Ch 8 Flashcards
2 possible classifications for operating assets?
Tangible or intangible
Operating assets? What must investors be able to do?
Operating assets are major productive assets of many companies
Investors must be able to evaluate if these assets will
Generate return on their investments
Tangible assets
Property, plant, equipment, fixed assets
Intangible assets
Goodwill, patents, copyrights, intellectual property
Acquisition cost AKA historical cost or original cost
Amount that includes all cost normally necessary to
Acquire an asset and prepare for its intended use
4 normal costs associated with acquiring an asset?
Purchase price
Taxes paid at time of purchase
Transportation charges
Installation costs
How do you record more than one asset bought for a lump some of money?
Acquisition costs must be allocated btw assets
Fair market value, how is it used in an acquisition?
Purchase price should be allocated btw assets acquired
based on proportion of fair market value each
asset represents of total purchase price
Capitalization of interest
Interest on constructed assets is added
To asset account
Land improvements
Costs related to land but have limited life
Represent a Depreciable asset with a limited life
How should interest on borrowed money used to acquire assets be treated?
Treated as expense of period
How should interest incurred from money borrowed to constructed assets be treated?
Interest must be capitalized as part of acquisition cost of asset
The amount of interest capitalized should be based on?
Average accumulated expenditures
Depreciation
Allocation of original cost of asset to periods benefited
By its use
3 factors the cause an assets decline in usefulness?
Physical deterioration from usage or passage of time
Obsolescence factors such as changes in technology
Company’s repair and maintenance policy
3 methods of depreciation?
Straight line, units of production, double declining balance
Straight Line method depreciation
Method by which same dollar amount of depreciation
Is recorded in each year of asset use
SL depreciation = (acquisition cost - residual value)/ life
Book value
Book value = original cost of asset - accumulated depreciation
Units of production method depreciation
Depreciation is determined as a function of
units the asset produces
Depreciation per unit =
(acquisition cost - residual value)/total # of units in asset’s life
Annual depreciation (depreciation per unit method)
Annual depreciation =
depreciation per unit) X (units produced in current year
Accelerated depreciation
Higher amount of depreciation is recorded in
Early years and lower amount in later years
Double declining balance method
Depreciation is recorded at twice the straight line rate
But the balance is reduced each period
4 Reasons companies use the straight line method of depreciation?
1 Simplicity,
2 reporting to stock holders
3 Comparability
4 Management bonus plans (higher net income = higher compensation)
2 reasons firms use accelerated depreciation?
Technological competitiveness
Lower taxes
Change in estimate
Change in life of asset or in its residual value
Capital expenditure AKA item treated as asset
When should an expenditure be treated as a capital expenditure?
Cost that improves the asset and is added to asset account
When expenditure increases the life of asset or it’s productivity
It should be treated as a capital expenditure and
added to asset acct.
Revenue expenditure AKA item treated as an expense of the period
Cost that keeps an asset in its normal operating condition
And is treated as an expense
When expenditure simply maintains an asset in its normal
Operating condition, it should be treated as an expense
Gain on asset sale
Excess of selling price over asset’s book value
How do you record a journal entry where the
asset cost was 20,000
Acc. Depr. 9,000
Selling price 12,400?
Acc. Depreciation machine. 9000
Cash. 12400
Machine. 20000
Gain on sale of asset. 1400. (revenue)
Loss on sale of asset
Amount by which selling price is less than book value
How do you record a journal entry for a asset that:
Asset cost 20,000
Acc. Depreciation. 9000
Sales price 10000?
Accu. Depr. Machine. 9000
Cash. 10000
Loss on sale of asset. 1000. (expense)
Machine. 20000
