Ch. 8: Reporting & Analysing Long-Term Operating Assets

Question 1

Common characteristics of long-term operating assets

Answer 1

1. Acquired for the purpose of producing and delivering products and services that generate revenues.
2. Help produce revenues for multiple periods.

Question 2

Tangible assets

Answer 2

Have physical substance.

Usually include land, buildings, machinery, fixtures and equipment.

Question 3

Intangible assets

Answer 3

Have no physical substance.

Provide the owner with specific rights and privileges.

Include trademarks, patents, copyrights

Question 4

Capital costs

Answer 4

Reported as assets on the balance sheet.

Called capital expenditures.

Must include all costs necessary to acquire an asset and prepare it for its intended use.

Includes:
▪ Installation costs
▪ Taxes
▪ Shipping costs
▪ Legal fees
▪ Setup and calibration costs 
▪ Asset retirement obligations

Question 5

Constructed assets

Answer 5

When assets are constructed by a company for its own use, capitalised costs should include:
▪ All direct material and labor costs, and
▪ A reasonable amount of overhead costs, and
▪ Capitalised interest -> Interest expenses associated with debt
incurred to finance the construction. Only if specific criteria are met.

Question 6

Costs subsequent to capitalisation

Answer 6

Additional costs incurred after an asset is placed in service:

1. Improvement or betterment
   ▪ Consist of outlays that enhance the usefulness of the asset or extend the asset’s useful life beyond the original expectation
   ▪ Costs should be capitalised
2. Routine repairs and maintenance
   ▪ Expensed in the period incurred

Question 7

Useful life

Answer 7

The period of time over which the asset is expected to provide economic benefits to the company.

Differs from the physical life

Question 8

Residual value

Answer 8

The expected realizable value of the asset at the end of its useful life.

Also known as salvage value.

Can represent the scrap, disposal, or resale value

Question 9

What are the three depreciation methods?

Answer 9

1. Straight-line method
2. Double-declining-balance method
3. Units-of-production method.

Question 10

Straight-line method

Answer 10

Equal expense each year.

Question 11

Double-declining-balance method

Answer 11

Accelerated method—more expense in early years.

Question 12

Units-of-production method

Answer 12

Based on activity instead of time.

Question 13

Selling long-term assets

Answer 13

Produces a gain if the proceeds are greater than the book value of the asset.

Produces a loss if the proceeds are less than the book value of the asset.

Gains and losses can be reported in income from continuing operations or, if applicable, as discontinued operations.

Question 14

Asset impairments

Answer 14

Companies must recognise losses on assets if impairment exists.

When does impairment exist?
▪ When market values of long-term assets decline to less than book value, and
▪ It can be determined that the asset’s value is permanently impaired

Question 15

Potential challenges of asset impairments

Answer 15

1. Insufficient Write-Down -> Assets sometimes are impaired to a larger degree than is actually recognised.
2. Aggressive Write-Down -> The “big bath” scenario can arise if income is currently and severely depressed.

Question 16

PPE turnover

Answer 16

Measures how efficient management utilised its plant
assets.

PPET = Sales revenue / Avg. PPE, net

Question 17

Types of intangible assets

Answer 17

1. Separately transferable intangibles

2. Not separately transferable intangibles

Question 18

Separately transferable intangibles

Answer 18

Those that are the product of contractual or other legal rights

Those that are not contractually or legally defined, but can be separated from the company and sold, transferred, or exchanged.

Question 19

Not separately transferable intangibles

Answer 19

(Goodwill)

The excess of cost over the fair value of net assets acquired in a business combination

Question 20

Problems with accounting for intangibles

Answer 20

Benefits provided by intangibles are uncertain
and difficult to quantify.

Useful life often impossible to estimate with confidence.

Question 21

Patent

Answer 21

An exclusive right to produce a product or use a technology.

Granted to protect the inventor by preventing other companies from copying the innovation

Question 22

Accounting costs of patents

Answer 22

If purchased from another company -> Capitalised and amortised.

If developed internally -> Only legal and registration fees are capitalised and amortised.

Question 23

Copyright

Answer 23

An exclusive right granted by the government to an individual author, composer, play writer, or similar individual.

For the life of the creator plus 70 years.

Question 24

Accounting costs of copyrights

Answer 24

Cost is capitalised and amortised over the expected remaining economic life

Question 25

Trademarks

Answer 25

A registered name, logo, package design, image, jingle, or slogan that is associated with a product

Question 26

Accounting costs of trademarks

Answer 26

If purchased from another company -> Capitalise the cost and amortise.

If developed internally -> Expense as incurred.

Question 27

Amortisation of intangible assets that have a definite life

Answer 27

Capitalised cost is amortised over the expected useful life of the intangible

Amortisation is a systematic allocation of the cost of an intangible asset over its useful life

Straight-line method used most often

Question 28

Amortisation of intangible assets that have an indefinite life

Answer 28

Not amortised until the useful life can be specified.

Must be tested for impairment annually.

Considered to be impaired if the book value of the asset exceeds its fair value.

Write-down equal to:
Book value – Fair value

Question 29

Goodwill

Answer 29

The excess of the purchase price paid over the fair value of its identifiable net assets to buy an entire company.

Cannot be separated from the acquired company or sold separately.

Has an indefinite life.

Never amortised.

Subject to impairment of value

Question 30

Goodwill impairment test

Answer 30

Impaired when the fair value of the acquires business is less than the recorded book value. (Book value > fair value)