FIXED (NON-CURRENT) ASSETS
 
1.   What are fixed (non-current) assets
 
      So far we have studied current assets. As you all remember, current assets are cash, or assets that are expected to be converted into cash or benefited within a year. The current assets we have studied are: cash and cash equivalents, trade receivables, other receivables, inventories, prepaid expenses (ST), accrued revenues, advance payments, and VAT carried forward. The benefit of all these current assets last within a year. In other words, the business receives the benefits of the current assets within a year.
 
      There is another class of assets, which is fixed (non-current) assets. Fixed assets are assets that are expected to be converted into cash more than a year or assets that are expected to be used (or benefited) more than a year. As you understand from this definition fixed (non-current) assets provide a capacity for a business to generate revenue for several years. In this sense, fixed assets can be regarded as long-term investments. There are different types of fixed (non-current) assets. These are:
 
      a.   Trade receivables whose maturities are more than a year (remember trade receivables whose maturities are less than a year are included in current assets),
      b.   Other receivables whose maturities are more than a year,
      c.      Financial fixed assets,
      d.      Tangible assets,
      e.      Intangible assets,
f.        Prepaid expenses.
 
      We are not going to discuss trade receivables and other receivables included in fixed assets. They are the same as the receivables included in current assets. Only difference is that the maturities of the receivables included in fixed assets are more than a year while the maturities of the receivables included in current assets are less than year. We will discuss other types of fixed assets in detail in the following sections. We will start with prepaid expenses (LT).
 
2.   Prepaid expenses (LT)
 
      As you remember from the previous subjects, prepaid expenses are payments before receiving a benefit or service. If this benefit or service will be received within a year, prepaid expenses are included in current assets. If this benefit or service will be received more than a year, prepaid expenses are included in fixed assets. Prepaid expenses included in current assets are denoted as prepaid expenses (ST), prepaid expenses included in fixed assets are denoted as prepaid expenses (LT). Let’s explain the subject by taking an example:
 
      A firm rented an apartment flat whose monthly rent is 4,000 TL on 01 April 2012. The firm paid three-year rent in advance from the bank account. The apartment flat is used for administrative purposes.
 
      The accounting record on 01 April 2012:
     
 
Debit
Credit
Prepaid expenses (ST)
48,000
 
Prepaid expenses (LT)
96,000
 
 Bank accounts
 
144,000
 
      The firm paid the rent in advance before using (benefiting) the apartment flat. The firm acquired the benefit of using this flat for three years (36 months) by paying 144,000 TL (36 * 4,000 TL). So, the firm made a payment for a future benefit. This is an asset called prepaid expenses. The benefit that will be received within a year (in the next 12 months) is a current assets, so it is debited as prepaid expenses (ST) (12 * 4,000 = 48,000 TL), the benefit that is equal to 96,000 TL (24 * 4,000) will be received more than a year, so it is debited as prepaid expenses (LT).
 
      Make the accounting record at the end of April.
     
 
Debit
Credit
General administrative expenses
4,000
 
   Prepaid expenses (ST)
 
4,000
     
      At the end of April the firm received one-month benefit (used the apartment flat for its administrative activities for one month). So, one-month rent is recognized as an expense (general administrative expenses) and deducted from prepaid expenses (ST) by a credit entry. 
 
      Make the accounting record at the end of December 2012.
 
      At the end of December 2012, two records will be made. First record will recognize the rent expense for December 2012.
     
 
Debit
Credit
General administrative expenses
4,000
 
   Prepaid expenses (ST)
 
4,000
 
      On 31 December 2012, the benefit that will be received in a year (between December 2012 and December 2013) becomes short-term and must be included in current assets. When the firm made the payment, twelve-month benefit (between 01 April 2012 and 01 April 2013) was recorded as prepaid expenses (ST). Benefit after 01 April 2013 was long-term on 01 April 2012 and recorded as prepaid expenses (LT). On 31 December 2012, benefit between 31 December 2012 and 31 December 2013 becomes short-term. Benefit between 31 December 2012 and 01 April 2013 was included in prepaid expenses (ST) when the firm made the payment on 01 April 2012, on 31 December 2012 benefit between 01 April 2013 and 31 December 2013 (9 months) also becomes short-term and it must be transferred from prepaid expenses (LT) to prepaid expenses (ST). The amount is 9 * 4,000 = 36,000 TL. The accounting record:
 
 
Debit
Credit
Prepaid expenses (ST)
36,000
 
   Prepaid expenses (SL)
 
36,000
 
3.   Financial fixed assets
 
      Financial fixed assets are the investments of a business into the equity of another business. In other words, financial fixed assets are the ownership of a firm in another business. The purpose is to control the other business, that is why this investment into the equity of another business is not short-term, but it is long-term and included in fixed (non-current) assets. Another purpose to make investments into the equity of another business is to generate extra revenue as dividend from the other company. Sometimes businesses establish other businesses in order to create synergies with their regular operations. For example, banks establish insurance companies, leasing companies, factoring companies or brokerage firms. When a bank establishes a leasing company, it invests money as the capital of the leasing company and, in return owns shares of the company. This investment is called financial fixed asset.
 
      Financial fixed assets are classified according to the control percentage (control right) of the firm.
 
      If the investment into the equity of another firm gives at most 10 % control right it is called “long-term financial investments”,
     
      If the investment into the equity of another firm gives more than 10 % and at most 50 % control right it is called “affiliates”
 
      If the investment into the equity of another firm gives more than 50 % control right it is called “subsidiaries”
 
Example-1

A firm established another firm by investing 300,000 TL. This investment represents 100 % control right. Make the accounting record.
 
 
Debit
Credit
Subsidiaries
300,000
 
   Bank accounts
 
300,000
 
Here the firm established another firm by investing 300,000 TL into its equity. 300,000 TL is transferred from the firm’s (establishing firm) bank account to the bank account of the other firm (established firm) as capital. By this investment the establishing firm acquired a financial fixed asset. Since this investment gives 100 % control right to the establishing firm, it must be recorded as subsidiaries.
 

Example-2

A firm bought the shares of another firm by paying 120,000 TL. These shares give the firm 30 % control right. Make the accounting record.

 
 
Debit
Credit
Affiliates
120,000
 
   Bank accounts
 
120,000
 
 
Example-3
 
A firm bought the shares of another firm by paying 80,000 TL. These shares give the firm 7 % control right. Make the accounting record.
 
Debit
Credit
Long-term financial investments
80,000
 
   Bank accounts
 
80,000
 
Example-4
 
The firm received 50,000 TL dividends from its affiliate. Make the accounting record.
 
 
Debit
Credit
Bank accounts
50,000
 
   Dividend revenue
 
50,000
 
When the business liquidates (sells) its equity investment in another business (financial fixed asset), it receives money and transfers the shares to the buyers. If the money received is more than the amount of the original investment, the difference is a gain and called “gain on sale of financial fixed assets”; if the money received is less than the amount of the original investment, the difference is a loss and called “loss on sale of financial fixed assets”.
 
Example-5
 
In example-2 the firm bought the shares of another firm by paying 120,000 TL and it was recorded as affiliates (refer to example-2). The firm sold its shares for 150,000 TL. Make the accounting record.
 
 
Debit
Credit
Bank accounts
150,000
 
   Affiliates
 
120,000
   Gain on sale of financial fixed assets
 
30,000
 
The firm sold its shares. That means the firm also sold its equity investment in the other firm (the firm sold its affiliate). The firm received 150,000 TL. This amount is debited to bank accounts. When the firm bought the shares, the amount paid was debited to affiliates. When the firm sold the shares, the affiliates no longer exist. So affiliates must be closed. This is done by a credit entry to affiliates. 
 
Example-6
In example-3 the firm bought the shares of another firm by paying 80,000 TL and it was recorded as long-term financial investments (refer to example-3). The firm sold its shares for 70,000 TL. Make the accounting record.
 
 
Debit
Credit
Bank accounts
70,000
 
Loss on sale of financial fixed assets
10,000
 
   Long-term financial investments
 
80,000
 
4.   Tangible assets
 
      Another form of fixed (non-current) assets is tangible assets. Tangible assets are assets that are held for use in the production, or supply of goods or services, for rentals to others, or for other business activities. They are expected to be used for more than one year.
      a.   Types of tangible assets
 
            - Land
            - Land improvements
            - Buildings
            - Machinery and equipment
            - Vehicles
            - Furniture and fixtures
            - Construction in progress
 
            Construction in progress is a special type of tangible asset. When the firm has a facility (factory, hotel, mall, building, hospital etc.) built, all related costs to build this facility are accumulated in construction in progress during the construction period. When the facility is completed and operations begin in it, the costs accumulated in construction in progress are transferred to the appropriate tangible asset accounts.
           
      b.      Purchase of tangible assets
 
            When tangible assets are bought they are recorded at total cost. Total cost of a tangible asset includes the following items:
 
            a.      Purchase price,
            b.      Import duties and other taxes (except VAT),
            c.      Other costs necessary to deliver the asset and bring it to working condition such as funds, money transfer fees, transportation, in-transit insurance, installation, custom brokerage firm fees, etc.
 
       Example-1
 
      A firm ordered machinery and equipment. Purchase price (including transportation and installation) is 800,000 TL + 18 % VAT. The firm paid 160,000 TL in advance. When the firm received the machinery and equipment, paid another 350,000 TL + total VAT and gave a forward-dated check for the remaining amount. Make the accounting records at each step.
 
      At the first step the firm made the advance payment. Accounting record:
 
 
Debit
Credit
Advance payments
160,000
 
   Bank accounts
 
160,000
 
      At the second step the firm received the machinery and equipment, made a payment, and gave a forward-dated check for the remaining amount.
 
      Total VAT = 800,000 * 0.18 = 144,000 TL
 
      Payment = 350,000 + 144,000 = 494,000 TL
 
      Remaining amount = (800,000 + 144,000) – 494,000 – 160,000 = 290,000 TL
 
      Total amount that must be paid is 800,000 + 144,000 (purchase price + VAT)
 
      The firm paid 160,000 TL in advance, paid another 350,000 TL + total VAT (494,000 TL) when it received the machinery and equipment. We find the remaining amount by subtracting 160,000 TL + 494,000 TL from total amount that must be paid. This equals to 290,000 TL. Accounting record:
     
 
Debit
Credit
Machinery and equipment
800,000
 
VAT deductible
144,000
 
   Advance payments
 
160,000
   Bank accounts
 
494,000
   Notes payable
 
290,000
     
      When the firm receives the machinery and equipment, advance payments must be closed.
 
      Example-2
 
      The firm imported machinery and equipment. Purchase price is 1,200,000 Euro (including transportation and installation). The firm will make the payment after receiving the machinery and equipment.
 
      a.   The firm first paid 99,000 TL fund.
      b.   The firm accepted the draft sent by the importer and paid 5,000 TL bank’s fee. The firm received the machinery and equipment and paid 108,500 TL import duty, 311,000 TL VAT (1 Euro = 1.35 TL).
      c.   At the last step the firm paid 3,000 TL + 18 % VAT to a customs brokerage firm.
 
Make the accounting records at each step.
 
      First step: The firm paid the fund.
 
 
Debit
Credit
Advance payments
99,000
 
   Bank accounts
 
99,000
 
 
Second step: The firm accepted the draft, paid the bank’s fee, paid import duty and VAT, and received the goods.
 
Total cost at this step:
Purchase price = 1,200,000 * 1.35 = 1,620,000 TL
Fund                                    = 99,000 TL (paid in advance)
Bank’s fee                            = 5,000 TL
Import duty                          = 108,500 TL
Total cost                             = 1,832,500 TL
 
Accounting record:
 
 
Debit
Credit
Machinery and equipment
1,832,500
 
VAT deductible
311,000
 
   Advance payments
 
99,000
   Bank accounts
 
424,500
   Notes payable
 
1,620,000
 
Total cost at this step (1,832,500) is debited as machinery and equipment. VAT is debited as VAT deductible. Advance payments (fund paid before receiving the goods) is closed.
 
Total payment at this step: 5,000 TL (bank’s fee) + 108,500 TL (import duty) + 311,000 TL (VAT) = 424,500 is deducted from the bank accounts by a credit entry.
 
      Purchase price (1,200,000 * 1.35 = 1,620,000 TL) will be paid later. Since a draft is accepted this amount is credited to notes payable.
 
At the last step, customs brokerage firm’s fee is paid. Accounting record:
 
3,000 * 0.18 = 540 TL VAT.
 
 
Debit
Credit
Machinery and equipment
3,000
 
VAT deductible
540
 
   Bank accounts
 
3,540
 
      Example-3
 
      The firm imported machinery and equipment. Purchase price is 750,000 USD (including transportation to the Turkish Customs).
 
      a.   The firm opened a letter of credit (L/C). The bank charged 2,000 TL for this service.
      b.      Machinery and equipment arrived at the customs. The firm paid the purchase price to the bank (1 USD = 1.37 TL), received the machinery and equipment from the customs, and paid 68,000 TL import duty, 197,000 TL VAT.
      c.   The firm paid 10,000 TL + 18 % VAT to another firm for domestic transportation (transportation inside Turkey) and installation.
 
Required:
 
      a.   Make the accounting record at each step.
b.   What is the total cost of the machinery and equipment?
 
      At the first step, the firm paid 2,000 TL for L/C. Accounting record:
 
 
Debit
Credit
Advance payments
2,000
 
   Bank accounts
 
2,000
 
      At the second step, the firm made the payments and received the machinery and equipment.
 
      Total cost at this step:
 
      Purchase price     = 750,000 * 1.37 = 1,027,500 TL
      Bank’s fee                       = 2,000 TL (paid in advance)
      Import duty                      = 68,000 TL
      Total cost                         = 1,097,500
 
      Accounting record:
 
 
Debit
Credit
Machinery and equipment
1,097,500
 
VAT deductible
197,000
 
   Advance payments
 
2,000
   Bank accounts
 
1,292,500
 
      In the last step, the firm made the payment for domestic transportation and installation. Accounting record:
 
10,000 * 0.18 = 1,800 TL (VAT)
 
 
Debit
Credit
Machinery and equipment
10,000
 
VAT deductible
1,800
 
   Bank accounts
 
11,800
 
      Total cost of the machinery and equipment = 1,097,500 + 10,000 = 1,107,500 TL
 
Example-4
 
A firm bought a vehicle to be used for delivering the goods. The invoice is as follows:
 
Price                      : 35,000 TL
Excise tax               : 5,000 TL
VAT                      : 7,200 TL
Total                      : 47,200
 
According to the Turkish Tax Law excise tax of a vehicle may be added to the cost or may be expensed. Since it may be expensed, nearly all of the firms in Turkey choose to expense the excise tax of a vehicle. The accounting record:
 
 
 
Debit
Credit
Vehicles
35,000
 
760 Selling, marketing, and delivery expenses
5,000
 
VAT deductible
7,200
 
   Bank accounts
 
47,200
 
As you see, the excise tax is recorded as selling, marketing, and delivery expenses.
 
Example-5
 
A firm bought an apartment flat to be used for administrative activities. Price of the flat is 500,000 TL + 18 % VAT. The firm paid 8,200 TL title fee. The firm also paid 10,000 TL to a real estate agent. Make the accounting record.
 
Like vehicles, Turkish Tax Law allows the firms to expense title fee and payments made to the real estate agents. The firms may also add them to the cost. Nearly all of the firms in Turkey choose to expense the title fee and payment to real estate agents. The accounting record:
 
 
 
Debit
Credit
Building
500,000
 
770 General administrative expenses
18,200
 
VAT deductible
90,000
 
    Bank accounts
 
608,200
 
As you see title fee and the payment to the real estate agent (10,000 + 8,200) are recorded as general administrative expenses.
 
      c.      Depreciation of tangible assets
 
            Firms buy tangible assets in order to get economic benefit from them. The economic benefit for a firm is the revenue from sale of goods or services. Tangible assets are also used in the generation of revenue. As you see from the previous examples, when tangible assets are bought they are recorded as an asset (buildings, vehicles, machinery and equipment, etc.) at the total cost. Then, this asset is used to generate revenue. For example a vehicle is used to deliver the goods or a building is used for administrative activities, or a machinery and equipment is used in manufacturing. As these assets are used to generate revenue, a portion of their costs is expensed (or if the assets are used in manufacturing a portion of the cost is transferred to the goods manufactured by using the assets) in each period. The portion of the cost expensed (or transferred to the goods manufactured) is called depreciation. Depreciation is calculated in a systematic way. There are two methods to calculate depreciation. One of them is called straight-line method, another one is called double declining balance.
 
            If the asset is used in providing service, the depreciation is recorded as “service cost”,
             If the asset is used in manufacturing goods, the depreciation is recorded as “manufacturing overhead,
            If the asset is used in selling, marketing and delivery activities, the depreciation is recorded as “selling, marketing and delivery expenses”,
            If the asset is used in administrative activities, the depreciation is recorded as “general administrative expenses”,
 
Example-1
 
Let’s go back to example-4 above. The firm bought a vehicle to be used in delivery. Total cost is 35,000 TL (that is the cost recorded as vehicles). Now, we will expense this cost systematically as this vehicle is used in delivery activities. We have to know economic life to calculate depreciation. Economic life of this vehicle is 5 years. That means the cost of this vehicle is expensed in three years.
 
According to the straight-line method, total cost is divided by the economic life and this amount is expensed in each year.
 
Annual depreciation = 35,000 / 5 = 7,000 TL
 
Depreciation according to double declining balance method is calculated by preparing a table.
 
Year
Beginning balance
Rate X 2
Depreciation
Ending balance
1
35,000
0.4
14,000
21,000
2
21,000
0.4
8,400
12,600
3
12,600
0.4
5,040
7,560
4
7,560
0.4
3,024
4,536
5
4,536
 
4,536
0
 
Rate = 1 / Economic life = 0.2. Rate X 2 = 0.2 * 2 = 0.4
 
Depreciation = Beginning balance * Rate X 2
 
Depreciation in the first year = 35,000 * 0,4 = 14,000
 
Ending balance = Beginning balance – Depreciation
 
Ending balance in the first year = 35,000 – 14,000 = 21,000
 
Beginning balance in the last year (in our example year 5) is written as depreciation without calculation. So, the beginning balance in year 5 (4,536) is depreciated (recorded as an expense). At the end of the fifth year, ending balance is zero. That means the total cost of the vehicle (35,000) has been expensed throughout the economic life.
 
Let’s make the accounting record of depreciation in the first year.
 
 
Detail
Debit
Credit
760 Selling, marketing and delivery expenses
 
14,000
 
  -Depreciation and amortization 14,000    
   Accumulated depreciation
 
 
14,000
 
When recording depreciation, credit record is always “accumulated depreciation”. In this example annual depreciation (depreciation for one year) is calculated and recorded. Depreciation can also be calculated and reported quarterly (for a three month period) or monthly.
 
Quarterly depreciation = Annual depreciation / 4
Monthly depreciation = Annual depreciation / 12
 
In general, servise business and merchandising businesses record depreciation quarterly; manufacturing businesses record depreciation monthly.
 
Example-2
 
A firm has a machinery and equipment whose total cost is 900,000 TL. Economic life is 10 years. This machinery and equipment is used in manufacturing.
 
      a. Prepare a table to calculate depreciation in each year by using double declining balance method (up to the third year).
      b.   Make the monthly accounting record for depreciation in the third year.
      c.   What would be the depreciation in each year if the firm used straight-line method?
 
      a.   Rate = 1 / 10 = 0.1
Year
Beginning balance
Rate X 2
Depreciation
Ending balance
1
900,000
0.2
180,000
720,000
2
720,000
0.2
144,000
576,000
3
576,000
0.2
115,200
460,800
 
b.  
In the third year annual depreciation is 115,200 TL. Monthly depreciation is 115,200/12 = 9,600 TL.
 
 
Detail
Debit
Credit
730 Manufacturing overhead
 
9,600
 
  -Depreciation and amortization 9,600    
   Accumulated depreciation
 
 
9,600
 
c.
      900,000 / 10 = 90,000. If the firm used straight-line method, depreciation in each year would be 90,000 TL. Monthly depreciation would be 90,000/12 = 7,500 TL.
 
Example-3
 
Turkish Airlines has an airplane whose total cost is 50,000,000 TL. Economic life is 6 years.
 
      a. Prepare a table to calculate depreciation in each year by using double declining balance method (up to the third year).
      b.   Make the quarterly accounting record for depreciation in the third year.
      c.   What would be the depreciation in each year if the firm used straight-line method?
 
a.   Rate = 1 /6 = 0.1666
 
Year
Beginning balance
Rate X 2
Depreciation
Ending balance
1
50,000,000
0.3332
16,660,000
33,340,000
2
33,340,000
0.3332
11,108,888
22,231,132
3
22,231,132
0.3332
7,407,407
14,823,705
 
b.
Annual depreciation in the third year is 7,407,407 TL.
Quarterly depreciation is 7,407,407 / 4 = 1,851,852 TL.
 
 
Detail
Debit
Credit
740 Service cost
 
1,851,852
 
  -Depreciation and amortization 1,851,852    
   Accumulated depreciation
 
 
1,851,852
 
c.   50,000,000 / 6 = 8,333,333 annual depreciation.
      8,333,333 / 4 = 2,083,333 TL. quarterly depreciation.
 
Example-4
 
A firm has a building whose total cost is 600,000 TL. Economic life is 50 years. This building is used in general administrative activities.
 
      a. Prepare a table to calculate depreciation in each year by using double declining balance method (up to the third year).
      b.   Make the quarterly accounting record for depreciation in the third year.
      c.   What would be the depreciation in each year if the firm used straight-line method?
 
a.   Rate = 1 /50 = 0.02
 
Year
Beginning balance
Rate X 2
Depreciation
Ending balance
1
600,000
0.04
24,000
576,000
2
576,000
0.04
23,040
552,960
3
552,960
0.04
22,118
530,842
 
b.
    Annual depreciation in the third year is 22,118 TL.
    Quarterly depreciation is 22,118 / 4 = 5,530 TL.
 
 
Debit
Debit
Credit
770 General administrative expenses
 
5,530
 
   -Depreciation and amortization 5,530    
   Accumulated depreciation
 
 
5,530
 
c.   600,000 / 50 = 12,000 annual. 12,000 / 4 = 3,000 TL quarterly.
 
No depreciation is calculated for land.
 
d.   Sale of tangible assets
 
      Net value of a tangible asset = Total cost – Accumulated depreciation
 
      If a tangible asset is sold more than its net value, the difference between the net value and the money received is “gain on sale of tangible assets”.
 
      If a tangible asset is sold less than its net value, the difference between the net value and the money received is “loss on sale of tangible assets”.
 
Example-1
 
A firm has a machinery and equipment whose total cost is 500,000 TL and accumulated depreciation is 400,000 TL. Make the accounting record if the firm sells this machinery and equipment for 150,000 TL + 18 % VAT.
 
Net value = 500,000 – 400,000 = 100,000
 
Since the firm sold this machinery and equipment for 150,000 TL, (150,000 – 100,000) 50,000 TL is gain on sale of tangible assets. Accounting record:
 
VAT = 150,000 * 0.18 = 27,000 TL
 
 
Debit
Credit
Bank accounts
177,000
 
Accumulated depreciation
400,000
 
   Machinery and equipment
 
500,000
   VAT payable
 
27,000
   Gain on sale of tangible assets
 
50,000
 
The firm received 150,000 TL + 2,700 TL (VAT) from this sale. This amount is debited as bank accounts. Since the firm sold the machinery and equipment, accumulated depreciation is closed. Accumulated depreciation is always credit, so it is closed by a debit entry. Machinery and equipment is also closed. When the machinery and equipment is bought it is recorded (debited) at the total cost (500,000 TL). When it is sold, this amount (500,000 TL) is closed by a credit entry. Value added tax received is recorded (credited) as VAT payable. Since gains are always credited, gain on sale of tangible assets is credited.
 
Example-2
 
A firm has a vehicle whose total cost is 60,000 TL and accumulated depreciation is 40,000 TL. Make the accounting record if the firm sells this vehicle for 12,000 TL + 18 % VAT.
 
Net value = 60,000 – 40,000 = 20,000
 
Since the firm sold this vehicle for 12,000 TL, (20,000 – 12,000) 8,000 TL is loss on sale of tangible assets. Accounting record:
 
VAT = 12,000 * 0.18 = 2,160 TL
 
 
Debit
Credit
Bank accounts
14,160
 
Accumulated depreciation
40,000
 
Loss on sale of tangible assets
8,000
 
   Vehicles
 
60,000
   VAT payable
 
2,160
 
5.   Intangible assets
 
      Intangible assets are identifiable, non-monetary assets without physical substance (physical form). Classes of intangible assets are:
 
      a.      Copyright
      b.      Franchise
      c.   Patent
      d.   Rights
      e.      Formula
      f.    Brand
      g.      Softwares
      h.      Development costs
      i.      Leasehold improvements
j.        Goodwill
 
      Firms buy intangible assets to use them in their operations and get economic benefit. For example, a publisher buys copyright from the author in order to publish a book. The firm publishes the book based on the copyright, sells the book and generates revenue (receive economic benefit). The firm must receive the economic benefit more than a year in order to recognize an intangible asset. If the economic benefit has been received, or will be received within a year a an intangible asset cannot be recognized.
 
Example-1:
 
      A firm signed a franchise agreement. According to the agreement 20% of the sales revenue in every three-month will be paid to the firm that sold the franchise. Sale revenue during the first three-month of 2012 is 400,000 TL.
 
      Here, there is no intangible asset. Because the firm has already received the economic benefit (earned the revenue). Remember, if the economic benefit is received more than a year an intangible asset is recognized. The firm paid 20 % of the economic benefit (400,000 * 0.2 = 80,000 TL) to the seller of the franchise as franchise fee. This amount must be expensed. The accounting record:
     
 
Debit
Credit
770 General administrative expenses
80,000
 
   Bank accounts
 
80,000
 
Example-2:
 
The firm bought a franchise for five years and paid 250,000 TL.
 
In this example an intangible asset must be recognized. The firm paid 250,000 TL and bought the right to use the name for five years. The firm paid this amount for the economic benefit that will be received in five years. Since this franchise will provide economic benefit to the firm for more than a year, it must be recorded as an intangible asset. The accounting record:
 
 
Debit
Credit
Franchise
250,000
 
   Bank accounts
 
250,000
 
Example-3:
 
The firm paid 300,000 TL and bought a patent. Make the accounting record:
 
 
Debit
Credit
Patent
300,000
 
   Bank accounts
 
300,000
 
 
Example-4:
 
The firm paid 10,000,000 TL and bought a brand. Make the accounting record:
 
 
Debit
Credit
Brand
10,000
 
   Bank accounts
 
10,000,00
 
As in tangible assets, the cost of intangible assets is distributed to each year during its economic life. In other words, the cost of an intangible asset is expensed (or transferred to the goods that are manufactured based on patents) in each year during its economic life. This is called amortization (remember it is called depreciation in tangible assets). The same methods (straight-line and double declining balance) are used. 
 
Example-5:
 
In example-4 above, the total cost of the brand is 10,000,000 TL. Economic life is 15 years.
 
      a. Prepare a table to calculate amortization in each year by using double declining balance method (up to the third year).
      b.   Make the accounting quarterly record for amortization in the third year.
      c.   What would be the amortization in each year if the firm used straight-line method?
 
a.   Rate = 1 /15 = 0.066
 
Year
Beginning balance
Rate X 2
Depreciation
Ending balance
1
10,000,000
0.132
1,320,000
8,680,000
2
8,680,000
0.132
1,145,760
7,534,240
3
7,534,240
0.132
994,520
6,539,720
 
b. Amortization is generally recorded quarterly.
   In the third year yearly amortization is 994, 520 TL. Quarterly amortization is 994,520 / 4 = 248,630 TL.
 
 
 

Detail

Debit
Credit
740 Selling, marketing, and delivery expenses  
248,630
 
   -Depreciation and amortization 248,630    
Accumulated amortization
   
 
248,630
 
c.   10,000,000 / 15 = 666,667 TL, Quarterly = 667,667/4 = 166,917 TL.
 
Net value of an intangible asset = Total cost – accumulated amortization
 
If an intangible asset is sold more than its net value the difference between the net value and the payment received is called “gain on sale of intangible assets”; if an intangible asset is sold less than its net value the difference between the net value and the payment received is called “loss on sale of intangible assets”.
 
There two special types of intangible assets. Those are leasehold improvement and goodwill.
 
Leasehold improvements are major renovation made in a leased (rented) building or real estate.
 
Example
 
A firm rented a building and paid 120,000 TL for major renovations. Make the accounting record.
 
 
Debit
Credit
Leasehold improvements
120,000
 
   Bank accounts
 
120,000
 
 
Goodwill is related to business mergers. When two businesses are merged, one businesses’ legal entity finishes. Another firm (acquiring firm) buys the assets and assumes the liabilities of the acquired firm. In other words, assets and liabilities of the acquired firm become the assets and the liabilities of the acquiring firm. Acquiring firm records the assets and the liabilities of the acquired firm in its records.
 
Net value of the acquired firm = Market value of its assets (if there is no market value recorded value) – liabilities
Goodwill is the amount paid over the net value.
 
Example
 
A and B are merged. A is the acquiring firm, B is the acquired firm. The market value of B’s assets is 150,000,000 TL, liabilities of B is 70,000,000 TL. A paid 100,000,000 TL to merge with B. The accounting record of this transaction:
 
 
Debit
Credit
B’s assets (cash, bank accounts, trade receivables, inventories, buildings, vehicles, etc.)
150,000,000
 
Goodwill
20,000,000
 
   B’s liabilities (bank loans, trade payables, etc.)
 
70,000,000
   Bank accounts
 
100,000,000
 
Here A recorded B’s assets and liabilities. A paid 100,000,000 TL to B. This amount is credited to bank accounts.
 
Net value of B = 150,000,000 – 70,000,000 = 80,000,000 TL.
 
Goodwill = 100,000,000 – 80,000,000 = 20,000,000 TL.
 
Leasehold improvements and goodwill are also amortized. Economic life for both of them is 5 years. Double declining balance method is not used, only straight-line method must be used.
 
Glossary:
 
Denoted: Gösterilir
Affiliates: 襤tirakler
Subsidiaries: Bal覺 ortakl覺klar
Establishing firm: Kurucu firma
Dividend: Kar pay覺
Construction in progress: Yap覺lmakta olan yat覺r覺mar
Letter of credit (L/C): Akreditif
Expensed: Gider olarak kaydedilmek
Title fee: Tapu harc覺
Real estate agent: Emlakç覺
Real estate: Gayrimenkul
Business mergers: 襤letme birlemeleri
Legal entity: Tüzel kiilik
Acquiring firm: Devralan firma
Acquired firm: Devral覺nan firma
Assume liabilities: Yükümlülükleri (borçlar覺) üzerine almak