 = $72,000

(10-15 min.) E 8-19A

Req. 1 Cost of building in 2011: Construction cost Architect fees and building permits Total Req. 2 Journal POST DATE ACCOUNTS REF. Dr. 900,000 900,000 72,000 72,000 Cr. $900,000 72,000 $972,000

2011 Building Cash Incurred construction cost. Building Cash Paid architect fees and building permit fees.

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(10-15 min.) E 8-20A

Journal POST DATE ACCOUNTS REF. Dr. Cr.

Tanning Bed 1 Tanning Bed 2 Tanning Bed 3 Cash Notes Payable Record purchase of 3 tanning beds.

2,500 4,170 3,330 5,000 5,000

Computations:

Tanning Bed 1

Appraised Value $ 3,000

Percentage of Total Appraised Value $3,000 / $12,000 $5,000 / $12,000 $4,000 / $12,000 = = = .250 .417 .333 1.000

Total Purchase Price Cost of Each Bed $10,000 x $10,000 x $10,000 = = = $ 2,500 4,170 3,330 $10,000

2 3 Totals

5,000 4,000 $12,000

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(15-20 min.) E 8-21A

Reqs. 1 and 2 Accumulated Year 1 2 3 4 5 Cost $500,000 $500,000 $500,000 $500,000 $500,000 depreciation = $100,000 $200,000 $300,000 $400,000 $500,000 O = Overstated Equipment, net* $400,000 U $300,000 U $200,000 U $100,000 U Correct Net income $ 400,000U** $ 100,000 O $ 100,000 O $ 100,000 O $ 100,000 O

U = Understated

Computations: Straight-line: ($500,000)/ 5 years = $100,000 per year. *Equipment, net represents the net amount that should have appeared on the balance sheet for each year. Since no asset amount was recorded for this purchase, this represents the amount of the understatement. **$500,000 expense recorded - $100,000 depreciation expense that should have been recorded = $400,000 understatement of net income.

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(15-20 min.) E 8-22A

Req 1 DEPRECIATION EXPENSE PER YEAR Year 2010 2011 2012 2013 Straight-Line $ 6,000 6,000 6,000 6,000 $24,000 Units-of-Production $ 2,400 7,200 9,600 4,800 $24,000 Double-Declining-Balance $ 15,000 7,500 750 750 $24,000

Computations: Straight-line: ($30,000 $6,000)/ 4 years = $6,000 per year. Units-of-production: ($30,000 $6,000)/ 1,000 operations = $24 per operation Year 1: 100 operations $24 = $2,400 Year 2: 300 operations $24 = $7,200 Year 3: 400 operations $24 = $9,600 Year 4: 200 operations $24 = $4,800 Double-declining-balance: (1/4 years) 2 = 50% Year 1: 50% x $30,000 = $15,000 Year 2: 50% x ($30,000 $15,000) = $7,500 Years 3 and 4: ($30,000 $15,000 $7,500) = $7,500 $6,000 residual value = $1,500/ 2 years = $750.

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Req 2 The units-of-production method tracks the wear and tear on the equipment most closely. Req 3 For income-tax purposes, the double-declining-balance method is best because it provides the most depreciation and thus the largest tax deductions in the early life of the asset. This conserves cash in the early years.

(10-15 min.) E 8-23A

Journal DATE Year 15 ACCOUNT Depreciation Expense, Building Accumulated Depreciation, Building Record depreciation on building. 15,000 Dr. 15,000 Cr.

Year 16

Depreciation Expense, Building Accumulated Depreciation, Building Record depreciation on building.

20,000

20,000

Computations: Straight-line: ($700,000 $100,000)/ 40 years = $15,000 Straight-line for years 1-15: $ 15,000 15 years Revised SL depreciation = $225,000 $20,000 per year

= $700,000 - $225,000 - $175,000 = 15 years

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(15-20 min.) E 8-24A

Journal POST DATE 2011 Sept. 30 Depreciation Expense, Fixtures Accumulated Depreciation, Fixtures Record 9 months depreciation. 1,500 1,500 ACCOUNTS REF. Dr. Cr.

30 Cash Accumulated Depreciation, Fixtures Loss on Sale of Fixtures Fixtures Record the sale of fixtures. Computations: Straight-line, 2011: ($10,000/ 5 years) = $2,000 x 9/12 months = $1,500 Sale price of old fixtures Fixtures: Cost Less: Accumulated depreciation ($2,000 + $1,500) Book Value Loss on sale $10,000

5,000 3,500 1,500 10,000

$5,000

(3,500) 6,500 $1,500

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(10-15 min.) E 8-25A

Journal POST DATE 2010 Jan. 2 Cash Accumulated Depreciation, Plant, and Equipment 14,500 Plant, and Equipment Gain on Sale of Assets 60,000 30,000 75,500 ACCOUNTS REF. Dr. Cr.

Sale price of assets Book value: Plant, and Equipment: $600,000/10 = Less: Accumulated Depreciation: $145,000/10 = Gain on sale $60,000 (14,500)

$75,500

45,500 $30,000

(15-20 min.) E 8-26A

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Journal POST DATE 2012 Truck - new Accumulated Depreciation, Truck old * Truck - old Cash (480,000 - $275,000) Gain on Exchange ** 480,000 100,000 350,000 205,000 25,000 ACCOUNTS REF. Dr. Cr.

* Units-of-production: ($350,000 $100,000)/ 1,000,000 miles = $.25 per mile Year 1: 80,000 miles $.25 Year 2: 120,000 miles $.25 Year 3: 160,000 miles $.25 Year 4: 40,000 miles $.25 Total ** Trade-in value Book value of old truck: Cost Less: Accumulated Depreciation: Gain on sale $350,000 (100,000) 250,000 $25,000 = = = = $ 20,000 $ 30,000 $ 40,000 $ 10,000 $100,000 $275,000

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(10-15 min.) E 8-27A

Journal POST DATE Part 1(a) Patents Cash Record purchase of patent. ACCOUNTS REF. Dr. 1,000,000 1,000,000 Cr.

(b)

Amortization Expense, Patents ($1,000,000/ 8 years) Patents Record amortization of patent.

125,000 125,000

Part

Amortization Expense, Patents Patents Record amortization of patents.

250,000 250,000

Computations: Straight-line for years 1-4: $ 125,000 4 years = $500,000

Revised SL amortization

$1,000,000 - $500,000 2 years

$250,000 per year

(10-15 min.) E 8-28A

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Req. 1 Goodwill: Purchase price paid for Lancer, Inc Market value of Lancer, Inc.s assets Less: Lancer, Inc.s liabilities Market value of Lancer, Inc.s net assets Goodwill $15,000,000 (10,000,000) 5,000,000 $ 6,000,000 $11,000,000

Req. 2 Journal POST DATE Assets Goodwill Liabilities Cash Purchased Lancer, Inc. ACCOUNTS REF. Dr. 15,000,000 6,000,000 10,000,000 11,000,000 Cr.

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(10-15 min.) E 8-29A

Journal POST DATE (a) Mineral Assets Cash Purchased minerals. ACCOUNTS REF. Dr. 398,500 398,500 Cr.

(b) Mineral Assets ($500 + $1,000 + $60,000) Cash Paid fees and other costs related to minerals.

61,500 61,500

(c) Inventory - Minerals [($460,000/200,000) 40,000] Accumulated Depletion, Mineral Assets Record depletion. Note, an inventory account was debited instead of Depletion expense because the Minerals have not been sold. When they are sold, Depletion Expense will be debited and the Mineral inventory account will be credited

92,000 92,000

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(10-15 min.) E 8-30A

Balance Sheet: Property, plant, and equipment Less: Accumulated depreciation, plant and equipment $9,000,000 3,000,000 $6,000,000

The book value of property, plant, and equipment on December 31, 2010 was $6,000,000.

(10-15 min.) E 8-31B

Req 1 Cost of land: $110,000 + $140,000 + $1,500 + $3,500 + $10,400 = $265,400 Cost of building: $600,000 Cost of land improvements: $46,000 + $7,000 + $5,000 = $58,000

Req 2 Ogden will depreciate the building and the land improvements.

(10-15 min.) E 8-32B

Req. 1 Cost of building in 2011: Construction cost Architect fees and building permits Total $970,000 76,000 $1,046,000

Req. 2
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Journal POST DATE 2011 Building Cash Incurred construction cost. ACCOUNTS REF. Dr. 970,000 970,000 Cr.

Building Cash Paid architect fees and building permit fees.

76,000 76,000

(10-15 min.) E 8-33B

Journal POST DATE Tanning Bed 1 Tanning Bed 2 Tanning Bed 3 Cash Notes Payable Record purchase of 3 tanning beds. ACCOUNTS REF. Dr. 5,380 6,160 8,460 10,000 10,000 Cr.

Computations:

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Tanning Bed 1 2 3 Totals

Appraised Value $ 7,000 8,000 11,000 $26,000

Percentage of Total Appraised Value $7,000 / $26,000 $8,000 / $26,000 $11,000 / $26,000 = = = .269 .308 .423 1.000

Total Purchase Price $20,000 x $20,000 x $20,000

Cost of Each Bed = = = $ 5,380 6,160 8,460 $20,000

(15-20 min.) E 8-34B

Reqs. 1 and 2 Accumulated Year 1 2 3 4 5 Cost $520,000 $520,000 $520,000 $520,000 $520,000 depreciation = $104,000 $208,000 $312,000 $416,000 $520,000 O = Overstated Equipment, net* $416,000 U $312,000 U $208,000 U $104,000 U Correct Net income $ 416,000U** $ 104,000 O $ 104,000 O $ 104,000 O $ 104,000 O

U = Understated Computations:

Straight-line: ($520,000)/ 5 years = $104,000 per year. *Equipment, net represents the net amount that should have appeared on the balance sheet for each year. Since no asset amount was recorded for this purchase, this represents the amount of the understatement. **$520,000 expense recorded - $104,000 depreciation expense that should have been recorded = $416,000 understatement of net income.

(15-20 min.) E 8-35B

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Req. 1 DEPRECIATION EXPENSE PER YEAR Year 2010 2011 2012 2013 Straight-Line $ 3,500 3,500 3,500 3,500 $14,000 Computations: Straight-line: ($18,000 $4,000)/ 4 years = $3,500 per year. Units-of-production: ($18,000 $4,000)/ 400 operations = $35 per operation Year 1: 40 operations $35 = $1,400 Year 2: 120 operations $35 = $4,200 Year 3: 160 operations $35 = $5,600 Year 4: 80 operations $35 = $2,800 Double-declining-balance: (1/4 years) 2 = 50% Year 1: 50% x $18,000 = $9,000 Year 2: 50% x ($18,000 $9,000) = $4,500 Years 3 and 4: ($18,000 $9,000 $4,500) = $4,500 $4,000 residual value = $500/ 2 years = $250. Units-of-Production $ 1,400 4,200 5,600 2,800 $14,000 Double-Declining-Balance $ 9,000 4,500 250 250 $14,000

Req. 2
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The units-of-production method tracks the wear and tear on the equipment most closely. Req. 3 For income-tax purposes, the double-declining-balance method is best because it provides the most depreciation and thus the largest tax deductions in the early life of the asset. This conserves cash in the early years.

(10-15 min.) E 8-36B

Journal DATE Year 15 ACCOUNT Depreciation Expense, Building Accumulated Depreciation, Building Record depreciation on building. 23,000 Dr. 23,000 Cr.

Year 16

Depreciation Expense, Building Accumulated Depreciation, Building Record depreciation on building.

57,000 57,000

Computations: Straight-line: ($800,000 $110,000)/ 30 years = $23,000 Straight-line for years 1-15: $ 23,000 15 years Revised SL depreciation = $345,000 $57,000 per year

= $800,000 - $345,000 - $170,000 = 5 years

(15-20 min.) E 8-37B

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Journal POST DATE 2011 March 31 Depreciation Expense, Fixtures Accumulated Depreciation, Fixtures Record 3 months depreciation. 900 900 ACCOUNTS REF. Dr. Cr.

31 Cash Accumulated Depreciation, Fixtures Loss on Sale of Fixtures Fixtures Record the sale of fixtures. Computations: Straight-line, 2011: ($18,000/ 5 years) = $3,600 x 3/12 months = $900 Sale price of old fixtures Fixtures: Cost Less: Accumulated depreciation ($3,600 + $900) $18,000

5,000 4,500 8,500 18,000

$5,000

(4,500) 13,500

Loss on sale

$8,500

(10-15 min.) E 8-38B

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Journal POST DATE 2010 Jan. 2 Cash Accumulated Depreciation, Plant, and Equipment 80,000 Plant, and Equipment Gain on Sale of Assets 305,000 12,000 237,000 ACCOUNTS REF. Dr. Cr.

Sale price of assets Book value: Plant, and Equipment: $610,000/2= Less: Accumulated Depreciation: $160,000/2 = Gain on sale $305,000 (80,000)

$237,000

225,000 $12,000

(15-20 min.) E 8-39B

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Journal POST DATE 2012 Truck - new Accumulated Depreciation, Truck old * Truck - old Cash (524,400 - $314,400) Gain on Exchange ** 524,400 113,600 410,000 210,000 18,000 ACCOUNTS REF. Dr. Cr.

* Units-of-production: ($410,000 $10,000)/ 1,250,000 miles = $.32 per mile Year 1: 85,000 miles $.32 Year 2: 110,000 miles $.32 Year 3: 150,000 miles $.32 Year 4: 10,000 miles $.32 Total = = = = $ 27,200 $ 35,200 $ 48,000 $ 3,200 $113,600

** Trade-in value Book value of old truck: Cost Less: Accumulated Depreciation: Gain on sale $410,000 (113,600)

$314,400

296,400 $18,000

(10-15 min.) E 8-40B

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Journal POST DATE Part 1(a) Patents Cash Record purchase of patent. ACCOUNTS REF. Dr. 9,000,000 9,000,000 Cr.

(b)

Amortization Expense, Patents ($9,000,000/ 15 years) Patents Record amortization of patent.

600,000 600,000

Part

Amortization Expense, Patents Patents Record amortization of patents.

2,400,000 2,400,000

Computations: Straight-line for years 1-7: $ 600,000 7 years = $4,200,000

Revised SL amortization

$9,000,000 - $4,200,000 2 years

$2,400,000 per year

(10-15 min.) E 98-41B

Req. 1
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Goodwill: Purchase price paid for Lawrence, Inc Market value of Lawrence, Inc.s assets Less: Lawrence, Inc.s liabilities Market value of Lancer, Inc.s net assets Goodwill $22,000,000 (14,000,000) 8,000,000 $ 6,000,000 $14,000,000

Req. 2 Journal POST DATE Assets Goodwill Liabilities Cash Purchased Lawrence, Inc. ACCOUNTS REF. Dr. 22,000,000 6,000,000 14,000,000 14,000,000 Cr.

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(10-15 min.) E 8-42B

Journal POST DATE (a) Mineral Assets Cash Purchased minerals. ACCOUNTS REF. Dr. 831,600 381,600 Cr.

(b) Mineral Assets ($600 + $2,800 + $65,000) Cash Paid fees and other costs related to minerals.

68,400 68,400

(c) Inventory - Minerals [($900,000/600,000) 75,000] Accumulated Depletion, Mineral Assets Record depletion. Note, an inventory account was debited instead of Depletion expense because the Minerals have not been sold. When they are sold, Depletion Expense will be debited and the Mineral inventory account will be credited.

112,500 112,500

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(10-15 min.) E 8-43B

Balance Sheet: Property, plant, and equipment Less: Accumulated depreciation, plant and equipment $14,000,000 5,000,000 $9,000,000

The book value of property, plant, and equipment on December 31, 2010 was $9,000,000.

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Problems
(20-25 min.) P 8-44A

Req. 1 Land Item a b c d e f g h i j k l m n o p Totals $215,000 $74,400 $990,000 6,400 29,700 10,300 6,000 34,000 $107,100 2,100 $109,200 1,000 5,900 4,400 $ 500 22,500 709,000 224,000 Land $200,000 8,100 $17,600 Improvements Building Furniture

Computations:

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n. Land improvements: Building: Req. 2

$ 40,000 .15 = $ 6,000 $ 40,000 .85 = $34,000

Journal DATE ACCOUNTS Dec. 31 Depreciation Expense, Land Improvements Accumulated Depreciation, Land Improvements Record depreciation on land improvements. 31 Depreciation Expense, Building Accumulated Depreciation, Building Record depreciation on building. 31 Depreciation Expense, Furniture Accumulated Depreciation, Furniture Record depreciation on furniture. POST REF. Dr. 2,480 Cr.

2,480 16,500 16,500 9,100 9,100

Computations: Straight-line: Land improvements: $74,400/20 years x 8/12 months = $2,480. Building: $990,000/40 years x 8/12 months = $16,500. Furniture: $109,200/8 years x 8/12 months = $9,100.

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(20-25 min.) P 8-45A

Journal DATE Jan. 1 ACCOUNTS Motor-Carrier Equipment (new) Accumulated Depreciation, Motor-Carrier Equipment Motor-Carrier Equipment (old) Cash ($176,000 $70,000) Gain on Exchange Record trade of motor-carrier equipment. Depreciation Expense, Building Accumulated Depreciation, Building Record 6 months depreciation. Cash Note Receivable Accumulated Depreciation, Building ($250,000 + $6,250) Building Gain on Sale of Building Record sale of building. Land Building Cash Record purchase of land and a building. Dec. 31 Depreciation Expense, Motor-Carrier Equipment Accumulated Depreciation, Motor-Carrier Equipment Record depreciation on motor-carrier equipment. 22,500 22,500 POST REF. Dr. 176,000 90,000 130,000 106,000 30,000 6,250 6,250 100,000 600,000 256,250 550,000 406,250 100,000 200,000 300,000 Cr.

July

Oct.

31

31

Depreciation Expense, Buildings Accumulated Depreciation, Buildings

750

750

250

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Record depreciation on building.

Computations: Trade-in Value of Motor carrier equipment: Book value: Motor carrier equipment Less: Accumulated depreciation Gain on exchange = $130,000 (90,000) 40,000 $30,000 $70,000

Straight-line, building: ($550,000 $50,000)/ 40 years x 6/12 months = $6,250 Sale price of building: $100,000 + $600,000 Book value: Building Less: Accumulated depreciation Gain on sale = $550,000 (256,250) 293,750 $406,250 $700,000

Total P u r c h a s e P r i c e $300,000 = Cost of Each Asset

Asset

Market Percentage of Total Market Value $ 115,000 $115,000 / $345,000 Value

Land.

33%

$100,000
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Building Total

230,000 $230,000 / $345,000 $345,000

67% 100%

$300,000

= =

$200,000 $300,000

Units-of-production, motor-carrier equipment: [($176,000 $26,000) /1,000,000 miles] 150,000 miles = $22,500 Straight-line, building: ($200,000 - $20,000)/40 years x 2/12 months = $750.

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(20-25 min.) P 8-46A

Req. 1 Straight-Line Depreciation Schedule Depreciation for the Year

ASSET DATE Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 COST $240,000 1/5 1/5 1/5 1/5 1/5 $220,000 220,000 220,000 220,000 220,000 $ 44,000 44,000 44,000 44,000 44,000 $ 44,000 88,000 132,000 176,000 220,000 DEPRECIATION RATE DEPRECIABLE COST = DEPRECIATION EXPENSE ACCUMULATED DEPRECIATION BOOK VALUE $240,000 196,000 152,000 108,000 64,000 20,000

Computations: Asset cost: $224,000 + $700 + $100 + $12,100 + $3,100 Straight-line: ($240,000 $20,000) / 5 years = $44,000

= $240,000

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Req. 1

Units-of-Production Depreciation Schedule Depreciation for the Year ASSET DATE Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 COST $240,000 $1.10 1.10 1.10 1.10 1.10 50,000 45,000 40,000 35,000 30,000 $ 55,000 49,500 44,000 38,500 33,000 $ 55,000 104,500 148,500 187,000 220,000 DEPRECIATION PER UNIT NUMBER OF UNITS = DEPRECIATION ACCUMULATED EXPENSE DEPRECIATION BOOK VALUE $240,000 185,000 135,500 91,500 53,000 20,000

Computations: Units-of-production: ($240,000 $20,000) / 200,000 units = $1.10/mile

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Double-Declining-Balance Depreciation Schedule Depreciation for the Year ASSET DATE Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Computations: DDB rate: (1/5 years 2) =.40 Depreciation for Year 5: $31,104 residual value of $20,000 = $11,104 COST $240,000 .40 .40 .40 .40 $240,000 144,000 86,400 51,840 $ 96,000 57,600 34,560 20,736 11,104 $ 96,000 153,600 188,160 208,896 220,000 DDB DEPRECIATIONR ATE BOOK VALUE = DEPRECIATION ACCUMULATED EXPENSE DEPRECIATION BOOK VALUE $240,000 144,000 86,400 51,840 31,104 20,000

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Req. 2

The depreciation method that reports the highest net income in the first year of the equipments life is the straight-line method, which produces the lowest depreciation for that year, $44,000. The method that minimizes income taxes in the first year is the double-declining-balance method, which produces the highest depreciation amount for that year, $96,000. Req. 3 Straight-line $240,000 Accumulated (44,000) Method of depreciation Units of Production Declining Balance $240,000 $240,000 (55,000) (96,000)

Cost Less:

Depreciation Book value at Dec. 31, 2011 $196,000 $185,000 $144,000

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(15-20 min.) P 8-47A

Journal DATE a. ACCOUNTS Accumulated Depreciation, Equipment Loss on Disposal Equipment Record the disposition of equipment. Cash Accumulated Depreciation, Equipment Equipment Gain on sale of Equipment Record gain on sale of equipment. Equipment - new Accumulated Depreciation, Equipment Equipment - old Cash ($30,000 - $5,000) Gain on Exchange of Equipment * Record gain on exchange of equipment. Equipment - new Accumulated Depreciation, Equipment Equipment - old Note Payable ($20,000 - $1,000) Loss on Exchange of Equipment ** Record loss on exchange of equipment. POST REF. Dr. 23,000 2,000 Cr.

25,000 3,000 23,000 25,000 1,000 30,000 23,000 25,000 25,000 3,000 20,000 23,000 25,000 19,000 1,000

b.

c.

d.

* Gain on exchange = Trade in value less book value of old equipment = $5,000 - ($25,000 $23,000) = $3,000 ** Loss on exchange = Book value of old equipment - trade in value = ($25,000 - $23,000) - $1,000 = $1,000

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(15-20 min.) P 8-48A

Req. 1 Journal POST DATE Assets Goodwill Liabilities Cash Record purchase of Hungry Boy Diners ACCOUNTS REF. Dr. 2,700,000 2,500,000 2,200,000 3,000,000 Cr.

Computations: Goodwill: Purchase price paid for Hungry Boy Diners Market value of Hungry Boys assets Less: Hungry Boys liabilities Market value of Hungry Boys net assets Goodwill Req. 2

$3,000,000 $2,700,000 (2,200,000) 500,000 $2,500,000

Bennys Restaurants should measure the current value of its goodwill each year. If the goodwill has increased in value, there is nothing to record. But if goodwills value has decreased, then Bennys records a loss and writes down the goodwill.

(20-25 min.) P 8-49A

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Req. 1 Journal DATE ACCOUNTS Coal Reserves Cash Purchased coal mine rights. Coal Reserves ($60,000 + $45,000) Cash Paid costs related to acquisition of coal mine. Coal Reserves Note Payable Record note for costs related to coal mine. Depletion Expense, Coal Reserves Accumulated Depletion, Coal Reserves * Record depletion. Accounts Receivable (40,000 $39) Sales Revenue Record coal sales. Operating Expenses Cash Paid operating expenses. * [($2,800,000 + $60,000 + $45,000 +$30,000) / 100,000] 40,000 Req. 2 WRIGHT OIL COMPANY Income Statement Coal Operations Year 1 Sales revenue Depletion expense Operating expenses Net income $1,560,000 $1,174,000 252,000 1,426,000 $ 134,000 POST REF. Dr. 2,800,000 Cr. 2,800,000 105,000 105,000 30,000 30,000 1,174,000 1,174,000

1,560,000 1,560,000 252,000 252,000

(20-25 min.) P 8-50B

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Req. 1 Land Item A B C D E F G H I J K L M N O P Totals $208,200 $79,200 $1,000,800 6,600 28,700 10,700 12,000 68,000 $106,100 2,300 $108,400 1,100 6,300 5,000 $ 700 24,100 691,000 217,000 Land $192,000 8,800 $16,200 Improvements Building Furniture

Computations: n. Land improvements: Building:

$ 80,000 .15 = $ 12,000 $ 80,000 .85 = $ 68,000

*Some accountants would debit this cost to the Land account. Req. 2

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Journal POST DATE Dec. ACCOUNTS REF. Dr. 528 Cr.

31 Depreciation Expense, Land Improvements Accumulated Depreciation, Land Improvements Record depreciation on land improvements.

528

31 Depreciation Expense, Building Accumulated Depreciation, Building Record depreciation on building.

3,336

3,336

31 Depreciation Expense, Furniture Accumulated Depreciation, Furniture Record depreciation on furniture.

1,506

1,506

Computations: Straight-line: Land improvements: $79,200/25 years x 2/12 months = $528. Building: $1,000,800/50 years x 2/12 months = $3,336. Furniture: $108,400/12 years x 2/12 months = $1,506.

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(20-25 min.) P 8-51B

Journal DATE Jan. 1 ACCOUNTS Motor-Carrier Equipment (new) Accumulated Depreciation, Motor-Carrier Equipment Motor-Carrier Equipment (old) Cash ($136,000 $63,000) Gain on Exchange of Equipment Record trade of motor-carrier equipment. Depreciation Expense, Building Accumulated Depreciation, Building Record 6 months depreciation. Cash Note Receivable Accumulated Depreciation, Building ($265,000 + $6,500) Building Gain on Sale of Building Record sale of building. Land Building Cash Record purchase of land and a building. Dec. 31 Depreciation Expense, Motor-Carrier Equipment Accumulated Depreciation, Motor-Carrier Equipment Record depreciation on motor-carrier equipment. 20,160 POST REF. Dr. 136,000 83,000 136,000 73,000 10,000 6,500 6,500 90,000 620,000 271,500 565,000 416,500 124,000 276,000 400,000 Cr.

July

Oct.

31

20,160

31

Depreciation Expense, Buildings Accumulated Depreciation, Buildings

1,067

1,067
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Record depreciation on building.

Computations: Trade-in Value of Motor carrier equipment: Book value: Motor carrier equipment Less: Accumulated depreciation Gain on exchange = $136,000 (83,000) 53,000 $10,000 $63,000

Straight-line, building: ($565,000 $45,000)/ 40 years x 6/12 months = $6,500 Sale price of building: $90,000 + $620,000 Book value: Building Less: Accumulated depreciation Gain on sale = $565,000 (271,500) 293,500 $416,500 $710,000

Total Asset P u r c h a s e P r i c e $400,000 = Cost of Each Asset

Land.
262

Market Percentage of Total Value Market Value $ 140,000 $140,000 / $450,000

Solutions Manual

31%

$124,000

Building Total

310,000 $310,000 / $450,000 $450,000

69% 100%

$400,000

= =

$276,000 $400,000

Units-of-production, motor-carrier equipment: [($136,000 $24,000) /1,000,000 miles] 180,000 miles = $20,160 Straight-line, building: ($276,000 - $20,000)/40 years x 2/12 months = $1,067.

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(20-25 min.) P 8-52B

Req. 1 Straight-Line Depreciation Schedule Depreciation for the Year

ASSET DATE Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 COST $270,000 1/5 1/5 1/5 1/5 1/5 $240,000 240,000 240,000 240,000 240,000 $ 48,000 48,000 48,000 48,000 48,000 $ 48,000 96,000 144,000 192,000 240,000 DEPRECIATION RATE DEPRECIABLE COST = DEPRECIATION EXPENSE ACCUMULATED DEPRECIATION BOOK VALUE $270,000 222,000 174,000 126,000 78,000 30,000

Computations: Asset cost: $254,700 + $500 + $300 + $12,000 + $2,500 Straight-line: ($270,000 $30,000) / 5 years = $48,000

= $270,000

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Units-of-Production Depreciation Schedule Depreciation for the Year

ASSET DATE Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 COST $270,000 $0.96 0.96 0.96 0.96 0.96 60,000 55,000 50,000 45,000 40,000 $ 57,600 52,800 48,000 43,200 38,400 $ 57,600 110,400 158,400 201,600 240,000 DEPRECIATION PER UNIT NUMBER OF UNITS = DEPRECIATION EXPENSE ACCUMULATED DEPRECIATION BOOK VALUE $270,000 212,400 159,600 111,600 68,400 30,000

Computations: Units-of-production: ($270,000 $30,000) / 250,000 units = $.96/mile

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Double-Declining-Balance Depreciation Schedule Depreciation for the Year

ASSET DATE COST DDB DEPRECIATION RATE BOOK VALUE = DEPRECIATION EXPENSE ACCUMULATED DEPRECIATION BOOK VALUE

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

$270,000 .40 .40 .40 .40 $270,000 162,000 97,200 58,320 $ 108,000 64,800 38,880 23,328 4,992 $ 108,000 172,800 211,680 235,008 240,000

$270,000 162,000 97,200 58,320 34,992 30,000

Computations: DDB rate: (1/5 years 2) =.40 Depreciation for Year 5: $34,992 residual value of $30,000 = $4,992

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Req. 2

The depreciation method that reports the highest net income in the first year of the equipments life is the straight-line method, which produces the lowest depreciation for that year, $48,000. The method that minimizes income taxes in the first year is the double-declining-balance method, which produces the highest depreciation amount for that year, $108,000. Req. 3 Straight-line $270,000 Accumulated (48,000) Method of depreciation Units of Production Declining Balance $270,000 $270,000 (57,600) (108,000)

Cost Less:

Depreciation Book value at Dec. 31, 2011 $222,000 $212,400 $162,000

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(15-20 min.) P 8-53B

Journal DATE a. ACCOUNTS Accumulated Depreciation, Equipment Loss on Disposal Equipment Record the disposition of equipment. Cash Accumulated Depreciation, Equipment Equipment Gain on sale of Equipment Record gain on sale of equipment. Equipment - new Accumulated Depreciation, Equipment Equipment - old Cash ($35,000 - $5,000) Gain on Exchange of Equipment * Record gain on exchange of equipment. Equipment - new Accumulated Depreciation, Equipment Equipment - old Note Payable ($25,000 - $3,000) Loss on Exchange of Equipment ** Record loss on exchange of equipment. POST REF. Dr. 28,000 4,000 Cr.

32,000 6,000 28,000 32,000 2,000 35,000 28,000 32,000 30,000 1,000 25,000 28,000 32,000 22,000 1,000

b.

c.

d.

* Gain on exchange = Trade in value less book value of old equipment = $5,000 - ($32,000 $28,000) = $1,000 ** Loss on exchange = Book value of old equipment - trade in value = ($32,000 - $24,000) $3,000 = $1,000

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(15-20 min.) P 8-54B

Req. 1

Journal POST DATE Assets Goodwill Liabilities Cash Record purchase of Hungry Boy Diners ACCOUNTS REF. Dr. 2,750,000 2,700,000 2,250,000 3,200,000 Cr.

Computations: Goodwill: Purchase price paid for Hungry Boy Diners Market value of Hungry Boys assets Less: Hungry Boys liabilities Market value of Hungry Boys net assets Goodwill $2,750,000 (2,250,000) 500,000 $2,700,000 $3,200,000

Req. 2 Ticos Restaurants should measure the current value of its goodwill each year. If the goodwill has increased in value, there is nothing to record. But if goodwills value has decreased, then Ticos records a loss and writes down the goodwill.

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(20-25 min.) P 8-55B

Req. 1

Journal DATE Coal Reserves Cash Purchased coal mine rights. Coal Reserves ($68,000 + $45,000) Cash Paid costs related to acquisition of mine. Coal Reserves Note Payable Record note for costs related to coal mine. Depletion Expense, Coal Rserves Accumulated Depletion, Coal Reserves * Record depletion. Accounts Receivable (41,000 $36) Sales Revenue Record coal sales. Operating Expenses Cash Paid operating expenses. * [($1,900,000 + $68,000 + $45,000 + $33,000) / 200,000] 41,000 Req. 2 WRIGHT OIL COMPANY Income Statement Coal Operations Year 1 Sales revenue Depletion expense Operating expenses Net income $1,476,000 $419,430 248,000 667,430 $ 808,570 113,000 113,000 33,000 33,000 419,430 419,430 1,476,000 1,476,000 248,000 248,000 ACCOUNTS POST REF. Dr. 1,900,000 Cr. 1,900,000

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Continuing Exercise
Req. 1 Mower: ($1,000 / 4) = $250 Weed Whacker: ($400 / 4) = $100 Req. 2 Journal DATE Dec ACCOUNTS AND EXPLANATIONS 31 Depreciation expense Accumulated depreciation (250 + 100) X 7/12 DEBIT 204 204 CREDIT

Continuing Problem
Req. 1 2010 Depreciation Expense = = = = = = $280 $125 $1,000 $1,567 $3,920

Date 5/3 5/18 6/2 6/22 8/10 9/1

Asset Copy Machine Truck Land Furniture Furniture Building

Depreciation calculation x 2 = 50% x $4,700 x 8/12 ($31,000 - $3,000)/200,000 x 28,000 Not depreciated ($3,300 - $500)/5 x 6/12 ($1,200 - $0)/4 x 5/12 ($85,000 - $10,000)/25 x 4/12

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Req. 2 Property, Plant, and Equipment: Land Buildings Equipment (Copy machine and Truck) Furniture $15,000 85,000 35,700 4,500 140,200 Less: Accumulated Depreciation Net, Property, Plant and Equipment 6,892 $133,308

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Ethics in Action
Case #1 The accountant is concerned that the client wants to manipulate the financial statements to increase net income by intentionally capitalizing costs that should properly be expensed and by increasing the estimated useful life of the assets. The accountant does not want to violate GAAP. By definition, routine repair and maintenance costs should properly be expensed as incurred. Given the large number of vehicles, it would be expected that the routine repair and maintenance costs would add up to a large amount. The total amount is not the issue but rather the nature of each individual amount. Thus, regardless of the total these costs were each properly expensed as they each were incurred. Changing the estimated life of an asset is not unethical if the change is due to major improvements to the asset that extend its useful life. Also, changing the estimated life of an asset is acceptable if new information becomes available that clearly supports the change and therefore better reflects the depreciation expense. However, changing the estimated useful life simply to manipulate the financial statements is clearly unethical. Severing a client relationship is very serious. In this case, the accountant explained why the repairs and maintenance costs were expensed and not capitalized but the client would not agree. Further, the client wanted the accountant to change the estimated lives of the assets to also manipulate the net income. When an accountant stands firm on GAAP and a client refuses to comply, the accountant should seriously consider severing the relationship. In this case, the accountant was ethical but the client would not listen and demanded that the accountant participate in unethical actions. Accountants are professionals and are knowledgeable about GAAP. They have a responsibility to properly apply the rules of accounting in order to provide financial information that can be relied upon for decision-making purposes. In addition, accountants also educate their clients in proper adherence to GAAP. While the accountant has a responsibility to the client, there is also a responsibility to the users of

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the financial statement information. Accordingly, the accountant should always insist on ethically following GAAP. Case #2 There are no ethical issues involved. The accountant is following GAAP to reflect the new information and thereby provide more accurate financial statement disclosures. It does not matter whether or not the asset is intangible. A patent has a legal life, which can be used to amortize the cost over. Originally, the patent was thought to have ten years remaining. Given that new information had become available, the change in the estimated life was to improve the financial reporting. At the end of the sixth year the patent would be expired and thus should be fully amortized. If the amortizable life is not changed to reflect the actual remaining life then the patent will not be fully and properly amortized for its remaining life. Accordingly, it is correct to change the estimated life. The current value of the purchased goodwill needs to be measured annually pursuant to GAAP. In the event that the value has declined then the goodwill needs to be written off to the extent of the remaining value. From the facts given in the case, the goodwill has declined in value but not completely. Thus, the accountant is correct in reducing the amount of goodwill but certainly not to zero. Regardless of the CEOs concern for net income, the purchased goodwill still has some value and thus it should remain on the books at the reduced value. The accountant may have been overly pessimistic wanting to completely write off the total purchased goodwill. Further, there is nothing wrong with a CEO voicing concerns regarding the financial reporting. In fact, after discussing the concerns with the accountant, the CEO essentially agreed that the additional actions of changing the patent life and writing off some of the purchased goodwill were necessary. Further, there is merit in the point made that there was still some value remaining such that the purchased goodwill should not completely be written off. Both the accountant and the CEO were acting ethically.

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Financial Analysis
1. The ending net property, plant and equipment balance on December 31, 2008 was $229,693,000. The ending net balance on December 31, 2007 was $210,450,000. There was an overall increase in net property, plant and equipment of $19,243,000. There is no effect on Columbia Sportswears value of net property, plant and equipment as a result of removing the fully depreciated assets. This is because $357,000 will be taken out of the asset accounts and the related accumulated depreciation accounts. 2. Columbia Sportswear uses the straight-line method of depreciation. The estimated useful lives for the buildings and building improvements ranged from 15 to 30 years; for land improvements 15 years; for furniture and fixtures the lives ranged from 3 to 10 years; and for machinery and equipment the lives ranged from 3 to 5 years. The intangible assets that Columbia Sportswear has are patents, trademarks and trade names, and goodwill. Columbia Sportswear amortizes the patents. The trademarks and trade names and the goodwill are not amortized because they have indefinite lives. From the information given it is not possible to determine when most of the patents were purchased. However, it appears that the majority of the patents were purchased prior to 2007. 3. The total assets as of December 31 2008 were $1,148,236,000 and the net property, plant and equipment was $229,693,000, which was 20.0% ($229,693,000 $1,148,236,000). The total assets as of December 31, 2007 was $1,166,481,000 and the net property, plant and equipment was $210,450,000, which was 18.0% ($210,450,000 $1,166,481,000). The percentage of the net property, plant and equipment as a percentage of the total assets increased during the year. 4. Leasehold Improvements represent capital expenditures that Columbia Sportswear made related to property that it leases. For example, these expenditures could be related to the costs incurred to remodel a building that is being leased. Leasehold Improvements are depreciated over the life of the leases. Construction in progress represents capital expenditures made by Columbia Sportswear on assets that it is building (rather than buying).

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Industry Analysis
Since much of the wording for these Notes to Financial Statements is fairly standard, the differences between the two are subtle, at least as far as the Property and Equipment section is concerned. Under Armour does add a paragraph concerning Disposition of Property. The big differences seem to be under the Intangible Asset section. Under Armour only has one small paragraph where they discuss their intangible assets while Columbia has several paragraphs as well as a table which breaks down the various different intangible assets and accumulated amortization that they have on their books. The reason for the expanded discussion for Columbia regarding intangible assets is that they have a lot more intangible assets on their books than does Under Armour. You can look back at the Balance Sheets for the two companies to determine that. Also, Columbia has some goodwill on their books, so they have a discussion about the fact that goodwill is not amortized but is evaluated each year to determine if it has lost any value from the previous year.

Small Business Analysis

When a banker or any other financial analyst looks at a set of financial statements, two very important items they look at are cash and the net income. However, during their analysis process the analyst will make certain adjustments to net income to bring it closer to a cash basis. One of the adjustments they will make is to add back depreciation to the net income amount. Why do they do that? Because depreciation has nothing to do with cash! Although depreciation is an expense which does reduce net income, it doesnt reduce cash. Therefore, in order to get a better idea of the cash position of a company, the banker would adjust net income for the depreciation amount. So even though you are concerned that your net income has decreased from the previous year, the reason for that is because you are showing a lot more depreciation expense this year due to that large equipment purchase made earlier in the year. That would also help to explain why your cash balance actually increased even though net income went down.

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Written Communication
Thank you for forwarding the information regarding your recent purchase of the new business.. According to your asset list, the land and building were lumped together. Since land is an asset that cant be depreciated, it will be necessary to determine what part of the $1.5 million is land and what part is building. The best way to split the cost between the two assets would be to do an allocation based on the values of the two assets based on the real estate appraisal. For example, if the land equaled 25% of the total appraised value of the land and building, we would apply that same percentage to the $1,500,000 purchase price. That will put the cost of the land at $375,000 ($1,500,000 X 25%) and the building at $1,125,000. Regarding the merchandise inventory and the goodwill that was purchased, the inventory that you purchased with the deal will be treated just like any other inventory that is purchased during the normal course of business. It will be recorded as an asset and will be expensed as part of Cost of goods sold when its sold. The goodwill is an intangible asset. Normally, intangible assets are amortized (similar to depreciation) but goodwill is treated a little differently. In accordance with generally accepted accounting principles, goodwill is not amortized. Instead, its value is measured each year to determine if it has increased or decreased. Some adjustments may be necessary after that, but well deal with that at the end of the year. I hope this clears up some of the concerns you had regarding the accounting for this purchase. Good luck with your new business!

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