Intangible Assets

Productive investments that lack physical substance are also subject to cost allocation. The terminology for intangible cost allocation, however, is referred to as amortization rather than depreciation. Moreover, intangibles are always amortized on a straight-line basis over their productive lives.

Recall from Chapter 2 that Extreme Edge purchased a customer database for $25,000 on January 1, 2015. The firm expected the database to be a source of customer contact information for five years. Consequently, the first years accounting for the customer database was as follows:

Date	Accounts ($ in thousands)	Debit	Credit
1/1/15	Customer database	25
	Cash		25
12/31/15	Amortization expense	5
	Accumulated amortization, customer database		5

Asset Impairment

As noted earlier in this chapter, firms record productive investments in their accounts at their historical cost. That cost is subject to depreciation (except for land) or amortization. In a few instances, an investment becomes impaired. Asset impairment occurs when the firm cannot recover the adjusted cost of the investment through its business operations. If an asset becomes impaired, the firm must recognize a loss on its income statement.

To illustrate asset impairment, assume that Extreme Edge determined the fair (or market) value of its equipment was worth only $360,000 on January 1, 2016. Assuming straight-line depreciation, the net (or book value) on January 1, 2016 was $400,000 (or $500,000 cost minus $100,000 accumulated depreciation). Thus, the amount of the loss was $40,000 (or $400,000 book value minus $360,000 fair value. Extreme Edge would record the loss as follows:

Date	Accounts ($ in thousands)	Debit	Credit
1/1/16	Loss due to impairment	40
	Equipment		40

The fair value of the equipment at the time of impairment becomes the new basis for subsequent depreciation. Given that the equipment has four years of useful life remaining, depreciation on straight-line basis beginning at the end of 2016 would be as follows:

Date	Accounts ($ in thousands)	Debit	Credit
12/31/16	Depreciation expense ($360 / 4 years)	90
	Accumulated depreciation		90

Exercise 4-3

Assume that Extreme Edge determined the fair value of its equipment to be $280,000 on January 1, 2016 instead of $360,000. Make the necessary journal entry on January 1, 2016 for the impairment and record depreciation expense on December 31, 2016.