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TAMU ACCT 209 - Longer-Term Continued and Current Liabilites
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ACCT 209 1nd Edition Lecture 9 Outline of Last Lecture I. Long- lived assetsa. AcquisitionI. Exampleb. Use over multiple yearsI. MethodsII. ExampleOutline of Current Lecture II. Disposala. ExampleIII. Natural resourcesa. ExampleIV. Intangible assetsV. Current Liabilities OverviewVI. Short Term notes payablea. ExamplesVII. Discounted Notes Payablea. ExampleCurrent LectureChapter 9 LONG-TERM (FIXED) ASSETS ContinuedDisposal This class only focuses on getting cash or throwing it outAssets may be sold for cash, exchanged for new assets, or scrappedTo 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 isrecorded as a gain; if the book value exceeds the cash received a loss is recorded.Cost – AD = Book ValueGain – similar to revenue; Peripheral activatesThese 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 activatesAssets = L + SECash EQ AD1000 (400)600 (1000) ((400))ExampleNational 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 = 7,000a. The truck is sold for $7,000.No gain or lossCash received = Book valueb. The truck is completed destroyed in an accident, and the company receives $1,500 as an insurance settlement.Cash received < Book Value1,500 < 7,000 => loss of 5,500c. The truck is sold for $10,900.10,900 > 7,000 => Gain of 3,900NATURAL RESOURCESIncludes 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 methodDepletion rate = Cost of resource Estimated Units of resource ExampleAggie 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 / tonAssuming 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 expense5,000,000 Land with forest20,000 Land w/ Trees4,980,000 TreesINTANGIBLE ASSETSIntangible 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 DisneyTechnology related (patents)Marketing related (trademarks)Consumer related (info database)Contract related (franchise)GoodwillGenerally, intangible assets are recorded at their acquisition cost:purchased – Cost paid to purchase; includes legal fees, filing fees, ectinternally created – Only legal costs and filing feesResearch & development – Expensed as incurredAmortization – process of transferring cost to expense over useful lifeMost intangible assets are expensed over life (Except good will)Useful life – How long it is expected to generate revenueLegal life Balance sheet presentationUsually shown at net valueGood will – Shows up on balance sheet only when on company purchases an existing business and pays more than fair market valueImpairment losses – Destroy goodwill / reputation/ etcCurrent liabilitiesDefine liability:- Probable future sacrifice of assets or senses- Arising from a present obligation- Based on a past eventCurrent liability – Will be satisfied using current assets; Mature/ be paid within a yearExamples of current liabilities:Accounts payableAccrued liabilities (such as Wages payable, taxes payable, Interest payable)Generally result from adjustmentsUnearned revenue/gift cardsShort term notes payablePayroll liabilitiesCurrent portion of long-term debtShort term notes payablePromissory note – unconditional written promise to pay a specified amount on demand or at a specified dateMaker – 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 maturesTerm – the period of time between the date of borrowing and the maturity dateMaturity value – the total amount due at maturity; MV = Principal + InterestInterest – the cost of borrowing; the borrower incurs interest expense and the lender earns interest revenueInterest bearing notes and simple interest (Short term)Simple interest is calculated as I = P x R x TIn this class R = annual interest rateWhere 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 outstandingExample 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 = 450MV = 10,000 + 450 = 10,450c. How much interest expense will Aggie Company report in 2013? In 2014?How many months is the loan outstanding in 2013 - > 7 months2013 exp = 10,000 * 0.06 * 7/12 = 3502014 exp = 10,000 * 0.06 * 2/12 = 100These add up to 450Discounted notes payableWhen a discounted note is issued, the interest – called the discount – is computed as the face amount ofthe 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 =


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