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E update the accumulated depreciation account o write

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Unformatted text preview: o • • • • • Chapter 8: Long- term Assets • Two types: o Tangible – physical presence (e.g., property, plant and equipment) §༊ Maintain an accumulated depreciation relating to cost allocation §༊ Impairments can be performed periodically o Intangible – no physical presence (e.g., Patents, goodwill) §༊ May or may not maintain an accumulated amortization account relating to intangibles. If not, then write amortization expense directly to intangible asset account §༊ Goodwill = Purchase price – Fair value of net assets acquired o Fair value of net assets = Fair value of assets – fair value of liabilities §༊ Goodwill is not amortized but is tested periodically for impairment o Impairment testing 1. If net book value > estimated future cash flows à༎ asset is impaired 2. Impairment loss = Net book value – Fair value • General rule for costs included in the cost of the asset (when acquiring the asset): capitalize if the costs are necessary and reasonable to get the asset ready for its intended use (e.g. purchase price, transaction costs, demolition costs, shipping if paid by buyer) • Rules for capitalizing versus expensing costs post- acquisition o Capitalize if it improves an asset’s level of performance, extends the useful life of the asset, or is an addition of a major component o Expense if it only maintains an asset’s level of performance (e.g. annual repairs and maintenance) or should not be otherwise capitalized • Cost allocation for the different types of long- term assets have different names o Tangible à༎ depreciation 4 • • • • • • • • • • Prepared by: Sara Toynbee o Intangible (definite- lived) à༎ amortization o Natural resources à༎ depletion Cost allocation methods –in a test, you may be asked to calculate depreciation expense under the following methods. You should know what information you need to use and how (see handout #10 or page 398 for formulas)- o Straight- line method o Activity- based or units or production method o Double declining balance Calculating changes in depreciation expense due to assumption changes on useful life or residual value for instance Depreciation expense is not the same thing as accumulated depreciation! Know the difference and what we are asking for in the question… Be careful of dates in these problems – is there a partial...
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