Chapter 8

Question 1

Classifying Long-Lived Assets – Tangible

Answer 1

physical substance
- land (don’t depreciate)
- buildings, fixtures, and equipment
- natural resources

Question 2

Classifying Long-Lived Assets – Intangible

Answer 2

• Patent
• copyright
• franchises
• licenses (Own)
• trademarks
• Goodwill

Question 3

Goodwill

Answer 3

cost in excess of net assets required
- don’t depreciate

Question 4

Patent

Answer 4

legal protection to process

Question 5

copyright

Answer 5

legal protection for work

Question 6

Fixed Asset Turnover Ratio

Answer 6

high rate suggests effective management

Question 7

Measuring and Recording Acquisition Cost

Answer 7

• all reasonable and necessary expenditures made in acquiring and preparing an asset for use (or sale in terms of inv) should be recorded as cost of asset
• interest charges associated with purchases are recorded as expense incurred

Question 8

Expenditures are ______ when they are recorded as an asset

Answer 8

capitalized

Question 9

Leasing Long Term Assets

Answer 9

• instead of signing a note payable, companies may choose to lease LT assets
• Because leases confer right-of-use to the company using the asset, these are considered intangible assets and are not included in fixed assets

Question 10

how required to report leases on the balance sheet

Answer 10

Operating lease right of use asset with related obligations reported as debt entitled operating lease liabilities

Question 11

the lessee (one using asset) will recognize

Answer 11

• depreciation of right of use asset
• interest on lease liability

Question 12

Asset Cost Includes

Answer 12

• all materials and labor tracable to construction
• a reasonable amount of overhead
• interest on debt incurred during construction

Question 13

Ordinary Repairs and Maintenence

Answer 13

1) maintains productive capacity of asset during current period
2) recurring in nature
3) involve small amounts
4) do not increase productive life, operating efficiency, or capacity of asset
EXPENSE IN PERIOD INCURRED

Question 14

Improvements

Answer 14

1) Increase productive life, operating efficiency, or capacity of asset
2) occur infrequently
3) involve large amounts of money
ADD ASSET TO ACCOUNT (CAPITALIZE)

Question 15

Measuring Asset Impairment

Answer 15

corporations must review long-live tangible and most intangible assets for possible impairment when events or changed circumstances cause the estimated future cash flows of these assets to fall below their book value

Question 16

3 Steps to Test for Impairment

Answer 16

1) Consider whether indicators of impairment are present
2) Test the recoverability of long-lived assets
3) Measure impairment of long-lived assets

Question 17

Disposal of Property, Plant, and Equipment

Answer 17

businesses dispose of assets involuntarily (storm, fire etc) or voluntarily (sales, trade ins, retirements)
1) update depreciation expense through date of disposal
2) Record disposal by:
- recording cash received (dr) or paid (cr)
- writing off the asset cost (cr) and any accumulated depreciation (dr)
- recording a gain (cr) or loss (dr) (increase NI, SE)

Question 18

Nature of Intangible Assets

Answer 18

Intangible assets are increasingly important resources for organizations
- has value because of certain rights and privileges often conferred by law on its owner
0 has no material or physical substance (most evidenced by legal doc)
- RECORDED AT HISTORICAL COST ONLY IF THEY HAVE BEEN PURCHASED if developed internally by company, they are expenses when incurred

Question 19

Amortization of Tangible Assets

Answer 19

upon acquisition of intangible assets, managers determine whether they have def or indefinite lives
(don’t do with goodwill)

Question 20

Definite life

Answer 20

• cost is allocated (amortized) over its useful life
• straight-line method used to calc amortization expense (recorded on IS)
• most comps don’t estimate a residual value

Question 21

Indefinite Life

Answer 21

• not amortized
• asset must be reviewed at least annually for possible impairment of value (1st using qualitative factors)
• if impaired, the carrying value is reduced to fair market value