Chapter 11 book Flashcards
allocation of the cost of natural resources
depletion
cost allocation for intangibles
amortization
for assets used in the amnufacturing of a product, depreciation, depletion, or amortization is considered a
product cost
for assets not used in production, primarily plant and equipment and certain intangibles used in the selling and administrative functions of the company, depreciation and amortization are reported as
period expenses in the income statement
3 factors of cost allocation
- service life
- allocation base
- allocation method
the estimated use that the company expects to receive from the asset
service life
the cost of the asset expected to be consumed during its service life
allocation base
the pattern in which the allocation base is expected to be consumed
allocation method
the amount the company expects to receive for the asset at the end of its service life less any anticipated idsposal costs
residual value
allocation base equation
allocation base =
cost of the asset - estimated residual value
2 allocation method approaches
- time based methods
- activity based methods
allocate the cost base according to the passage of time
which allocation method is this?
time based methods
allocate an assets cost base using a measure of the assets input or output
which allocation method is this?
activity based methods
natural resources typciall follows an ____ based approach
activity
amortization of intangibles typically follows a _____ based approach
time
allocation of an equal amount to each yeaer
straight line method
represents the cumulative amount of the assets cost that has been depreciated in all prior years including the current year
accumulated depreciation
book value equation
book value =
assets cost - accumulated depreciaton
the assets reported amount in the balance sheet
book value
entry to record depreciation at the end of each yeaer using straight line effects assets and expenses how on the balance sheet
- total assets decrease
- total expenses increases
accelerated depreciation methods report higher depreciation in
earlier years
double declining balance method equation
double declining balance method =
assets beginning of year book value * (double the straight line rate)
sum of years digits method equation
sum of years digits method =
depreciable base * service life/service life years added up)
- 5 year service life
- 210,000 * 5/15
- 5 + 4 + 3 + 2+ 1 = 15
many companies switch from this depreciaion approach to this after the first half of the assets service life
accelerated to straight line
units of production method equation
units of production method =
depreciable base / # of units expected to be produced
then that number * actual activity
which method is superior but not practical
activity based
straight line method produces ____ net income than accelerated methods in the early years of an assets life
higher
the allocation of intangible asset cost
amortization
intangible assets with finite useful llives will be
amortized
intangible assets with indefinite useful lives will
not be amortized
estimated useful life is limited in nature
finite
expected residual value of an intangible asset usually is
0
for intangibles used in the mannufacturing of a product, amortization is a
product cost and is included in the cost of inventory
for intangible assets not used in production, amortization is a
period cost
any software development costs incurred after the point of technological feasibility and before the product is available for sale is
capitalized
capitalized software development costs are amortized based on whichever of the two methods
produces a greater amount
2 methods of capitalized software development costs are amortized
- the ratio of current revenues to current and anticipated revenues
- the straight line method based on the estimated useful life of the asset
no legal, contractual, or economic factors that are expected to limit their useful life to a company
indefinite
indefinite live intangible assets are not subject to
periodic amortization
_____ are considered to have indefinite useful lives
trademarks
_____ is the most common intangible asset with an indefinite useful life
goodwill
_____ is an intangible asset whose cost is not expensed through periodic amortization
goodwill
a change in estimate should be reflected in the financial statements of the
current periods and future periods
when a company changes depreciation method, the change will be effective for what assets
assets placed in service after that date
- do not require revision of past schedules
an asset _______ should be written down if there has been a significant impairment of value
held for use
2 guidelines for an asset to be helf and used
- ppe and intangible assets with finite useful lives
- intangible assets with indefinite useful lives
ppe and finite life intangible assets are tested for impairment only when
events or changes in circumstances indicate book value may not be recoverable
2 step process to determine that the asset will be disposed of significantly before the end of its estimated useful life
- recoerability test
- measurement
an impairment occurs when the undiscounted sum of estimated future cash flows from an asset is less than the assets book value
which of the 2 steps to determine if impairment loss has occurred
step 1: recoverability test
if the recoverability test from step 1 indicates an impairment has occurred, an impairment loss is recorded for the amount by which the assets fair value is less than its book value
which of the 2 steps to determine if impairment loss has occurred
step 2: measurement
a. a significant decrease in market price
b. significant adverse change in how the asset is being used or in its phsyical condition
c. a significant adverse change in legal factors or in the business climate
d. an accumulation of costs significantly higher than the amount originally expected for the acquisition or construction of an asset
e. a current period loss combined with a history of losses of a projection of continuing losses associated with the asset
f. a realization that the asset will be disposed of significantly before the end of its estimated useful life
events that would cause the investigation of an impairment
- an extension of the useful life of the asset
- an increase in the operating efficiency of the asset resulting in either an increase in the quantity og goods or services produced or a decrease in future operating costs
- an increase in the quality of the goods or services produced by the asset
ways expenditures related to assets can increase future benefits
expenditures that increase future benefits should be
capitalized initially then expensed in future period through depreciation, depletion, or amortization
many companies do not capitalize any expenditure unless it exceeds a predetermined amount that is considered
material
4 classifications of subsequent expenditures
- repairs and maintenance
- additions
- improvement
- rearrangements
expenditures for repairs and maintenance generally are expensed
when incurred
the cost of additions usually are
capitalized over the remaining useful life of origianl asset or own useful, whichever is shorter
the costs of improvements usually are
capitalized over the useful life of the improved asset
expenditures made to restructure an asset without addition, replacement, or improvement
not to extend its useful life
rearrangements
the costs of material reaarangements should be capitalized if they clearly
increase future benefits and over the future periods benefited
the costs incurred to succesfully defend an intangible right should be
capitalized
the costs incurred to unsuccessfully defend an intangible right shoule be
expensed
