Chapter 11: Long-Term Operating Assets: Acquisition, Cost Allocation, and Derecognition Flashcards
Property, plant, and equipment (PPE)
referred to as tangible fixed assets, are assets used in the production of goods and services that the firm sells in order to generate operating income and cash flow.
PPE assets
- Tangible in nature
- Expected to be used for more than one year (or more than one operating cycle, whichever in longer)
- Used in the production and sale of other assets, for rental to others, or for administrative purposes
Capitalization
is the process of recording an expenditure as an asset
Capital Expenditure
is a cost recorded by a company as an asset rather than an expense
Capitalization Policy
typically sets guidelines based on the type and/or the magnitude of the cost of the asset acquired
Nonmonetary Exchange
a company acquires an asset by exchanging another asset with the seller rather than paying cash
Basket Purchase
a firm acquires two or more fixed assets together for a single purchase price
Homogeneous Assets
assets that are the same
Heterogeneous Assets
assets that are dissimilar from one another
Relative Fair Value Method
allocates the total purchase cost to the individual assets acquired in a single transaction by assigning the total cost incurred based on the percentage that each asset’s fair value bears to the total fair value of all the assets purchased
Notes Payable
are formal credit arrangements between a creditor (lender) and a debtor (borrower) requiring the payment of a stated face amount on a specified maturity date
Imputed Rate of Interest
The firm computes the fair value of the asset by discounting the note payable at an _________ reflecting the market rate of interest that a borrower would incur today under similar terms and conditions
Avoidable Interest
is the interest the firm could have avoided if it had not borrowed funds to construct the plant asset
Weighted-Average Accumulated Expenditures
are the construction expenditures weighted by the portion of the year that the expenditure is outstanding until the project is complete, or the end of the year if the project is not complete
Full-Cost Accounting
the firm allocates a proportionate share of all indirect cost incurred by the company to the construction project
Depreciation
is the systematic and rational allocation of the cost of a long-term plant asset to expense over the asset’s expected useful life
Scrap Value
(also referred to as residual or salvage value) is the amount the firm expects to realize on disposal of the fixed asset at the end of its productive service to the firm
Accumulated Depreciation
a contra-asset account that represents the total depreciation taken over the life of the asset
New Book Value (NBV) or Net Fixed Assets (NFA)
in the noncurrent asset section of the balance sheet
Straight-Line Method
applies a constant rate of depreciation against a constant depreciable cost
Units-of-Output Method
derives a rate of depreciation per unit produced and applies that rate against the actual number of units produced each period
Decreasing-Charge Methods
depreciation methods that take more depreciation in the early years than in the late years of the asset’s useful life
Double-Declining Balance Method (DDB)
a decreasing-charge method that applies a constant rate of depreciation against a declining net book value (defined as cost less accumulated depreciation)
Half-Year Convention
the firm records a half year of depreciation for an asset acquired during the year of purchase (the assumption is that the firm acquired the asset at the midpoint of the year)
Intangible Assets
are assets without physical substance that have economic value because of the contractual or legal rights they confer upon the holder
Finite-Life Intangible Assets
are intangible assets that can be individually identified and have limited useful lives
Patent
grants the holder an exclusive right to use a formula, product, or process for a fixed period of time, usually 20 years
Copyright
is an exclusive right to reproduce and sell an original work–including books, musical scores, advertisements, other works of art, and computer programs–for the creator’s life plus 70 years
Leasehold
is the right to use a specific piece of property for a fixed period of time in exchange for a certain payment
Customer List
consists of information about customers such as their names and contact information
Franchise
represents the right or privilege to sell a product or deliver a services of another entity, such as a business or government
Indefinite-Life Intangible Asset
has no identifiable legal, regulatory, contractual, or competitive factors that limit the asset’s revenue-generating term
Trademark or Trade Name
represents the firm’s product or service; the firm has the legal right to protect the ___________ from any unauthorized use by outside parties
Goodwill
an indefinite-life intangible asset
Bargain Purchase
when the fair value of the identifiable net assets in an acquisition exceeds the purchase price, meaning that the buying entity acquired the company for less than its fair value
Acquired in-process R&D
is an asset obtained in a business combination representing the fair value assigned to in-progress research and development projects that are not yet commercially viable
Amortization
is the systematic and rational allocation of the cost of a finite-life intangible asset to expense over the asset’s expected useful life or legal life, whichever is shorter
Average Age
a company’s assets is computed as the amount of accumulated depreciation divided by depreciation expense
Fixed Asset Turnover Ratio
is computed as total revenues divided by a company’s average net fixed assets
Commercial Substance
A nonmonetary exchange transaction has ________ if the future cash flows change as a result of the transaction – that is, if the economic positions of the parties to the transaction change
Natural Resources
another category of long-term operating assets, include oil and gas deposits, timberlands, coal and other mineral deposits
Depletion
the process of allocating the cost of the natural resource over its useful life
Acquisition Costs
the price paid to obtain the property or the right to search and explore, including acquisitions accounted for as capitalized leases
Exploration and Evaluation Costs
costs incurred to find and determine the technical feasibility and commercial viability of extracting the resource
Development Costs
include intangible costs (such as grading the land and digging tunnels and shafts) as well as tangible costs (such as heavy equipment needed to extract the natural resource)
Restoration Costs
to return property to its original condition after the removal of the natural resource
Full-Cost Method
capitalizes all costs associated with both successful and unsuccessful exploration costs into the natural resource
Successful-Efforts Method
capitalizes only those costs associated with exploring and developing successful wells and expenses the costs associated with dry wells
