Intangible Assets and Depreciation Quiz

Plant and Intangible Assets

• Plant assets are long-lived assets used in business operations, similar to long-term prepaid expenses.
• The cost of plant assets represents the advance purchase of services.
• As time passes and services are used, the cost is transferred to depreciation expense.

Major Categories of Plant Assets

• Tangible Plant Assets: Long-term assets with physical substance (land, buildings, equipment, furniture, fixtures).
• Intangible Assets: Noncurrent assets without physical substance (patents, copyrights, trademarks, franchises, goodwill).
• Natural Resources: Sites acquired for extracting valuable resources (oil reserves, timber, minerals).

Accountable Events

• Acquisition: The initial purchase of plant assets.
• Allocation of Acquisition Cost: Distributing the cost over the asset's useful life (depreciation).
• Sale or Disposal: The process of selling or getting rid of an asset.

Acquisition of Plant Assets

• The cost of an asset includes the asset price and related necessary costs (getting the asset ready for use, and to the desired location).

Determining Cost

• Example: Heat Co. buys a machine for $52,000 with 8% sales tax, $500 shipping, $1,300 setup, and $4,000 testing costs.
• The total cost was $61,960.

Special Considerations

• Land: Costs include real estate commissions, legal fees, clearing, and grading the property. Improvements to land (driveways, fences, landscaping) are recorded separately.
• Buildings: Sometimes purchased for remodelling prior to use. Ordinary repairs are considered maintenance expense. Related costs like interest, insurance, and taxes are treated as current period expenses.
• Equipment: Similar to buildings, ordinary repairs are treated as current period expenses.
• Allocation of a Lump-Sum Purchase: The total cost is allocated to separate accounts for each asset based on their relative fair market value.

Capital Expenditures and Revenue Expenditures

• Capital Expenditure: Any significant expenditure benefiting several accounting periods (e.g., building improvements). Capitalized expenditures are recorded as assets.
• Revenue Expenditure: Expenditures for ordinary repairs and maintenance, affecting only the current period. Revenue expenditures are expenses in the period they occur.

Depreciation

• Depreciation is the systematic allocation of the cost of a plant asset to expense over the periods in which services are received from the asset.
• Depreciation affects the balance sheet (assets: plant and equipment) and income statement (expenses: depreciation).

Book Value

• Book value of an asset is shown on the balance sheet as Cost - Accumulated Depreciation.

Accumulated Depreciation

• Accumulated Depreciation is a contra-asset account that represents the sum of depreciation expense recorded for an asset over time.

Causes of Depreciation

• Physical Deterioration: Wear and tear from use and environmental factors (sun, wind).
• Obsolescence: An asset becomes outdated because newer, more efficient models are developed.

Straight-Line Depreciation

• Depreciation Expense per Year = (Cost - Residual Value) / Years of Useful Life
• Residual Value: The estimated amount a company will receive when disposing of an asset.

Straight-Line Depreciation Example

• Example: Bass Co. buys a boat for $24,000 with an estimated residual value of $3,000 and useful life of 5 years. Annual depreciation is $4,200.

Depreciation for Fractional Periods

• Half-Year Convention: When an asset is acquired during the year, use half of the annual depreciation expense in that acquisition year.

Declining-Balance Method

• Depreciation Expense = Remaining Book Value × Accelerated Depreciation Rate
• The accelerated depreciation rate is 200% of the straight-line rate (1/Useful Life). This method results in higher depreciation expense in the early years of an asset's life.

MACRS

• MACRS (Modified Accelerated Cost Recovery System) is the only accelerated method allowed by the IRS for computing depreciation for tax return purposes.
  • Deprecation rates are found in IRS tables.

Financial Statement Disclosures

• Estimates of useful life and residual value may differ among companies.
• The reasonableness of management's estimates is evaluated by external auditors.
• Companies should maintain consistent depreciation methods over time.

Revising Depreciation Rates

• Over the life of an asset, new information might cause revisions to original depreciation estimates.
• Example: If an asset's useful life is revised, re-calculate the depreciation expense for the remaining useful life.

Impairment of Assets

• An asset is impaired if its market value is lower than its book value. The asset's book value is adjusted to its net realizable value (market value).

Disposal of Plant and Equipment

• Update depreciation to the date of disposal.
• Journalize the disposal by:
  • Recording cash received or paid
  • Removing accumulated depreciation
  • Recording a gain or loss
  • Removing the asset cost

Trading in Used Assets for New Ones

• The new FASB standard does not distinguish between similar and dissimilar exchanges.
• An exchange has commercial substance if future cash flows change significantly.
• Boot is additional monetary consideration exchanged in an asset transaction.

Intangible Assets

• Intangible assets have no physical substance but have value due to exclusive privileges and rights.
• Sources of intangible assets include government grants, legal contracts, and entrepreneurial capabilities.
• Intangible assets generally include patents, copyrights, leaseholds, goodwill, trademarks, and trade names

Intangible Assets-Amortization

• Amortization systematically writes off the cost of intangible assets as expense.
• Amortization is usually calculated using the straight-line method.
• Intangible assets are amortized over shorter of economic life or legal life, with a maximum of 40 years.

Intangible Assets – Goodwill

• Goodwill arises when one company buys another company.
• Goodwill is the amount by which the purchase price exceeds the fair market value of acquired net assets.

Intangible Assets – Patents

• Patents provide exclusive rights from the government to manufacture and sell inventions.
• The cost of a patent includes the purchase price and legal costs to defend the patent.
• Amortize patents over the shorter of their legal or useful life (up to 17 years).

Intangible Assets – Trademarks and Trade Names

• Trademarks and trade names are unique symbols, designs, or logos associated with a business.
• Internally developed trademarks have no recorded asset cost.
• Purchased trademarks are recorded at cost and amortized over their legal or economic life, capped at 40 years.

Intangible Assets – Franchises

• Franchises are legally protected rights to sell or offer services acquired from the franchisor.
• A franchise's purchase price is recorded as an intangible asset and amortized within the shorter period of the operating rights or 40 years.

Intangible Assets – Copyrights

• Copyrights give exclusive rights to protect artistic or intellectual property.
• Amortize copyrights over a period not exceeding 40 years.
• Copyrights are amortized over the life of the creator plus 50 years.

Natural Resources

• Natural resources are assets from natural sources, like minerals, oil, and timber.
• They are recorded at their purchase cost plus exploration and development costs.
• They are recorded on the balance sheet at their cost minus accumulated depletion. Depletion is similar to depreciation.

Depletion of Natural Resources

• Depletion is exhausting a natural resource through removal.
• To record depletion, debit Depletion Expense and credit Accumulated Depletion (a contra-account).
• Depletion is calculated using the units-of-production method
• Calculate the depletion rate by taking the cost of the resource minus the salvage value, divided by the total units of capacity.

Test your knowledge on intangible assets and their amortization! This quiz covers key concepts such as types of intangible assets, depreciation methods, and useful life estimates. Perfect for accounting students or professionals looking to refresh their understanding.