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Distinguish between Tangible and Intangible Assets
- Tangible assets are assets that have physical substance.
- Long-term tangible assets are assets used in the normal course
of operation of businesses that last for more than one year and are
not intended to be resold.
- Examples of long-term tangible assets are land, building, and
- Intangible assets lack physical substance but often have value
and legal rights and protections, and therefore are still assets to
- Examples of intangible assets are patents, trademarks,
copyrights, and goodwill.
Analyze and Classify Capitalized Costs versus
- Costs incurred to purchase an asset that will be used in the
day-to-day operations of the business will be capitalized and then
depreciated over the useful life of that asset.
- Costs incurred to purchase an asset that will not be used in
the day-to-day operations, but was purchased for investment
purposes, will be considered an investment asset.
- Investments are short term (can be converted to cash in one
year) or long term (held for over a year).
- Costs incurred during the life of the asset are expensed right
away if they do not extend the useful life of that asset or are
capitalized if they extend the asset’s useful life.
Explain and Apply Depreciation Methods to Allocate Capitalized
- Fixed assets are recorded at the historical (initial) cost,
including any costs to acquire the asset and get it ready for
- Depreciation is the process of allocating the cost of using a
long-term asset over its anticipated economic (useful) life. To
determine depreciation, one needs the fixed asset’s historical
cost, salvage value, and useful life (in years or units).
- There are three main methods to calculate depreciation: the
straight-line method, units-of-production method, and
- Natural resources are tangible assets occurring in nature that
a company owns, which are consumed when used. Natural resources are
depleted over the life of the asset, using a units-consumed
- Intangible assets are amortized over the life of the asset.
Amortization is different from depreciation as there is typically
no salvage value, the straight-line method is typically used, and
no accumulated amortization account is required.
Describe Accounting for Intangible Assets and Record Related
- Intangible assets are expensed using amortization. This is
similar to depreciation but is credited to the intangible asset
rather than to a contra account.
- Finite intangible assets are typically amortized using the
straight-line method over the useful life of the asset.
- Intangible assets with an indefinite life are not amortized but
are assessed yearly for impairment.
Describe Some Special Issues in Accounting for Long-Term
- Because estimates are used to calculate depreciation of fixed
assets, sometimes adjustments may need to be made to the asset’s
useful life or to its salvage value.
- To make these adjustments, the asset’s net book value is
updated, and then the adjustments are made for the remaining
- Assets are sometimes sold before the end of their useful life.
These sales can result in a gain, a loss, or neither, depending on
the cash received and the asset’s net book value.
- accumulated depletion
- contra account that records the total depletion expense for a
natural resource over its life
- accumulated depreciation
- contra account that records the total depreciation expense for
a fixed asset over its life
- allocation of the costs of intangible assets over their useful
economic lives; also, process of separating the principal and
interest in loan payments over the life of a loan
- process in which a long-term asset is recorded on the balance
sheet and its allocated costs are expensed on the income statement
over the asset’s economic life
- contra account
- account paired with another account type, has an opposite
normal balance to the paired account, and reduces the balance in
the paired account at the end of a period
- exclusive rights to reproduce and sell an artistic, literary,
or musical asset
- current expense
- cost to the business that is charged in the current period
- expense associated with consuming a natural resource
- process of allocating the costs of a tangible asset over the
asset’s economic life
- double-declining-balance depreciation
- accelerated depreciation method that accounts for both time and
usage, so it takes more expense in the first few years of the
- fixed asset
- tangible long-term asset
- functional obsolescence
- reduction of an asset’s value to the company, not including
- value of certain favorable factors that a business possesses
that allows it to generate a greater rate of return or profit;
includes price paid for an acquired company above the fair value of
its identifiable net assets
- intangible asset
- asset with financial value but no physical presence; examples
include copyrights, patents, goodwill, and trademarks
- short-term and long-term asset that is not used in the
day-to-day operations of the business
- long-term asset
- asset used ongoing in the normal course of business for more
than one year that is not intended to be resold
- natural resources
- assets a company owns that are consumed when used; they are
typically taken out of the earth
- contract providing exclusive rights to produce and sell a
unique product without competition for twenty years
- physical obsolescence
- reduction in the value of an asset to the company based on its
- salvage (residual) value
- price that the asset will sell for or be worth as a trade-in
when the useful life is over
- straight-line depreciation
- depreciation method that evenly splits the depreciable amount
across the useful life of the asset
- tangible asset
- asset that has physical substance
- exclusive right to a name, term, or symbol a company uses to
identify itself or its products
- units-of-production depreciation method
- depreciation method that considers the actual usage of the
asset to determine the depreciation expense
- useful life
- time period over which an asset cost is allocated