Chapter USED ASSETS MANAGEMENT

By
Dr Zahir
 Trading in Used Assets
for New Ones
Accounting
Accounting depends
depends onon whether
whether
assets
assets are
are similar
similar or
or dissimilar.
dissimilar.

Airplane
Airplane Truck
Truck
for
for for
for
Airplane
Airplane Airplane
Airplane

Only
Only situations
situations where
where cash
cash
is
is paid
paid will
will be
be demonstrated.
demonstrated.
 Trading in Used Assets
for New Ones – Similar Assets

On
On May
May 30,
30, 2003,
2003, Essex
Essex Company
Company
exchanged
exchanged aa usedused airplane
airplane and
and $35,000
$35,000
cash
cash for
for aa new
new airplane.
airplane. The
The old
old airplane
airplane
originally
originally cost
cost $40,000,
$40,000, had
had up-to-date
up-to-date
accumulated
accumulated depreciation
depreciation of
of $30,000,
$30,000, and
and
aa fair
fair value
value of
of $4,000.
$4,000.

SIMILAR
 Trading in Used Assets
for New Ones – Similar Assets
The
The exchange
exchange resulted
resulted in
in a:
a:

Cost $ 40,000
a.
a. gain
gain of
of $6,000.
$6,000. Accum. Depr. 30,000
b.
b. loss
loss of
of $6,000.
$6,000. Book Value $ 10,000
Fair Value 4,000
c.
c. loss
loss of
of $4,000.
$4,000. Loss $ 6,000
d.
d. gain
gain of
of $4,000.
$4,000.
Prepare a journal entry
to record the exchange.
 Trading in Used Assets
for New Ones – Similar Assets
Prepare
Prepare the
the journal
journal entry
entry to
to record
record
the
the trade.
trade.

Date Description Debit Credit

May 30 Airplane (new) 39,000
Accumulated Depreciation 30,000
Loss on Exchange 6,000
Airplane (old) 40,000
Cash 35,000
 Trading in Used Assets
for New Ones – Similar Assets

On
On June
June 30,
30, 2004,
2004, Rancho
Rancho Landscape
Landscape
exchanged
exchanged aa usedused truck
truck and
and $11,500
$11,500 cash
cash
for
for aa new
new truck.
truck. The
The old
old truck
truck originally
originally
cost
cost $10,000,
$10,000, had
had up-to-date
up-to-date accumulated
accumulated
depreciation
depreciation ofof $8,000,
$8,000, and
and aa trade
trade in
in
allowance
allowance of of $3,500
$3,500 and
and has
has aa book
book value
value
of
of $2,000
$2,000
(Trade
(TradeininAllowance:
Allowance:The
Theamount
amountby
bywhich
whichthe
theseller
sellerreduces
reducesthe
thesale
saleprice
priceof
of
an
anasset
assetininreturn
returnfor
foran
anasset
assetof
ofthe
thebuyer)
buyer)
 Trading in Used Assets
for New Ones – Similar Assets
The
The exchange
exchange resulted
resulted in
in a:
a:

Cost $ 15,000
a.
a. gain
gain of
of $1,500.
$1,500. Accum. Depr. 8,000
b.
b. loss
loss of
of $1,500.
$1,500. Book Value $ 2,000
Fair Value 3,500
c.
c. loss
loss of
of $2,000.
$2,000. Gain $ 1,500
d.
d. gain
gain of
of $3,000.
$3,000.
Prepare a journal entry
to record the exchange.
 Trading in Used Assets
for New Ones – Similar Assets
Prepare
Prepare the
the journal
journal entry
entry to
to record
record
the
the trade.
trade.

Date
Date Description
Description Debit
Debit Credit
Credit
May
May3030Truck (new) 15,000
Accumulated Depreciation 8,000
Truck (old) 10,000
Cash 11,500
Gain on Disposal oof plant asssets 1,500
 Intangible Assets
Noncurrent
Noncurrent assets
assets Often
Oftenprovide
provide
without
without physical
physical exclusive
exclusiverights
rights
substance.
substance. or
orprivileges.
privileges.

Characteristics
Characteristics

Useful
Usefullife
lifeis
is Usually
Usually acquired
acquired
often
often difficult
difficult for
for operational
operational
to
todetermine.
determine. use.
use.
 Intangible Assets
Record at • Patents
current cash • Copyrights
equivalent cost,
• Leaseholds
including
purchase price, • Leasehold
legal fees, and Improvements
filing fees. • Goodwill
• Trademarks and
Trade Names
 Intangible Assets
•• Amortize
Amortize over
over shorter
shorter of
of economic
economic
life
life or
or legal
legal life,
life, subject
subject to
to aa maximum
maximum
of
of 40
40 years.
years.
•• Use
Use straight-line
straight-line method.
method.
•• Research
Research and
and development
development costs
costs are
are
normally
normally expensed
expensed as
as incurred.
incurred.
Intangible Assets – Goodwill
Goodwill
Goodwill
Occurs
Occurs when
when one
one Only
Only purchased
purchased
company
company buys
buys goodwill
goodwill is
is an
an
another
another company.
company. intangible
intangible asset.
asset.

The
The amount
amount by
by which
which the
the
purchase
purchase price
price exceeds
exceeds the
the fair
fair
market
market value
value of
of net
net assets
assets acquired.
acquired.
 Goodwill
• Positive attributes of goodwill are:
– Favorable reputation
– Positive market share
– Positive advertising image
– Reputation of high quality and loyal
employees
– Superior Management
– Manufacturing and other operating
efficiency
Intangible Assets – Goodwill
Eddy
Eddy Company
Company paid paid $1,000,000
$1,000,000 to
to
purchase
purchase all
all of
of James
James Company’s
Company’s assets
assets
and
and assumed
assumed liabilities
liabilities of
of $200,000.
$200,000. The
The
acquired
acquired assets
assets were
were appraised
appraised at
at aa fair
fair
value
value ofof $900,000
$900,000..
Intangible Assets – Goodwill
What
What amount
amount of
of goodwill
goodwill should
should be
be
recorded
recorded on
on Eddy
Eddy Company
Company books?
books?
FMV of Assets $ 900,000
a.
a. $100,000.
$100,000. Debt Assumed 200,000
FMV of Net Assets $ 700,000
b.
b. $200,000.
$200,000. Purchase Price 1,000,000
c.
c. $300,000.
$300,000. Goodwill $ 300,000

d.
d. $400,000.
$400,000.
 Intangible Assets – Patents
Exclusive
Exclusive right
right granted
granted
by
by federal
federal government
government to to sell
sell or
or
manufacture
manufacture an an invention.
invention.

Cost
Cost is
is purchase
purchase Amortize
Amortize costcost
price
price plus
plus legal
legal over
over the
the shorter
shorter of
of
cost
cost to
to defend.
defend. useful
useful life
life or
or 17
17 years.
years.
 Patents
Assume
Assume thatthat the
the patent
patent is is purchased
purchased from from
the
the inventor
inventor atat aa cost
cost of of $100,000
$100,000 after
after 55
years
years of
of legal
legal life
life have
have expired,
expired, therefore
therefore
the
the remaining
remaining legal
legal life
life is
is 12
12 years.
years. But
But ifif
estimated
estimated useful
useful life
life is
is only
only four
four years,
years,
amortization
amortization should
should be be based
based on on this
this
shorter
shorter period.
period. The
The entry
entry to to record
record this
this
amortization
amortization is is
 Patent
Prepare
Prepare the
the journal
journal entry
entry to
to record
record
the
the trade.
trade.

Description Debit Credit

Amortization expense: Patent 25,000
Patents 25,000
 Intangible Assets –
Trademarks and Trade Names
A
A symbol,
symbol, design,
design, or
or logo
logo
associated
associated with
with aa business.
business.

Purchased
Internally trademarks
developed are recorded
trademarks at cost, and
have no amortized over
recorded shorter of legal
asset cost. or economic life,
or 40 years.
 Intangible Assets – Franchises
Legally
Legally protected
protected right
right to
to sell
sell products
products or
or
provide
provide services
services purchased
purchased by by
franchisee
franchisee from
from franchisor.
franchisor.

Purchase
Purchase price
price is
is intangible
intangible asset
asset
which
which is
is amortized
amortized over
over the
the shorter
shorter of
of
the
the protected
protected right
right oror 40
40 years.
years.
 Intangible Assets – Copyrights

Exclusive
Exclusive right
right granted
granted by
by the
the
federal
federal government
government to to protect
protect
artistic
artistic or
or intellectual
intellectual properties.
properties.

Legal
Legal life
life is
is Amortize
Amortize cost
cost
life
life of
of creator
creator over
over aa period
period not
not
plus
plus 5050 years.
years. to
to exceed
exceed 40
40 years.
years.
 Natural Resources

Total
Total cost,
cost, Extracted
Extracted from
from
including
including the
the natural
natural
exploration
exploration and
and environment
environment
development,
development, and
and reported
reported
is
is charged
charged to
to at
at cost
cost less
less
depletion
depletion expense
expense accumulated
accumulated
over
over periods
periods depletion.
depletion.
benefited.
benefited.

Examples:
Examples: oil,
oil, coal,
coal, gold
gold
Depletion of Natural Resources
Depletion is calculated using the
units-of-production method.

Unit depletion rate is calculated as follows:

Cost – Salvage Value

Total Units of Capacity
 Depletion of Natural Resources
Total depletion cost for a period is:

Unit Depletion Number of Units

Rate × Extracted in Period

Cost
Cost of
of
Total goods
goodssold
sold
Total Inventory
depletion Inventory
depletion for
cost forsale
sale
cost Unsold
Unsold
Inventory
Inventory
 Depletion of Natural Resources

Specialized plant assets may be required

to extract the natural resource.

These assets are recorded in a separate

account and depreciated.
 Natural resources
Assume
Assume that that rainbow
rainbow minerals
minerals paypay $45
$45
million
million to
to acquire
acquire redred valley
valley mine
mine that
that has
has
10
10 million
million tons
tons of
of coal.
coal. The
The residual
residual is
is
estimated
estimated to to be
be $5
$5 million.
million. The
The depletion
depletion
over
over life
life is
is of
of 40
40 years
years and
and rate
rate $4
$4 per
per
million.
million. Assume
Assume that that 22 million
million tons
tons are
are
mined
mined during
during first
first year
year soso prepare
prepare journal
journal
entry
entry
 Natural resources
Prepare
Prepare the
the journal
journal entry
entry to
to record
record
the
the trade.
trade.

Description Debit Credit

Inventory 8,000,000
Accumulated Depletion: Red vally 8,000,000
 Natural resources
Rainbow
Rainbow Mineral’s
Mineral’s Balance
Balance sheet
sheet

Property plant and equipment

Mining properties: Red vally $45,000,000
Less Accumulated depricition 8,000,000 $37,000,000
 The Units-of-Output Method

Cost per Unit Cost - Residual Value

=
of Output Estimated Units of Output

Depreciation Cost per Unit Number of

Expense
= ×
of Output Units Produced
 Unit of Output method
Consider
Consider SS & &G G delivery
delivery truck
truck which
which cost
cost
$17,000
$17,000 and and has
has anan estimated
estimated salvage
salvage
value
value ofof $$ 2,000
2,000 .. Assume
Assume thatthat SS &&GG plans
plans
to
to retire
retire this
this truck
truck after
after itit has
has been
been
delivered
delivered 100,000
100,000 mile.
mile. Calculate
Calculate thethe
deprecation
deprecation raterate
 Unit of Output

Cost per Unit Cost - Residual Value

of Output Estimated Units of Output

Cost per Unit 17,000 - 2,000

of Output 100,000 miles

$0.15 Depreciation per mile

End of the Lecture