Chapter 11: Long-Term Operating Assets: Acquisition, Cost Allocation, and Derecognition

Question 1

Property, plant, and equipment (PPE)

Answer 1

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.

Question 2

PPE assets

Answer 2

1. Tangible in nature
2. Expected to be used for more than one year (or more than one operating cycle, whichever in longer)
3. Used in the production and sale of other assets, for rental to others, or for administrative purposes

Question 3

Capitalization

Answer 3

is the process of recording an expenditure as an asset

Question 4

Capital Expenditure

Answer 4

is a cost recorded by a company as an asset rather than an expense

Question 5

Capitalization Policy

Answer 5

typically sets guidelines based on the type and/or the magnitude of the cost of the asset acquired

Question 6

Nonmonetary Exchange

Answer 6

a company acquires an asset by exchanging another asset with the seller rather than paying cash

Question 7

Basket Purchase

Answer 7

a firm acquires two or more fixed assets together for a single purchase price

Question 8

Homogeneous Assets

Answer 8

assets that are the same

Question 9

Heterogeneous Assets

Answer 9

assets that are dissimilar from one another

Question 10

Relative Fair Value Method

Answer 10

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

Question 11

Notes Payable

Answer 11

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

Question 12

Imputed Rate of Interest

Answer 12

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

Question 13

Avoidable Interest

Answer 13

is the interest the firm could have avoided if it had not borrowed funds to construct the plant asset

Question 14

Weighted-Average Accumulated Expenditures

Answer 14

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

Question 15

Full-Cost Accounting

Answer 15

the firm allocates a proportionate share of all indirect cost incurred by the company to the construction project

Question 16

Depreciation

Answer 16

is the systematic and rational allocation of the cost of a long-term plant asset to expense over the asset’s expected useful life

Question 17

Scrap Value

Answer 17

(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

Question 18

Accumulated Depreciation

Answer 18

a contra-asset account that represents the total depreciation taken over the life of the asset

Question 19

New Book Value (NBV) or Net Fixed Assets (NFA)

Answer 19

in the noncurrent asset section of the balance sheet

Question 20

Straight-Line Method

Answer 20

applies a constant rate of depreciation against a constant depreciable cost

Question 21

Units-of-Output Method

Answer 21

derives a rate of depreciation per unit produced and applies that rate against the actual number of units produced each period

Question 22

Decreasing-Charge Methods

Answer 22

depreciation methods that take more depreciation in the early years than in the late years of the asset’s useful life

Question 23

Double-Declining Balance Method (DDB)

Answer 23

a decreasing-charge method that applies a constant rate of depreciation against a declining net book value (defined as cost less accumulated depreciation)

Question 24

Half-Year Convention

Answer 24

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)

Question 25

Intangible Assets

Answer 25

are assets without physical substance that have economic value because of the contractual or legal rights they confer upon the holder

Question 26

Finite-Life Intangible Assets

Answer 26

are intangible assets that can be individually identified and have limited useful lives

Question 27

Patent

Answer 27

grants the holder an exclusive right to use a formula, product, or process for a fixed period of time, usually 20 years

Question 28

Copyright

Answer 28

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

Question 29

Leasehold

Answer 29

is the right to use a specific piece of property for a fixed period of time in exchange for a certain payment

Question 30

Customer List

Answer 30

consists of information about customers such as their names and contact information

Question 31

Franchise

Answer 31

represents the right or privilege to sell a product or deliver a services of another entity, such as a business or government

Question 32

Indefinite-Life Intangible Asset

Answer 32

has no identifiable legal, regulatory, contractual, or competitive factors that limit the asset’s revenue-generating term

Question 33

Trademark or Trade Name

Answer 33

represents the firm’s product or service; the firm has the legal right to protect the ___________ from any unauthorized use by outside parties

Question 34

Goodwill

Answer 34

an indefinite-life intangible asset

Question 35

Bargain Purchase

Answer 35

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

Question 36

Acquired in-process R&D

Answer 36

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

Question 37

Amortization

Answer 37

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

Question 38

Average Age

Answer 38

a company’s assets is computed as the amount of accumulated depreciation divided by depreciation expense

Question 39

Fixed Asset Turnover Ratio

Answer 39

is computed as total revenues divided by a company’s average net fixed assets

Question 40

Commercial Substance

Answer 40

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

Question 41

Natural Resources

Answer 41

another category of long-term operating assets, include oil and gas deposits, timberlands, coal and other mineral deposits

Question 42

Depletion

Answer 42

the process of allocating the cost of the natural resource over its useful life

Question 43

Acquisition Costs

Answer 43

the price paid to obtain the property or the right to search and explore, including acquisitions accounted for as capitalized leases

Question 44

Exploration and Evaluation Costs

Answer 44

costs incurred to find and determine the technical feasibility and commercial viability of extracting the resource

Question 45

Development Costs

Answer 45

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)

Question 46

Restoration Costs

Answer 46

to return property to its original condition after the removal of the natural resource

Question 47

Full-Cost Method

Answer 47

capitalizes all costs associated with both successful and unsuccessful exploration costs into the natural resource

Question 48

Successful-Efforts Method

Answer 48

capitalizes only those costs associated with exploring and developing successful wells and expenses the costs associated with dry wells