Chapter 18 - Property, Plant, and Equipment Flashcards
ACQUISITION AND DEPRECIATION
personal property
- assets such as machinery, equipment, furniture, and fixtures that can be removed and used elsewhere
ACQUISITION AND DEPRECIATION
capitalized costs
- all costs recorded as part of an asset’s cost
ACQUISITION AND DEPRECIATION
Acquisition cost of an asset
- includes :
- gross purchase price less discounts, including cash discounts for prompt payment
- transportation costs
- installation costs
- costs of adjustments or modifications needed to prepare the asset for use
ACQUISITION AND DEPRECIATION
net book value
- the cost of an asset minus its accumulated depreciation, depletion, or amortization
ACQUISITION AND DEPRECIATION
depreciation information shown on financial statements or in notes accompanying the financial statements
- depreciation expense for the period
- balances in the depreciable asset accounts, classified according to their nature or their function
- accumulated depreciation
- description of the method(s) used to compute depreciation
ACQUISITION AND DEPRECIATION
real property
- assets such as land, land improvements (such as sidewalks and parking lots), buildings, and other structures attached to the land
ACQUISITION AND DEPRECIATION
residual value
- the estimate of the amount that could be obtained from the sale or disposition of an asset at the end of its useful life; also called salvage or scrap value
ACQUISITION AND DEPRECIATION
net salvage value
- the salvage value of an asset less any costs to remove or sell the asset
ACQUISITION AND DEPRECIATION
Straight-Line Method (Depreciation)
- an equal amount of depreciation is recorded for each period over the useful life of an asset
ACQUISITION AND DEPRECIATION
Declining-Balance Method
- an accelerated method of depreciation in which an asset’s book value at the beginning of a year is multiplied by a constant percentage (equal to double the straight-line rate) to determine depreciation for the year
ACQUISITION AND DEPRECIATION
accelerated method of depreciation
- a method of depreciating asset cost that allocates greater amounts of depreciation to an asset’s early years of useful life
ACQUISITION AND DEPRECIATION
double-declining-balance method
- a method of depreciation that uses a rate equal to twice the straight-line rate and applies that rate to the book value of the asset at the beginning of the year.
1. Calculate straight line rate
2. Calculate the double declining rate
3. Compute depreciation for the period by multiplying the book value by the double declining rate
4. In the final year of depreciation, take only the amount of depreciation that will reduce the asset’s net book value to its salvageable value
ACQUISITION AND DEPRECIATION
sum-of-the-years’-digits method
- a method of depreciating asset costs by allocating as expense each year a fractional part of the asset’s depreciable cost, based on the sum of the digits of the number of years in the asset’s useful life
ACQUISITION AND DEPRECIATION
units-of-output method also known as units-of-production method
- a method of depreciating asset cost at the same rate for each unit produced during each period
- may be measured in terms of :
- physical quantities of production
- number of hours the asset is used
- other measures
1. Determine the depreciation per unit (per mile)
2. Compute depreciation
DISPOSITION OF ASSETS
gain
- the disposition of an asset for more than its book value
DISPOSITION OF ASSETS
loss
- the disposition of an asset for less than its book value
DISPOSITION OF ASSETS
steps for when an asset is sold for recording
Step 1. Record depreciation to the date of disposition
Step 2. Remove the cost of the asset
Step 3. Remove the accumulated depreciation
Step 4. Record the proceeds
Step 5. Determine and record the gain or loss, if any
DISPOSITION OF ASSETS
trade in transactions
Step 1. Record the depreciation up to the date of trade-in
Step 2. Record the trade-in of the old asset and the purchase of the new asset
- Under financial accounting rules, losses on trade-ins are recorded, but gains on trade-ins are not recorded
- For federal income tax purposes, neither gains nor losses are recognized in trade-ins
DISPOSITION OF ASSETS
Steps to record the trade-in if there is a gain on a transaction
Step 1. Remove the cost of the old asset
Step 2. Remove the accumulated depreciation for the old asset
Step 3. Record the payment
Step 4. Record the new asset as the sum of cash paid and the book value of the old asset
DISPOSITION OF ASSETS
Steps to record the trade-in if there is a loss on a transaction
Step 1. Remove the cost of the old asset
Step 2. Remove the accumulated depreciation for the old asset
Step 3. Record the payment
Step 4. Record the new asset at its fair market value
Step 5. Determine and record the loss
DISPOSITION OF ASSETS
income tax method
- a method of recording the trade-in of an asset for income tax purposes
- it does not permit a gain or loss to be recognized on the transaction
DISPOSITION OF ASSETS
Application of tax rules on trade-in transactions
Step 1. Remove the cost of the old asset
Step 2. Remove the accumulated depreciation for the old asset
Step 3. Record the cash payment
Step 4. Record the new asset at the sum of the book value of the old asset and the cash paid
SPECIAL TOPICS IN LONG-TERM ASSETS
depletion
- allocating the cost of a natural resource to expense over the period in which the resource produces revenue
SPECIAL TOPICS IN LONG-TERM ASSETS
impairment
- a situation that occurs when the asset is determined to have a market value or a value in use less than its book value
SPECIAL TOPICS IN LONG-TERM ASSETS
recoverability test
- test for possible impairment that compares the asset’s net book value with the estimated net cash flows from future use of the asset
SPECIAL TOPICS IN LONG-TERM ASSETS
intangible assets
- asset’s that lack a physical substance, such as goodwill, patents, copyrights, and computer software, although software has, in a sense, a physical attribute
SPECIAL TOPICS IN LONG-TERM ASSETS
patent
- an intangible asset
- an exclusive right given by the U.S. Patent Office to manufacture and sell an invention for a period of 17 years from the date the patent is granted
SPECIAL TOPICS IN LONG-TERM ASSETS
copyright
- an intangible asset
- an exclusive right granted by the federal government to produce, publish, and sell a literary or artistic work for a period equal to the creator’s life plus 70 years.
SPECIAL TOPICS IN LONG-TERM ASSETS
franchises
- an intangible asset
- a right to exclusive dealership granted by a governmental unit or a business entity
SPECIAL TOPICS IN LONG-TERM ASSETS
trademarks, trade names, and brand names
- an intangible asset
- an exclusive business symbol registered with the U.S. Patent Office
SPECIAL TOPICS IN LONG-TERM ASSETS
computer software
- an intangible asset
- written programs that instruct a computer’s hardware to do certain tasks
SPECIAL TOPICS IN LONG-TERM ASSETS
goodwill
- an intangible asset
- the value of a business in excess of the net value of its identifiable assets
SPECIAL TOPICS IN LONG-TERM ASSETS
amortization
- the process of periodically transferring the acquisition cost of intangible assets with estimated useful lives to an expense account
