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ACCT Chapter 8 Condensed (Day 3).docx

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Northeastern University
ACCT 1201
Ronen Gal-or

Chapter 8 Condensed (Day 3) I. Property, Plant, and Equipment (PPE) II. Acquisition and maintenance of PPE III. Fixed asset turnover ratio IV. Depreciation and Depletion V. Asset Impairment VI. Disposal, Retirement and Trading of PPE VII. Intangible Assets and Amortization VII. Intangible Assets - Intangible assets are rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance. Examples: the patents of Polaroid, the franchises of McDonald's, the trade name Macintosh, and Nike's trademark “Swoosh” A. Acquisition (purchased externally) - Intangible assets are recorded at historical cost only if they have been purchased If developed internally by the company, they are expensed when incurred B. Upon acquisition, managers determine whether the separate intangibles have (1) definite or (2) indefinite lives: 1. Definite life (e.g. Patent, Copyright, Trademark) i. Cost of an intangible asset with a definite life is allocated on a straight- line basis each period over its useful life in a process called amortization (similar to depreciation) ii. Most companies do not estimate a residual value for their intangible assets iii. Amortization expense is included on the income statement each period iv. Intangible assets are reported at cost less accumulated amortization on the balance sheet v. The amortization period of an intangible asset is the lower between its useful life and legal life. Example: A company purchases a 25-year patent for $800,000 and intends to use it for 20 years; adjusting entry to record $40,000 in patent amortization expense ($800,000 ÷ 20 years): Dr. Patent Amortization Expense 40,000 Cr. Accumulated Amortization - Patent 40,000 1 2. Indefinite Life (e.g. Goodwill) i. Intangible assets with indefinite lives are NOT amortized ii. Instead, these assets are to be tested at least annually for possible impairment, and the asset’s book value is written down (decreased) to its fair value if impaired Impairment Loss = Book Value − Fair Value C. Types of Intangible Assets 1. Goodwill (Indefinite life) i. Excess of the purchase price of a business over the fair market value of the business’s assets and liabilities ii. Reported as an asset only if another business is purchased iii. Considered to have an indefinite life; must be reviewed at least annually for possible impairment Dr. Goodwill Impairment Loss Cr. Goodwill Example: AOL Time Warner Merger
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