Chapter 8: Assets Flashcards
What is included in long-lived asset
- Tangible
- Intangible Assets
Criteria of long-lived assets?
- Actively used in operations
- Expected to benefit future periods
Tangible Assets
Physical Substance
- Land
- Assets subject to depreciation (buildings, equipment, furniture, and fixtures)
- Natural resource assets subject to depletion
- Mineral deposits and timber
Intangible Assets
- Non-current assets without Physical Substance
- Useful life is often difficult to determine
- Often provide exclusive rights or privileges
- Usually acquired for operational use
Assets with Definite Life
- Patents
- Copyrights
- Franchises
Assets with Indefinite Life
- Trademarks
- Goodwill
Acquisition cost includes…
- Purchase Price
- All expenditures needed to prepare the asset for its intended use
Acquisition cost DOES NOT include…
- Financing charges
- Cash discounts
Acquisition Cost (Buildings)
- Purchase Price
- Renovation and Repair Costs
- Legal and Realty Fees
- Title fees
Acquisition Cost (Equipment)
- Purchase Price
- Installation Costs
- Modification to building necessary install equipment
- Transportation Costs
Acquisition Cost (Land)
- Purchase Price
- Real Estate Commissions
- Title Insurance Commissions
- Delinquent Taxes
- Surveying Fees
- Title Search and Transfer Fees
Asset Cost in Acquiring by Construction includes…
- ALL materials and labor traceable to the construction
- Reasonable amount of overhead cost
- Interest on debt incurred during the construction
- Building
Ordinary repairs and maintenance is considered as…
Revenue (expense in the current period)
Revenue Expenditure
- Statement of Earnings (Account DEBITED)
- Expense is RECOGNIZED
- Earnings is LOWER
- Taxes is LOWER
Characteristics of Repairs & Maintenance
- Maintains normal operating conditions
- Does not increase productivity
- Does not extend life beyond the original estimate
- Recurring in nature involves small amounts of money at each occurrence.
Additions and Improvements is considered as…
Capital (Add to asset accounts)
Capital Expenditure
- Statement of Financial Position (Account DEBITED)
- Expenses is DEFERRED
- Earnings is HIGHER
- Taxes is HIGHER
Characteristics of Additions and Improvements
- Major overhauls or partial replacements
- Usually occur infrequently
- Increases efficiency
- May extend useful life
- Involves large amounts of money
Depreciation is…
Cost allocation process that systematically and rationally matches acquisition costs of operational assets with periods benefited by their use.
Depreciation Expense
Depreciation for current year
Accumulated Depreciation
Total depreciation to date on the asset
3 amounts required to calculate depreciation
- Acquisition Cost
- Estimated useful life
- Estimated residual value
Useful life
Expected service life of an asset to the present owner
Residual (salvage) value
Estimated amount to be recovered, less disposal costs at the end of estimated useful life of an asset
The 3 depreciation methods
- Straight-line
- Units of production
- Accelerated method: Declining Balance
Straight-Line Depreciation
(Cost - Residual Value) / Useful Life in Years
Units-of-Production Method
Step 1:
Depreciation Rate = (Cost - Residual Value) / Life in Units of Production
Step 2:
Depreciation Expense = Depreciation Rate x Number of Units Produced for the Year
Accelerated Depreciation
Matches higher depreciation expense with higher revenues in early years of an asset’s useful life when asset is more efficient
Declining Balance Method
Carrying Amount = Cost - Accummulated Depreciation
Changes in Depreciation Estimates (Straight-Line Method)
Carrying amount at date of change - Residual Value at Date of Change.
= Remaining useful life at date of change
What is Asset Impairment?
Impairment is the loss of a significant portion of the utility of an asset through:
- Casualty
- Obsolescence
- Lack of Demand for the asset’s services
When is Book Value impaired?
When the probable future benefits of an asset are less than the asset’s book value.
When does impairment occurs?
If carrying amount > Recoverable amount
Impairment Loss = Carrying amount - Recoverable amount
Disposal of PP&E
Voluntary Disposals:
- Sale
- Trade-In
- Retirement
Involuntary Disposals
- Fire
- Accident
Journalizing Disposal
- Recording cash received (debit) or paid (credit) –> Write off accummulated depreciation (debt)
- Recording a gain (credit) or loss (debit) –> Write off the asset cost (credit)
Relation of Cash and NBV
If Cash > NBV, record gain (credit)
If Cash < NBV, record loss (debit)
If Cash = NBV, no gain or loss
Acquisition and Amortization of Intangible Assets
Definite Life
- Amortize over shorter of economic life or legal life.
- Use straight-line method
Indefinite Life
- Not Amortized
- Tested at least annually for possible impairment, and carrying amount is reduced to fair value if impressed
Amortization is a cost allocation process similar to depreciation and depletion
What is Goodwill?
The amount by which the purchase price exceeds the fair value of net assets required.
- Occurs when one company buys another company
- Only purchased goodwill is an intangible asset
- Not Amortized
Trademarks
- Symbol, design, or logo associated with a business
- Exclusive legal right to use a name, image, or slogan
- Purchased trademarks are recorded at cost
Copyrights
- Exclusive right to publish, use, and sell a literary, musical, or artistic work
- Legal life is life of creator plus 50
- Amortize cost over the period benefited
Patents
- Exclusive rights granted by the federal government to sell or manufacture an invention
- Cost is purchase rice plus legal cost to defend
- Amortize cost over the shorter of useful life or 20 years
- Research and development costs that might result in a patent are normally expensed as incurred
Franchises
- Legally protected right purchased by a franchisee to sell products or provide services for a specified period and purpose
- Purchase price is an intangible asset that is amortized
Licenses and Operating Rights
- Limited permissions to use a product or service according to specific terms and conditions
- You may be using computer software that is made available to you through a campus licensing agreement.
Leaseholds
- Contract to use property granted by a lessor (owner) to a lessee (another party).
- Rights granted under the lease are called leaseholds
- Leasehold is recorded only if advance payment is involved, otherwise, periodic payments are treated as rent expense
- Leasehold improvements are long-term alterations made by lessee to leased property and are recorded at cost and amortized over their useful life
Research and Development Expense - Not an Intangible Asset
- If an intangible asset is developed internally –>, the Cost of development is recorded as an R&D Expense
- Under specific circumstances, costs can be deferred to future accounting periods, recorded as assets, and then amortized over time, if the company can meet specific criteria for deferral
Development Cost (Capitalize)
- Technical feasibility of completing the intangible asset
- The entity’s intention to complete it for use or for sale
- The entity’s ability to use or sell it
- Availability of technical, financial, and other resources needed to complete it, and to use or sell it
- The way in which the future economic benefits will be received, including the existence of a market for the asset if it will be sold, or its usefulness to the entity if it will be used internally
- The ability to reliably measure the costs associated with and attributed to the intangible asset during its development
