Chapter 8- Longterm Assets Flashcards
What are fixed assets/plant assets?
-Held LT (> 1 year)
-tangible
-wears down or decays
-recorded at cost (initial price + any costs to get it ready for use)
ex: shipping, repairs, installation insurance, sales tax, maintenance
What is depreciation?
Annual expense of allocating the cost of the fixed asset each year over its useful life (length of time (years) that an asset is depreciated over
ex: buildings, cars, machinery, furniture
*Do NOT depreciate land
What is salvage value?
amount a fixed asset can be sold at after its fully depreciated
What is book value?
Current value of the fixed asset on the books
What is the equation for book value?
BV= initial cost - accumulated depreciation
OR
BV= Beg BV - Current year depreciation expense
What is the Depreciation Expense account?
-Equity
-NB: debit
*only only current year depreciation
What is Accumulated Depreciation account?
-contra asset
-NB: credit
*current year and all prior depreciation
What is the straight line method?
-Allocates an equal amount of depreciation per year over the asset’s useful life, as long as its for a full year
cost-salvage value months SL= ------------------------------- X. --------------
useful life 12
^depreciation for the entire year
What is units of production?
-Depreciation expense varies each year based on usage of the assets
-More units produced by the asset = ^ depreciation expense
-use this method when usage of asset varies year to year; better matches revenues with expenses
-Ex: snow plow business
cost- salvage value units produced and
—————————— X sold
total units of production
What is declining balance method?
-Accelerated method
(Taking the most depreciation upfront in year 1 and then the amount of depreciation declines every year after)
-Two types of DB:
1. Double declining
2. 150%
**for DB IGNORE salvage value upfront
Instead at the end (last year) do NOT depreciate below salvage value
What are the steps for the declining balance method?
Step 1: SL Rate 1/useful life
Step 2: DDB Rate = SL Rate x 2 (200%)
Step 3: Depreciation Expense= DDB Rate x Beginning of Year Book Value
What is Partial Year Depreciation?
-When an asset is purchased on any day except Jan 1 and disposed of/sold on any date other than Dec 31
-If purchased mid month > use the first of the month closet to the transaction date
What is disposal of an asset?
-assets can be “scrapped” (throwing away) or “sold” (money)
-Assets can be disposed of either before or after they’re fully depreciated
If before > you must first bring depreciation up to date and then record the sale
If after > just need to record the sale or scrap of asset
What do you do if an asset is disposed BEFORE its fully depreciated?
AJE 1: 1 Bring the depreciation up to date of sale
AJE 2: 2. Remove the asset of your books along with its accumulated depreciation
3. Record any cash received
4. Calculate and record any gain (CR) or loss (DR)
What is depletion?
-Annual expense related to natural resources (assets from the land that are consumed when used; ex: coal, timber, oil, gas, ore, iron)
What is the equation for depletion?
cost-SV units extracted and
Depletion = —————————— x. sold in the period
total units of capacity
*any resources extracted but not sold in the period become inventory
What is amortization?
-annual expense of intangibles
-Nonphysical assets they give rights and privileges or competitive advantage to the owner
-LT assets
-Ex: copyrights, trademarks/logos, franchises. goodwill , leases
What is goodwill?
amount someone will pay for a business in which the price paid > fair market value (A-L)
-well known
-client list
-prime office location
-reputation of business
-amortize usually SL method
What are leases?
-property is rented not owned
-if you have leasehold improvement (fixed up the property)
What is Total Asset Turnover?
measures a company’s ability to utilize its assets effectively and efficiently
What is the equation for the Total Asset Turnover ratio?
Average Total Assets
(Beg total assets + end total assets/ 2)
