Question

E9.17 (LO 2, 4), C The questions listed below are independent of one another.

Answer questions on depreciation and intangibles.

Instructions

Provide a brief answer to each question.

a. Why should a company depreciate its buildings?

b. How can a company have a building that has a zero reported book value but substantial fair value?

c. What are some examples of intangibles that you might find on your college campus?

d. Give some examples of company or product trademarks or trade names. Are trade names and trademarks reported on a company’s balance sheet?

Answer 1

(a)

A  company should depreciate its buildings because buildings are capital assets that have a useful life of more than 1 year.

As buildings are used over multiple accounting periods, the benefits from their use are received over multiple years. Hence, expensing the entire cost of the building in the year of acquisition/construction is not correct.

Therefore, a portion of the building's cost is expensed each year, over multiple years. The number of years depends on the depreciation rules and the useful life of the building.

(b)

As per accounting and depreciation rules, a building is depreciated over a certain number of years. At the end of this period, the book value of the building becomes zero. However, the building may still have useful life remaining. It may be fit to be used for business purposes. In this case, the market value would be substantial. Thus, the fair value would be high, but book value would be zero.

(c)

Some examples of intangibles that you might find on your college campus are patents, computer software and logos.

(d)

Some examples of company or product trademarks or trade names are :

• Coca Cola
• Apple
• Google
• Ikea

Yes, trade names and trademarks reported on a company’s balance sheet as intangible assets