Questions for Review of Key Topics
The difference between tangible and intangible long-lived, revenue-producing assets is that intangible assets lack physical substance and they primarily refer to the ownership of rights.
The cost of property, plant, and equipment and intangible assets includes the purchase price (less any discounts received from the seller), transportation costs paid by the buyer to transport the asset to the location in which it will be used, expenditures for installation, testing, legal fees to establish title, and any other costs of bringing the asset to its condition and location for use.
The cost of a developed natural resource includes the acquisition costs for the use of land, the exploration and development costs incurred before production begins, and the restoration costs incurred during or at the end of extraction.
Purchased intangibles are valued at their original cost to include the purchase price and all other necessary costs to bring the asset to condition and location for use. Research and development costs incurred to internally develop an intangible asset are expensed in the period incurred. Filing and legal costs for both purchased and developed intangibles are capitalized.
Goodwill represents the unique value of the company as a whole over and above all identifiable tangible and intangible assets. This value results from a company’s clientele and reputation, its trained employees and management team, its unique business location, and any other unique features of the company that can’t be associated with a specific asset. Because goodwill can’t be separated from a company, it is not possible for a buyer to acquire it without also acquiring the whole company or a substantial portion of it. Goodwill will appear as an asset in a balance sheet only when it was paid for in connection with the acquisition of another company. The capitalized cost of goodwill equals the purchase price of the acquired company less the fair value of the net assets acquired. The fair value of the net assets equals the fair value of all identifiable tangible and intangible assets less the fair value of any liabilities of the selling company assumed by the buyer.
Answers to Questions (continued)
A lump-sum purchase price generally is allocated based on the relative fair values of the individual assets. The relative fair value percentages are multiplied by the lump-sum purchase price to arrive at the initial valuation of each of the separate assets.
Assets acquired in exchange for deferred payment contracts are valued at their fair value or the present value of payments using a realistic interest rate. Theoretically, both alternatives should lead to the same valuation.
Assets acquired through the issuance of equity securities are valued at the fair value of the securities if known; if not known, the fair value of the assets received is used.
Donated assets are valued at their fair values.
When an item of property, plant, and equipment is sold, a gain or loss is recognized for the difference between the consideration received and the asset’s book value. Retirements and abandonments are handled in a similar fashion. The only difference is that there will be no monetary consideration received. A loss is recorded for the remaining book value of the asset.
The basic principle used to value assets acquired in a nonmonetary exchange is to use the fair value of asset(s) given up plus (minus) monetary consideration - cash - paid (received).
The two exceptions are (1) when fair value is not determinable and (2) when the exchange...