ACCT Ch 8 Flashcards
Plant Assets are resources that:
- Have physical substance
- Are used in the operations of a business, and
- Are not intended to be sold to customers
Plant assets are recorded at historical cost principle consisting of all expenditures necessary to acquire the asset and make it ready for intended use
Land- the cost of land includes:
Land is NOT DEPRECIATED (it has an indefinite useful life)
- Cash purchase price
- Closing costs such as title and attorney feels
- Real estate brokers commissions and
- All necessary costs incurred in making the land ready for its intended use
4a. Clearing, draining, filling, and grading vacant land
4b. Demolition and removal of old building
Buildings:
a. Purchase price
b. Closing costs
c. Attorney’s fees
d. Title insurance
e. Real estate broker’s commissions
Equipment - the cost of equipment consists of the:
a. Cash purchase price
b. Sales tax
c. Freight-In Charges
d. Insurance during transit
e. Assembling, installing, and testing the unit
f. Capitalized - One-time costs are on the balance sheet and are generally included (like insurance during transit) Expense - recurring costs are on income sheet and are NOT included (like yearly insurance)
Ordinary Repairs and Maintenance are Expensed
recurring costs like yearly insurance are on the Income sheet
Additions and Improvements are Capitalized
one-time costs like adding a logo to the vehicle are on the Balance sheet
Ordinary Repairs and Maintenance (Expensed)- expenditures for normal operating upkeep of long-lived assets
a. RECURRING in nature
b. involve small amounts at each occurrence
c. Do NOT LENGTHEN the USEFUL LIFE of the asset
d. JE to record:
Dr. Maintenancce and Repairs Expense (+E, +SE)
Cr. Cash (-A) or Accounts Payable (+L)
Additions and Improvements (Capitalized) - infrequent expenditures that increase an asset’s economic usefulness in the future
a. INFREQUENT in nature
b. Involve large amounts of money
c. Increase an asset’s economic USEFULNESS
d. JE to Record:
Dr. Equipment (+A)
Cr. Cash (-A) or Accounts Payable (-L)
JE to Record Capitalized (Additions and Improvements)
Dr. Equipment (+A)
Cr. Cash (-A) or Accounts Payable (-L)
JE to Record (Ordinary Repairs and Maintenance)
Dr. Maintenancce and Repairs Expense (+E, +SE)
Cr. Cash (-A) or Accounts Payable (+L)
Depreciation Definition
Depreciation is NOT a process of determining an asset’s current market value! It is however the process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method like Straight-line, Units-of-Production, Double Declining Methods
Periodic Adjusting Entry for Depreciation
Dr. Depreciation Expense (+E, -SE) (Operating Expense in I/S)
Cr. Accumulated Depreciation (+XA, -A) (XA in B/S)
Accumulated Depreciation Definition
the amount of depreciation expense accumulated since the acquisition date.
How Accumulated Depreciation looks like in B/S
Automobile
(Accumulated Depreciation (Automobile)
= Total PP&E
There are 3 amounts you need to calculate depreciation, what are they?
- Acquisition cost
- Estimated useful life - the expected service life of the asset
- Estimated residual (or salvage) value- estimated amount to be recovered by the company at the end of the asset’s estimated useful life
Estimated Useful Life definition
the expected service life of the asset
Estimated Residual (or Salvage) value definition
estimated amount to be recovered by the company at the end of the asset’s estimated useful life
ex: Company buys a car, even at the end of the car’s useful life it will still be worth something
Depreciation expense is an ______
estimate
Straight-Line formula
Depreciation expense = (cost-residual value)/useful life
Units of Production Formula
Depreciation Expense = ((cost-residual value)/estimated total production) * actual production
Units of Production things to keep in mind:
- Don’t multiply by number of months because your formula only considers units/hours the machine works
B/S things to keep in mind for accumulated depreciation (A/D)
After the first year make sure to add Accumulated Depreciation from previous years for the Net Value of the asset
Double-Declining Balance Method Formula
Depreciation Expense=((Cost-Accumulated Depreciation)/Usefulife)*2
Things to note with the Double-Declining Method:
- BECAREFUL: residual value is not in this formula so be careful for when it reaches its end of useful life as the numerator increases then the expense decreases
- First year the accumulated depreciation is zero!
2a. After the first year the Accumulated depreciation is the depreciation expense you found
Finding Asset Impairment
- Test for impairment. If net book value > Estimated future cash flows, then the asset is impaired
- Computation of impairment loss:
Impairment loss=Netbook value - fair value
JE to record
Dr. Asset Impairment (+E, -SE)
Cr. Equipment (-A)
JE to record Asset Impairment
Dr. Asset Impairment (+E, -SE)
Cr. Equipment (-A)
Disposal, Retirement, and Trading of PP&E
1 JE to record Depreciation expense on the sale/disposal date:
Usually requires two JE’s:
1. An adjusting entry to update the depreciation expense and accumulated depreciation accounts
2. Remove asset and it’s related Accumulated Depreciation. Collect cash any difference between book value (salvage value) and cash given when sold is either a gain or loss.
2a. If book value (salvage value < cash given then it’s a gain on sale, gain on sale is credited.
Dr. Depreciation Expense (+E, -SE)
Cr. Accumulated Depreciation (+XA, -A)
Dr. Cash
Dr. Accumulated depreciation (-XA, +A)
Cr. Equipment
Cr. Gain on Sale
Dr. Cash
Dr. Accumulated Depreciation (-XA, +A)
Dr. Loss on sale
Cr. Equipment
Intangible Assets and Amortization
Intangible assets is assets that do not posses physical substance
A. Acquisition (purchased externally)- intangible assets are capitalized (on the B/S) and recorded at historical cost only if they have been purchased.
B. If developed internally by the company, they are expensed when inccured
C. There are two types Definite Life and Indefinite Life
Definite Life Definition
Assets- Trademark, Copyright, Technology, Patents, Franchises, Licenses and Operating Rights
Formula to find Amortization is Total Cost/Useful Life * (#/12) months if given mid year
Use etiher useful life or legal life whichever # is lower
Cost of an intangible asset has a straight-line basis each period over it’s useful life called Amortization (similar to depreciation)
Amortization expense is on Income statement
Intangible assets are represents at cost minus accumulated amortization on the B/S
JE to record definite life of intangible asset amortization expense
Dr. Amortization Expense (+E,-SE)
Cr. Accumulated Amortization (+XA, -A)
Indefinite Life (Good will)
Indefinite life assets are NOT AMMORTIZED instead they are tested annualy for possible impairment and assets book value is written down (decreased) to it’s fair value
Formula for Indefinite Life
Impairment loss = Book value - Fair value
Goodwill (Indefinite Life)
is the reputation that company has with it’s customers
It’s formula
Net Assets at fair value = Assets - Liabilities
then
Purchase price - Net asset at fair value
It’s reported as an asset ONLY if another business is purchased, now if it is internally generated it is not recorded as an asset
JE to Record possible Impairment
Dr. Goodwill Impariment (+E,-SE)
Cr. Goodwill
