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MS2 Accounting Intro Review > Chapter 10: Plant Assets, Natural Resources, and Intangible Assets > Flashcards

Chapter 10: Plant Assets, Natural Resources, and Intangible Assets Flashcards

1
Q

Patents

A

An intangible asset
The exclusive right to manufacture/ sell/ control an invention for 20 years from date of grant

Capitalize - cost of purchasing, legal fees of SUCCESSFULLY defending patent

Amortize directly (no contra-asset) over useful life or 20 years, whichever is shorter

Expense R&D Costs

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2
Q

Intangible Assets

A

Rights, privileges, competitive advantages that do NOT possess physical substance

Categorized as having either a limited life or indefinite life (also internally created vs purchased)

Trademarks, patents, goodwill, copyrights, franchises/ licenses

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3
Q

Natural Resources

A

AKA Wasting assets

  • physically extracted in the course of operations
  • replaceable only by act of nature

Uses depletion to spread cost across usage until used up

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4
Q

Impairment

A

A permanent decline in asset value (down to LESS than book value)

intangible assets are tested for impairment annually and if it occurs the company records a loss in the period the decline is identified

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5
Q

Depreciation

A

A process of cost allocation (not asset valuation)

  • expenses to period that benefits from the use of the asset (matching principle)
  • Does NOT apply to land
  • Shows how revenue producing ability declines over an assets natural life
  • Depreciation stops when book value = salvage value
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6
Q

Plant assets

A 
Includes land improvements
Attributes:
- Possess physical substance
- Used in operations
- Not for Resale to Customers
- Long-Term
- Usually a depreciated expense

AKA: property, plant and equipment, PP&E, Plant + Equipment, or Fixed Assets

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7
Q

Salvage Value

A

Estimate of an asset’s value at the end of its useful life. (also “residual value”)

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8
Q

Cost of Plant assets

A

DOES NOT INCLUDE MAINTENANCE AND UPKEEP
- Always at historical cost (cost principle)
- The asset is shown at historical cost of its entire useful life. Contra-asset accounts shows depreciation
- Cost includes all necessary expenditures to acquire asset and make it ready for use, including:
Fees and commissions, closing costs, cost to make ready (improvements, removals) Taxes, freight, discounts, trial runs
- interest costs are included ONLY during construction and only if its a significant period of time.

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9
Q

Classes of Plant Assets

A
  • Land (for use in ops, NOT investment property)
  • Land improvements (driveways, parking lots, etc.. have limited useful life)
  • Building (used in ops, not investments)
  • Equipment
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10
Q

Types of expenditures on plant assets

A 
Ordinary Expenditures (Revenue Expenditures)
- maintaining operating efficiency, shows in expenses for that period

Capital Expenditures (Additions and Improvements)

  • Increases the operating efficiency, capacity or useful life
  • Debit the plant asset effected
  • Depreciated over its useful life
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11
Q

Modified Accelerated Cost Recovery System

A

MACRS

  • Required by the IRS, but not acceptable under GAAP
  • Assets divided by IRS regulation into specific classes that determine useful life
  • Ignores residual value
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12
Q

Accelerated Depreciation Methods

A

Expense more of the assets cost at the start of its useful life and less at the end

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13
Q

Capital Expenditure vs Revenue Expenditure

A

Capital Expenditure:

  • Balance Sheet Expenditure
  • Debited to an asset account

Revenue Expenditure:

  • Debited to Expense Account
  • Income Statement Expenditure
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14
Q

Extraordinary Repair

A

Repair work that generates a capital expenditure because it extends the assets life past the normal expected life

debited to an asset account

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15
Q

Land Improvements

A

A depreciable improvement to the land such as fencing, sprinklers, paving, signs or lighting

NOT included as cost of the land (which does not depreciate) but as individual depreciable assets

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16
Q

(to) Capitalize

A

Recording the acquisition of land, building or other assets by debiting (increasing) an asset account

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17
Q

Copyrights

A

Exclusive right to reproduce and sell artistic or published work

Granted for the life of the creator + 70 years (depends on the date of publication)

Capitalize: Acquisition cost + Successful cost to defend

Amortize over useful life (usually a short period)

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18
Q

Amortization

A

Decreases asset directly over useful life, no contra-asset account required. (Though may choose to use one)

Means the asset disappears from the books at the end of its useful life - no need to discard/ no physical asset to dispose of

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19
Q

Trademark / Trade Names

A

An intangible asset
Legal protection for an indefinite number of 20 year renewal periods. Indefinite life

Capitalize- Acquisition costs
Expense - cost to develop or maintain as they are incurred

No amortization allowed under GAAP

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20
Q

Franchises and Licenses

A

Arrangement between a franchisor and franchisee

  • licenses and permits are a type of franchise between a government body and a business over the use of public property
  • Franchise with limited life: cost to acquire amortized to expense over life of franchise

-Indefinite life, carried at cost, not amortized

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21
Q

Goodwill

A

Intangible, indefinite asset
ONLY recorded when entire business is purchased - cannot be sold separately
- internally created goodwill not capitalized
-no amortization allowed (indefinite life)

value = purchase price of business - fair market value of net asset acquired

22
Q

Modified Half-Month convention

A

Alternative to calculating partial month or daily depreciation for partial year depreciation

An asset purchased on/ before the 15th of a month will be depreciated for the whole month

An assert purchased after the 15th will not be depreciated until following month

23
Q

Commercial substance

A

Exchanges have commercial substance if future cash flows change as a result of the exchange

24
Q

Intangible asset amortization periods

A

Patents: 20 year legal life, amortized over useful or legal life

Franchises/Licenses: Legal life by contract or indefinite, amortized over useful life

Copyrights: Legal = life of creator + 70 years, Amortized over short period (useful life)

Goodwill: indefinite legal life, not amortized

Trademarks/Trade Names: Indefinite legal life, Not amortized

25
Q

Journaling Exchange of Equipment/ Plant Assets

A 
Debit Equipment (new)
Debit Accumulated Depreciation
Debit Any Loss on Exchange
     Credit Equipment (old) 
     Credit Cash paid
     Credit any gain on Exchange
26
Q

Journaling Plant Asset Disposal

A

Disposed by: sale, exchange or retirement (scrapped/ discarded)

Depreciation must be recorded up until the date of disposal (must be brought up to date before journaling disposal) or until book value = salvage value

Debit Accumulated Depreciation
Credit Asset Account
+ recognize any value received or loss (of salvage value)

27
Q

Recording Depletion Expense

A

Debut Depletion Expense
Credit Accumulated Depletion

Accumulated depletion = contra-asset account

28
Q

Limited life intangibles

A
  • Amortize to expense over asset’s useful life
  • no contra-asset account. Credit asset account directly

Debit Amortization Expense
Credit Asset Account

29
Q

Indefinite Life Intangibles

A

No amortization allowed per GAAP

30
Q

Internally Created Intangibles

A
  • Generally expensed as costs incurred (no amortization/ depreciation)

Exceptions: can capitalize direct costs to register, defend, or perfect title and internally created assets (legal costs)

31
Q

Research and Development Costs

A

Always expensed when incurred (whether successful or not)

32
Q

Purchased Intangibles

A
  • Recorded at cost (includes all costs to make ready for use)
  • Amortized over (limited) useful life (allocated to periods benefited
  • At disposal asset is eliminated and gains or losses recorded
33
Q

Journal Periodic Depreciation Accumulation

A

Debit Depreciation Expense

Credit Accumulated Depreciation

34
Q

Capital Expenditures

A

Debit Asset Account

Credit Cash or A/R

35
Q

Revising Periodic Depreciation

A

Allowable by GAAP - a change in the estimate
- change in current and future periods of depreciation, no retrospetive changes

Revised depreciation expense = Revised depreciable cost / remaining useful life

(Revised depreciable cost = current book value - current salvage value)

36
Q

Natural Resource Depletion Expense

A

Acquisition cost = cost to acquire + cost to prepare for use

Depletion: allocated over resources’ useful life

Use units of activity depletion - based on units extracted/ year

(Acquisition cost - Salvage Value)/ estimated units available = cost per unit

Depletion expense = units extracted (and sold) x Depletion cost per unit

37
Q

Goodwill Calculation

A

= purchase prices - fair market value of net assets acquired

Net Assets = total assets - total liabilities

38
Q

Asset Turnover Ratio

A

= Net Sales/ Average Total Assets

Average Total Assets= (Beginning assets + ending assets)/ 2

Measures how efficiently a company uses assets to generate sales

shows amount of sales each dollar invested in assets produces

39
Q

Computing depreciation

A

Need:

  • Cost (all expenditures to acquire and make ready)
  • Useful life (estimated based on expected repairs, service life, obsolesce)
  • Salvage Value

Want to use best method to represent actual contribution to revenue

  • Straight line (most used)
  • units of activity
  • Declining balance

multiply by fraction of a year if its a partial year

40
Q

Depreciable Cost

A

Asset cost less salvage value

41
Q

Relative Market Value Method

A

A method of allocating the total cost of multiple assets purchased at one time (lump sum or basket). Total cost is divided among the assets according to their relative value.

1) Find market value of each asset
2) Calculate what percentage that is of total market value
3) use that percentage to calculate relative market value

42
Q

Units-of-Activity Depreciation Method

A

AKA Units of Production Method

(Depreciable cost / estimated total units of activity) x activity units per year = depreciation amount for year

units can be qty or hours

Often difficult to estimate total activity but results in the best matching of revenues and expenses if productivity varies between periods

Good for items that depreciate from wear and tear

43
Q

(Double) Declining balance method of depreciation

A

An Accelerated depreciation method. Multiples depreciable assets decreasing book value by a constant percentage that is 2x the straight line depreciation rate.

= book value x 2 x (1/useful life)
(aka book value x (2/useful life)

Book value = cost - accumulated depreciation. Changes yearly

Residual value is ignored until depreciation would take book below residual and then residual is plugged

Called declining balance because book value AND depreciation expense decline each year

higher depreciation in early years = higher output from new asset

44
Q

Straight Line Depreciation

A

Depreciable cost / useful life (years) = annual depreciation expense

  • Depreciation is the same each year
  • Matches the expenses and revenues if asset is used fairly uniformly throughout service life (often items that become obsolete)
45
Q

Intangible assets on financial statements

A

Usually shown as a separate category from PP&E

(Natural resources listed under PP&E)

Shown only at net book value - amortization expense as an operating expense

46
Q

Depreciation and Taxes

A

IRS does not require companies to use the same depreciation method on financial statments and taxes

Taxes require MACRS (may allow straight line method, book and presentation disagree)
MACRS= Modified Accelerated Cost Recovery System (not allowed under GAAP)

47
Q

How Depreciation is shown on financial reports

A

Income statement: shows depreciation expense

Balance sheet: shows asset and accumulated depreciation

48
Q

Result of incorrect capitalization

A

Capitalization delays expense recognition to future periods - boost current period profits.

49
Q

Gains or Losses on PP&E on Financial Statements

A

Goes in Other Revenue and Gains or Other Expenses and Losses (not an operating expenses)

50
Q

IFRS - Component Depreciation

A

Any significant parts of a depreciable asset that have different estimated useful lives should be separately depreciated.

Required by IFRS

51
Q

Long-lived assets under IFRS

A

R&D expensed under GAAP, NOT under IFRS

IFRS uses “residual value” not salvage value

IFRS allows companies to re-value assets to Fair Market Value as of Reporting Date

  • must be applied to all assets in that asset class
  • if asset is experiencing rapid changes in value must re-evaluate annual
  • Requires component depreciation
  • IFRS allows revaluation of intangible assets (besides goodwill) GAAP does not.

MS2 Accounting Intro Review (16 decks)

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