Long-Lived Nonmonetary Assets
and Their Amortization
(Part Two)
Sherinne Christie Ann Z. Albao
Reporter, 2012
 Does not represent the “accumulation” of
any tangible thing. (Not money)
 Funding Depreciation – is a financing
transac...
 They are also assets of the company that
owns the right to extract them. (e.g. coal,
oil, minerals, gas).
 Measuring th...
 Full cost method – all exploration cost
should be capitalized as asset value of the
reserves during the year.
 Successf...
A petroleum company explores 10 location, incurring costs of
$ 10 million each. It discovers oil and gas at three of these...
 The increase in the value arising through
natural process of growth or aging. (e.g.
timberland, cattle, tobacco, wine an...
 Also an increase in the value of asset.
 Not the opposite of depreciation
 Recognized in unusual circumstances.
 e.g....
 Limited Useful Life
 Indefinite Useful Life
 Good will
 Patents, Copyrights, Franchise, Licenses and
Lease.
 Usually converted into expense over a
number of accounting periods...
Intangible Asset Term
Patents 20 years (R.A. No 8293)
Copyrights Life of author and 50 years
after his or her death
Licens...
 Broadcasting License and Trademarks.
 Recognized as long lived assets with indefinite
useful lives that are not amortiz...
 The excess of acquisition cost over net assets
required.
 Often referred to as the most “intangible” of
all intangible ...
 Initially recorded at their cost.
 If acquired by purchase the cost includes
purchase price and direct attributable
exp...
 Technology-based intangible asset
 Legal fees and other costs of successfully
prosecuting or defending a patent is expe...
 Also initially recorded at their cost.
 Artistic related intangible asset
 Cost consist of all expenses incurred in th...
 Reverts the owner at the end of the period.
 Any improvements of the property belonged to
the owner.
 The useful life ...
 Same as prepaid expenses.
 Included as long-lived assets only if they
have a relatively long life.
 Long-lived assets ...
 Cost incurred to developed new knowledge,
products or innovations, services and
processes.
 Can help increase revenues ...
 Average age of depreciation
Accumulated depreciation/Annual Depreciation Expense
 Asset’s depreciation period
Cost/ Ann...
Anthony, Robert N., et.al. Accounting: Text and Cases 13th
Edition,
(McGraw-Hill Companies, Inc © 2011), pp. 186-198.
Vali...
Long-Lived Nonmonetary Assets
and Their Amortization
Problem 7-1
Problem 7-4
Case 7-2
 Machine cost: $ 300,000
 Estimated Useful Life: 6 years
 Residual Value: $ 18,000
 Expected number of units to be pro...
(a) Units of Production Method:
= $ 282,000/3,525,000 units
= $ 0.08 per unit (Depreciation Rate)
*Depreciation Charge = N...
(b) Sum-of-the-years’ digits method
SYD = n((n+1)/2)
= 6 ((6+1)/2)
= 6 (7/2)
= 6 (3.5)
= 21
Depreciation Rate for Year 1 i...
Yea
r
Units
Depreciation
Charge
(UPM) SYD
Depreciation Charge
(SYD)
1 930,000 $74,400.00 6/21 $80,571.43
2 800,000 $64,000...
(1) Land 80,600.00
Cash 80,600.00
(2) Building 138,000.00
Ordinary Shares Capital 90,000.00
Notes Payable 16,000.00
Cash 3...
a.
Capitalized as additional cost of the additional wing of
the factory building
b.
Capitalized as additional cost of the ...
e.
Capitalized as additional cost of the additional wing
of the factory building
f. Expense
g. Add to Overhead Expense
h.
...
a.
The cost of the buildings will be attributed to the cost
of the land
b.
The cost of the razing will also be added to th...
Should the accounting treatment of the old
buildings and the cost of demolishing them
differ from your recommendations wit...
The previous case is different because the cost
of the razing of the building is added to the
cost of the land. Any additi...
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Long Lived Monetary Assets Part 2

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Long Lived Monetary Assets Part 2

  1. 1. Long-Lived Nonmonetary Assets and Their Amortization (Part Two) Sherinne Christie Ann Z. Albao Reporter, 2012
  2. 2.  Does not represent the “accumulation” of any tangible thing. (Not money)  Funding Depreciation – is a financing transaction (unrelated to recording depreciation).  Not a means of automatically creating a fund for replacing assets.  Simply an amount of original cost than has been expense.
  3. 3.  They are also assets of the company that owns the right to extract them. (e.g. coal, oil, minerals, gas).  Measuring the cost of these wasting assets are the same as those for tangible assets.  Full cost method  Successful efforts method e.g. Petroleum
  4. 4.  Full cost method – all exploration cost should be capitalized as asset value of the reserves during the year.  Successful efforts method – only cost incurred at discovered reserves should be capitalized and the “dry hole” costs should be an expense.  Depletion – the process of amortizing the cost of natural resources in the accounting period (same as depreciation).
  5. 5. A petroleum company explores 10 location, incurring costs of $ 10 million each. It discovers oil and gas at three of these locations.  Full cost method – recorded as $ 100 million Successful cost method – asset recorded is $ 30 million and $ 70 million will be charged as expense. If an oil property cost $ 250 million and is estimated to contain 50 million barrels of oil. The company produced 8 million barrels of oil for that year. Depletion for a period = (cost of reserve/estimated no. of units, let say barrels) * no. of units extracted during the period. = ($ 250 million/50 million barrels)* 8 million barrels = $ 5 per barrel (depletion rate) * 8 million barrels = $ 40 million is the total depletion for the year.
  6. 6.  The increase in the value arising through natural process of growth or aging. (e.g. timberland, cattle, tobacco, wine and other agricultural products).  Not recognized in accounts until sold.  Cost incurred in the growing or aging process are added to the asset value.
  7. 7.  Also an increase in the value of asset.  Not the opposite of depreciation  Recognized in unusual circumstances.  e.g. Buying a company and current value of assets is above book value – These assets are written up to their current value.  Increase in value is recognized in accounts only when revenue is realized.
  8. 8.  Limited Useful Life  Indefinite Useful Life  Good will
  9. 9.  Patents, Copyrights, Franchise, Licenses and Lease.  Usually converted into expense over a number of accounting periods.  The systematic allocation of the costs of these assets to the periods in which they provide benefits is called amortization.  Amortization is the same process as the depreciation of tangible assets.
  10. 10. Intangible Asset Term Patents 20 years (R.A. No 8293) Copyrights Life of author and 50 years after his or her death Licenses Depends upon the licenses one to five years at best Franchise Depends upon the contract Lease Depends upon the contract An entity developed a patent at cost of P200,000 and spent P120,000 for licensing of patent including legal fees and cost of models and drawings that accompany the registration on January 1, 2011. Patent P 120,000.00 Research and Development Expense* P 200,000.00 Cash P320,000.00 Amortization (of Patent for 2012) P 6000.00 Patent P 6000.00
  11. 11.  Broadcasting License and Trademarks.  Recognized as long lived assets with indefinite useful lives that are not amortized.  They are subjected to periodic impairment tests.  It is considered indefinite if there are no legal, regulatory, contractual, competitive, economic or other factors that limits its life. Intangible Term Impairment Franchise/License Depends upon contract Annually Trademark 10 years Every 10 years
  12. 12.  The excess of acquisition cost over net assets required.  Often referred to as the most “intangible” of all intangible assets.  Not specifically identifiable, indeterminate life, inherent in continuing business and relates to an entity as a whole.  Arises as part of a purchase transaction*.  Cannot be amortized under any circumstances. Subjected to annual impairment test. Any write down due to impairment is charge to income.
  13. 13.  Initially recorded at their cost.  If acquired by purchase the cost includes purchase price and direct attributable expenditure.  If developed internally cost also includes licensing and other legal fees. All related research and development cost is expense*  Any engineering and consulting costs to develop the patent and design changes require by the patent authority is patent cost.
  14. 14.  Technology-based intangible asset  Legal fees and other costs of successfully prosecuting or defending a patent is expense.  If litigation is unsuccessful, the legal and remaining costs of the patent is written as loss.  Can be renewed for life extension as a new patent with improvement and changes.  Useful life limited by agreement and law.  But due to technological advancement or other reasons, practical life will be shorter than legal age.
  15. 15.  Also initially recorded at their cost.  Artistic related intangible asset  Cost consist of all expenses incurred in the production of the work including those require to established or obtain the right.  If copyright is purchased the cost includes cash paid and direct attribute costs for its use.  The useful life is that period in which benefits, royalties and sales are expected.  Usually advisable to write cost of copyright against the revenue of the first printing.
  16. 16.  Reverts the owner at the end of the period.  Any improvements of the property belonged to the owner.  The useful life of the improvements corresponds to the period of the lease.  Even though improvements are capitalized, the useful life of these improvements is not determined by the physical characteristics of the improvement but by the terms of the lease agreement.
  17. 17.  Same as prepaid expenses.  Included as long-lived assets only if they have a relatively long life.  Long-lived assets subject to amortization are deferred charges in the literal sense.  Restricted to long-lived tangibles.  Some companies charge them as expense even though there is no offsetting revenue.
  18. 18.  Cost incurred to developed new knowledge, products or innovations, services and processes.  Can help increase revenues or lower cost.  Discussed in detailed in Chapter 12.
  19. 19.  Average age of depreciation Accumulated depreciation/Annual Depreciation Expense  Asset’s depreciation period Cost/ Annual depreciation expense  Annual expenditure for an intangible asset Annual amortization expense +/- increase or decrease in asset’s balance.
  20. 20. Anthony, Robert N., et.al. Accounting: Text and Cases 13th Edition, (McGraw-Hill Companies, Inc © 2011), pp. 186-198. Valix, Conrado T., et.al. Financial Accounting: 2010 Volume One, (GIC Enterprises & Co., Inc. © 2010), pp. 1125-1239. www.ipophil.giv.ph, Intellectual Property of the Philippines Website, (Philippine Government., © 2012), Last access: July 19, 2012.
  21. 21. Long-Lived Nonmonetary Assets and Their Amortization Problem 7-1 Problem 7-4 Case 7-2
  22. 22.  Machine cost: $ 300,000  Estimated Useful Life: 6 years  Residual Value: $ 18,000  Expected number of units to be produced during it’s useful life: 3,525,000 units  Net cost: $ 282,000
  23. 23. (a) Units of Production Method: = $ 282,000/3,525,000 units = $ 0.08 per unit (Depreciation Rate) *Depreciation Charge = No. of units in Year n * Depreciation Rate Year Units Depreciation Charge* 1 930,000 $74,400.00 2 800,000 $64,000.00 3 580,000 $46,400.00 4 500,000 $40,000.00 5 415,000 $33,200.00 6 300,000 $24,000.00
  24. 24. (b) Sum-of-the-years’ digits method SYD = n((n+1)/2) = 6 ((6+1)/2) = 6 (7/2) = 6 (3.5) = 21 Depreciation Rate for Year 1 is 6/21.
  25. 25. Yea r Units Depreciation Charge (UPM) SYD Depreciation Charge (SYD) 1 930,000 $74,400.00 6/21 $80,571.43 2 800,000 $64,000.00 5/21 $67,142.86 3 580,000 $46,400.00 4/21 $53,714.29 4 500,000 $40,000.00 3/21 $40,285.71 5 415,000 $33,200.00 2/21 $26,857.14 6 300,000 $24,000.00 1/21 $13,428.57 The units-of-production method showed a difference in depreciation charges in each year than the sum-of-the- years’ digits method.
  26. 26. (1) Land 80,600.00 Cash 80,600.00 (2) Building 138,000.00 Ordinary Shares Capital 90,000.00 Notes Payable 16,000.00 Cash 32,000.00 (3) Office Equipment 9,600.00 Cash 9,600.00
  27. 27. a. Capitalized as additional cost of the additional wing of the factory building b. Capitalized as additional cost of the additional wing of the factory building c. The cash discount will be deducted from the Building cost d. Capitalized as additional cost of the additional wing of the factory building
  28. 28. e. Capitalized as additional cost of the additional wing of the factory building f. Expense g. Add to Overhead Expense h. Capitalized as additional cost of the additional wing of the factory building Add to expense (for injuries, losses and damages)
  29. 29. a. The cost of the buildings will be attributed to the cost of the land b. The cost of the razing will also be added to the cost of the land c. The razing of the old buildings will not be charged to the cost of the land or new building. It will be charged as loss of retirement of the old building. The new buildings will become additional assets (building) of the company
  30. 30. Should the accounting treatment of the old buildings and the cost of demolishing them differ from your recommendations with respect to (a) and (b) above? Why? Yes. It differs because in the latter case the company did not sold the land and it has been assumed that it owned the buildings for a long time and whatever cost they did to demolish the old buildings could not be added to the cost of the new buildings because the retirement of the old buildings will be added as loss or expense of the retirement of the old building.
  31. 31. The previous case is different because the cost of the razing of the building is added to the cost of the land. Any additional cost to bring the asset to its present location or form will be added to the cost of the asset.
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