Chapter 11 of Principles of Accounting

1. PowerPoint Image Slideshow
Accounting for Assets
Principles of Accounting, Volume 1: Financial Accounting

2. Chapter Outline
• Accounting for Uncollectible Accounts for Accounts Receivable
• Distinguish between Tangible and Intangible Long Term Assets
• Analyze and Classify Capitalized Costs versus Expenses
• Explain and Apply Depreciation Methods to Allocate Capitalized Costs
• 11.4 Describe Accounting for Intangible Assets and Record Related
Transactions

3. Module 9.2 Account for Uncollectible Accounts Using the Balance
Sheet and Income Statement Approaches
Bad debts are uncollectible amounts from customer accounts and are
a necessary aspect of allowing customers to use credit to pay for goods
and services.
• Bad debt negatively affects accounts receivable.
• When future collection of receivables cannot be reasonably assumed,
companies must estimate the amount of expected nonpayment.
• Methods a company may use to recognize bad debt:
• The direct write-off method
• The allowance method
• Aging of accounts receivable method

4. Direct Write-off Method
• A bad debt is written off when the company is fairly certain that
collection is not possible.
• This method is not acceptable under GAAP because it violates the
matching principle.
• For example, a sale that occurs in January is not written off until November.
• January’s income includes the sale.
• November’s income includes bad debt expense.

5. • The allowance method estimates bad debt during a period, based on
past experience and industry standards.
• Matches bad debt with related sales during the period
• Two approaches to calculate amount of bad debt expense:
• Income statement approach
• Balance sheet approach
• Journal entry the same under either approach
Allowance Method

6. • The allowance for doubtful accounts is a contra asset account and is
subtracted from Accounts Receivable.
• A contra account has an opposite normal balance to its paired account.
• The adjustment can be an addition or a subtraction from a controlling account.
• Net Realizable Value of Accounts Receivable appears on the balance sheet
and is gross Accounts Receivable minus allowance for doubtful accounts on
the balance sheet.

7. Assume a company has reported an Accounts Receivable balance of $90,000
and a Balance in the Allowance of Doubtful Accounts of $4,800. The
following shows how this information would be reported in the current
(short-term) section of the company’s Balance Sheet.
Gross Accounts Receivable
Contra Account Net Accounts Receivable
Modified for PPT.

8. If the company already had a credit balance in Allowance for Doubtful Accounts
from the prior period of $1,000 and a current period estimated balance of $2,500,
the company would need to subtract the prior period’s credit balance from the
current period’s estimated credit balance in order to calculate the amount to be
added to the Allowance for Doubtful Accounts.
Therefore, the adjusting journal entry would be as follows.

9. If instead the company already had a debit balance from the prior period of $1,000,
and a current period estimated balance of $2,500, the company would need to add
the prior period’s debit balance to the current period’s estimated credit balance.
Therefore, the adjusting journal entry would be as follows.

10. When a specific customer has been identified as an uncollectible account, the
following journal entry would occur.
Let’s say that the customer unexpectedly pays on the account in the future.

11. Income Statement Method
The income statement method (also known as the percentage of sales
method) estimates bad debt expenses based on the assumption that at
the end of the period, a certain percentage of sales during the period
will not be collected. The estimation is typically based on credit sales
only, not total sales.

12. $458,230 × 5%
Let’s continue with Billie’s Watercraft Warehouse (BWW) as the
example. Billie’s end-of-year credit sales totaled $458,230. BWW
estimates that 5% of its overall credit sales will result in bad debt. The
following adjusting journal entry for bad debt occurs.
Modified for PPT.

13. On April 8, it was determined that Customer Robert Craft’s account was
uncollectible in the amount of $5,000. BWW makes the following entry:

14. On June 5, Craft unexpectedly makes a partial payment on his account
in the amount of $3,000.

15. Balance Sheet Method
The balance sheet method (also known as the percentage of accounts
receivable method) estimates bad debt expenses based on the balance
in accounts receivable. The method looks at the balance of accounts
receivable at the end of the period and assumes that a certain amount
will not be collected.

16. Assume that BWW’s end-of-year accounts receivable balance totaled
$324,850. This entry assumes a zero balance in Allowance for Doubtful
Accounts from the prior period. BWW estimates 15% of its overall
accounts receivable will result in bad debt. BWW would record the
following.
Prior Period Allowance Balance $ 0.00
Current Period Estimated 48,727.50
Allowance for Doubtful Accounts $48,727.50

17. What if instead, BWW had a $23,000 credit balance in the allowance
for doubtful accounts from the previous period. The adjusting entry
would be as follows.

18. The balance sheet aging of receivables method estimates bad debt expenses
based on the balance in accounts receivable, but it also considers the uncollectible
time period for each account. The longer the time passes with a receivable unpaid,
the lower the probability that it will get collected
For BWW, it has an accounts receivable balance of $324,850 at the end of the year.
The company splits its past-due accounts into three categories: 0–30 days past due,
31–90 days past due, and over 90 days past due. The uncollectible percentages and
the accounts receivable breakdown are shown here.

19. The journal entry to record the estimation of bad debts using aging of
accounts receivable would be as follows.

20. Suppose BWW had a $20,000 debit balance in Allowance for Doubtful
Accounts from the previous period. The adjusting journal entry would
recognize the following.

21. Module 10.1 Describe and Demonstrate the Basic Inventory Valuation
Methods and Their Cost Flow Assumptions
Accounting for inventory is a critical function of management.
Inventory accounting is significantly complicated by the fact that it is an
ongoing process of constant change, in part because
(1) most companies offer a large variety of products for sale
(2) product purchases occur at irregular times
(3) products are acquired for differing prices
(4) inventory acquisitions are based on sales projections, which are
always uncertain and often sporadic

22. Remember how inventory affects the balance sheet and the income
statement:
Figure 10.2
Financial Statement Effects of Inventory Transactions. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA
4.0 license)

23. Relationship between inventory purchases, goods available for sale,
and cost of goods sold:
Figure 10.3
Fundamentals of Inventory Accounting. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

24. A critical issue for inventory accounting is the frequency for which inventory
values are updated.
There are two primary methods used to account for inventory balances: the
periodic inventory method and the perpetual inventory method.
Perpetual Inventory Method
Date Account Debit Credit
Inventory
Accounts Payable
$$$
$$$
Accounts Receivable
Sales
COGS
Inventory
$$$
SSS
SSS
SSS
Ordering Inventory
Selling Inventory
Periodic Inventory Method
Date Account Debit Credit
Purchases
Accounts Payable
$$$
$$$
Accounts Receivable
Sales
$$$
SSS

25. Additional Inventory Issues
• Consigned goods refer to merchandise inventory that belongs to a third
party but which is displayed for sale by the company. These goods are not
owned by the company and thus must not be included on the company’s
balance sheet nor be used in the company’s inventory calculations.
• Free on Board (FOB) are transportation costs. FOB shipping point means
that the seller transfers title and responsibility to the buyer at the shipping
point, so the buyer would owe the shipping costs. The purchased goods
would be recorded on the buyer’s balance sheet at this point.
• FOB destination means the seller transfers title and responsibility to the
buyer at the destination, so the seller would owe the shipping costs.
• Reporting inventory values on the balance sheet using the accounting
concept of conservatism (which discourages overstatement of net assets
and net income) requires inventory to be calculated and adjusted to a value
that is the lower of the cost calculated using the company’s chosen
valuation method or the market value based on the market or replacement
value of the inventory items. This is called Lower of Cost or Market (LCM)

26. Module 11.1 Distinguish between Tangible and Intangible Assets
Assets
• Are items a business owns
• Categorized as current or long-term
• Assets that are expected to be used by the business for more than one year
are considered long-term assets; all others are current.
• Long-term assets are not intended for resale.
• They are expected to help generate future revenue for the business.
• Are either tangible or intangible
• Tangible: have physical substance—can be seen and touched
• Intangible: assets used in the operations of the business that they do not
intend to sell, but that do not have physical substance, such as patents,
copyrights, trademarks, franchises

27. Figure 11.2
Property, Plant and Equipment is a common subheading within long-
term assets.
Apple Inc.’s Property, Plant and Equipment, Net. This report shows the company’s consolidated financial statement details as
of September 30, 2017, and September 24, 2016 (in millions). (attribution: Copyright Rice University, OpenStax, under CC BY-
NC-SA 4.0 license)

28. Figure 11.3
Consolidated Balance Sheets for Apple, Inc. in 2017 and 2016. Modified for PPT. (attribution: Copyright Rice University,
OpenStax, under CC BY-NC-SA 4.0 license)
Different categories
of long-term assets
held by Apple, Inc.

29. Intangible Assets
• The value of intangible assets is very subjective. An intangible is usually not
shown on the balance sheet until there is an event that indicates value
objectively, such as the purchase of an intangible asset.
• A company often records the costs of developing an intangible asset internally as
expenses, not assets, especially if there is ambiguity in the expense amounts or
economic life of the asset. There are conditions under which the costs can be
allocated over the anticipated life of the asset.
• Sample intangibles:
• Patent: a contract that provides a company exclusive rights to produce and sell a unique
product for 20 years; right is granted by the federal government
• Copyright: the exclusive right to reproduce and sell artistic, literary, or musical compositions
for the life of the author plus 70 years; right is granted by the federal government
• Trademark: the exclusive right to the name, term, or symbol a company uses to identify itself
or its products for 10 years with optional 10-year renewable periods; right is granted by the
federal government

30. Think It Through: Categorizing Intangible Assets
Your company has recently hired a star scientist who has a history of
developing new technologies. The company president is excited with
the new hire, and questions you, the company accountant, why the
scientist cannot be recorded as an intangible asset, as the scientist will
probably provide more value to the company in the future than any of
its other assets. Discuss why the scientist, and employees in general,
who often provide the greatest value for a company, are not recorded
as intangible assets.

31. Think It Through: Research and Development Costs
Jane works in product development for a technology company. She just
heard that her employer is slashing research and development costs.
When she asks why, the marketing senior vice president tells her that
current research and development costs are reducing net income in the
current year for a potential but unknown benefit in future years, and
that management is concerned about the effect on stock price. Jane
wonders why research and development costs are not capitalized so
that the cost would be matched with the future revenues. Why do you
think research and development costs are not capitalized?

32. Your Turn: Classifying Long-Term Assets as Tangible or Intangible
Your cousin started her own business and wants to get a small loan from a local bank to expand production in the next year. The bank
has asked her to prepare a balance sheet, and she is having trouble classifying the assets properly. Help her sort through the list
below and note the assets that are tangible long-term assets and those that are intangible long-term assets.
• Cash
• Patent
• Accounts Receivable
• Land
• Investments
• Software
• Inventory
• Note Receivable
• Machinery
• Equipment
• Marketable Securities
• Owner Capital
• Copyright
• Building
• Accounts Payable
• Mortgage Payable

33. Sample Problem
PA9. For each of the following unrelated situations, calculate the
annual amortization expense and prepare a journal entry to record the
expense:
A. A patent with a ten-year remaining legal life was purchased for
$300,000. The patent will be usable for another eight years.
B. A patent was acquired on a new smartphone. The cost of the patent
itself was only $24,000, but the market value of the patent is
$600,000. The company expects to be able to use this patent for all
twenty years of its life.

34. Module 11.2 Analyze and Classify Capitalized Costs versus Expenses
Long-term asset major categories:
• Property, plant, and equipment (fixed assets)
• Asset that will be used in the business’s daily operation for years
• Capitalized: asset is recorded as an asset and the cost is allocated over time
through an expense account (i.e., depreciation expense) on the income
statement
• Investments
• Asset that is not used in the day-to-day operations of the business
• The company does not expect to use up the asset over time; rather the
company hopes that the asset (investment) would grow in value over time.
• Investments can be current or long-term assets.

35. Long-Term Asset Major Categories (continued)
• Repair and maintenance costs
• Costs to keep an asset in working order
• Expensed as incurred
• Any adjustment/repair that does not extend the useful life of the asset
beyond the original estimate, increase the capacity of the asset, or improve
the quality of the asset is expensed.
• If the adjustment/repair extends the useful life, increases the capacity of the
asset, or improves the quality of the asset, that cost is capitalized and
depreciated over the asset’s remaining life.

36. Your Turn: Classifying Assets and Related Expenditures
You work at a business consulting firm. Your new colleague, Marielena, is helping a client
organize his accounting records by types of assets and expenditures. Marielena is a bit
stumped on how to classify certain assets and related expenditures, such as capitalized
costs versus expenses. She has given you the following list and asked for your help to sort
through it. Help her classify the expenditures as either capitalized or expensed, and note
which assets are property, plant, and equipment.
Expenditures:
• normal repair and maintenance on the manufacturing facility
• cost of taxes on new equipment used in business operations
• shipping costs on new equipment used in business operations
• cost of a minor repair on existing equipment used in business operations
Assets:
• land next to the production facility held for use next year as a place to build a warehouse
• land held for future resale when the value increases
• equipment used in the production process

37. Sample Exercise
EA2. Jada Company had the following transactions during the year:
• Purchased a machine for $500,000 using a long-term note to finance it
• Paid $500 for ordinary repair
• Purchased a patent for $45,000 cash
• Paid $200,000 cash for addition to an existing building
• Paid $60,000 for monthly salaries
• Paid $250 for routine maintenance on equipment
• Paid $10,000 for extraordinary repairs
• If all transactions were recorded properly, what amount did Jada capitalize
for the year, and what amount did Jada expense for the year?

38. Think It Through: Correcting Errors in Classifying Assets
You work at a business consulting firm. Your new colleague, Marielena, helped a client organize his accounting
records last year by types of assets and expenditures. Even though Marielena was a bit stumped on how to
classify certain assets and related expenditures, such as capitalized costs versus expenses, she did not come to
you or any other more experienced colleagues for help. Instead, she made the following classifications and
gave them to the client who used this as the basis for accounting transactions over the last year. Thankfully,
you have been asked this year to help prepare the client’s financial reports and correct errors that were made.
Explain what impact these errors would have had over the last year and how you will correct them so you can
prepare accurate financial statements.
Expenditures:
• Normal repair and maintenance on the manufacturing facility were capitalized.
• The cost of taxes on new equipment used in business operations was expensed.
• The shipping costs on new equipment used in business operations were expensed.
• The cost of a minor repair on existing equipment used in business operations was capitalized.
Assets:
• Land next to the production facility held for use next year as a place to build a warehouse was depreciated.
• Land held for future resale when the value increases was classified as Property, Plant, and Equipment but
not depreciated.
• Equipment used in the production process was classified as an investment.

39. Sample Problem
PA1. Selected accounts from Phipps Corporation’s trial balance are as
follows. Prepare the assets section of the company’s balance sheet.

40. Module 11.3 Explain and Apply Depreciation Methods to Allocate
Capitalized Costs
• Depreciation: the process of allocating the cost of a tangible asset to
the periods in which that asset will be used to generate revenues
• There are several methods and we look at:
• Straight-line
• Units-of-production
• Double-declining-balance
• Depletion: the process of allocating the cost of natural resource to
the periods in which that natural resource will produce revenues
• Amortization: the process of allocating the cost of an intangible asset
to the periods (useful or legal life) in which that intangible asset will
be used to generate revenues

41. Recording the Initial Purchase of an Asset
Assets are recorded at cost, which means all the costs necessary to get
the asset ready for its intended use. Examples of these costs are:
• Invoice price
• Shipping
• Taxes
• Set up
• Calibration

42. Liam purchased his silk-screening machine for $5,000 by paying $1,000
cash and the remainder in a note payable over five years.
Equipment is recorded as an asset, not an expense.
Modified for PPT.

43. Components for Calculating Depreciation
• Book value: the asset’s original cost less accumulated depreciation
• Useful life: the length of time the asset will be productively used within
operations
• Salvage (residual) value: the price the asset will sell for or be worth as a
trade-in when its useful life expires
• Depreciable base (cost): the cost of the asset minus the salvage value, or
the depreciation expense over the asset’s useful life
• Example: A truck was purchased for $10,000; $3,000 of depreciation has been
recorded so far. The truck has a useful life of 6 years and a salvage value of $1,000.
What is the depreciable base? What is the book value at this time? Book value =
$10,000 – $3,000 = $7,000
• Depreciable base = $10,000 – $1,000 = $9,000

44. • Depreciation is recorded as follows, regardless of the method used to
calculate the amount of the expense.
• Accumulated depreciation is a contra account to the asset account.
• Is used to offset the main account balance
• Records the total depreciation expense for a fixed asset over its life
• The asset account stays recorded at the historical value.
• Accumulated depreciation is subtracted from the historical cost of the
asset on the balance sheet to show the asset at book value.

45. Book Value
Historical Cost
Balance Sheet Presentation of Accumulated Depreciation
Modified for PPT.

46. Kenzie Company bought a printing press for $54,000. Kenzie pays
shipping costs of $1,500 and setup costs of $2,500, assuming a useful
life of five years or 960,000 pages. Based on experience, Kenzie
Company anticipates a salvage value of $10,000. What is the
depreciable base?

47. • Straight-line depreciation is a method of depreciation that evenly
splits the depreciable amount across the useful life of the asset.
• The cost of the printing press for Kenzie was $58,000 and the salvage
value was $10,000, giving a depreciable base of $48,000. The asset
has a five-year life; therefore, depreciation using the straight-line
method would be:
Straight-Line Depreciation
cost salvage
life
$58,000 $10,000
= $9,600 per year
5



48. The journal entry to record depreciation expense in the first year is:
The balance sheet at the end of the first year would show:

49. The journal entry to record depreciation expense in the second year is:
The balance sheet at the end of the second year would show:
Year 1 $ 9,600
+ Year 2 $ 9,600
$19,200
Modified for PPT.

50. Units-of-Production Depreciation
• Units-of-production depreciation method bases depreciation on the actual usage of the
asset.
• The cost of the printing press for Kenzie was $58,000 and the salvage value was $10,000,
giving a depreciable base of $48,000. The asset has a five-year life or 960,000 pages.
During the first year, the machine printed 180,000 pages. Depreciation using the units-of-
production method would be:
cost salvage
depreciation rate per unit =
estimated total units
$58,000 $10,000
=
960,000 pages
= $0.05 per page


depreciation expense = actual units produced for period depreciation rate per unit
= 180,000 $0.05 per page
= $9,000



51. Double-Declining-Balance Depreciation
• Double-declining-balance method accounts for both time and usage and takes more expense in
the first few years of the asset’s life. A depreciation rate is computed, and that rate is applied to
the book value of the asset each year.
• The cost of the printing press for Kenzie was $58,000 and the salvage value was $10,000, giving a
depreciable base of $48,000. The asset has a five-year life or 960,000 pages. During the first year,
the machine printed 180,000 pages. Depreciation using the double-declining-balance method
would be:
double declining balance (DDB) rate = 2/life
= 2/5
= 40% per year
depreciation expense year 1 = DDB rate book value year 1
= 40% $58,000
= $23,200



52. Annual Depreciation Using Double-Declining-Balance

53. Sample Exercise
EA7. Alfredo Company purchased a new 3-D printer for $900,000.
Although this printer is expected to last for ten years, Alfredo knows
the technology will become old quickly, and so they plan to replace this
printer in three years. At that point, Alfredo believes it will be able to
sell the printer for $15,000. Calculate yearly depreciation using the
double-declining-balance method.

54. Same expense per year Expense based on usage Expense more quickly
Same total depreciation under either method
Five-Year Comparison of the Three Methods
Modified for PPT.

55. Think It Through: Choosing Appropriate Depreciation Methods
You are part of a team reviewing the financial statements of a new computer
company. Looking over the fixed assets accounts, one long-term tangible
asset sticks out. It is labeled “USB” and valued at $10,000. You ask the
company’s accountant for more detail, and he explains that the asset is a
USB drive that holds the original coding for a game the company developed
during the year. The company expects the game to be fairly popular for the
next few years, and then sales are expected to trail off. Because of this, they
are planning on depreciating this asset over the next five years using the
double-declining method. Does this recording seem appropriate, or is there a
better way to categorize the asset? How should this asset be expensed over
time?

56. Think It Through: Deciding on a Depreciation Method
Liam is struggling to determine which deprecation method he should
use for his new silk-screening machine. He expects sales to increase
over the next five years. He also expects (hopes) that in two years he
will need to buy a second silk-screening machine to keep up with the
demand for products of his growing company. Which depreciation
method makes more sense for Liam: higher expenses in the first few
years, or keeping expenses consistent over time? Or would it be better
for him to not think in terms of time, but rather in the usage of the
machine?

57. Your Turn: Calculating Depreciation Costs
Liam buys his silk screen machine for $10,000. He estimates that he can
use this machine for five years or 100,000 presses, and that the
machine will only be worth $1,000 at the end of its life. He also
estimates that he will make 20,000 clothing items in year one and
30,000 clothing items in year two. Determine Liam’s depreciation costs
for his first two years of business under straight-line, units-of-
production, and double-declining-balance methods. Also, record the
journal entries.

58. Module 11.4 Describe Accounting for Intangible Assets and Record
Related Transactions
Intangible assets
• Purchased intangibles are recorded at their acquisition cost.
• Amortized over the useful or legal life of the asset
• Internally generated intangibles are expensed as the costs are incurred.
• An exception is legal costs to register or defend an intangible asset. These costs are
capitalized and amortized.
• Intangible assets are typically amortized using the straight-line method.
• There is typically no salvage value, and no accumulated amortization
account is needed.
• Certain intangible assets are restricted and given limited life spans, while
others are infinite in their economic life and not amortized.

59. While copyrights have a finite life span of 70 years beyond the author’s
death, they are amortized over their estimated useful life.
• Example: If a company acquired a copyright on a new graphic novel
for $10,000 and estimated it would be able to sell that graphic novel
for the next ten years, then the company would record the following.
Copyrights

60. Patents have a finite life span of 50 years, but often they are amortized
over their estimated useful life.
• Example: Mech Tech purchased the patent for a new pump system.
The patent cost $20,000, and the company expects the pump to be a
useful product for the next twenty years. Mech Tech will then
amortize the $20,000 over the next twenty years, which is $1,000 a
year.
Patents

61. The purchase of goodwill occurs when one company buys another
company for an amount greater than the total value of the company’s
net assets.
• Example: The London Hoops professional basketball team was sold
for $10 million. The new owner received net assets of $7 million, so
the goodwill (value of the London Hoops above its net assets) is $3
million.
Goodwill is not amortized, however, it can be written down or written
off due to permanent impairment.
Goodwill

62. If the new owner of London Hoops assesses that London Hoops now
has a fair value of $9,000,000 rather than the $10,000,000 of the
original purchase, the owner would need to record the impairment as
shown.

63. Sample Problem
PA9. For each of the following unrelated situations, calculate the
annual amortization expense and prepare a journal entry to record the
expense:
A. A patent with a ten-year remaining legal life was purchased for
$300,000. The patent will be usable for another eight years.
B. A patent was acquired on a new smartphone. The cost of the patent
itself was only $24,000, but the market value of the patent is
$600,000. The company expects to be able to use this patent for all
twenty years of its life.