Chapter 7 - Long-term Assets Flashcards
Tangible assets
Land, land improvements, buildings, equipment, natural resources
What is the value of land, land improvements, buildings, equipment, or natural resources?
Includes the cost of the asset + all expenditures necessary to get it ready for its intended use
(can be costs adds to this but money made from the asset while getting it ready decreases it)
Intangible assets
Patents, trademarks, copyrights, franchises, goodwill
Land improvements
Amounts spent to improve the land
Are future costs a part of acquisition cost?
No, future costs like tax are NOT included as a part of acquisition cost
Basket purchases
What is it?
How are each of the assets recorded and priced at?
Purchase of more than one asset at the same time for one purchase price
Record each of the assets acquired (like land, building, equipment) in separate accounts
Allocate the total purchase price based on the relative fair values of the individual assets
Expensing an asset
Recording an expense for an expenditure after acquisition that benefits only the current period
For example, repairs on a building (maintaining a given level of benefits)
Capitalizing an asset
Instead of recording an expenditure after acquisition as an an expense, recording it as an asset and depreciating it
For example, if you built a new building on land
What factors are used in calculating depreciation
Service life
Residual value
Depreciation method
Service life
The estimated use the company expects to receive from the asset before disposing of it
Residual value
The amount the company expects to receive from selling the asset at the end of its service life
Depreciation method
The pattern in which the asset’s depreciable cost is allocated over time
What are the three depreciation methods?
Straight-line
Declining-balance
Activity-based
Straight-line depreciation method
(Cost - residual value)/estimated useful life
Most companies use this method
Double-declining-balance depreciation method
What is the depreciation rate?
Accelerating depreciation, the ending book value of one year is the beginning book value of the next
On the last year, record the amount of expense needed to reach to residual value
The depreciation rate is 2/est. useful life
The depreciation rate is twice that of the straight-line depreciation method, hence the name “double.” It is the original cost of the asset times twice the rate of the straight-line method.
Activity-based depreciation method
Based on how often you use the asset
Depreciation per use is the (original cost - estimated final book value)/uses
Is land depreciated?
No
Amortization
Allocating the cost of most intangible assets to expense
Return on assets
Indicates the amount of net income generated for each dollar invested in assets
Return on assets = net income/average total assets
Profit margin
Indicates the earnings per dollar of sales
Net income/net sales
Asset turnover
Measures the sales per dollar of assets invested
Net sales/average total assets
