Chapter 7 Flashcards
LT Assets
- Tangible Assets (PP&E)
- depreciation
- spread out original cost of the asset over the years of the asset’s useful life
- only depreciate if it has a LIMITED useful life - Intangible Assets (patents, copyrights, trademarks, software & web technologies, franchises, goodwill)
- amortization
- spread out original cost of the intangible over the years of the asset’s useful life
- only amortize those intangibles with a LIMITED useful life
Tangible Assets
- Non-Depreciable Assets - Land
- does not have a limited useful life -> DO NOT DEPRECIATE - Depreciable Assets - PP&E with limited useful lives. Allocate cost of asset to expense over useful life using depreciation.
Determining Acquisition Cost
*original cost should include all costs incurred to bring asset into its productive capacity
1) Land - purchase price + commissions + taxes due + any land preparation costs - proceeds from salvage
2) Improvements (does depreciate) the company must maintain with limited useful lives
3) Buildings - pp + renovation costs + legal fees + title fees
4) Equipment - invoice price - purchase discounts + transportation in + installation costs + trial runs + sales tax
*make sure not to include repair expense or any prepaid expenses
Group Purchases
Determining the original cost of individual assets. Must allocate purchase price to each asset acquired to determine original cost. Record each asset using a weighted average of values multiplied by the actual cost the company paid.
*for extra expenditures, add in after allocation
Depreciation Purpose
- Cost Allocation
- Charging the original cost of a tangible asset to expense over its useful life.
- Follows MATCHING!
Depreciation Terms
- Depreciation Expense - operating expense on IS; only represents amount “used up” in current year (1 year at a time)
- Accumulated Depreciation - contra-asset on BS. Represents the sum of all years’ depreciation recorded on the asset. Can be used to determine asset age.
- Book Value - reported on BS, Cost - AD = BV
- Salvage/Residual Value - $ amount expected to be recovered at end of asset’s life when it is sold
- Depreciable Base - max amount of depreciation that can be recorded over asset’s life, Cost - SV = Max AD
Straight Line
**remember, methods should match pattern of use expected from asset
Allocates cost of asset to expense evenly over its useful life.
(Cost - SV)/# useful years = depreciation expense
Accelerated Method (Double Declining Balance)
Records larger amounts of depreciation in early years of asset life.
(Cost - AD) * (2/#of useful years) = depreciation expense
*don’t depreciate asset past SV!
Units of Production Method
Useful life is based on the number of units it will produce over its entire life.
1) Determine depreciation rate:
Cost - SV/# units life
2) Determine depreciation expense for current year:
rate * # units in year
Expenditures AFTER Acquisitions
- Capital Expenditure - those that are expected to benefit future periods by:
a. increasing productivity (quantity of output)
b. extending useful life
Accounting treatment - add cost to asset
[asset, cash]
- Revenue Expenditure - normal recurring expenditure designed to maintain asset
Accounting treatment - expense when incurred immediately
[repair exp, cash]
Disposal of Plant & Equipment
A. Upon disposal:
1) update depreciation expense/AD
2) calculate gain/loss (BV - disposal)
3) record journal entry:
Cash
AD
Loss
Asset
Gain
B. To determine Gain/Loss:
- if proceeds > BV -> gain
- if proceeds < BV -> loss
Intangible Assets
A. Characteristics:
- lack physical substance
- provide future benefits (like the revenue-producing ability of company)
- many have definite/indefinite (only amortize definite)
B. Typical Intangibles & Legal Lives
- Patents = 20 years granted by federal govt
- Copyrights = 70 years + life of creator
- *Trademarks = 10 years; can be renewed indefinitely, do NOT amortize
- Franchises
- Software and Web technologies
- *Goodwill = when one company buys another and pays more than FMV of net assets, do NOT amortize
Determining Original Cost
A. If purchased outright -
pp + legal fees
B. If developed internally
legal fees only
Amortization of Intangible Assets
Allocates the original cost to expense over asset’s LIFE. Amortize over the lesser of
- useful life
- legal life
- max of 20 years
Uses straight-line amortization (no salvage)
[amortization expense, intangible]
*reduces asset account directly!
Research & Development
EXPENSE as incurred (according to GAAP). Under IFRS, development costs may be capitalized as an asset after “technical and commercial feasibility” have been established.
