Accounting Notes Tangible v Intangible assets Tangible assets have a physical presence and can be seen and touched o Long term tangible assets Property Plant and Equipment depreciate over their useful life Natural resources mineral deposits oil and gas reserves etc deplete over their useful life Land has an infinite life and does not depreciate Intangible assets right or privileges that can t be seen or touched o Identifiable Useful Lives patents and copyrights Amortize the cost of each over its useful life o Indefinite Useful Lives renewable franchises trademarks and goodwill The cost of these assets is not expensed unless it can be shown that there has been an impairment in value Cost of Long term Assets Buildings o Purchase price o Sales taxes o Title search and transfer document costs o Realtor s and attorney s fees o Remodeling costs Equipment o Purchase price less discounts o Sales taxes o Delivery costs o Installation costs o Costs to adapt to intended use Land o Purchase price o Sales taxes o Title search and transfer document costs o Realtor s and attorney s fees o Costs of removal of old buildings o Grading costs Basket Purchase Allocation Occurs when one price was paid for multiple things Step 1 determine appraisal value for each asset Step2 Divide the appraisal value for each asset by the total appraisal value of the assets to get a percentage Step 3 Multiply the of each asset by the basket purchase price what we paid Depreciation Methods Straight line method the same amount is depreciated each accounting period o Cost salvage value expected life Double declining balance produces more depreciation expenses in the early years of an asset s life with a declining amount of expense in later years o Determine straight line rate of depreciation 1 divided by expected life o Multiply straight line rate by two o Multiply double declining rate by the book value of the asset at the beginning of the period Accumulated Depreciation can t exceed cost of the asset minus the salvage value Units of production produces varying amounts of depreciation in different accounting periods depending upon the number of units produced o Cost Salvage value total estimated units of production depreciation charge per unit of production o Depreciation charge per unit of production x units of production in current accounting period periodic depreciation expense Continuing Expenditure for Plant Assets Cost of routine maintenance and minor repairs that occur to keep an asset in good working are expensed as incurred credit cash and debit repairs expense Expenditures that improve the quality of an asset are capitalized as part of the cost of that asset credit cash and debit equipment Amount of expenditures that extend the life of an asset should reduce the balance in the accumulated depreciation account debit accumulated depreciation and credit cash Natural Resources Depletion cost salvage value total estimated units recoverable depletion charge per unit of resource o Depletion charge per unit of resource x number of units extracted and sold this period periodic depletion expense Reduces the asset amount rather than contra account Intangible assets Trademarks name or symbol that identifies a company of a product Cost of trademark may include design purchase or defense of the trademark Patents exclusive legal right to produce and sell a product that has one or more unique features The legal life of a patent is 20 years Copyrights protection of writings musical composition work of art or other intellectual property The protection extends for the life of the creator plus 70 years Goodwill excess of cost over fair value of net tangible assets acquired in a business acquisition Franchise exclusive right to sell products or perform services in certain geographic areas Warranty Obligations Generally within the warranty period the seller promises to replace or repair defective products without charge to the customer credit warranties payable and debit warranty expense with estimated amount o When actually settling warranty obligations debit warranties payable and credit cash Accounting for Long Term Debit Long term notes liabilities that usually have terms from 2 5 years o Each payment covers interest for the period and a portion of the principal With each payment interest gets smaller while the principal portion gets larger Applying payments to principal and interest 1 Identify the unpaid principal balance 2 Amount applied to interest unpaid principal balance x interest rate 3 Amount applied to principal cash payment amount applied to interest in step 2 4 Unpaid principal balance unpaid principal balance in 1 amount applied to principal in 3 Bond Liabilities Principal long term borrowing of a large sum of money o Usually paid back as a lump sum at maturity Periodic interest payments based on a stated rate of interest o Interest is paid semiannually Interest principal x stated interest rate x time o Bond prices are quoted as a percentage of the face amount Ex a 1 000 bond priced at 104 would sell for 1 040 Advantage of bonds 1 longer term to maturity than notes payable and 2 bond interest rates are usually lower than bank loan rates Market Rate of Interest o Stated Rate Market Rate Bond Price Face Value no difference to account for o Stated Rate Market Rate Bond Price Face Value bond discount Recorded in a contra liability account o Stated Rate Market Rate Bond Price Face Value bond premium Recorded in a liability To amortize bonds o Cash Payment Face Value x Stated Rate o Interest Expense Carrying Value x Market Rate o Discount Interest Expense Cash Payment o Premium Cash Payment Interest Expense o Carrying Value Previous Year Carrying Value Discount Premium o Always should end with the Face Value of the bond once you ve finished amortizing To determine the selling price of the bond o Bond Face Value x PV MR T Principal x SR x PVA MR T To determine which chart to use o Lump Sum Use Present Value if you are given Future Value of the bond Use Future Value if you are given the Present Value of the bond o Annual Payments Determine when you are receiving the bond Use PVA if you receive money today Use FVA if you will receive money in the future o Annual payment x factor in table money today future Bond Redemptions companies may redeem bonds with a call provision prior to the maturity date o Gains or losses incurred as a result of early redemption of bonds should be reported as other income or other expense on the