Chapter 8 (Long Lived Assets & Intangibles) Flashcards
- Long lived asset = actively used in operations for > _ years
- Tangible assets = PP&E and natural resources
- Intangible assets = no ________ substance - General rule for cost capitalization: The initial cost of an asset includes the purchase price and all expenditures necessary to bring the asset to its desired condition & _________ for use.
> 1 years
physical
condition & location
Costs to be capitalized Examples (tangible)
- Equipment (* any current property taxes & insurance paid at acquisition are recorded __________, from say sales tax)
- Land: land is ___ depreciable, because it is considered to have an indefinite life
- Land Improvements
- Buildings
- Natural Resources
separately
not
Depreciation
- The process of cost __________ which matches the acquisition cost with the periods benefitted by its use
- Depreciation expense (Credit/Debit?): Current year amount; presented on the ______ statement
- Accumulated depreciation (Credit/Debit?): Total depreciation to date; Presented on the ________ ______
- Not used to measure changes in an asset’s market value
cost allocation
debit, income
credit, balance sheet
Depreciation Methods
- Straight line Depreciation: Results in the ____ amount of depreciation in each year of asset’s service life
- Formula: Depreciation Expense per Year = (Cost - _________ value) / Useful Life in Years
- Units-of-Production (Activity) Depreciation: 2 Steps to Calculate
1) Depreciation Rate = (Cost - Residual Value) / Life in _____ of Production
2) Depreciation _______ = Depreciation Rate * Number of Units produced for the year
same
(Cost - Residual Value)/ Useful Life in Years
1) Depreciation Rate = (Cost - Residual Value) / Life in Units of Production
2) Depreciation Expense
Depreciation Methods Continued
- Declining-Balance Method: Ignores _________ value, except for stop depreciating when NBV = residual value
- Formula: Annual Depreciation Expense = ___ ____ _____ (NBV) * (2/ Useful Life in Years)
- Declining balance rate of 2 is double-declining balance rate, but this number can be replaced with any other number
residual
Net Book Value ( = cost - accumulated depreciation)
Repairs, Maintenance, & Improvements
- Type of Expenditure: Ordinary repairs and maintenance (typically lower costs) = _______ in period incurred.
- Additions and Improvements (typically higher costs) = additions to _____ accounts (i.e. capitalizing)
expenses
asset
- Changes in estimated useful life and residual value are accounted for prospectively (forward-thinking)
Asset Dispositions - can be voluntary or involuntary
- Require two entries: update accumulated ____________ through the disposition date / record the disposition
- Remove the asset (Credit/Debit?) & accumulated depreciation (Credit/Debit?); recognize gain (Credit/Debit?) or loss (Credit/Debit?)
depreciation
Credit, Debit, Credit, Debit
Asset Impairment
- loss of significant portion of the utility of the asset which can’t be recovered
- Impairment Formula = ___ - Fair Value (______ Price)
- Presented as a ____ on the
income statement
Intangible Assets
- _________ right that provide benefits to the owner in the production of goods and services (i.e. provide value or benefit in the company’s future without physical substance)
- If purchased, initial costs include the ________ price, and legal & filing fees; if internally developed, initial costs include on legal & filing fees
- For internally developed patents, ___ costs are expensed in the period incurred
NBV - Fair Value (Market Price)
loss
Exclusive
purchase
R&D
Intangible Asset Amortization
- typically ____ residual value, typically amortized using the ________-____ method
Goodwill
- Occurs when one company ____ another company; only purchased goodwill is an intangible asset
- Goodwill formula: ________ price - fair market value of net ______ acquired
- Goodwill is amortized (rather than depreciated), but rather tested at least annually for possible impairment
zero, straight-line
Purchase price - fair market value of net assets acquired
Natural Resource Depletion
- As natural resources are “used up”, the cost of the natural resources must be allocated to the units extracted
- The approach is based on the _____-___-___________ method
- Unit Depletion Rate = (____ of Natural Resource - ________ Value) / Estimated Recoverable Units
- Total Depletion Cost = Unit Depletion Rate * Units _________
units-of-production
Cost of Natural Resource - Residual Value
Unit Depletion Rate * Units Extracted
- Declining-Balance Method Note: For final year, take the total accumulated depreciation you need to reach the ________ value, and subtract from it the accumulated depreciation thus far. This will equal the depreciation expense for the final year.
- Asset Dispositions Note: 1) Record cash with a _____ to the account, 2) Remove the asset with a _____ to the account and remove accumulated depreciation with a _____ to the account, 3) Record a gain with a ______ to the account or record a loss with a _____ to the account
- A contra-asset account is not used to record accumulated amortization for intangible assets, will be written as “Intangible Asset - x account”
residual
debit, credit, debit, credit, debit
Exam 2 Notes
- Goodwill is the excess of the purchase price over the ____ value of the net assets acquired
- Once you reach an asset’s ________ value, the company will stop depreciating the asset, so the asset’s NBV doesn’t decrease further
fair
residual
