Tangible and Intangible Assets Jennifer Geolfos July 19, 2012 ACC291 Mary Larsen Tangible and Intangible Assets Tangible and intangible assets include everything listed under total assets on the balance sheet. “Assets consist of resources a business owns,” (Kimmel, Weygandt, & Kieso, 2010, p. 12). Tangible assets would include land, land improvements, buildings, and equipment. These types of asset would be classified as fixed assets. Intangible assets are rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance,” (Kimmel, Weygandt, & Kieso, 2010, p. 414). Types of intangible assets include patents, copyrights, trademarks, franchises, licenses, and goodwill. These assets would be classified as long-lived assets. Depreciation “Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner,” (Kimmel, Weygandt, & Kieso, 2010, p. 02). Depreciable assets include land improvements, buildings, and equipment because the usefulness of the asset decreases over its useful life. Land’s usefulness remains constant over its useful life and is not considered a depreciable asset. A depreciable asset also can be considered obsolete when it becomes outdated before it physically wears out. Computing depreciation involves cost, useful life, and salvage value. Cost is the original asset’s value. Useful life is the expected productive life of the asset to the owner.
Salvage value is the asset’s value at the end of the useful life. Depreciation is usually computed using the straight-line method, the declining-balance method, or the units-of-activity method. Straight-line is the most widely used method in the United States. “Under the straight-line method, companies expense an equal amount of depreciation each year of the asset’s useful life,” (Kimmel, Weygandt, & Kieso, 2010, p. 441). To record the depreciation on the sale of a depreciable asset, a company increases Depreciation Expense, and decreases Accumulated Depreciation.
Declining-balance method uses a declining book value figured over periodic depreciation and is also call an accelerated-depreciation method because the first years of an asset’s life produces higher depreciation in comparison to straight-line method. The units-of-activity method takes the useful life in position of total production units or expected use of the asset. This method is typically used for factory machinery or delivery equipment in terms of hours used. The total amount of depreciation is the same no matter which depreciation method is used. Amortization The process of allocating the cost of intangibles is referred to as amortization,” (Kimmel, Weygandt, & Kieso, 2010, p. 414). “To record amortization of an intangible asset, a company increases (debits) Amortization Expense, and decreases (credits) the specific intangible asset,” (Kimmel, Weygandt, & Kieso, 2010, p. 415). Companies amortize intangible assets over their useful life or legal life, whichever is shorter. This life is never allowed to exceed 40 years, (“Investing Answers”, 2001-2012). The initial cost of any intangible asset is the cash or cash equivalent price paid to obtain the asset.
The company adds any legal fees, acquisition fees, and registration fees to determine the amount to be amortized for that asset. This applies to patents, copyrights, trademarks, franchises, and licenses. Goodwill value is determined by the excess cost over fair market value of the net asset purchased. Acquisition and Disposal Acquisition and disposal of tangible assets refers to the buying and selling of land, buildings, and equipment. Acquisition requires determining the initial cost to add the asset to the company’s financial records.
The entry would be an increase (debit) to the asset (Equipment) and a decrease (credit) to cash or increase (credit) to accounts payable. Companies dispose of a fixed asset by retirement (scrap or discard), sale, or exchange (trade-in). Book value is determined by deducting the accumulated depreciation to date from the initial cost of the asset. “The book value is then eliminated by (1) debiting (decreasing) Accumulated Depreciation for the total depreciation to date, and (2) crediting (decreasing) the asset account for the cost of the asset,” (Kimmel, Weygandt, & Kieso, 2010, p. 10). Conclusion Tangible and intangible assets and the tools to manage each type of asset are important to understand for the financial statements. Each type of asset has its own devices that must be used to represent the appropriate aspects of the asset. Using these tools will create financial statements that show the assets accurately and factually. References Weygandt, J. J. , Kimmel, P. E. , & Kieso, D. E. (2010). Financial Accounting (7th ed. ). Hoboken, NJ: John Wiles and Sons. Investing Answers. (2001-2012). Retrieved from http://www. investinganswers. com