ACCT 209 1nd Edition Lecture 9 Outline of Last Lecture I Long lived assets a Acquisition I Example b Use over multiple years I Methods II Example Outline of Current Lecture II Disposal a Example III Natural resources a Example IV Intangible assets V Current Liabilities Overview VI Short Term notes payable a Examples VII Discounted Notes Payable a Example Current Lecture Chapter 9 LONG TERM FIXED ASSETS Continued Disposal This class only focuses on getting cash or throwing it out Assets may be sold for cash exchanged for new assets or scrapped To record the disposal of an asset both the asset and its accumulated depreciation accounts should be zeroed out If the asset is sold any cash received in excess of the asset s book value is recorded as a gain if the book value exceeds the cash received a loss is recorded Cost AD Book Value Gain similar to revenue Peripheral activates These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Loss similar to expense Peripheral activates Assets Cash 600 L SE EQ AD 1000 400 1000 400 Example National Express Delivery Company has a small truck that is no longer needed by the firm The truck was purchased for 18 000 on January 2 Year 3 and had an estimated salvage value of 2 000 and an estimated useful life of 4 years National uses the straight line method of depreciation The disposal date of the truck is October 1 1 Year 5 Determine the gain or loss on the disposal of the truck under each of the following assumptions 18 000 2 000 4 4 000 year Straight line 2 years 9 months 2 75 years 4 000 11 000 AD Book value 18 000 11 000 7 000 a The truck is sold for 7 000 No gain or loss Cash received Book value b The truck is completed destroyed in an accident and the company receives 1 500 as an insurance settlement Cash received 1 500 c Book Value 7 000 The truck is sold for 10 900 10 900 7 000 NATURAL RESOURCES Gain of 3 900 loss of 5 500 Includes items such as oil deposits timber coal and minerals The expense associated with the use consumption of the natural resource is depletion The depletion rate is a cost per unit of natural resource expense is the rate multiplied by number of units used mined cut drilled etc similar to units of activity method Depletion rate Cost of resource Estimated Units of resource Example Aggie Sand and Gravel paid 400 000 for the mining rights to a gravel deposit The deposit is expected to contain 1 million tons of gravel What is the depletion rate for the gravel 400 000 1 000 000 40 ton Assuming 90 000 tons of gravel are mined and sold during the year how much is Aggie s depletion expense 90 000 40 36 000 Depletion expense 5 000 000 Land with forest 20 000 Land w Trees 4 980 000 Trees INTANGIBLE ASSETS Intangible assets are long lived assets used in the operations of a business but that have no physical existence Intangible assets include Artistic related copyrights Like walt Disney Technology related patents Marketing related trademarks Consumer related info database Contract related franchise Goodwill Generally intangible assets are recorded at their acquisition cost purchased Cost paid to purchase includes legal fees filing fees ect internally created Only legal costs and filing fees Research development Expensed as incurred Amortization process of transferring cost to expense over useful life Most intangible assets are expensed over life Except good will Useful life How long it is expected to generate revenue Legal life Balance sheet presentation Usually shown at net value Good will Shows up on balance sheet only when on company purchases an existing business and pays more than fair market value Impairment losses Destroy goodwill reputation etc Current liabilities Define liability Probable future sacrifice of assets or senses Arising from a present obligation Based on a past event Current liability Will be satisfied using current assets Mature be paid within a year Examples of current liabilities Accounts payable Accrued liabilities such as Wages payable taxes payable Interest payable Generally result from adjustments Unearned revenue gift cards Short term notes payable Payroll liabilities Current portion of long term debt Short term notes payable Promissory note unconditional written promise to pay a specified amount on demand or at a specified date Maker borrower Issuer Payee lender Principal the amount borrowed the amount on which interest accrues Face amount Maturity date the due date the date the loan matures Term the period of time between the date of borrowing and the maturity date Maturity value the total amount due at maturity MV Principal Interest Interest the cost of borrowing the borrower incurs interest expense and the lender earns interest revenue Interest bearing notes and simple interest Short term Simple interest is calculated as I P x R x T In this class R annual interest rate Where P is the principal or amount borrowed the interest rate R is expressed as an annual rate and the time T should be expressed as the portion of the year the loan is outstanding Example 1 On June 1 2013 Aggie Company issued a 9 month interest bearing note payable to the Last National Bank in the amount of 10 000 The interest rate on the note is 6 a What is the maturity date of the note March 1 2014 9 months after June 1 2013 b What is the maturity value of the note 10 000 06 9 12 450 MV 10 000 450 10 450 c How much interest expense will Aggie Company report in 2013 In 2014 How many months is the loan outstanding in 2013 7 months 2013 exp 10 000 0 06 7 12 350 2014 exp 10 000 0 06 2 12 100 These add up to 450 Discounted notes payable When a discounted note is issued the interest called the discount is computed as the face amount of the loan the interest rate the time period of the loan However instead of receiving the face value at issue the borrower receives the face amount LESS the discount at maturity the borrower pays the face value Example 2 On June 1 2013 Aggie Company discounted a 9 month note payable to the Last National Bank in the amount of 10 000 The interest rate on the note is 6 10 000 06 9 12 450 a How much cash will Aggie receive on March 1 10 000 450 9 550 b How much cash will Aggie have to repay to the bank on January 1 2014 10 000 c How much interest expense will Aggie report for 2013 For 2014 Same as above 2013 350 2014 100 I P R T 450 9 550 R 9 12 450 7162 50 R R 0 0628