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Business LibreTexts

11.6: Summary

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  • 11.1 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 machinery.
    • Intangible assets lack physical substance but often have value and legal rights and protections, and therefore are still assets to the firm.
    • Examples of intangible assets are patents, trademarks, copyrights, and goodwill.

    11.2 Analyze and Classify Capitalized Costs versus Expenses

    • 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.

    11.3 Explain and Apply Depreciation Methods to Allocate Capitalized Costs

    • Fixed assets are recorded at the historical (initial) cost, including any costs to acquire the asset and get it ready for use.
    • 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 double-declining-balance method.
    • 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 method.
    • 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.

    11.4 Describe Accounting for Intangible Assets and Record Related Transactions

    • 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.

    11.5 Describe Some Special Issues in Accounting for Long-Term Assets

    • 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 years.
    • 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.

    Key Terms

    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 method
    accelerated depreciation method that accounts for both time and usage, so it takes more expense in the first few years of the asset’s life
    fixed asset
    tangible long-term asset
    functional obsolescence
    reduction of an asset’s value to the company, not including physical obsolescence
    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 physical deterioration
    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