chapter 8: depreciation of all type of thangs Flashcards
long lived assets
tangible or intangible resources owned by a business
used in operation to produce benefits over several years
what are the long term assets?
land
equipment
property
biological assets
natural ressources
intangibles
does land record depreciation? Why?
nah boy
it never becomes obsolete (unless you destroy the or some thing of the sort)
Caan land be impaired in value?
yeee
what re biological assets?
living things that you own
plants
animals
what is another frequent term for intangibles?
intellectual property
fixed asset turnover ration
formula and meaning
how is management using property, plant, and equipment to generate revenues?
operating revenues (net sales) / average net fixed assets
measures the sales dollar generated by each dollar of fixed assets used
higher ratio is gyuer
the cost principle
all costs incurred in acquiring long lived asset, placing it for operations, and preparing it for use should be recorded in designated assets account
added to purchase price of assets
what does it mean for costs to be capitalized?
when they are recorded as assets on statement of financial position instead of expenses on statement of earnings of the current period
acquisition cost of an asset
the amount recorded for the purchase
net cash-equivalent paid or the be paid for the asset
what are the acquisition methods
for cash
for debt
for equity (or other non cash cosniderations)
by construction
basket purchase of assets
operating lease
short term leases
does not transfer sub tally all risks and rewards of ownership from lesser of the lessee
not recorded on statement of financial position as liabilities
assets not included in fixed assets
finance lease (capital lease)
long term leases
acquisition of assets reported in statement of financial position
transfers substantially all risks and rewards of ownership from lesser to lessee
capitalized interest
interest on loans attributed to construction assets until its ready for use
reduces company total interest expense until asset is ready for use
basket purchase
acquisition of two or more assets in single transaction for single lump sum
cost of each asset must be measured and recorded separately
expenditure
payment of money to acquire goods or services
can be recorded as assets or expenses
are expenditures and expenses the same thing?
nah boy
how are classified expenditures that are made AFTEr an asset was purchased?
ordinary repairs and maintenance or revenue expenditures
extraordinary repairs and betterments
ordinary repairs and maintenance
expenditures for normal operating upkeep of long lived assets
revenue expenditures
maintain productive capacity of the asset during the current accounting period only
are recorded as expenses
extraordinary repairs
infrequent expenditures to enhance the asset’s economic selfness in the future
betterments
costs incurred to enhance the productive or service potential of a lang lived asset
capital expeniditures
increase productive life , operating efficiency, or capacity of the asset
recorded as increases in assets accounts, not as expenses
depreciation
process of cost allocation, not to know the market value of an asset
carrying amount (book value)
acquisition cost of an asset - depreciation and any write offs
how do you calculate the remaining life of an asset
(carrying amount / acquisition cost) * estimated useful life
estimated useful life
management’s estimate of the asset’s useful economic life to the the company
not total economic life to all potential users
continuity assumption
business must consider that they will continue to remain active in a foreseeable future and not liquidate
residual salvage value
estimated amount to be recovered - disposal costs
all at the end of estimated life of an asset
componentization of assets
depreciating different assets separately
considering that different assets have different lasting useful lives, remaining life, and residual value
what are the three most common depreciation methods?
straight line
units of production
declining (or diminishing) balance
straight line method
most used
depreciation is calculated equally each year of an asset’s useful life until it gets to the residual value
depreciation expense is constant amount each year
accumulated depreciation increases equally each year
carrying amount decreases by same amount each year
units of production method
what is the formula
allocates the cost of an asset over its useful life based how much it has produced in the period and how much it can produce
((cost - residual value) / estimated total production) * actual production
= depreciation expense
why is the units of production method a variable expense?
depreciation expense varies directly with production, or use
carrying amount and accumulated depreciation will fluctuate each year
declining balance method
also give formula
reflects the declining benefits that an asset will provide each year of use
also called, accelerated depreciation
(cost - accumulated depreciation) * 2 / useful life
= depreciation expense
accumulated depreciation and depreciation expense are smaller each year
when do you choose usually the declining balance method?
when an asset is considered to be more productive in its earliest years, and that it decreases a lot in its latter years
what are the two important differences between declining balance method and the two other methods
in the formula of the declining balance method, it doesn’t include residual value, but the accumulated depreciation (which increases each year)
since accumulated depreciation can’t make the carrying amount below the residual value, the depreciation expense of the last year might need to be reduced and formula might be disregarded
what is the asset half year rule?
since calculating depreciation can be complicated if an asset isn’t actually bought on January 1 of the year, some companies assume they bought their assets halfway through the year
can you identify if any company will have higher net earnings in the long term if they use straight line or accumulated depreciation?
nah boy
at first, straight line will have higher net earnings but in the latter years, accumulated depreciation will be higher
net earnings would come back to the same technically
what happens when there is a change in estimate in residual value, expected useful of an asset, or both?
- first you calculate all the accumulated depreciation from the years before you changed the estimate
- then, you find the carrying amount which is the original acquisition cost - the accumulated depreciation
- that carrying amount, you subtract to it the new residual value if there is one which give the new depreciable amount
- from that amount, you divide the remaining years from the new estimate
why do managers use the straight line method?
asset is expected to provide benefits evenly over time
easy to explain and use
in early years, provide higher net earnings
what is an asset’s fair value?
amount at which an asset can be bought or sold
why would investors be interested in an asset’s fair value?
adjusted historical costs are not relevant for their decisions or analysis of cash flows
what is the value in use
fair value for long term assets
measured at present value (or current cash equivalent values) of future cash flows expected to be derived from the use of the asset over time
what are the two steps required to assess assets for impairment?
- test for impairment
- computation of impairment loss
- you write down the asset to its recoverable amount
when does impairment occur
when events or changed circumstances cause the carrying amount of assets to exceed recoverable amount
carrying amount > recoverable amount
computation of impairment loss
carrying amount - recoverable amount
can an impairment loss be recovered in the future?
yeee boyyyy
what are the types of disposals when companies decide not to use their assets for all their life?
sale
trade-in
retirement
if a disposal happens, at what date must the depreciation of an asset be recorded?
at the date of the disposal
how can a gain or loss on disposal occur?
- depreciation expense is based on estimates that may differ from actual experience
- depreciation is based on original cost, not current market value
why are natural resources called wasting assets?
because they become depleted
what is depletion
the systematic and rational allocation of the cost of natural resource over the period of exploitation
is depletion considered en expense? why?
it is not considered an expense
it turn into an asset that the company now uses to sell or utilize
how does one calculate the depletion rate?
dividing (total acquisition - residual value) / estimated units that can be withdrawn
like the units of production depreciation method
how can intangibles’ lives be defined?
definite life
indefinite life
how are recorded the costs of obtaining an intangible?
as expenses
definite life of an intangible
recorded on a straight line basis over useful life called amortization
no residual balie
amortization
straight line basis recording of the acquisition cost of the intangible over its useful life
amortization expense included in statement of earnings
indefinite life of intangible
no amortization
tested for impairment instead (carrying amount decreases if present)
goodwill
most reported intangible
favorable reputation of a company
only way to report it as an asset is to buy a company
purchase price - all net assets of company purchased
examples of intangibles
goodwill
trademarks
patents
copyright
franchise
technology
licenses an operating rights
leaseholds
trademarks
exclusive right to own special name, image, or slogan
can be renewed every 15 years
those with definite lives amortized in straight line basis
patents
granted by Big G for invention
exclusive right given tot he owns to use, manufacture and sell new product
lasts for period of 20 years
copyright
exclusive right to publish, use, and sell a literary, musical, or artistic artwork
lasts less than 50 years after authors’ death
franchise
contractual right to sell certain products or services, use certain trademarks, or perform activities in a geographical region
life of franchise depends of a contract
technology
costs for computer software and web development
has increased significantly in recent years
licenses an operating rights
obtained through agreements with governmental units and agencies
permit owners to use public property in performing their activities
leaseholds
right granted to a lessee under lease contract
right to use specific asset
is research development an intangible asset?
naaah boooyyy
its the expense recorded when you develop intangible assets or other shit
are gain and losses affecting the cash flows?
they affect it indirectly
they affect net earnings which in turn affects computation of cash flows from operating activities
are gain and losses of disposal of long lived assets affecting the cash flows?
they affect it indirectly
they affect net earnings which in turn affects computation of cash flows from operating activities
how do gains on disposal of long term assets affect net earnings?
it reduces it
how do losses on disposal of long term assets affect net earnings?
it increases it
