Chapter 9 Flashcards
Assets that are used actively in the operations of the business, and that are expected to benefit the operations into the future.
Long-Lived Assets
Two Major Categories of Long Lived Assets:
(1) Tangible Plant Assets
(2) Intangible Assets
Long-term assets that have physical substance.
Tangible Plant Assets
Long-lived assets without
physical substance.
Intangible Assets
Land, buildings, equipment, furniture, and fixtures
Long Lived Tangible Assets
Land is _______ depreciated.
NOT
Buildings, equipment, furniture, and fixtures ______ depreciated
ARE
Allocates the cost of a long-lived asset over the periods benefited by its use.
Depreciation
Trademarks, copyrights, patents, licensing rights, technology, franchises, and goodwill
Intangible Assets
Intangibles with a limited life, such as patents and copyrights, _____ subject to amortization.
ARE
Intangibles with an unlimited (or indefinite) life, such as goodwill and trademarks, _______ amortized.
ARE NOT
________ is a process of allocating cost over the useful life, similar to depreciation.
Amortization
Stages in an Asset’s Life:
(1) Asset Acquired
(2) Assets are used to produce revenue
(3) Assets are disposed of
Cost
Asset Acquired
Depreciation and Impairment
Assets are Used to Produce Revenue
Gain or Loss
Assets are Disposed of
Cost of Tangible Asset includes:
(1) Purchase Price
(2) All costs necessary to get the asset in place and ready for its intended use
Recording acquisition costs as assets is called ______ the costs.
Capitalizing
Finance charges _____ included in the cost of an asset.
ARE NOT
The total cost of a combined purchase of land and building is allocated in proportion to their __________.
Relative Market Values
Types of Expenditures:
(1) Ordinary repairs and maintenance
(2) Extraordinary repairs, replacements, and additions
(1) Relatively small, recurring expenditures that maintain normal operating activities
(2) Do not increase productivity
(3) Do not extend life beyond original estimate
Ordinary Repairs and Maintenance
Accounting treatment for ordinary repairs and maintenance:
Expense
(1) Relatively large, infrequent expenditures such as major overhauls or replacements of major components
(2) May extend useful life
(3) May increase productivity or efficiency
Extraordinary repairs, replacements and additions
Accounting treatment for extraordinary repairs, replacements, and additions:
Capitalize
(1) Non-current assets without physical substance.
(2) Often provide exclusive rights or privilege’s
(3) Useful lie is often difficult to determine
(4) Usually acquired for operational use.
Intangible Assets
Trademarks, Copyrights, Patent, Licensing, Rights, Technology, Assets, Franchise, Goodwill
Intangible Assets
Intangible assets are normally recorded at the __________ plus any legal or related fees.
Purchase Price
_______ is the systematic write-off of the cost of an intangible asset over its useful or legal life, whichever is shorter.
Amortization
Goodwill and trademarks have unlimited (or indefinite) lives and are not _______.
Amortized
Journal Entry for Amortization:
Dr. Amortization Expense
Cr. Intangible Asset Account
Created when one company buys another company.
Goodwill
True or False: If the purchase price of the company is greater than the fair value of the net assets and liabilities acquired, we have goodwill associated with the transaction.
True
Purchase a Patent Journal Entry:
Dr. Amortization Expense
Cr. Accumulated Amortization or the Asset Account
_______ is a process of cost allocation. We allocate the cost of the asset to expense over its useful life in some rational and systematic manner. We do not want to confuse asset valuation, an economic concept, with allocation.
Depreciation
Depreciation Expense appears on _____.
Income Statement
Depreciation for the current year
Accumulated Depreciation appears on _____.
Balance Sheet
Total of depreciation to date for an asset
Acquisition cost appears on _______ and after cost allocation it appears as an expense on the ____.
Balance Sheet, Income Statement
Depreciation expense ________ the contra asset account Accumulated Depreciation and ______ the expense account Depreciation Expense.
Increases, increases
Journal Entry for Depreciation:
Dr. Depreciation Expense
Cr. Accumulated Depreciation
Depreciation calculations require three amounts for each asset:
(1) Acquisition cost
(2) Estimated useful life
(2) Estimated residual value
Methods to compute depreciation expense:
(1) Straight line
(2) Units of production
(3) Declining balance
Cost - Residual Value (RV)
Depreciable Cost
An asset can never be depreciated below this amount
Depreciated Cost
Must always evaluate and “plug” last period of depreciation
Double Declining Method
Used when the asset is expected to be used up in equal amounts. Spreads the depreciation expense evenly throughout the periods; IT IS THE SAME EACH PERIOD.
Straight Line Method
Depreciation Expense = (Cost – Residual Value) / Useful Life
Straight Line Method
Used when the amount of the asset production varies significantly from period to period; Production can be defined in terms of miles, products, machine hours, etc.
Units of Production Method
Steps in Calculating Unit of Production Depreciation Rate:
(1) Find the Depreciation Rate
Depreciation Rate = (Cost – Residual Value) / Estimated Total Production
(2) Find Depreciation Expense
Depreciation Expense = Depreciation Rate x Actual Production for the Period
Depreciation Rate = (Cost – Residual Value) / Estimated Total Production
Units of Production Method
Depreciation Expense = Depreciation Rate x Actual Production for the Period
Units of Production Method
Matches higher depreciation expense with higher revenues in the early years of an asset’s useful life when the asset is more efficient.
Declining Balance Method
Declining Balance Method Early Years
Depreciation Expense: High
Repair Expense: Low
Declining Balance Method Later Years:
Depreciation Expense: Low
Repair Expense: High
Focuses on the overall ownership of the asset; attempts to match depreciation expense with repairs and maintenance expenditures. Reports MORE depreciation expense in the early years when asset is more efficient and less in the later years.
Double Declining Balance Method
Calculating Double Declining Balance:
Depreciation Expense = ((Cost – Accumulated Depreciation) x 2) / Useful Life
Ignores residual value for the calculation.
BUT…be CAUTIOUS of the LAST year of depreciation expense –
need to make sure BV = RV, which will require a manual calculation
Double Declining Balance Method for Depreciation Expense
Last year (final year) of depreciation expense = Current Book Value – Residual Value
When a plant asset is acquired during the year, depreciation is calculated for the __________the asset is owned.
Fraction of the year
(1) Update depreciation through date of disposal
(2) Compute gain or loss on disposal
Disposal of Asset
_________, in the early years of an asset’s useful life, results in higher depreciation expense, lower net income, and lower book value than would result using straight-line depreciation.
Accelerated Depreciation
Selling an asset with a ____ book value, resulting from accelerated depreciation, might result in a ____.
Low; Gain
Selling the same asset with a ______ book value, resulting from straight-line depreciation, might result in a _____.
Higher; Loss
(Net Sales Revenue) / Average Net Fixed Assets =
Fixed Asset Turnover
(Beginning Fixed Assets + Ending Fixed Assets) / 2 =
Average Net Fixed Assets
Measures the sales dollars generated by each dollar invested in fixed assets.
Fixed Asset Turnover Ratio
Gain or Loss Calculation
Selling price (cash received) - Book Value (cost – accumulated depreciation)
Journal Entry when Selling Price equals Book Value:
Dr. Cash (+A)
Dr. Accumulated Depreciation (+A)
Cr. Asset (-A)
Journal Entry with Gain:
Dr. Cash (+A)
Dr. Accumulated Depreciation (+A)
Cr. Asset (-A)
Cr. GAIN on disposal (+R)
Journal Entry with Loss:
Dr. Cash
Dr. Accumulated Depreciation
Dr. LOSS on disposal
Cr. Asset
Selling price > Book Value
Gain
Selling price < Book Value
Loss
Selling price = Book Value
Neither Loss or Gain
