Chapter 7 Flashcards
Long Term Assets
useful life is greater than 1 year
Tangible (Fixed) Assets
Plant, Property, & Equipment (PP&E)
- are depreciating, only depreciate PP&E the assets that have a LIMITED useful life
Intangible Assets
Patents, Copyrights, Trademarks, Software & Web Technologies, Franchises, Goodwill
- amortization
- spread out the original cost of the intangible over the years of the assets useful life
- only amortize those intangibles with a limited useful life
Determining Acquisition Cost (original or Historical Cost)
- Land (do not depreciate)- purchase price + commissions + taxes due + any land preparations costs (-) less proceeds from salvage
- Land Improvements (do depreciate)- improvements the company must maintain with limited useful lives (fence, parking lot, driveway, land scraping, outdoor lighting)
- Buildings- purchase price + renovation costs + legal and realty fees + title fees
- Equipment = Invoice price (-) purchase discounts + transportation (freight) in + installation costs + trial runs + sales tax
Group purchases: determining the original cost of individual assets
- must allocate purchase price to each asset acquired to determine its historical cost
record each asset by either:
1. FMV
2. weighted average of appraisal values (FMV) applied to the actual cost the company paid to acquire the assets (use this when the purchase price is less than FMV)
Depreciation Methods
- Straight Line
- Accelerated Method (Double Declining Balance)
- Units of Production Method
Straight Line
allocates cost of asset to expense evenly over its useful life
Solving steps to find depreciation expense for the year:
($ Cost - $ Salvage)/ # of years in useful life
Accelerated Method (Double Declining Balance)
record larger amounts of depreciation in early years of asset life
Solving steps for finding depr. expense for the year
(2/ #of years in useful life) x ($ Cost - AD)
(DO NOT depreciate as asset past its salvage value)
Unit or production Method
the assets useful life is based on the number of units it will produce over its entire life, not # of years
Steps to Solve:
1. ($ cost - $ salvage value)/ # of units in life = cost per unit
2. cost per unit x # of units produced in current year = depreciation expense
Partial years
when a company purchases a fixed asset in the middle of their accounting period, only depreciate the asset for the time they used it
Expenditures after aquisitions “theory only”
Capital vs. Revenue expenditure
- Capital expenditure
- Revenue expenditure
Capital expenditure
those that are expected to benefit future periods by:
1. increasing productivity
2. extending useful life
Accounting treatment: Add cost to asset- add the new cost to the BV & depreciate over remaining life
Depr. expense: [(BV of asset + new cost) - salvage] / # of years remaining in life
Revenue expenditure
normal recurring expenditures designed to maintain the asset
Accounting treatment: expense when incurred (immediately)
Disposal of PP&E
A. Upon disposal
1. remove assets historical cost from books
2. remove accum. depr. account
3. if book value is not equal to Sale Price (FMV) recognize gain or loss on sale (Include gain/loss on income stmt.)
Journal entry:
Cash xx
AD xx
Old Asset xx
Gain xx
B. To determine gain/loss
Cost - AD = Book value
if book value is < cash received its a GAIN
if book value is > than cash received its a LOSS
Journal Entry:
Cash xx
AD xx
Loss xx
Old asset xx
Patents
-exclusive right to use, manufacture, or sell products
-legal life= 20 years
record at original cost + legal fees for successful defense + filing fees + registration fees
copyrights
-right to reproduce or sell a published work
record at cost + legal fees + registration fees
-legal life= life of the creator + 70 years
Trademark/ tradename
-symbol or name that allows a product or service to be recognized
record at cost + registration fees + legal fees
- legal life= 20 years but can be renewed
franchises
right to conduct business in a certain geographic area. franchise can be granted for a definite or indefinite period of time
record at cost to acquire
Good will
ONLY occurs when one company purchases another company and pays more than the FMV of the net assets (DO NOT AMORTIZE)
Characteristics of Intangibles
- lack physical substance (legal document)
- Provide future benefit (increases the future revenue producing ability of the company)
- May have definite or indefinite life (only amortize intangibles with DEFINITE lives)
Amortization of Intangible Assets
- allocates (spreads out) the original cost to expense over the assets life
- for intangibles with a definite life, amortize over the lesser of:
- useful life
- Legal life - uses straight line amortization (no salvage)
-amortization of intangible reduces the asset account directly
Research & Development Costs
Expense all R&D costs as incurred (according to GAAP)
