8. Operating assets

Question 1

Acquisition cost

Answer 1

The amount that includes all of the cost normally necessary to acquire an asset and prepare it for its intended use, i.e. purchase price, taxes, transportation, installation. Not including e.g. insurance or repair expenses.

Question 2

Capitalization of interest

Answer 2

Interest on constructed assets is added to the asset account. I.e. normally interest on borrow money is treated as an expense. However, if the borrowed money is used in construction of an asset and interest occurs during the construction, this interest is treated as part of the acquisition cost of the asset.

Question 3

Land improvement

Answer 3

Costs that are related to land but that have a limited life, e.g. construction of a plant.

Question 4

Depreciation

Answer 4

The process of allocating the cost of a long-term tangible asset over its useful life. It is not a continuous re-evaluation of the asset, but merely a way of adhering to the matching principle.

Question 5

Accumulated depreciation

Answer 5

The total amount of depreciation assigned to an asset at a point in time.

Question 6

Book value

Answer 6

The original cost of an asset minus the amount of accumulated depreciation, i.e. acquisition cost minus accumulated depreciation

Question 7

Residual value

Answer 7

the amount that could be obtained from selling an asset at the end of its useful life.

Question 8

Straight-line method

Answer 8

The assignment of an equal amount of depreciation to each period. Calculated by dividing acquisition cost minus residual value with the lifetime of the asset.

Question 9

Units-of-production method

Answer 9

Depreciation is determined as a function of the number of units the asset produces.

Question 10

Accelerated depreciation

Answer 10

A higher amount of depreciation is recorded in the early years and a lower amount in the later years.

Question 11

Double-declining-balance method

Answer 11

A form of accelerated depreciation. Depreciation is recorded at twice the straight-line rate, but the balance is reduced each period, i.e. the amount that should be depreciated is recalculated each period, getting lower and lower.

Question 12

Change in estimate

Answer 12

A change in the life of the asset or in its residual value.

Question 13

Capital expenditure

Answer 13

A cost that improves the asset and is added to the asset account, i.e. the cost is added to the acquisition cost of the asset because it enhances the asset

Question 14

Revenue expenditure

Answer 14

A cost that keeps an asset in its normal operating condition and is treated as an expense.

Question 15

Gain on sale of asset

Answer 15

The excess of the selling price over the asset’s book value. Treated as an income statement account.

Question 16

Loss on sale of asset

Answer 16

The amount by which selling price is less than book value. Treated as an income statement account.

Question 17

Intangible assets

Answer 17

Assets with no physical properties; licenses, patents, goodwill, R&D, etc.

Question 18

Goodwill

Answer 18

The excess of the purchase price to acquire a business over the value of the individual net assets acquired.

Question 19

Research and development costs

Answer 19

Costs incurred in the discovery of new knowledge. Treated as expenses, but because of the uncertainty of the outcome, it is not treated as an asset and do not appear on the balance sheet.

Question 20

Amortization

Answer 20

If the intangible asset has a finite life, depreciation must be accounted for. However, when dealing with intangibles, depreciation is called amortization. It works the exact same way though.