ch09 Fundamental of Financial Accounting by Edmonds (4th Edition)

Fundamental
Financial Accounting
Concepts
Fourth Edition
by
Edmonds, McNair, Milam, Olds
PowerPoint® presentation by
J. Lawrence Bergin
9- 2
Chapter 9
Long-Term
Operational Assets
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

9- 3
Classification of Operational Assets

● Operational assets are used by a
business to generate revenue.
● Tangible operational assets have

physical substance.
– Land, buildings, fixtures, and
equipment
– Natural resources

9- 4
Long-term Operational Assets...
● Long-term assets will be

used more than one
year.
● Tangible operational
assets are reported on
the balance sheet in a
classification called
Property, Plant, and
Equipment.

9- 5
Classification of Operational Assets

● Intangible operational assets lack
physical substance and confer specific
use rights on the owner.
Burger Queen
❐ Patents Franchise
❐ Copyrights
❐ Franchises
❐ Licenses
❐ Trademarks

9- 6
Measuring and Recording
Acquisition Cost
Purchased operational assets are recorded at
cost, an amount that includes all normal and
reasonable expenditures necessary to get the
asset in place and ready for its intended use.
❐ Invoice price
❐ Sales taxes
❐ Transportation costs
❐ Installation costs
❐ Renovation and repair cost incurred prior to use.

9- 7
Measuring Acquisition Cost
● Acquisition cost is the net cash

equivalent amount paid for the asset.
● Financing charges are excluded from

the acquisition cost but should be
reported as interest expense.

9- 8
Measuring Acquisition Cost

● The cost of land includes:
– Acquisition price
– Real estate commissions
– Title search and transfer fees
– Title insurance premiums
– Delinquent taxes
– Surveying fees
● Land is not depreciated.

9- 9
Basket Purchases of Assets
When land and building are purchased

together, the land cost and the building
cost are placed in separate accounts.
The total cost of the purchase is
separated on the basis of relative
market values.

9- 10

Example: On March 1, Arco Co. purchased
land and building for $100,000 cash. The
appraised value of the building was $90,000
and the land was appraised at $30,000.
How much of the $100,000
purchase price will be
allocated to each account?
Land = ? Building = ?

9- 11

Fair Market Values:
Building $ 90,000
Land $ 30,000
Total market value $120,000
Allocation of cost:
Building * $100,000 =
Land * $100,000 =

9- 12

Fair Market Values:
Fraction
Building $ 90,000
Land $ 30,000
Allocation of cost:
Building * $100,000 =
Land * $100,000 =

9- 13

Fair Market Values:
Fraction
Building $ 90,000 9/12
Land $ 30,000 3/12
Total market value $120,000 12/12
Allocation of cost:
Building * $100,000 =
Land * $100,000 =

9- 14

Fair Market Values:
Fraction
Building $ 90,000 9/12
Land $ 30,000 3/12
Total market value $120,000 12/12
Allocation of cost:
Building 9/12 * $100,000 =

Land 3/12 * $100,000 =

9- 15

Fair Market Values:
Building $ 90,000
Land $ 30,000
Allocation of cost:
Building 9/12 * $100,000 = $75,000

Land 3/12 * $100,000 = $25,000

9- 16

General Journal entry:
Building $ 75,000
Land $ 25,000
Cash $100,000
Allocation of cost:
Building 9/12 * $100,000 = $75,000

Land 3/12 * $100,000 = $25,000

9- 17
Nature of Depreciation, Depletion,

and Amortization
The matching principle requires that part of
the acquisition cost be expensed in periods
when the future revenues are earned.
...as the asset

Cost of asset is used..... Expense on
on Balance Income
Sheet Statement
[capitalize] [expense]

9- 18
Terminology: Write-off….amortize
● Amortization:
● Depreciation:
– Property, plant,
– Intangible assets
equipment
franchise
● Depletion:
–Natural resources

9- 19
Depreciation Methods
❐ For Financial Accounting
(books)
❐ Straight-line
❐ Production method
❐ (Double) Declining balance
❐For Tax Returns
❐ Modified Accelerated Cost
Recovery System (MACRS)

9- 20
Straight-Line Method
Depreciation Cost - Residual Value

=
Expense per Year Life in Years

9- 21
Straight-Line Method: Example
On January 1, 2004, equipment was purchased

for $55,000 cash. The equipment has an
estimated useful life of 5 years and an estimated
residual value of $10,000.
What is the annual straight-line depreciation

expense?

9- 22

=
Expense per Life in Years
Year
Depreciation =
Expense per Year
Depreciation
=
Expense per Year

9- 23

=
Year
55,000 - 10,000
Depreciation =
Expense per Year 5
Depreciation
=
Expense per Year

9- 24

=
Year
55,000 - 10,000
Depreciation =
Expense per Year 5
Depreciation 9,000
=
Expense per Year

9- 25
Calculate depreciation expense for the

second year of the asset’s life.
9,000
Depreciation expense is the same

amount each year of the asset’s life
using the straight-line method.

9- 26
Units-of-Production Method
Step 1:
Depreciation = Cost - Residual Value

Rate Estimated units of useful life

9- 27
Units-of-Production Method
Step 1:
Depreciation = Cost - Residual Value

Rate Estimated units of useful life
Step 2:
Number of
Depreciation Depreciation
= × Units Produced
Expense Rate
for the Year

9- 28
Example of Units of Production Method
Given the same information [asset cost $55,000,

has a residual value of $10,000, has a useful life
of five years] plus the fact that the asset is
estimated to have a total productive capacity of
100,000 units during the useful life:
If 22,000 units were produced this year, what

is the amount of depreciation expense?

9- 29
Example of Production Method
Step 1:
Depreciation $ $
= = = $.
Rate Per unit
Step 2:
Dep. rate x units produced
Depreciation
Expense = $ x = $

9- 30
Step 1:
Depreciation Cost - salvage value $45,000

= = = $.45
Rate Productive output 100,000 Per unit
Step 2:
Dep. rate x units produced
Depreciation
Expense = $ .45/unit x 22,000 = $9,900

9- 31

● If 15,000 units are produced during the
second year of the asset’s life, what is the
amount of depreciation expense?
$
● What is the Accumulated Depreciation at
the end of the second year?
$
● What is the 12/31/05 Equip. Book Value?
$

9- 32

● If 15,000 units are produced during the
second year of the asset’s life, what is the
amount of depreciation expense?
$0.45 x 15,000 = $6,750
● What is the Accumulated Depreciation at
the end of the second year?
$9,900 + $6,750 = $16,650
● What is the 12/31/05 Equip. Book Value?
$55,000 cost - $16,650 Accum. Dep. = $38,350

9- 33
Accelerated Depreciation
● Accelerated depreciation methods result in

more depreciation expense in the early
years of an asset’s useful life and less
depreciation expense in later years of the
an asset’s useful life.

9- 34
Double-Declining Balance Method
● Declining-balance depreciation is based

on the straight-line rate multiplied by an
acceleration factor.
– For example, when the acceleration
factor is 200 percent, the method is
referred to as double-declining
balance depreciation.
● Declining-balance depreciation
computations ignore residual value.

9- 35
Double-Declining Balance Method

Annual Depreciation is calculated with
the following formula:
Book Value × (2 × Straight-Line Rate)

9- 36
Double-Declining-Balance
Method
Annual Depreciation is calculated with
the following formula:
Book Value × (2 × Straight-Line Rate)
100%
Book Value × ( 2 × Useful Life in Years )

9- 37
Double-Declining-Balance
Example
Using the same information from our

earlier example [asset cost $55,000,
residual value is $10,000, and useful life
is 5 years]:
Calculate the depreciation expense

for the first two years of the asset’s life.

9- 38
Double-Declining-Balance Example
100%
First year’s depreciation:
Second year’s depreciation:

9- 39
100%
First year’s depreciation expense:
55,000 * [2 * 1.00/5] = 55,000 * .40 = $22,000

Second year’s depreciation expense:
(Cost - Accum. Dep) x .40
($55,000 - $22,000) x .40 = $13,200 D.Exp.

9- 40
100%
What is the ACCUMULATED depreciation after Yr. 2?
Dep. Exp, Yr. 1 + Dep. Exp. Yr. 2 = Accumulated Dep. At end of yr. 2
$22,000 + $13,200 = $35,200 Accum.Dep.

Third year’s depreciation expense:
(Cost - Accum. Dep) x .40
($55,000 - $35,200) x .40 = $ 7,920 D.Exp.

9- 41
Comparison of Depreciation Methods

Straight-line
Before comparing theseProduction* Double-Declining
methods, let’s Bal.
look at a problem in the
later years
Dep. Accum.of lifeDep.
whenAccum.
using Double-declining
Dep. Accum. balance.
Year Exp.
Since Dep.writeExp.
we cannot off theDep. Exp. value,Dep.
$10,000 salvage total
depreciation of $45,000 ($55,000 Cost - $10,000 Sal. Val.) must be
1 9000 over
written-off 9000 9900
the life 9900 The
of the asset. 22,000 22,000
DDB formula would
result in too much Dep. Exp. in year 4. Here’s why….
2 9000 18000 6750 16650 13,200
40%x (Cost - Accum. Dep. @ Yr. 3 end)
35,200
3 = .40x
9000 27000
($55,000- 11250
43,120) 27900
= $4,752 D.Exp. 7,920 43,120
But, after Year 3 there is only $1,880
4 9000 43,120)
($45,000- 36000left11250 39150to
to depreciate 1,8801 45,000
accumulate $45,000 of depreciation.
5 9000 45000 5850 45000 01 45,000
*Units produced were Yr 1= 22,000; Yr 2=15,000; Yrs 3&4=25,000 each;
Solution: Depreciate the final $1,880
Yr. 5=13,000. [1 In yr. 4, didn’t use DDB formula. Wrote-off last 1,880.]
in Yr. 4 and $0 Dep. Exp in Yr. 5.

9- 42

Straight-line Production* Double-Declining Bal.
Dep. Accum. Dep. Accum. Dep. Accum.
Year Exp. Dep. Exp. Dep. Exp. Dep.
1 9000 9000 9900 9900 22,000 22,000
2 9000 18000 6750 16650 13,200 35,200
3 9000 27000 11250 27900 7,920 43,120
4 9000 36000 11250 39150 1,8801 45,000
5 9000 45000 5850 45000 01 45,000
*Units produced were Yr 1= 22,000; Yr 2=15,000; Yrs 3&4=25,000 each;
Yr. 5=13,000. [1 In yr. 4, didn’t use DDB formula. Wrote-off last 1,880.]

9- 43

● The total amount of depreciation recorded
over the useful life of an asset is the same
regardless of the method used.
● Depreciation expense recorded in any one
period will vary according to method used.
● The straight-line method is used for
financial accounting purposes (“the books”)
by about 95 percent of companies because
it is easy to use and to explain to financial
statement users.

9- 44
Horizontal Model Transactions

Depreciation and Disposal
1. Jan. 1, 2004, the owner invested $70,000 cash to start the business.
2. Jan. 1, 2004 the Co. purchased equipment paying $55,000 cash.
3. During 2004 the Co. earned $30,000 of cash revenue.
4. Dec. 31, ‘04 adjustment for straight-line depreciation was recorded.
(Estimated life = 5 years with $10,000 residual value.)

4B. Calculate the balances at the end of 2004 which will be carried
over to begin 2005.
5. Dec. 31, ‘05 adjustment for straight-line depreciation was recorded.
5B. Calculate the 2005 ending balances to carry over to start 2006.
Sept. 1, 2006 the equipment was sold for $26,000 cash.
6. Update the depreciation accounts to the disposal date.
7. Record the disposal, including any gain or loss.

9- 45
Horizontal Model Transaction Analysis

Balance Sheet Income Statement Cashflow
Assets = Liab.+ Equity Rev./ Exp. Statem’t
Cash + Equip.- Acc.D.= A/P + C.C.+ R.E. Gains - Loss= N.I. OA,IA,FA

9- 46

1 70,000 70,000 70,000 FA
2 (55,000) 55,000 (55,000) IA
3 30,000 30000 30,000 30,000 30,000 OA
4 + 9000 (9000) 9,000 (9000)
B 45,000 55,000 9000 70,000 21000 Closed out 45,000 B

9- 47
What’s the result? - End of Year 1

How much depreciation expense is on the 2004 income Statement?
$
How much Accumulated Deprec. is on the 12/31/04 Bal. Sheet?
$
What is the equipment’s Book Value
(or Carrying Value) at the end of 2004?
Equip, cost $
Less: Accum.Dep.
Equip, (net BV) $

9- 48

1 70,000 70,000 70,000 FA
2 (55,000) 55,000 (55,000) IA
3 30,000 30000 30,000 30,000 30,000 OA
4 + 9000 (9000) 9,000 (9000)
B 45,000 55,000 9000 70,000 21000 Closed out 45,000 B

9- 49

$9,000
$9,000
Equip, cost $55,000
Less: Accum.Dep. 9,000
Equip, (net BV) $46,000

9- 50

4. Dec. 31, 2004 adjustment for depreciation was recorded.

over to begin 2005.

9- 51

1 70,000 70,000 70,000 FA
2 (55,000) 55,000 (55,000) IA
3 30,000 30000 30,000 30,000 30,000 OA
4 + 9000 (9000) 9,000 (9000)
B 45,000 55,000 9000 70,000 21000 Closed out 45,000 B
5 9000 (9000) 9,000 (9000)
B 45,000 55,000 18,000 70,000 12,000 Closed out 45,000 B

9- 52

$
$
Equip, cost $
Less: Accum.Dep.
Equip, (net BV) $

9- 53

1 70,000 70,000 70,000 FA
2 (55,000) 55,000 (55,000) IA
3 30,000 30000 30,000 30,000 30,000 OA
4 + 9000 (9000) 9,000 (9000)
B 45,000 55,000 9000 70,000 21000 Closed out 45,000 B
5 9000 (9000) 9,000 (9000)
B 45,000 55,000 18,000 70,00012,000 Closed out 45,000 B

9- 54

$ 9,000
$18,000
Equip, cost $55,000
Less: Accum.Dep. 18,000
Equip, (net BV)
$37,000

9- 55
Disposal
of
Operational Assets

9- 56


over to begin 2005.

9- 57
Disposal of Operational Assets
● Voluntary disposal refers to situations

where a business gives up ownership of
an asset by:
– Sale
– Trade-in
– Retirement
● Involuntary disposal results because of
a casualty such as a fire or an accident.

9- 58
1. Update the depreciation on the asset to

the date of disposal. (Jan.1-Sept 1 = 8 mo.)

9- 59

Cash + Equip.- Acc.D. = A/P + C.C.+ R.E. Gains - Loss= N.I.
OA,IA,FA
1 70,000 70,000 70,000 FA
2 (55,000) 55,000 (55,000) IA
3 30,000 30000 30,000 30,000 30,000 OA
4 + 9000 (9000) 9,000 (9000)
B 45,000 55,000 9000 70,000 21000 Closed out 45,000 B
5 9000 (9000) 9,000 (9000)
B 45,000 55,000 18,000 70,00012,000 Closed out 45,000 B
6 6,000 (6000) 6,000 (6000)

9- 60

1. Update the depreciation on the asset to
the date of disposal.
2. Record the disposal by . . .
– Removing the asset cost (credit).
– Removing the Accumulated Depreciation
(debit).
– Recording cash received (debit) or cash paid
(credit).
– Recording a loss (debit) or gain (credit).

9- 61
Gain or Loss on Disposal?

How do we know if there is a Loss or Gain on the disposal?
● Compare cash received for the asset with

the asset’s book value (BV).
– If cash greater than BV, record a gain (credit).
– If cash less than BV, record a loss (debit).
– If cash equals BV, no gain or loss.
le
r sa
t fo
s se
a

9- 62

Compare cash received for the asset with

the asset’s book value (BV).
Cash received $ a le
r s
t f o
Equipment, cost $ sse
a
Less: Accum. Dep.
Equip, Book Value
Gain (Loss) $

9- 63

Compare cash received for the asset with

the asset’s book value (BV). - 5000
.
Cash received $26,000

Equipment, cost $55,000
Less: Accum. Dep. 24,000
Equip, Book Value 31,000
Gain (Loss) $ (5,000)

9- 64

1 70,000 70,000 70,000 FA
2 (55,000) 55,000 (55,000) IA
3 30,000 30000 30,000 30,000 30,000 OA
4 + 9000 (9000) 9,000 (9000)
B 45,000 55,000 9000 70,000 21000 Closed out 45,000 B
5 9000 (9000) 9,000 (9000)
B 45,000 55,000 18,000 70,00012,000 Closed out 45,000 B
6 6,000 (6000) 6,000 (6000)
7 26,000 (55,000) (24,000) (5000) 5,000 (5000) 26,000
IA

9- 65
Journalize the Disposal

Cash $
Accumulated Depreciation (to remove)
Loss on Disposal of Equipment
Equipment (original cost)
What if there had been a GAIN on disposal?

The GAIN would be a CREDIT in the
journal entry above (and there would be
more cash).

9- 66
Journalize the Disposal

Cash $26,000
Accumulated Depreciation (to remove) 24,000
Loss on Disposal of Equipment 5,000
Equipment (original cost) 55,000
What if there had been a GAIN on disposal?

The GAIN would be a CREDIT in the
journal entry above (and there would be
more cash).

9- 67

Cash + Equip.- Acc.D. = A/P + C.C.+ R.E. Gains - Loss= N.I.
OA,IA,FA
1 70,000 70,000 70,000 FA
2 (55,000) 55,000 (55,000) IA
3 30,000 30000 30,000 30,000 30,000 OA
4 + 9000 (9000) 9,000 (9000)
B 45,000 55,000 9000 70,000 21000 Closed out 45,000 B
5 9000 (9000) 9,000 (9000)
B 45,000 55,000 18,000 70,00012,000 Closed out 45,000 B
6 6,000 (6000) 6,000 (6000)
7 26,000 (55,000) (24,000) (5000) 5,000 (5000) 26,000 IA
B 71,000 0 0 70,000 1,000 Closed out 71,000 B

9- 68
What’s the result? - For Year 3

How much depreciation expense is on the 2006 Income Statement?
$6,000
How much Gain or Loss is on the 2006 Income Statement?
$5,000 Loss on Disposal

$0 (We don’t have the equipment anymore.)

$0 (We don’t have the equipment anymore.)

9- 69
What’s the result? - For Year 3

How much depreciation expense is on the 2006 Income Statement?
$
How much Gain or Loss is on the 2006 Income Statement?
$
$
$

9- 70
Depreciation and Federal Income Tax

● Most corporations use the Modified
Accelerated Cost Recovery System
(MACRS) for tax purposes. (Could use
straight-line depreciation.)
● MACRS provides for rapid write-off of
an asset’s cost in order to stimulate
investment in modern facilities.
● MACRS uses half-year convention
and assumes no residual value.

9- 71

MACRS example
Same purchase recorded previously:
On Jan. 1, 2004 equipment costing $55,000
was purchased. Estimated life = 5 yrs.
Estimated residual value = $10,000.
Calculate the depreciation tax
deduction assuming the equipment
is classified as “5 year property.”
Note: See tax tables in your text for 5-Yr. and 7-Yr.
properties.

9- 72

MACRS example
IRS Table Equipm’t Depreciation
yr. % Cost Deduction
1 20.00 x$ = $
2 32.00 x =
3 19.20 x =
4 11.52 x =
5 11.52 x =
6 5.76 x =

9- 73

MACRS example
IRS Table Equipm’t Depreciation
yr. % Cost Deduction
1 20.00 x $55,000 = $11,000
2 32.00 x 55,000 = 17,600
3 19.20 x 55,000 = 10,560
4 11.52 x 55,000 = 6,336
5 11.52 x 55,000 = 6,336
6 5.76 x 55,000 = 3,168
$55,000

9- 74
Revising Estimates of Salvage
Value or of Useful Life
● When an estimate is revised, no
changes are made to amounts
reported in the past.
● The new estimates are
incorporated into the present
and future calculations only.
● Depreciation amounts are
revised using the book value,
estimated useful life and salvage
value at beginning of the year of
the revision.

9- 75
Value or of Useful Life - Example
On Jan. 1, 2004 the Goodview Co.
purchased Equipment costing $55,000. It
was estimated to last 5 years and have a
$10,000 residual value. Straight-line
depreciation ($9,000) has been used.
On Jan. 1, 2006 management determined
that the equipment would last 4 years from
this date, but would only be worth $5,000 at
the end of that time.
How much depreciation expense should be
recorded each year starting on Dec. 31, 2006?

9- 76
The equipment has already been depreciated two years (‘04
and ‘05) at $9,000 per year. So, Accumulated Depreciation
has an $18,000 balance at the beginning of 2006.
Original Cost $
Less: Accum. Dep.
= Book value, Jan. 1, ‘2006
Less: Revised Residual Value

= Remainder to be depreciated
Divided by Remaining life Starting in 2006
= New annual Depreciation expense $

9- 77
The equipment has already been depreciated two years (‘04
and ‘05) at $9,000 per year. So, Accumulated Depreciation
has an $18,000 balance at the beginning of 2006.
Original Cost $55,000
Less: Accum. Dep. 18,000
= Book value, Jan. 1, ‘2006 37,000
Less: Revised Residual Value 5,000

= Remainder to be depreciated 32,000
Divided by Remaining life 4 Starting in 2006
yrs.
= New annual Depreciation expense $ 8,000
9- 78
Continuing Expenditures
for Plant Assets
● Expenditures made to keep
an asset in good working
order are expensed in the
period in which they are
incurred. (normally expected
repairs & maintenance)
● Substantial costs spent to
improve the quality or extend
the life of an asset are
capitalized.

9- 79
Accounting for capital expenditures:

Extraordinary Repairs Betterments
Ex: Overhaul Ex: Attach snowplow to
● Extend the life? truck owned for 2 years.
– viewed as canceling ● Improve the quality?
some of the previous – viewed as an additional
depreciation cost of the equipment
– journal entry to – journal entry to increase
reduce (debit) (debit) the cost of the
accumulated asset
depreciation – new depreciation
– new depreciation amount will be
amount will be calculated using the
calculated using the revision approach.
revision approach.

9- 80
Natural Resources
● Assets supplied by nature
– Examples: gold, oil, and coal
● Presented on balance sheet as
non-current assets at cost minus
all depletion to date.
● Total cost of the asset is the cost of
acquisition, exploration and development.
● Cost is “written-off” as “Depletion Expense”
over periods that related revenues are
earned. (Usually, units-of-production method.)

9- 81
Natural Resources
A depletion rate is calculated using

the units-of-production method.
Depletion Cost Per Unit Is Calculated As Follows:
Total Cost of Natural Resource
Estimated Number of Available Units

of Natural Resource

9- 82
Intangible Assets
● Noncurrent assets without physical

substance that confer certain rights and
privileges on the owner of the asset.
– Examples: patents, copyrights, franchises
and licenses, leaseholds, leasehold
improvements, trademarks, and goodwill.
● Purchased intangible assets are recorded
at cost.

9- 83
Two Categories of Intangible Assets

● Intangible assets with IDENTIFIABLE useful lives.
– e.g. Patents and Copyrights
They have a legal life, BUT they MAY become
obsolete or worthless before their legal live is over.
● Intangible assets with INDEFINITE useful lives.

– e.g. Goodwill, Franchise, Trademark
How long will the “name” of a restaurant keep attracting
customers if new owners don’t serve good food and
provide good service?

9- 84
Intangible Assets with

IDENTIFIABLE Useful Lives
● Amortize (write-off) over the shorter of their

useful life or legal life.
● Normally the straight-line method is used and

the asset is reported on the balance sheet at
book value without a related accumulated
amortization account.

9- 85
Intangible Assets: Patents

● A patent is an exclusive right granted by
the federal government to sell or
manufacture an invention.
● A patent is amortized over the shorter
of its useful life or 17-year legal life.

9- 86

IDENTIFIABLE Useful Lives
Example: (1) A patent is purchased from a company for $20,000.
(2) When purchased, there were 15 years remaining of the 17
year legal life, but management estimates that new technology
will make this patent obsolete in 4 years. ($20,000/4=$5,000)
INCOME STATEMENT CASHFLOW

= + EQUITY STATEMENT
Accts Com. Ret. Net OA,IA,FA
Cash + Patent = Pay. + Stk. + Earn. Rev. - Exp. = Inc. $ amt
BB 30,000 22,000 8,000 30,000 bal.
1 (20,000) 20,000 (20,000) IA
2 (5,000) (5,000) 5,000 (5,000)
EB 10,000 + 15,000 = - + 22,000 + 3,000 - - 5,000 = (5,000) 10,000 bal.
Patent 20,000 Amortization Expense 5,000

Cash 20000 Patent 5000

9- 87

INDEFINITE Useful Lives
● Must be tested for IMPAIRMENT each year.

If the fair market value of the intangible asset is
less than its book value, the value has been
IMPAIRED (reduced).
● To reduce the intangible asset to its new lower fair

value an IMPAIRMENT LOSS is recorded and
reported on the Income Statement. The intangible
asset is reduced by the same amount.

9- 88
Intangible Assets: Goodwill

● Goodwill is the added value of a business that is
attributable to favorable factors such as a good
reputation, location, and superior products.
● Goodwill must be PURCHASED by acquiring an
existing business at a cost that is higher than the
Fair Market Value of its physical assets (minus
any liabilities assumed by the buying company).
● Goodwill has an INDEFINITE useful life, so it must
be tested for IMPAIRMENT each year.

9- 89
Intangible Assets: Goodwill (Example)

Winona Co. purchased Rushford Co. by
paying $1,500 cash for all of its assets, but
also agreeing to assume its liabilities.
Individual company balance sheets before purchase:
Rushford Co. Winona Co.
Assets: Liab.-A/P 200 Assets: Liab.-A/P
1000
Eq.,net 1000 C.Cap. 500 Cash 2000 C.Cap. 3000
Ret.Earn 300 Eq.,net 7000 Ret.Earn 5000
T. Assets 1000 T. L&Eq.1000 T.Assets 9000 T. L&Eq. 9000
An appraiser says the Fair Market Value of Rushford’s

assets is $1,300.

9- 90
Intangible Assets: Goodwill (example)

Calculation of Goodwill
Cash Paid $
+ Liab. Assumed
= Total cost
- FMV of Assets Acquired
= Goodwill purchased $

9- 91
Intangible Assets: Goodwill (example)

Calculation of Goodwill
Cash Paid $1,500

+ Liab. Assumed 200
= Total cost 1,700
- FMV of Assets Acquired 1,300
= Goodwill purchased $ 400

9- 92

Record the Goodwill related transactions in the Horizontal Model of
the Winona Company, the purchasing company.
1. Purchase of the Rushford Company.
3. After one year, many of the former Rushford customers have
taken their business elsewhere. As a result management
concluded Goodwill has been impaired by $100.
Cash + Equip.+Gdwill = A/P.+ C.C.+ R.E. Gains - Loss= N.I. OA,IA,FA
B 2,000 7,000 0 1,000 3,000 5,000 2,000 bal

9- 93

Record the Goodwill related transactions in the Horizontal Model of
the Winona Company, the purchasing company.
1. Purchase of the Rushford Company.
3. After one year, many of the former Rushford customers have
taken their business elsewhere. As a result management
concluded Goodwill has been impaired by $100.
Cash + Equip.+Gdwill = A/P.+ C.C.+ R.E. Gains - Loss= N.I.
B OA,IA,FA
2,000 7,000 0 1,000 3,000 5,000 2,000 bal
1 (1,500) 1,300 400 200 (1,500) IA
2 (100) (100) 100 (100)
B 500 8,300 300 1,200 3,000 4,900 0 100 (100) 500bal
Equipment 1300 Impairment Loss 100
Goodwill 400 Goodwill 100
Acct. Pay. 200
Cash 1500
9- 94
Chapter 9
The End

ch09 Fundamental of Financial Accounting by Edmonds (4th Edition)

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Fundamental

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Classification of Operational Assets

● Tangible operational assets have

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Long-term Operational Assets...

● Long-term assets will be

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Classification of Operational Assets

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Measuring Acquisition Cost

● Acquisition cost is the net cash

● Financing charges are excluded from

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Measuring Acquisition Cost

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Basket Purchases of Assets

When land and building are purchased

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Basket Purchases of Assets

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Basket Purchases of Assets

Total market value $120,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Basket Purchases of Assets

Total market value $120,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Basket Purchases of Assets

Total market value $120,000 12/12

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Basket Purchases of Assets

Total market value $120,000 12/12

Building 9/12 * $100,000 =

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Basket Purchases of Assets

Total market value $120,000

Building 9/12 * $100,000 = $75,000

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Basket Purchases of Assets

Building 9/12 * $100,000 = $75,000

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Nature of Depreciation, Depletion,

...as the asset

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Depreciation Cost - Residual Value

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Straight-Line Method: Example

On January 1, 2004, equipment was purchased

What is the annual straight-line depreciation

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Straight-Line Method: Example

Depreciation Cost - Residual Value

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Straight-Line Method: Example

Depreciation Cost - Residual Value

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Straight-Line Method: Example

Depreciation Cost - Residual Value

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