Chapter 10 Flashcards
assets are _______
long lived and revenue producing
PP&E consists of
land
buildings
equipment
machinery
furniture
autos/trucks
intangible assets consist of
patents
copyrights
trademarks
franchises
goodwill
natural resources consists of
oil and gas deposits
timber tracts
mineral deposits
PP&E
productive assets that derive their value from long term use in operations rather than from resale
how do we value PP&E
purchase cost + all expenditures necessary to get the asset in condition and location for its intended use
equipment
broad term includes machinery, computers, and other office equipment, vehicles, furniture and fixtures
initial value: purchase cost (less discounts), plus: taxes, transportation, installation, testing, trial, runs, reconditioning, legal fees to establish title, any other costs to bring the asset to condition and location for use
NOTE: only taxes for first time purchase (insurance too) –> anything that is after or yearly is not included
you would include insurance during shipping
land
real property used in ops
land held for speculative investment or future use is reported as investments or other assets
initial value: purchase price: attorney fees, title fees, recording fees, commissions, back taxes, mortgages, liens, clearing, filling, draining, and removing old buildings
(if it is property tax for the year - thats an expense)
current portion of property taxes are NOT included
proceeds from sale of salvaged materials after purchase reduce the cost of land
delinquent property taxes
say listed in problem they are 4,000
if 2000 are in current fiscal year after the purchase date
property taxes are 6000-2000 = 4,000 of Delinquent property taxes
you include the 4,000 in delinquent PT but not the current
land improvements
enhancements to property such as parking lots, driveways, private roads, fences, landscaping, and sprinkler systems
initial value: separately indentifiable costs and capitalized
(depreciated over periods benefited by their use)
useful lives that are estimable
buildings
structures that include warehouses, plant facilities, and office buildings
IV: purchase price, attorney fees, commissions, reconditioning
natural resources
productive assets that are physically consumed in operations such as timber, mineral deposits and oil/gas reserves
IV:
1) if purchased: acquisition + any other costs necessary…
2) acquisition costs exploration, development and restoration costs
benefits are derived from their physical consumption
intangible assets
productive assets that lack physical substance and have long term but typically uncertain benefits
IV: purchase price + all expenditures necessary to get the asset in condition and location for its intended use
patents
exclusive 20yr right to manufacture a product or use a process
purchase price, legal fees, filing fees, not including R&D
copyrights
exclusive right to benefit for 70yrs + life of creator - from creative work - song, film, painting, photograph, or book
IV: purchase price, legal fees, filing fees, not including internal R&D
trademarks (tradenames)
exclusive right to display a word, a slogan a symbol or an emblem that distinctively indentifies a co. product or service
10yrs
IV: purchase price, legal fees, filing fees, not including internal R&D
franchises
a contractual agreement under which a franchisor grants the franchisee the exclusive right to use the franchisor’s trademark or tradename and certain product rights
IV: franchise fee (purchase price) plus any legal fees
some of these costs might be incurred monthly - which would be an expense
software development costs
costs incurred to develop or purchase computer software to be sold, leased, or otherwise marketed (or to develop computer software to be used internally)
costs incurred after teach feaseibility but before product release (or costs incurred after application development stage is reached for intern software)
acquired research and development
developed techs or in process R&D purchased in a business acquisition
IV: FV of R&D on the date of acquisition
goodwill
the unique value of co. as a whole over and above all identifiable assets
IV: excess of FV of the consideration given for a co. over the FV of the identifiable net assets acquired
what are ways assets can be acquired which would need to be capitalized
purchase
self construction
donation
business combination
lease
exchange
ARO
asset retirement obligation
company may incur obligations associated with the disposition of PP&E and NR
gives rise to ARO –> existing legal obligation associated with the disposition/retirement of a tangible, long lived asset
ex: oil/gas exploration co might be required to restore land to its original condition after extraction is completed
what does GAAP require for ARO
that an existing legal obligation associated with the retirement of a tangible, long-lived asset be recognized as a liability and measured at FV if value can be reasonably estimated
provisions of standards to address ARO’s
scope:
recognition
measurement
scope with AROS
only from legal obligations associated with the retirement of a tangible long lived asset that result from the acquisition, construction, development, normal operation a long lived asset
recognition of ARO’s
might arise at the inception of an assets life or during its operating life
when value of ARO can be reasonably estimated
measurement at ARO’s
a company recognizes the fair value of an ARO’s in the period its incurred - the amount of the liability increases the valuation of the related asset - usually the fair value is estimated by calculating the PV of estimated future cash outflows
PVA calculations with ARO’s
expected cash flow approach - adjust the cash flows, not the discount rate for the uncertainty or risk of those cash flows
ARO problem
know how to do
basically your restoration costs have to be calculated in a special way –> this is the ARO = PV of expected cash outflow
trying to figure out the capitalization cost of the copper deposit
ARO journal entries
Debit: Copper mine (capitalized amount)
Credit: Cash (sum of purchase, exploration and development costs)
Credit: Asset retirement liability (amount of ARO)
accretion expense
know how to do
debit: accretion expense
Credit: Asset retirement liability
(basically its like accumulated depreciation)
what happens if actual restoration (what you are paying in cash), is greater than the estimated future costs of restoration costs (590,000)
loss
JE:
Debit: Asset retirement obligation 590,000 (what you estimated)
Debit: loss 35,000
Credit: Cash: 625,000 (actual restoration costs)
what happens if actual restoration costs (what pay in cash at end of 3yrs) are less than 590,000 (future value of estimated restoration costs)
gain
Debit: asset retirement liability 590,000
Credit: gain 190,000
Credit: Cash 400,000
intangible assets
represents exclusive rights that provide benefits to the owner
lack physical substance
difficult to anticipate the timing and the exsistence of future benefits attributable to many intangible assets
what are two ways companies can obtain IA
1) purchase them from other entities: exsisting patents, copyrights, trademarks
2) develop them internally: develop a new product that is then patented
finite useful lives of IA’s are
amortized
indefinite useful lives of IA’s are
NOT amortized
the cost of an IA
purchase price + all other costs necessary to get the asset ready for use
patents
exclusive right to manufacture a product or to use a process
granted by the US patent and trademark office for a period of 20yrs
costs: purchase price, legal fees, filing gees, not including internal research and development
copyrights
exclusive right of protection given to a creator of a published work
song/film/book
granted by the US Copyright Office for the life of the creator 70yrs
trademarks
right to display a word, slogan, or a symbol that distinctly identifies a co., product or service
registered with US Patent and Trademark Office for a period of 10yrs
costs: purchase price, legal fees, filing fees, not including internal R&D
franchises
exclusive right to franchisor to franchisee to use the franchisor’s trademark/product
franchisor grants it for a specified period of time to the franchisee
Initial payment plus periodic payments over the life of the franchise agreement and any legal costs associated with the contract
goodwill
unique value of a co. as a whole over and above its identifiable and intangible assets
how can goodwill emerge
clientele and reputation
trained employees and management team
favorable business location
can goodwill be separated from a company
no
its not possible for the buyer to acquire it without also acquiring the whole company or portion of it
this is where we figure out how to capitalize the cost of goodwill
how to capitalize the cost of goodwill
Fair value of the consideration given in exchange for the company (acquisition price)
Fair value of net indentifiable net assets acquired
what is the FV of identifiable net assets acquired for capitalizing the cost of goodwill
the fair value of all identifiable tangible and intangible assets (less) the fair value of any liabilities of the selling company assumed
how to calculate goodwill (problem)
fair value of consideration given (cash)
Less: FV of identifiable net assets acquired:
FV of identifiable assets acquired
Less: FV of liabilities assumed
= Good will
IGNORE book value
sometimes you will have to find goodwill without them specifically telling you
it will give other assets and what you paid for them with cash and taking on the companies liabilities (assuming them)
the goodwill is the difference
lump sum purchases
acquisition of a group of assets for a single sum
valuation of these assets differs when: each asset is indistinguishable
why: assets have diff characteristics and diff useful lives
what must happen to lump sum purchases with assets that have different characteristics and diff useful lives
allocate the lump sum acquisition price among the separate items
lump sum purchases typically will be
less than the total with individual valuation costs of assets
also fair values will be estimated by independent appraisals
know how to do formula:
JE:
will be debit to all assets at initial valuations with credit to cash of total for lump sum
noncash acquistions
companies can acquire assets without paying with them for cash
1) deferred payments (NP)
2) issuance of equity securities
3) donated assets
4) exchanges of nonmonetary assets for other assets
how are non-cash acquisitions valued
at the fair value of the assets given or the fair value of the assets received, whichever is more clearly evident
noncash acquisitions - deferred payments
NP - obligation to make payment in future
know how to do problems
1) note indicative of FV but interest bearing note
2) asset acquired with debt - PV of note indicative of FV
3) non interest bearing note indicative of FV
just a deferred payment
if gives equipment cost on date sign NP - then that is the PV
- acquisition:
Debit: Equipment
Credit: NP - dec 31, 2024
D: Interest expense
C: Interest Payable - dec 31, 2025L
D:Interest expense 4545 (calculated by the 4132 + 41323)
D:interest payable 4132
(from previous period)
D:NP (original cost of equipment)
C: Cash 50,000
if the question gives the Fair value (future value of the note) that you are exchanging for equipment
non- interest bearing note requiring 50,000 in two years
if borrowing cash –> bank requires 10% interest rate
equipment is custom built so Fair value (cash price) unavailable
Debit: equipment 41323 (what you have to solve for)
Debit: Discount on NP
Credit: NP (face amount of 50,000 due in 2yrs)
interest would be:
Dec 31, 2024:
D: interest expense 4132 (41323 x .10)
C: Disct on NP 4132
Dec 31, 2025
D: Interest expense 4545 [(41323 + 4132) x .10]
C: disct on NP 4545
D: NP 50,000
C: Cash 50,000
NOTE: your discount payable is decreasing and your interest expense is increasing with payments on dec 31 of 24/25
noninterest bearing note but unsure of interest rate
requires co. to pay 100,000 on Dec 31 2026
unsure of interest rate
price lists indicate equipment could have been purchased for cash price at 79,383
D: Equipment (cash price) 79,823
D: Disct on NP 20,167
C: NP (face amount) 100,000
solving for interest rate of PV
so take 79823/100,000 = .79383
PV of $1 –> n=2, i = ???
basically 8%
issuance of equity securities
can occur when small co.s incorporate and the owner or owners contribute assets to the new corporation in exchange for owners securities
transactions exchange value either (for issuance of equity securities)
1) the FV of the assets received by the corporation
2) the market value of the shares of corporations whose stock is actively traded
JE for issuance of equity securities
Land 200,000
Common Stock 200,000
issued 10,000 shares of no par common stock
$20 per share
20 x 10,000
donated assets
usually is an enticement to do something that benefits the donor
recorded at their fair value based on either an available market price or an appraisal value
revenue is credited
example of asset donation
company decided to relocate its office to the city of Westmont. City agreed to pay 20% of the $20 million cost of building the headquarters in order to entice co. to relocate. the building was completed on May 3, 2024, co. paid its portion of the cost of the building in cash
debit: building 20,000,000 (cost of building)
Credit: cash (difference) - what you pay the rest of
Credit: revenue - donation of asset (part that the city agreed to pay, so helps you out with expenses, so that reveneue)
decision makers perspective (capital budgeting)
capital budgeting: decisions pertaining to acquisitions of property, plant and equipment and intangiable assets
requires management to forecasts all future net cash flows generated by the assets
you want your present value of future net cash flows > initial acquisition cost
fixed asset turnover ratio
indicates the level of sales generated by the co.’s investment in fixed assets
= net sales/average fixed assets (beg and end of period)
you look at the book value or carrying value/amount is the cost - AD and depletion
exchanges
an asset received in an exchange of non-monetary assets generally is valued at fair value
old asset at fair value traded in new asset acquired at fair value (difference is the paid in cash or other asset)
gain or loss is recognized in these transactions for the difference between the fair value and the book value of the asset given
steps for exchanging an asset
1) record the new asset at fair value
- FV is determined based on the fair value of the assets given up or the fair value of the asset received (in a normal exchange these would be equal)
2) remove the book value of the nonmonetary asset given (book value equals the recorded cost of the old asset minus its accumulated depreciation
3) record any cash received or paid - cash is used to equalize the fair values of the nonmonetary assets in the exchange
4) record gain or loss: the difference between the fair value and book value of the old asset
recording gain or loss in dealing with exchanging nonmonetary assets
if FV < BV (loss)
if FV > BV (gain)
also the net increase or decrease in total assets from the exchange
what happens if the fair value is not determinable in nonmonetary asset exchange
old equipment has BV of 100,00 (cost of 500,000 - AD of 400,000)
FV of both new and old equipment is not determinable
430,000 was paid in cash
Debit: Equipment - new 530,000 (this is based off of the BV of the old asset and the cash paid –> because there is no FV)
Debit: AD 400,000
Credit: Equipment - old 500,000
Credit: Cash 430,000
no gain or loss is recognized
exchanges that lack commercial substance
commercial substance is when future cash flows change as a result of the exchange
example: newer models of equipment can increase production or improve manufacturing efficiency causing an increase in rev or a decrease in operating costs with a corresponding increase in future cash flows
gain: BV of old asset is used to record the exchange
loss: Fair value of old asset is used to record the exchange (unlkikely situation)
journal entry for lacking commercial substance at a gain
you do NOT recognize the gain
old land has BV of 2,500,000 and a fair value of 4,500,000
paid 500,000 in cash
exchange lacks commercial substance
Debit: Land - new: 3,000,000
(so new land is still cash + BUT its the BV of old asset not FV)
Credit: Land old: 2,500,000
Credit: Cash 500,000
ignore fair value and original cost
what happens in an exchange if you receive cash
you subtract it from the new equipment
self constructed assets
company might decide to construct an asset for its own use rather than buying an exsisting one
identifying the cost is difficult because there is no eternal transaction to establish an exchange price
what are the two critical issues with self constructed assets
determining the amount of indirect manufacturing costs (overhead) to be allocated to the construction
deciding on the proper treatment of interest (actual or implict) incurred during construction
overhead allocation for self constructed assets
- inclusion of only the incremental overhead costs
- full cost approach (GAAP)
interest capitalization for self constructed assets
capitalized and then allocated as depreciation
qualifying assets for IC
assets constructed for a co’s own use as well as discrete projects for sale or lease
only interest incurred during the construction period is eligible for capitalization
period of capitalization for IC
begins when construction begins and the 1st expenditure is made as long as interest costs are actually being incurred
what is average accumulated expenditures
approximates the average debt necessary for construction
- if evenly incurred construction expenditures = average
- if not evenly incurred construction expenditures = weighted average
so for specific interest method
- EIC: is just beg + end / 2
- NEIC: is the loans you have to find the average percentage between the other debt
- the construction loan itself is always evenly incurred
weighted average interest method is where you use the fractions to find the average accumulated expenditures (would not even / 2)
steps for IC
determine weighted average accumulated expenditures
calculate the amount of interest to be capitalized
- for specific interest method will have to find the average % between the other two loans
- for weighted average interest method will be given % in construction loan and multiply by your average accumulated expenditure
NOTE: remember we are yes calcualting IC, but that itself represents an expenditure –> so whatever you find for IC, that expenditure is added to the cost of the self constructed asset to get to accumulated expenditures at Dec 31, 2024
- compare the calc interest with the actual interest incurred
(the calculated interest was from step 2) - the actual interest was the % x construction loan and then if you ONLY multiply the % by each of the other debt loans (so in this case your actual interest is where you other debt loans (not SB) do not have the average %
calculated interest is what you are capatlizing
actual interest is the interest when you multiply the loan by the specific %
R&D
research - planned search/critical investigation to discover new knowledge that helps developing a new product or service or a new process of technique or improving exsisting product/processes
development - translation of research findings into a plan or design for a new product or process or improving exsisting product or processes whether intended for sale or use
determining R&D costs
includes costs relevant to R&D projects:
- salaries, wages and other labor costs of R&D personnel
- costs of materials consumed, equipment, faciltiies, intangibles used in R&D projects
- costs of services performed by others
- reasonable allocation of indirect costs related to R&D activities
determining R&D costs also includes:
asset purchased for single R&D project - cost is considered R&D and expenses immediately in the current year
asset purchased for more than a single R&D project
- depreciation or amortization of these assets is included as R&D expenses only in the periods the assets are used for R&D activities
examples of R&D costs: costs incurred are R&D costs
Laboratory research aimed at
discovery of new knowledge.
* Searching for applications of
new research findings or other
knowledge.
* Design, construction, and
testing of preproduction
prototypes and models.
* Modification of the formulation
or design of a product or
process.
examples of non R&D costs - costs incurred are non R&D costs
Engineering follow-through in an early
phase of commercial production.
* Quality control during commercial
production including routine testing of
products.
* Routine ongoing efforts to refine, enrich, or
otherwise improve on the qualities of an
existing product.
* Adaptation of an existing capability to a
particular requirement or customer’s need
as a part of a continuing commercial
activity
what is an expense not to be included in R&D expenses
salaries, wages and payments to others
patent filing and legal costs
are not R&D expenses, part of patent valuation itself
equipment with R&D costs
do NOT include in R&D expenses
BUT the depreciation on the equipment for the R&D is INCLUDED
D: R&D expense
C: AD - equipment
so you can have total expenditures of
R&D expense
capitalized as equipment
capitalized as patent
