Accounting Notes:Tangible v. Intangible assets- Tangible assets- have a physical presence and can be seen and touchedo 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 touchedo Identifiable Useful Lives- patents and copyrights Amortize the cost of each over its useful lifeo Indefinite Useful Lives- renewable franchises, trademarks, and goodwill The cost of these assets is not expensed unless it can be shown thatthere has been an impairment in valueCost of Long-term Assets Buildingso Purchase priceo Sales taxeso Title search and transfer document costso Realtor’s and attorney’s feeso Remodeling costs Equipmento Purchase price (less discounts)o Sales taxeso Delivery costso Installation costso Costs to adapt to intended use Lando Purchase priceo Sales taxeso Title search and transfer document costso Realtor’s and attorney’s feeso Costs of removal of old buildingso Grading costsBasket 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 periodo 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 twoo 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 producedo Cost-Salvage value/total estimated units of production= depreciation charge per unit of productiono Depreciation charge per unit of production x units of production in currentaccounting period= periodic depreciation expenseContinuing 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 costof 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 cashNatural 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 accountIntangible 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 areasWarranty 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 cashAccounting for Long-Term Debit- Long-term notes-liabilities that usually have terms from 2-5 yearso 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 interest1. Identify the unpaid principal balance2. Amount applied to interest=unpaid principal balance x interest rate3. Amount applied to principal=cash payment- amount applied to interest in step 24. Unpaid principal balance= unpaid principal balance in 1- amount applied to principal in 3Bond Liabilities- Principal- long-term borrowing of a large sum of moneyo Usually paid back as a lump sum at maturity- Periodic interest payments based on a stated rate of interesto Interest is paid semiannually Interest= principal x stated interest rate x timeo 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 Interesto Stated Rate=Market Rate, Bond Price=Face Value, no difference to account foro 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 Rateo Interest Expense= Carrying Value x Market Rateo Discount= Interest Expense- Cash Paymento Premium= Cash Payment – Interest Expenseo 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 bondo 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 futureo Annual payment x # factor in table=money today/future- Bond Redemptions- companies may redeem bonds