Intermediate I: CH11 Depreciation, Goodwill,

1
Intermediate ICH11 Depreciation, Goodwill,
Impairments
2
Goodwill

• Common Sense Customers really like you
• Never on books unless bought another Co.
• Definition Excess of Purchase Price over FV of
  Net Identifiable Assets
• Paid 10M BV Assets 9M Liab 1M MV of
  Assets 8M
• GOODWILL
• Paid 10M
• Net FV 7M Goodwill 3M
• True Asset or Overpmt?

3
Goodwill Amortization

• Used to amortize over 40 yrs
• New rules say life is indefinite (like land)
• Write down only if IMPAIRED
• New FV vs. BValue
• Lumpy writeoffs vs. smooth SLine amortization
  under old system

4
Tax Issues

• Depreciation method (MACRS) used for tax purposes
  is not the same method used for financial
  reporting purposes.
• Tax allows depletion based on times the value
  of the resource instead of the cost---
• May have more depletion over time than the
  original cost
• NOT allowed for book purposes.

5
E11-18(1) Impairment of Tangible PPE

• 3 restaurants with declining profit
• BV 6.2M
• Estimated Undiscounted future cash 4M
• Fair Value 3.5M
• Step one Recoverability test
• IS IMPAIRED 4M will not return full cost
• Step two IF impaired write down to FV
• 6.2 less 3.5M 2.7M impairment loss

6
E11-18(2) Impairment of Tangible PPE

• BV 6.2M
• Est. Undiscounted future cash 6.5M
• Fair Value 5M
• Step one Recoverability test
• IS NOT IMPAIRED 6.5 will return full cost
• Step two No write-down if not impaired
• Doesnt matter that BV of 6.2M is greater than
  FV of 5M by 1.2M do not record this as 1.2M
  loss

7
E11-19(1) Impairment of Goodwill

• Alliant bought Centerpoint for 300M of which
  50M was allocated to G/Will
• Tests for impairment end of each yr
• FV of Centerpoint 220M
• FV of n/assets excluding G/will 200M
• BV of Centerpoint including G/will 250M
• Implied value of Gwill 220-200 20M
• BV of Gwill 50M
• Write down by 30M

8
E11-19(2) Impairment of Goodwill

• Alliant bought Centerpoint for 300M of which
  50M was allocated to G/Will
• Tests for impairment end of each yr
• FV of Centerpoint 270M
• FV of n/assets excluding G/will 200M
• BV of Centerpoint including G/will 250M
• Implied value of Gwill 270-200 70M
• BV of Gwill 50M
• Gwill is not Impaired no write down

9
Costs after acquisition Revenue vs. Capital
Expenditure

• ORDINARY REPAIRS
• Revenue Expenditures -- dr. to EXPENSE
• EXTRAORDINARY REPAIRS
• Extends life beyond normal -- dr. A/Depr.
• BETTERMENTS or ADDITIONS
• -- dr. Asset account
• REARRANGEMENTS
• Expense Or Dr. Intangible Asset if Probable
  Future Benefits???

10
E11-20Subsequent Expenditures

• Heating system replaced for 300,000
• Extraordinary repair
• A/Depr 300,000
• Cash 300,000
• Replaces benefits, doesnt increase overall
  value
• New wing added for 750,000 Betterment or
  addition
• Building 750,000
• Cash 750,000
• Increases value of overall asset

11
E11-20 Continued

• Annual Building maintenance
• Basic repairs
• Repairs Expense 12,000
• Cash 12,000
• Maintains but does not increase future service
  potential
• Rearrangement of machinery increases productive
  capacity
• Rearrangement (Intangible Asset) 50,000
• Cash 50,000

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Asset Retire. Oblig. P. 467-8

• Common ex Environmental Cleanup
• Put liab on now and dr. Asset ?? too
• Recent FASB concept of Expected Cash flow .. P.
  468 more than one guess
• Probability weighted liab. then take PValue using
  credit adj risk free rate. (DISCUSS)
• Dr. to Asset is then depr/amortized over asset
  life ..
• Impairment write-off??

13
Retirement Replacement Depr. In Appendix

• No longer allowed unless immaterial
• Utilities .. Phone lines
• No systematic depreciation when poles replaced
  either original cost to depreciation (retirement
  approach) OR
• Net Cost of New pole to depreciation (rep.)
• Similar to same effect as SLine IF replace equal
  each yr otherwise could manipulate NI

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Ex11-22(1)

• 500,000 100,000/ 8 yrs 50,000 X 2
• Cost 500,000
• A/Depr 100,000 BV 400,000
• Write down to 175,000 January 2003
• 175,000 25,000/ 2 75,000
• D. 175,000 BV less another 75,000 A/dep
  100,000 BV

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Ex11-22(2)

• 100,000 10,000/10 9000/yr
• 9000 X 4 yrs 36,000
• Book Value
• Cost 100,000
• A/Depr (36,000) 64,000
• Remaining BV 64,000 4000 / 4 15000 depre
• B. NEW BV 64,000 15000 49,000

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Ex11-22(3)

• 714000/15 47,600 X 3 yrs 142,800
• Book value 714,000 142,800 571,200
• 571,200 divided by 7 REMAINING YRS
• 81,600
• B. 571,200 81,600 489,600

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Ex11-22(4)

• Machine and cost to install is capitalized
• So are all rearrangement costs if you really
  believe they provide probable future benefits in
  excess of cost.
• A. Total of costs listed 147,000

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P10-6

• Southern Building FV 1.4M
• Cost of 2M A/depr of 1.2 .8 M BValue
• Exchanges for Eastern Building
• Eastern Cost of 1.6M 650,000 950,000 BV
• Eastern gives Southern 140,000 to complete
  exchange.
• IMPLIED Eastern FV must be
• 1,400,000 less 140,000 1,260,000

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P10-6 Southern Entries

• Cash 140,000
• New Bldg 1,260,000
• A/depr 1,200,000
• Old Bldg 2,000,000
• GAIN??? 600,000
• What fraction of transaction is for cashgt
• 140,000/1,400,000 10
• Leave 60,000 gain on books
• New Bldg 1,260,000 540,000 720,000

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P10-6 Eastern Entries

• New Bldg 1,400,000
• A/depr 650,000
• Old Bldg 1,600,000
• Cash 140,000
• Gain 310,000
• Boot given similar trade dont recognize any
  of the gain collapse into new asset
• 1,400,000 310,000 1,090,000