Ch. 9: Long-life And Intangible Assets

Question 1

amortization

Answer 1

The systematic write-off of the cost of an intangible asset over its economic life.

Question 2

depletion

Answer 2

The pro-rata allocation of the cost of land (through direct ownership or lease) to the units of natural resources removed from the land.

Question 3

depreciation

Answer 3

The systematic and rational allocation of the cost of an asset over its useful life.

Question 4

intangible asset

Answer 4

An asset that cannot readily be seen or touched. Examples of intangible assets are copyrights, franchises, patents, and trademarks. Intangible assets have no physical substance, but are of value to the owners of the organization.

Question 5

long-life asset

Answer 5

An asset that has an expected useful life of 1 year or more. Long-life assets are also referred to as “fixed assets,” “plant assets,” or “property, plant, and equipment.

Question 6

accelerated cost recovery system

Answer 6

A method used from 1981 to 1986 for calculating depreciation for Federal Income Tax purposes. This method approximated the 150% declining balance method of calculating accelerated depreciation. This method was not recognized by GAAP.

Question 7

accumulated depreciation

Answer 7

A contraasset account that is used to offset an asset that is subject to depreciation. The balance in this account represents the amount of cumulative depreciation expense recognized since the asset was placed into service. When the value of the accumulated depreciation account is subtracted from the value of the asset, the resulting amount is known as the book value of the asset. Any gain or loss resulting from the subsequent sale of the asset is determined by the excess of revenue received beyond the book value of the asset. Obviously, if the book value exceeds the revenue received, then a loss results.

Question 8

book value

Answer 8

The original cost of a fixed asset, less the accumulated depreciation.

Question 9

capital expenditure

Answer 9

A material expenditure, for an asset that will be used for more than 1 year, that increases the value or useful life of that fixed asset.

Question 10

capital improvement

Answer 10

An expenditure (cost) made to a fixed asset in order to increase the useful life of the asset over several accounting periods. Examples include the installation of a new motor in an old truck and the addition of a room to a building.

Question 11

capital

Answer 11

The ownership of the assets of a business by the proprietor(s).

Question 12

contra-asset account

Answer 12

An account that has a credit balance and reduces an asset account to reflect the proper amount on the balance sheet. The accumulated depreciation account and the allowance for bad debts account are examples of contra-asset accounts.

Question 13

cost principle

Answer 13

The cost assigned to an asset, including the purchase price, transportation charges, installation charges, and any other costs associated with placing the asset into use by the organization.

Question 14

current asset

Answer 14

An asset that can reasonably be expected to be used up or converted into cash or sold within 1 year or less.

Question 15

depreciable value

Answer 15

The original cost of a fixed asset, less the residual value of the asset. Depreciable value represents the total cost of the asset that is subject to depreciation.

Question 16

double-declining balance method

Answer 16

An accelerated method of depreciation that uses a rate twice as high as the straight-line method. The rate is applied to the remaining balance (book value) of the asset every year.

Question 17

fixed asset

Answer 17

An asset that has an expected useful life or 1 year or more. Fixed assets are also referred to as “plant assets” or “property, plant, and equipment.

Question 18

franchise

Answer 18

A right or privilege to sell or distribute a product in accordance with special conditions.

Question 19

goodwill

Answer 19

The dollar value assigned to a business’s managerial skills and reputation. It is usually recognized at the time the business is sold.

Question 20

income tax method

Answer 20

A method whereby, when a plant asset is traded in for a similar asset, recognition of the gain or loss on the trade is spread out over the useful life of the new asset acquired.

Question 21

leasehold

Answer 21

Real estate held by a tenant as a result of a lease.

Question 22

license

Answer 22

A right, usually purchased, to market or use a particular process or product.

Question 23

modified accelerated cost recovery system

Answer 23

A method used to calculate depreciation from 1987 on. It approximates the double-declining balance method of calculating depreciation and is used for Federal Income Tax purposes as outlined in the Tax Reform Act of 1987. It is a method not recognized by GAAP.

Question 24

obsolescence

Answer 24

The condition whereby an asset is no longer useful to an organization because of technological improvement or business reorganization of the process for which the asset was previously used.

Question 25

patent

Answer 25

An exclusive right, given by the federal government, to an individual or a group to market or use a particular process or invention. See also license.

Question 26

physical deterioration

Answer 26

The wearing out of a plant asset due to use.

Question 27

property, plant, and equipment

Answer 27

Assets that have a useful life of more than 1 year and are used in the continuing operations of the organization.

Question 28

residual value

Answer 28

The value of a fixed asset after it has been fully depreciated. It is an estimate of what the asset will be sold for when it is no longer usable.

Question 29

revenue expenditure

Answer 29

An expenditure related to a plant asset that is expensed when incurred. Maintenance and repair costs are usually handled as a revenue expenditure.

Question 30

straight-line method

Answer 30

The most common method used by companies to reflect the deterioration of assets. The total cost of the asset, less any residual value, is divided by the useful life of the asset to determine the annual depreciation cost. The name given to the method reflects the fact that the same depreciation is recognized each year for a given plant asset.

Question 31

sum of the years’ digits method

Answer 31

An accelerated method of recognizing depreciation. The rate used is a fraction that has as its numerator the remaining life of the asset and as its denominator the sum of all the years of useful life.

Question 32

trade-in allowance

Answer 32

The value or amount allowed on the old asset by the seller toward the selling price of the new asset.

Question 33

trademark

Answer 33

A symbol, name, or other device designating the origin or ownership of a unique product. A trademark is legally reserved for exclusive use by the owner.

Question 34

units of production method

Answer 34

A depreciation method based on use rather than time. The following formula is used. The resulting rate is then multiplied by the number of units produced each year in order to determine the annual depreciation expense.