Chapter 7: Long-Lived Assets Flashcards
What are Long-Term Assets?
a term used to identify P.P.E, Intangible assets, goodwill or development, construction, maintenance or repair of assets.
What are Long-lived assets listed as on the SFP?
Non-current assets
What are tangible assets?
assets that can be touched and are of physical substance, often P.P.E
What are the three kinds of tangible assets held for use in operations?
- Land
- Buildings, fixtures, equipment
- Natural resources
What are intangible assets?
Assets with no physical substance
What are some intangible assets?
Intellectual property
- copyrights
- Patents
- Licences
- Trademarks
What is goodwill?
No physical substance, it reflects favourable reputation a company has with its customers
Arises from factors like: Confidence, reputation for good service and quality, financial standing.
Only reported as asset when business purchases another business
What is fixed asset turnover ratio?
How effectively management uses P.P.E to generate revenues
Fixed asset turnover ratio = Net sale revenue/Average Net fixed assets
What is cost principle
A principle that requires all reasonable necessary costs incurred in:
acquiring a long lived asset & placing and preparing it for operation , be recorded in a designated asset account
Said costs are recorded as a part of total cost NOT RECORDED AS EXPENSES
What are some costs when acquiring a long lived asset?
non-refundable taxes
legal fees
transportation costs
installation costs
What are some costs when purchasing land?
Title fees
Sales commissions
Legal Fees
Title insurance
delinquent taxes
surveying fees
Why must land be recorded as a seperate asset?
because it does not depreciate
What are acquisition costs
Net cash paid for asset
or
When non-cash assets are used as payment, the fair value of asset given or received (Cash equivalent price)
What is capitalized interest?
The amount of interest that is included in the cost of the construction of an asset
When will interest costs on construction loans be expensed?
Once construction is completed
What is a basket purchase?
When several long-lived assets (Like Land, building & equipment) are acquired in a single transaction for a single lump sum.
Cost of each asset must be measured and recorded seperately
What are expenditures made afer an asset is acquired?
Ordinary repairs and maintenance
or
Improvements
What are ordinary repairs & maintenance?
expenditures for normal maintenance and upkeep of long lived assets that maintain productive capacity of asset.
- Recorded as expense in the current period
What are Improvements?
Expenditures that increase productive life, operating efficiency or capacity of the asset
What is depreciation?
A term used to identify and allocate the acquisition cost of using buildings and equipment that generate revenue over their productive lives
What is amount of depreciation recorded on statement of earnings
Depreciation expense
What is Carrying amount/Net book value?
The acquisition cost less the accumulated depreciation and any write-downs in asset value
What is estimated useful life?
managements estimate of assets useful economic life
What is estimated residual value?
Managements estimate of amount the company expects to recover upon disposal of asset at end of useful life less any disposal/sale costs
What are the three most common depreciation methods?
Straight line
Units of production
Declining Balance
What is the straight line depreciation formula?
Depreciation expense per year = (Cost - residual value) / (useful life in years)
What is Units of production depreciation?
((Cost - Residual Value) / Estimated total production) x Actual production = Depreciation expense
What is accelerated depreciation?
an asset that is more efficient in its earliest years, declining in later years
What is double declining balance formula
(Cost - Accumulated depreciation) x (2 / Useful life) = Depreciation expense
What happens if depreciation amount goes past residual value?
Only the amount of depreciation expense needed to make carrying amount equal to the residual value is recorded
What happens when a there is a change in estimate?
Substitutions are made
- Carrying amount of original acquisition cost
- New residual value for original amount
- Estimated remaining useful life for original estimated useful life
What is a fair value of an asset
a value which reflects the amount at which an asset can be bought or sold between two parties.
What are the two steps for measuring asset impairment?
Step 1:Test for impairment
Step 2: Computation of impairment loss
What is the test fair impairment?
If carrying amount > Recoverable amount, Asset = Impaired
What is the computation of impairment loss
Impairment loss = Carrying amount - recoverable amount
What are the disposals of P.P.E?
Sale
Trade-in
Retirement
What are the journal entries to dispose of a depreciable asset?
- An adjusting entry to update the depreciation expense & accumulated depreciation accounts
- An entry to record the disposal
What is amortization?
The straight line depletion of an intangible asset with a definite life over its useful life
Usually does not hold a residual value
What is a patent?
An exclusive right granted byh the Canadian Intellectual Property office for a period of 20 years
What is copyright?
protection granted by the Canadian intellectual property office
What is a trademark?
An exclusive legal right to use a name image or slogan.
What is a franchise?
a contractual right to sell certain products or services, use trademarks, or perform activities in a geographical region
