GLENCOE / McGraw-Hill

Property,Plant,andEquipment

6. Compute and record depletion of natural resources.7. Compute and record amortization of intangible

assets.8. Recognize asset impairment and understand the

general concepts of accounting for impairment.

Special Topics in Long-Term Assets Section Objectives

Depletion is the term used to describe allocating the cost of the natural resource to expense over the period in which the resource provides revenue.

ANSWER:

QUESTION:

What is depletion?

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Depletion matches an asset’s costs with the benefits derived from its use.

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Natural Resources: Iron ore

Oil

Gold

Coal

Types of Depletion

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Depletion for Financial Statement Purposes

Depletion for Federal Income Tax Purposes

Depletion for Financial Statement Purposes

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Depletion of natural resources for financial statement preparation is called cost depletion.

Formula for cost depletion:

Depletion per unit=Cost of natural resource

Estimated units of the resource

Depletion for Federal Income Tax Purposes

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Depletion for federal income tax purposes is the larger of cost depletion or percentage depletion.

Formula for percentage depletion:

Gross income from sale of resource X a percentage

Intangible assets are assets that lack a physical substance.

ANSWER:

QUESTION:

What are intangible assets?

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Types of Intangible Assets

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Patent

Copyright

Franchises

Trademarks, trade names, brand names

Computer software

Goodwill

Acquiring Intangible Assets

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There are two ways to acquire intangible assets:

1. Produce or develop them.

2. Purchase them.

Amortization is the process of periodically transferring the acquisition cost of an intangible asset to an expense account.

ANSWER:

QUESTION:

What is amortization?

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Notice the similarities:

Depreciation

Depletion

Amortization

These processes transfer the cost of assets to expense accounts over a period of time.

Amortizing the Costs of Intangible Assets

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Most intangible assets have limited legal and economic lives.

Intangible assets are amortized for a period not to exceed 40 years.

The periodic amortization is debited to Amortization Expense and credited directly to the intangible asset account.

The intangible asset account is decreased.

Contra Asset Accounts

Accumulated Depreciation

Accumulated Depletion

AccumulatedAmortization

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Asset impairment occurs when the asset is determined to have a market value or a value in use less than its book value.

ANSWER:

QUESTION:

What is asset impairment?

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Impairment of Property, Plant, and Equipment

Three steps to use to determine whether an asset is impaired.

Step 1. Review circumstances that suggest impairment may have occurred.

Step 2. Apply the recoverability test.

Step 3. Compute the amount of the impairment.

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The recoverability test compares the asset’s net book value with the estimated net cash flows from the asset’s useful life.

ANSWER:

QUESTION:

What is the recoverability test?

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Internal Control of Property, Plant, and Equipment

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Authorize and justify the purchase of assets.

Assign identification number to each asset.

Maintain an asset register listing.

Assign responsibility for safekeeping, maintaining, and operating each asset to a specific person.

Take a physical inventory periodically.

Establish procedures to authorize asset retirement, sale, or other disposition.

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_________ is the term used to describe allocating the cost of a natural resource to expense over the period in which the resource produces revenue.

Depletion of natural resources used for GAAP purposes is called _____________.

_______________ are assets that lack a physical substance.Intangible assets

cost depletion

Depletion

Complete the following sentences:

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___________ is the process of periodically transferring the acquisition cost of an intangible asset to an expense account.

The entry to record amortization of a patent is a debit to ___________________ and a credit to ______.

__________ of long-term assets occurs when the asset is determined to have a market value or a value in use less than its book value.

Impairment

Amortization Expense

Amortization

Complete the following sentences:

Patent

Thank Youfor using

College Accounting, Tenth Edition

Price • Haddock • Brock