Long-Lived Nonmonetary Assets

and Their Amortization

(Part Two)

Sherinne Christie Ann Z. Albao

Reporter, 2012
 Does not represent the “accumulation” of
any tangible thing. (Not money)
 Funding Depreciation – is a financing
transaction (unrelated to recording
depreciation).
 Not a means of automatically creating a fund
for replacing assets.
 Simply an amount of original cost than has
been expense.
 They are also assets of the company that
owns the right to extract them. (e.g. coal,
oil, minerals, gas).
 Measuring the cost of these wasting assets
are the same as those for tangible assets.

 Full cost method

 Successful efforts method

e.g. Petroleum
 Full cost method – all exploration cost
should be capitalized as asset value of the
reserves during the year.
 Successful efforts method – only cost
incurred at discovered reserves should be
capitalized and the “dry hole” costs should
be an expense.
 Depletion – the process of amortizing the
cost of natural resources in the accounting
period (same as depreciation).
A petroleum company explores 10 location, incurring costs of
$ 10 million each. It discovers oil and gas at three of these
locations.
 Full cost method – recorded as $ 100 million
Successful cost method – asset recorded is $ 30 million and
$ 70 million will be charged as expense.

If an oil property cost $ 250 million and is estimated to

contain 50 million barrels of oil. The company produced 8
million barrels of oil for that year.

Depletion for a period = (cost of reserve/estimated no. of units, let

say barrels) * no. of units extracted during the period.
= ($ 250 million/50 million barrels)* 8 million barrels
= $ 5 per barrel (depletion rate) * 8 million barrels
= $ 40 million is the total depletion for the year.
 The increase in the value arising through
natural process of growth or aging. (e.g.
timberland, cattle, tobacco, wine and other
agricultural products).
 Not recognized in accounts until sold.
 Cost incurred in the growing or aging process
are added to the asset value.
 Also an increase in the value of asset.
 Not the opposite of depreciation
 Recognized in unusual circumstances.
 e.g. Buying a company and current value of
assets is above book value – These assets are
written up to their current value.
 Increase in value is recognized in accounts
only when revenue is realized.
 Limited Useful Life
 Indefinite Useful Life
 Good will
 Patents, Copyrights, Franchise, Licenses and
Lease.
 Usually converted into expense over a
number of accounting periods.
 The systematic allocation of the costs of
these assets to the periods in which they
provide benefits is called amortization.
 Amortization is the same process as the
depreciation of tangible assets.
 Intangible Asset Term
Patents 20 years (R.A. No 8293)
Copyrights Life of author and 50 years
after his or her death
Licenses Depends upon the licenses
one to five years at best
Franchise Depends upon the contract
Lease Depends upon the contract

An entity developed a patent at cost of P200,000 and spent P120,000

for licensing of patent including legal fees and cost of models and
drawings that accompany the registration on January 1, 2011.
Patent P 120,000.00
Research and Development Expense* P 200,000.00
Cash P320,000.00

Amortization (of Patent for 2012) P 6000.00

Patent P 6000.00
 Broadcasting License and Trademarks.
 Recognized as long lived assets with indefinite
useful lives that are not amortized.
 They are subjected to periodic impairment
tests.
 It is considered indefinite if there are no
legal, regulatory, contractual, competitive,
economic or other factors that limits its life.

Intangible Term Impairment

Franchise/License Depends upon contract Annually
Trademark 10 years Every 10 years
 The excess of acquisition cost over net assets
required.
 Often referred to as the most “intangible” of
all intangible assets.
 Not specifically identifiable, indeterminate life,
inherent in continuing business and relates to
an entity as a whole.
 Arises as part of a purchase transaction*.
 Cannot be amortized under any circumstances.
Subjected to annual impairment test. Any write
down due to impairment is charge to income.
 Initially recorded at their cost.
 If acquired by purchase the cost includes
purchase price and direct attributable
expenditure.
 If developed internally cost also includes
licensing and other legal fees. All related
research and development cost is expense*
 Any engineering and consulting costs to
develop the patent and design changes
require by the patent authority is patent
cost.
 Technology-based intangible asset
 Legal fees and other costs of successfully
prosecuting or defending a patent is expense.
 If litigation is unsuccessful, the legal and
remaining costs of the patent is written as
loss.
 Can be renewed for life extension as a new
patent with improvement and changes.
 Useful life limited by agreement and law.
 But due to technological advancement or
other reasons, practical life will be shorter
than legal age.
 Also initially recorded at their cost.
 Artistic related intangible asset
 Cost consist of all expenses incurred in the
production of the work including those require
to established or obtain the right.
 If copyright is purchased the cost includes cash
paid and direct attribute costs for its use.
 The useful life is that period in which benefits,
royalties and sales are expected.
 Usually advisable to write cost of copyright
against the revenue of the first printing.
 Reverts the owner at the end of the period.
 Any improvements of the property belonged to
the owner.
 The useful life of the improvements corresponds
to the period of the lease.
 Even though improvements are capitalized, the
useful life of these improvements is not
determined by the physical characteristics of
the improvement but by the terms of the lease
agreement.
 Same as prepaid expenses.
 Included as long-lived assets only if they
have a relatively long life.
 Long-lived assets subject to amortization
are deferred charges in the literal sense.
 Restricted to long-lived tangibles.
 Some companies charge them as expense
even though there is no offsetting revenue.
 Cost incurred to developed new knowledge,
products or innovations, services and
processes.
 Can help increase revenues or lower cost.
 Discussed in detailed in Chapter 12.
 Average age of depreciation
Accumulated depreciation/Annual Depreciation Expense

 Asset’s depreciation period

Cost/ Annual depreciation expense

 Annual expenditure for an intangible asset

Annual amortization expense +/- increase or decrease in asset’s
balance.
Anthony, Robert N., et.al. Accounting: Text and Cases 13th Edition,
(McGraw-Hill Companies, Inc © 2011), pp. 186-198.

Valix, Conrado T., et.al. Financial Accounting: 2010 Volume One,

(GIC Enterprises & Co., Inc. © 2010), pp. 1125-1239.

www.ipophil.giv.ph, Intellectual Property of the Philippines

Website, (Philippine Government., © 2012), Last access: July 19,
2012.
 Long-Lived Nonmonetary Assets
and Their Amortization

Problem 7-1
Problem 7-4

Case 7-2
 Machine cost: $ 300,000
 Estimated Useful Life: 6 years
 Residual Value: $ 18,000
 Expected number of units to be produced
during it’s useful life: 3,525,000 units
 Net cost: $ 282,000
(a) Units of Production Method:
= $ 282,000/3,525,000 units
= $ 0.08 per unit (Depreciation Rate)
Depreciation
Year Units Charge*
1 930,000 $74,400.00
2 800,000 $64,000.00
3 580,000 $46,400.00
4 500,000 $40,000.00
5 415,000 $33,200.00
6 300,000 $24,000.00
*Depreciation Charge = No. of units in Year n * Depreciation Rate
(b) Sum-of-the-years’ digits method
SYD = n((n+1)/2)
= 6 ((6+1)/2)
= 6 (7/2)
= 6 (3.5)
= 21
Depreciation Rate for Year 1 is 6/21.
 Depreciation Depreciation Charge
Yea Units Charge (SYD)
r (UPM) SYD
1 930,000 $74,400.00 6/21 $80,571.43
2 800,000 $64,000.00 5/21 $67,142.86
3 580,000 $46,400.00 4/21 $53,714.29
4 500,000 $40,000.00 3/21 $40,285.71
5 415,000 $33,200.00 2/21 $26,857.14
6 300,000 $24,000.00 1/21 $13,428.57

The units-of-production method showed a difference in

depreciation charges in each year than the sum-of-the-
years’ digits method.
(1) Land 80,600.00
Cash 80,600.00

(2) Building 138,000.00

Ordinary Shares Capital 90,000.00
Notes Payable 16,000.00
Cash 32,000.00

(3) Office Equipment 9,600.00

Cash 9,600.00
 Capitalized as additional cost of the additional wing of
a. the factory building
Capitalized as additional cost of the additional wing of
b. the factory building
The cash discount will be deducted from the Building
c. cost
Capitalized as additional cost of the additional wing of
d. the factory building
 Capitalized as additional cost of the additional wing
e. of the factory building

f. Expense

g. Add to Overhead Expense

Capitalized as additional cost of the additional wing

h. of the factory building

Add to expense (for injuries, losses and damages)

 The cost of the buildings will be attributed to the cost
a. of the land
The cost of the razing will also be added to the cost of
b. the land
The razing of the old buildings will not be charged to
c. the cost of the land or new building.
It will be charged as loss of retirement of the old
building.
The new buildings will become additional assets
(building) of the company
Should the accounting treatment of the old
buildings and the cost of demolishing them
differ from your recommendations with
respect to (a) and (b) above? Why?

Yes. It differs because in the latter case the

company did not sold the land and it has been
assumed that it owned the buildings for a long
time and whatever cost they did to demolish
the old buildings could not be added to the
cost of the new buildings because the
retirement of the old buildings will be added
as loss or expense of the retirement of the old
building.
The previous case is different because the cost
of the razing of the building is added to the
cost of the land. Any additional cost to bring
the asset to its present location or form will be
added to the cost of the asset.