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Financial Accounting II > Chapter 8: Assets > Flashcards

Chapter 8: Assets Flashcards

1
Q

What is included in long-lived asset

A
  • Tangible
  • Intangible Assets
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2
Q

Criteria of long-lived assets?

A
  • Actively used in operations
  • Expected to benefit future periods
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3
Q

Tangible Assets

A

Physical Substance
- Land
- Assets subject to depreciation (buildings, equipment, furniture, and fixtures)
- Natural resource assets subject to depletion
- Mineral deposits and timber

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4
Q

Intangible Assets

A
  • Non-current assets without Physical Substance
  • Useful life is often difficult to determine
  • Often provide exclusive rights or privileges
  • Usually acquired for operational use
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5
Q

Assets with Definite Life

A
  • Patents
  • Copyrights
  • Franchises
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6
Q

Assets with Indefinite Life

A
  • Trademarks
  • Goodwill
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7
Q

Acquisition cost includes…

A
  • Purchase Price
  • All expenditures needed to prepare the asset for its intended use
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8
Q

Acquisition cost DOES NOT include…

A
  • Financing charges
  • Cash discounts
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9
Q

Acquisition Cost (Buildings)

A
  • Purchase Price
  • Renovation and Repair Costs
  • Legal and Realty Fees
  • Title fees
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10
Q

Acquisition Cost (Equipment)

A
  • Purchase Price
  • Installation Costs
  • Modification to building necessary install equipment
  • Transportation Costs
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11
Q

Acquisition Cost (Land)

A
  • Purchase Price
  • Real Estate Commissions
  • Title Insurance Commissions
  • Delinquent Taxes
  • Surveying Fees
  • Title Search and Transfer Fees
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12
Q

Asset Cost in Acquiring by Construction includes…

A
  • ALL materials and labor traceable to the construction
  • Reasonable amount of overhead cost
  • Interest on debt incurred during the construction
  • Building
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13
Q

Ordinary repairs and maintenance is considered as…

A

Revenue (expense in the current period)

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14
Q

Revenue Expenditure

A
  • Statement of Earnings (Account DEBITED)
  • Expense is RECOGNIZED
  • Earnings is LOWER
  • Taxes is LOWER
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15
Q

Characteristics of Repairs & Maintenance

A
  1. Maintains normal operating conditions
  2. Does not increase productivity
  3. Does not extend life beyond the original estimate
  4. Recurring in nature involves small amounts of money at each occurrence.
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16
Q

Additions and Improvements is considered as…

A

Capital (Add to asset accounts)

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17
Q

Capital Expenditure

A
  • Statement of Financial Position (Account DEBITED)
  • Expenses is DEFERRED
  • Earnings is HIGHER
  • Taxes is HIGHER
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18
Q

Characteristics of Additions and Improvements

A
  1. Major overhauls or partial replacements
  2. Usually occur infrequently
  3. Increases efficiency
  4. May extend useful life
  5. Involves large amounts of money
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19
Q

Depreciation is…

A

Cost allocation process that systematically and rationally matches acquisition costs of operational assets with periods benefited by their use.

20
Q

Depreciation Expense

A

Depreciation for current year

21
Q

Accumulated Depreciation

A

Total depreciation to date on the asset

22
Q

3 amounts required to calculate depreciation

A
  • Acquisition Cost
  • Estimated useful life
  • Estimated residual value
23
Q

Useful life

A

Expected service life of an asset to the present owner

24
Q

Residual (salvage) value

A

Estimated amount to be recovered, less disposal costs at the end of estimated useful life of an asset

25
Q

The 3 depreciation methods

A
  • Straight-line
  • Units of production
  • Accelerated method: Declining Balance
26
Q

Straight-Line Depreciation

A

(Cost - Residual Value) / Useful Life in Years

27
Q

Units-of-Production Method

A

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

28
Q

Accelerated Depreciation

A

Matches higher depreciation expense with higher revenues in early years of an asset’s useful life when asset is more efficient

29
Q

Declining Balance Method

A

Carrying Amount = Cost - Accummulated Depreciation

30
Q

Changes in Depreciation Estimates (Straight-Line Method)

A

Carrying amount at date of change - Residual Value at Date of Change.

= Remaining useful life at date of change

31
Q

What is Asset Impairment?

A

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
32
Q

When is Book Value impaired?

A

When the probable future benefits of an asset are less than the asset’s book value.

33
Q

When does impairment occurs?

A

If carrying amount > Recoverable amount

Impairment Loss = Carrying amount - Recoverable amount

34
Q

Disposal of PP&E

A

Voluntary Disposals:
- Sale
- Trade-In
- Retirement

Involuntary Disposals
- Fire
- Accident

35
Q

Journalizing Disposal

A
  1. Recording cash received (debit) or paid (credit) –> Write off accummulated depreciation (debt)
  2. Recording a gain (credit) or loss (debit) –> Write off the asset cost (credit)
36
Q

Relation of Cash and NBV

A

If Cash > NBV, record gain (credit)
If Cash < NBV, record loss (debit)
If Cash = NBV, no gain or loss

37
Q

Acquisition and Amortization of Intangible Assets

A

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

38
Q

What is Goodwill?

A

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
39
Q

Trademarks

A
  • Symbol, design, or logo associated with a business
  • Exclusive legal right to use a name, image, or slogan
  • Purchased trademarks are recorded at cost
40
Q

Copyrights

A
  • 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
41
Q

Patents

A
  • 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
42
Q

Franchises

A
  • 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
43
Q

Licenses and Operating Rights

A
  • 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.
44
Q

Leaseholds

A
  • 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
45
Q

Research and Development Expense - Not an Intangible Asset

A
  • 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
46
Q

Development Cost (Capitalize)

A
  • 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

Financial Accounting II (6 decks)

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