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MGMT 201: Financial Accounting > Chapter 8: Long-Term Assets > Flashcards

Chapter 8: Long-Term Assets Flashcards

1
Q

Land is never depreciated because its useful life is indefinite

A

Depreciation

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2
Q

What Are the Various Types of Long-Term Assets?

A
  1. Property, plant, and equipment
  2. Intangible assets
  3. Goodwill
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3
Q

Property, Plant, and Equipment: For example a building

PP&E

A
  • is purchased to help generate revenues in future periods.

- has physical form.

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4
Q

Intangible assets: For example a trademark

A
  • is purchased to help generate revenues in future periods.
  • lacks physical form.
  • is separable (that is, it could be sold or licensed).
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5
Q

Goodwill:

A
  • results from a business combination.
  • will contribute to the generation of revenues in future periods.
  • cannot be separated from the business and sold.
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6
Q

Tangible asset

A

An asset that has physical substance, such as land, buildings, or machinery, furniture, computer equipment, vehicles, planes, boats.

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7
Q

Are PP&E purchased for resale?

A

PP&E are not purchased for resale. (Otherwise, they would be considered to be inventory, as discussed

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8
Q

Intangible assets

A

A non‐physical capital asset that usually involves a legal right, which will provide future economic benefits to the organization, such as patents, copyrights, or licences

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9
Q

Can intangible assets be sold?

A

Yes, they can be resold, licensed, or rented (separately identifiable from other assets)

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10
Q

Goodwill

A

long-term asset that arises when two businesses are combined.

An intangible asset that results from a business combination and represents a company’s above‐average earning capacity as a result of reputation, advantageous location, superior sales staff, expertise of employees, and so on. It is only recorded when a company acquires another company and pays more for it than the fair market value of its identifiable net assets.

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11
Q

Why pair more for a goodwill

A

the premium or excess paid by one business when it is acquiring another that is related to factors such as management expertise, corporate reputation, or customer loyalty.

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12
Q

Why Are Long-Term Assets of Significance to Users?

A
  • Users will want to monitor the age of a company’s long-term assets.
  • Users will also want to know if the company has determined whether there have been any significant negative changes in the expected use of the asset
  • a user might also want to determine the extent to which the company’s long-term assets have been pledged as security to creditors or the extent to which the company has chosen to lease its long-term assets rather than purchase them.
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13
Q

Do PP&E produce revenues?

A

PP&E assets do not produce revenues on their own

used in combination with other PP&E assets, together with the efforts of employees, to produce revenues.

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14
Q

Secondary benefit to PP&E

A

PP&E assets also embody a secondary future benefit in that they may be sold in the future when they are no longer of use to the company.

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15
Q

Under IFRS, there are two models that can be considered when determining the amount at which PP&E will be reflected on the statement of financial position

A

1) Cost model

2) Revaluation model

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16
Q

What model is allowed for ASPE

A

Only the cost model is allowed under ASPE

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17
Q

The majority of both private and public corporations use the

A

Cost model

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18
Q

Under the cost model, PP&E assets are presented on the statement of _________ at their _______

A 
Financial position 
carrying amount (net book value)
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19
Q

Carrying amount (net book value)

A

which is their cost less their accumulated depreciation and accumulated impairment losses
(80,000 - 2,000 - 8,000)

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20
Q

Acquisition cost.

A

An asset’s original cost

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21
Q

Depreciation

A

The allocation of the cost of capital assets to expense over their estimated useful lives

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22
Q

Accumulated depreciation is a

A

Contra-asset account (This means that it is an asset account, but its normal balance will be a credit)

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23
Q

KEY POINTS

Carrying amount is:

A
  • the portion of the asset’s cost that has yet to be expensed.
  • not what the asset is worth.
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24
Q

Capitalized

A

Characteristic of a cost that has been recorded as an asset, rather than an expense.

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25
Q

“Cost” Includes (aka costs to be capitalized)

cost include

A
  • purchase price (less any discounts or rebates)
  • non-refundable taxes and import duties on the purchase price
  • legal costs associated with the purchase
  • shipping or transportation costs
  • site preparation, installation, and set-up costs
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26
Q 
Basket purchase (aka lump-sum purchase)
Lump sum purchase
A

A purchase of assets in which more than one asset is acquired for a single purchase price (like a grocery store)

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27
Q

Most popular basket purchase

A

a company purchases a warehouse or office building. At the same time, it would normally also acquire the land on which the building is situated

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28
Q

Relative fair value

A

The proportion that an asset’s fair value represents of the total fair value of a group of assets purchased in a single transaction (that is, a basket purchase), which is used to allocate the purchase price

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29
Q

Most common Relative fair value

A

The most common way would be to have an appraisal completed that will provide the relative fair values of each asset

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30
Q

But remember

A

It is important to remember that the company must record the purchase for what it paid, not what the appraised values are

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31
Q

Basket purchase scenarios can occur in other situations, including the purchase of an airplane or cargo vessel. In both these situations,

A

IFRS requires companies to determine if there are separate depreciable components within the asset
(i.e For an airplane, it may be necessary to depreciate the fuselage (or body of the plane) differently from the engines)

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32
Q

Expensed

A

The characteristic of a cost, such as repairs to an item of property, plant, and equipment, being classified as a cost in a certain period rather than capitalizing it

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33
Q

Future economic benefit to assets

A

1) will these costs extend the useful life of the asset (beyond the original estimate),
2) will they reduce the asset’s operating costs,
3) will they improve the asset’s output either in terms of quantity or quality?

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34
Q

Capitalized vs expensedd

A

If you said yes to any point made in slide 33, then it is capitalized, if you said ‘no’ to all then it is expensed

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35
Q

Materiality

A

is an element of the fundamental qualitative characteristic of relevance. Information is considered to be material if it would affect the decisions of a financial statement user.

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36
Q

revaluation model

A

PP&E assets are carried at their fair value (as determined at points of time known as the revaluation dates) less any subsequent accumulated depreciation and any subsequent impairment losses

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37
Q

When does revaluation happen do assets?

A

may be annual for assets with rapidly changing values or every three to four years for assets whose values change slowly

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38
Q

Important revaluation note

A

If a company is following the revaluation model for a class of assets, then all of the assets in that class must be revalued.

(For example, all buildings or all land must be revalued, rather than just individual buildings or parcels of land.)

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39
Q

Why Do We Depreciate Property, Plant, and Equipment?

A

We depreciate PP&E in order to allocate a portion of the asset’s cost to each of the periods in which the future economic benefits embodied in the asset are being used up or consumed as a result of its use

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40
Q

In order to depreciate PP&E, we need to know three pieces of information

A

1) Cost
2) Estimated residual value
3) Estimated useful life

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41
Q

Estimated residual value

A

This is a management estimate and is the net amount that the company expects it would receive if the asset were sold in the condition it is expected to be in at the end of its useful life.

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42
Q

Estimated useful life

A

This is a management estimate and can be determined by time (such as years) or usage (such as units, hours, or kilometres)

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43
Q

Depreciable amount

A

The portion of an asset’s cost that should be expensed over the periods in which the asset is expected to help generate revenues, calculated by the cost less the estimated residual value.

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44
Q

Depreciable Amount =

A

Cost - Estimated Residual Value

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45
Q

There are a variety of acceptable depreciation methods, and a company is expected to use the method that:

A

best reflects the pattern in which it expects the asset’s future benefits to be used up

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46
Q

Depreciation Methods

A

1) Straight-line method
2) Units-of-production method
3) Diminishing-balance method

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47
Q

straight-line method (aka straight-line depreciation)

straight line depreciation, straight line method

A

which allocates the asset’s depreciable cost evenly over its useful life. This means that depreciation expense will be the same in each year of the asset’s useful life.
-Most common and simplest

48
Q

Units-of-production method (AKA the units-of-activity method and the usage method)

A

A method of depreciation that allocates an asset’s depreciable cost to the years of its useful life as a function of the amount of its usage or production each period
-Truck needed to get a certain number of kilometers (calculate depreciation based per kilometer)

49
Q

Diminishing-balance method (AKA the declining-balance method)

A
  • An accelerated depreciation method
  • That is, more of the asset’s cost is depreciated early in its useful life and less as time goes by.
  • This means that depreciation expense will be highest in the first year of the asset’s useful life and less in each subsequent year.
50
Q

Important depreciation note

A

Regardless of the depreciation method selected:

Total depreciation expense will be the same over the life of the asset.

The carrying amount of the asset will be the same at the end of the asset’s useful life.

51
Q

Depreciation rate =

used for straight-line method

A

1 / Estimated useful life

depreciation rate x depreciable amount

52
Q

Depreciation Expense per Unit =

Units-of-Production Method

A

(Cost - Estimated residual value) / Estimated useful life (in units)

53
Q

Types of units of output

A

Delivery trucks could be depreciated using their expected useful lives can be expressed in kilometres driven.

Machinery used in manufacturing products may have an expected useful life based on the total number of units of output.

Other valid units of output include hours (in the aviation industry), cubic metres (in the forest industry), or tonnes (in the mining industry).

54
Q

The shorter the useful life, the ______ the depreciation rate

A

Higher

55
Q

A capital asset with a relatively _______ useful life (such as a building) would have a fairly low depreciation rate (such as 5% or 10%),

A

long expected

56
Q

A capital asset with a relatively ______ useful life (such as equipment) would have a higher depreciation rate (such as 20% or 30%).

A

short expected

57
Q

double-diminishing-balance method (AKA the double-declining-balance method)

A

A particular type of diminishing‐balance depreciation method that is calculated by using a percentage rate that is double the rate that would be used for straight‐line depreciation

58
Q

Three Steps to Calculating Double-Diminishing-Balance Depreciation

A

STEP 1: Determine the depreciation rate. (1/Estimated Useful Life) x 2
STEP 2: Apply the rate to the asset’s carrying amount.
STEP 3: Ensure that the asset’s ending carrying amount is greater than or equal to the asset’s estimated residual value.

59
Q

How Do We Choose a Depreciation Method?

A

Companies are expected to use the depreciation method that is most consistent with the manner in which management expects the asset’s economic benefits to be consumed through usage.

60
Q

If we were depreciating a piece of equipment, then the entry would be: (accounts used in depreciation)

A

DR Depreciation Expense

  CR Accumulated Depreciation, Equipment

61
Q

Crediting Accumulated Depreciation rather than the Equipment account keeps .

A

the original cost amount intact, allowing users to judge the asset’s relative age

62
Q

The financial statement effects of the depreciation entry are:
What statements get effected?

A
  1. Statement of income: Expenses are increased and net income would be decreased.
  2. Statement of financial position: The asset’s carrying amount is decreased, thereby reducing total assets.
  3. Statement of cash flows: No effect because depreciation is a non-cash transaction
63
Q

Depreciation…

A

Does not involve cash.

is a non-cash expense.

64
Q

Does an Asset’s Carrying Amount Tell Me What It Is Worth?

A

No! It is important to note that depreciation is a cost allocation process rather than an attempt to value PP&E

carrying amount indicates the portion of the asset’s cost that will be expensed in future periods when the asset generates revenues or the portion of the asset’s cost that management expects to recover when the asset is disposed of

65
Q

Depreciation Expense for Partial Period =

A

Annual Depreciation Expense x (number of full months / 12)

66
Q

Is Depreciation Expense Recorded Every Period for Each PP&E Asset?

A

Depreciation expense should be recorded for each PP&E asset that a company holds for use in its operations. (even if asset was idle)

Exceptions:

  • if the asset is already fully depreciated (its carrying amount is equal to its expected residual value)
  • if the company uses the units-of-production method to depreciate the asset and the asset was idle during the period
  • PP&E asset is no longer being used in the business and management has determined that it will be sold
67
Q

Does the Choice of Depreciation Method Affect Corporate Income Taxes?

A

No! The Canada Revenue Agency (CRA) does not allow companies to deduct depreciation expense when calculating their taxable income

68
Q

Capital cost allowance (CCA)

A

The deduction permitted by the Canada Revenue Agency for tax purposes, instead of depreciation

69
Q

Can We Change Depreciation Estimates and Methods?

A

Yes! An asset’s estimated useful life and estimated residual value are management estimates.

70
Q

change in an accounting estimate

A

Any change to an estimate made by management for accounting purposes, including an asset’s useful life or residual value, the percentage of receivables considered to be uncollectible, the extent of warranty claims, and so on.

71
Q

Whenever there is a change in the cost, estimated residual value, useful life, or depreciation method for a PP&E asset, you should

A

determine the asset’s carrying amount at the time of the change. Then, you should carry on with this as the new “cost.”

72
Q

Impaired

A

The characteristic of an asset whose expected future economic benefits are estimated to be less than its carrying amount as a result of a change in circumstance

73
Q

External factors for impariment

A

changes in technology or in government regulations

74
Q

Internal factors for impairment

A
  • the asset had been physically damaged,
  • the business unit in which it operated was to be curtailed or restructured,
  • internal reports indicate that the future economic benefits expected from the asset will be less than originally anticipated.
75
Q

When indications of impairment are present

A

(1) the future cash flows that are expected to be generated from the asset’s use
(2) the asset’s fair value less any costs that would be incurred to sell it.

76
Q

recoverable amount

A

Amount used when there are indications that an item of property, plant, and equipment may be impaired. The impairment amount is equal to the carrying amount less the recoverable amount, which is the greater of the future cash flows that are expected to be generated from an asset’s use, and the asset’s fair value less any selling costs.

77
Q

impairment loss

A

The decline in the recoverable value of an asset below its current carrying value. It is recognized as a loss on the statement of income. The impairment loss is calculated by subtracting the recoverable amount from the carrying amount.

78
Q

impairment loss entry:

A

Loss on Impairment 3,000

  Accumulated Impairment Losses, Equipment 3,000

79
Q

Derecognized

A

The removal of a long‐lived asset from the accounts upon its disposal or when it no longer provides any future benefits.

80
Q

2 steps for derecognized

A
  1. The asset should be depreciated up to the date of derecognition.
  2. The asset and the related accumulated depreciation should be removed from the company’s records and any resulting gain or loss be determined.
81
Q

Loss on disposal

A

If the carrying amount is greater than the proceeds of sale

82
Q

Gain on disposal

A

If the proceeds of sale are greater than the carrying amount

83
Q

Recording a gain on disposal example

A

Cash 6,000
Accumulated Depreciation, Equipment 45,000
  Equipment 50,000
  Gain on Disposal of Equipment 1,000

84
Q

Recording a loss of disposal example

A

Accumulated Depreciation, Equipment 45,000
Loss on Disposal of Equipment 5,000
  Equipment 50,000

85
Q

What Are Intangible Assets?

A

Intangible assets are long-term assets without physical form that are separately identifiable (that is, they can be resold or licensed)

86
Q

Types of intangible assets

A
  1. Intellectual property
    - Trademark
    - Patents
    - Copyrights
    - Trade secrets
  2. Licences
  3. Customer lists
  4. Franchise rights
  5. Computer software
  6. Development costs
87
Q

Trademark registration

A

In Canada, trademark registration provides the company with the exclusive right to use the mark within Canada for 15 years and is renewable every 15 years.

88
Q

Patents

A

Patents are legal rights to unique products or processes

In Canada, a patent provides the holder with legal protection for 20 years from the date of filing

89
Q

Copyrights

A

legal rights over literary, musical, artistic, and dramatic works. They provide the holder with the right to reproduce them.
-copyright generally lasts for the life of the creator plus 50 years

90
Q

Trade secrets

A

include recipes, chemical formulas, and processes

-Canada has no legal registration system for trade secrets, so keep them secret!

91
Q

Licences

A

(including fishing licences, broadcast licences, telecommunications licences, taxi licences, and aircraft landing rights).

92
Q

Customer lists

A

(including listing agreements in the real estate industry).

93
Q

Franchise rights

A

(that is, when a company, the “franchisor,” grants another company, the “franchisee,” the right to use its trademark, brand, and operating system)

94
Q

Computer software

A

(including website development costs, as long as the site is used to generate revenues and enable customers to process orders rather than just to promote the company’s products)

95
Q

Development costs

A

There is a distinction between research costs (the costs of investigating for new scientific or technical knowledge) and development costs (the cost of applying research findings to plan or design new products, materials, processes, and so on)

96
Q

At What Amount Are Intangible Assets Reflected on the Statement of Financial Position?

A

Just like PP&E, intangible assets are initially recorded at cost (the amount paid to a third party for the asset)

97
Q

Finite useful life

A

it will generate economic benefits for a fixed period in the future

98
Q

Infinite useful life

A

There is no foreseeable limit to the period in which the asset will generate economic benefits for the company

99
Q

amortization

A

The depreciation of intangible assets that are not natural resources.

100
Q

KEY POINTS

Intangible assets:

A
  • are normally depreciated using the straight-line method.

- do not normally have a residual value.

101
Q

The journal entry to record the amortization of a patent

A

Amortization Expense XXX

  Accumulated Amortization, Patents XXX

102
Q

accumulated amortization

A

The total amortization expense that has been recorded for an intangible asset

103
Q

What Is Goodwill?

A

Goodwill is a long-term asset that arises when two businesses are combined

104
Q

internally generated goodwill

A

cannot be recognized as an asset under IFRS or ASPE

105
Q

At What Amount Is Goodwill Reflected on the Statement of Financial Position?

A
  • it is not amortized
  • management is required to review the carrying amount of goodwill annually to determine whether there is evidence that it has been impaired
106
Q

How Is Goodwill Treated Differently from Other Long-Term Assets?

A
  1. Goodwill is not amortized (because it is considered to have an indefinite useful life).
  2. Goodwill must be reviewed annually to determine whether there is evidence that it has been impaired.
107
Q

Average Age % =

A

Total accumulated depreciation / (total property, plant, and equipment - land)

108
Q

Why care for Average Age %

A

This ratio provides the user with information on the extent to which a company’s PP&E assets have been depreciated.

109
Q

Average age =

A

Total accumulated depreciation / depreciation expense

110
Q

Why care for average age percentage ?

A

This ratio provides the user with information on how long a company has been using its PP&E.

111
Q

Fixed Asset Turnover =

A

Sales Revenue / Average Net Property,Plant,and Equipment

112
Q

Average Net Property,Plant,and Equipment

A

This is determined by adding the opening and ending balances and dividing by 2.

113
Q

Why care for Fixed Asset Turnover =

A

This ratio provides the user with information on how effective the company has been in generating sales relative to its investment in PP&E.

114
Q

goodwill is calculated by

A

taking the purchase price of a business and subtracting the fair value of the net identifiable assets purchased.

115
Q

Which of the following are ways that plant assets can be derecognized

A

Retirement
Sale
Exchange

MGMT 201: Financial Accounting (12 decks)

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