chapter 9 Flashcards
property, plant and equipment will have 3 of the following characteristics
Tangible long-lived assets that a company controls
Assets used to produce goods or services for customers or to earn other types of income or for other business purposes
Assets are not intended to be sold to customers
ppe will typically be recorded at cost, which includes
- Purchase price, including non-refundable taxes and duties, less discounts or rebates
- Expenditures necessary to bring asset to its intended location and make it ready for its intended use
- Estimated cost of future expenditures to dismantle, remove, or restore the asset at the end of its useful life
the cost of land should include which of the following?
Purchase price
Closing costs: survey, title search and legal fees
Costs to prepare land: clearing, draining, excavating, grading (make land level)
Costs to demolish and remove unwanted buildings (less any proceeds from salvaged materials)
SHOULD NOT BE DE[RECIATED
when do land improvements occur?
. they are structural additions. after land has been acquired and can be distinguished from the land itself, such as driveways, sidewalks, fences, lighting, sprinklers and parking lots. Costs to get land ready for use would not be included here.
when a building is purchased, what would the costs include?
include the purchase price, closing costs (legal fees) and costs required to make building ready for its intended use
when a building is constructed, its costs consist of what?
Contract price
Architect’s fees
Building permits
Excavation cost
how is equipment separated
will typically be separated into several categories of similar assets
the cost of equipment includes
Purchase price
Costs to get the equipment ready for use: freight/shipping costs, sales taxes not reimbursed, insurance during transit
Assembly, installation and testing costs
after a company has acquired an asset and put it into use, ongoing expenses will be expensed as what?
operating expenses
what are operating expenses?
will generally only benefit the current period and are required to maintain the asset in its normal operating condition. Examples would include replacing tires or painting a building.
what are capital expenditures?
are those that will benefit more than one period and will either increase the life of an asset or its productivity/efficiency. These would normally be infrequent and larger expenditures. For example, the cost to replace the roof of a building.
instead of purchasing long term assets, companies have the option to do what?
lease
what are advantages of leasing?
Little or no down payment
Reduced risk of obsolescence
Cash payments are delayed over time instead of upfront
Income tax advantages as lease payments are deductible
when entering a lease, who is the lessor and the lesse
the lessor will be the owner of the asset for lease and the lessee is the party leasing the asset from the owner.
what does the IRSF say about leases?
a Lease is considered an asset purchase financed with a loan provided by the lessor
the lessee is required to report wha?
leased asset called right of use asset and the related liability as a lease liability.
when are leases be treated as operating expenses?
Lease terms of less than 12 months
Leases for low-value assets (ex. computers)
aspe polices cover which type of leases?
capital leases and operating leases
what are capital leases ?
Treated similarly to IFRS leases, this occurs when substantially all benefits and risks of ownership are transferred from lessor to lessee
Lessee required to record leased asset and related liability at present value of minimum lease payments
what is an operating lease?
benefits and risks of ownership not transferred to lessee
Lease (rental) payments recorded as expense by lessee and as revenue by lessor
what is depreciation?
is the allocation of the cost of PPE of over the asset’s useful life.
how di you record depreciation?
Dr. Depreciation (or amortization) expense / Cr. Accumulated depreciation
what are the three factors that affect the depreciation calculation?
cost, useful life, residual value
what is the depreciable amount
cost of asset- residual
what is an assets useful life?
the time an asset is expected to be used for or the number of units an asset is expected to provide
what is the residual value?
the estimated amount to be received from the disposal at the end of an asset’s useful life
wat are the three methods of depreication?
straight line, diminishing balance, units of production
what is the straight line method?
method in which depreciation expense is calculated by dividing the depreciable amount of a long-lived asset, such as buildings or equipment, by its useful life
what are the steps for the straight line method?
- figure out depreciable cost (cost- residual)
- residual cost/ years to get the rate
- multiply the rate by the amount of months that it is used per year
what is the units of production method>
useful life is expressed in terms of the total units of production or total use expected from the asset.
what are the steps for the units of production method?
- get depreciable cost by doing cost - residual
- divide the depreciable cost by the total usage to get rate
- multiply your rate by the amount used per year
what is the diminishing balance method/
shows how in the early years, the asset depreciates quicker
what are the steps for the diminsihnv balance method
make a chart with the dec rate, dep expense and ending book value. we cant have our ending value be less than our residual value so once you hit that, you have to work backward
how does a company choose which method to use
Management should choose the method that best reflects the assets pattern of use
why should management review depreciation calculations?
to assess the following:
Any changes in estimated useful life or expected residual value
Any capital expenditures added during the assets useful life that would increase the depreciable amount
Any indications of impairment
Changes in pattern of use in which asset’s economic benefits are consumed (so change in depreciation method)
what is a change in estimate?
making a change for a future year, dont go back in time, A new depreciation expense will need to be calculated, based on the current carrying amount and new information obtained
what is an impairment loss?
carrying amount is bigger than its fair value
how do you calculate an impairment loss?
carrying amount (cost- accumulated dep)n- fair value
what is depletion?
depreciation of natural resources. have to use units of production method
depreciation and income tax?
must deduct the income tax version of depreciation, known as capital cost allowance (CCA).
what is the revaluation model?
A model of accounting for a long-lived asset that carries the asset at its fair value less accumulated depreciation or amortization.
what are the four steps In recording deregcognition of ppe
- update depreciation
- calculate the carrying amount
- calculate the gain or loss
- record the disposal
what are intangible assets and good will?
no physical substance, and provide rights, oroveilges and competitive advantages
what are the two criteria for intangible assets?
They can be separated from the company and sold, licensed, or rented; orThey are based on contractual or legal rights, regardless of whether or not they can be separated from the company.
how are intangible assets recrided/
at cost, (cost of acquisition and other costs t make the asset ready for use)
for a company to record the intangible asset on the balance sheet, what are the traits?
The asset can be separated from company and sold, licensed, or rented
Based on contractual or legal rights
intangible assets either have which types of life?
finite and indefinite life
if an intangible asset has a finite life, what should we do ?
allocate its cost to an expense over its useful life and we use the term amortization
what re examples of assets with finite loves?
parents and copyrights
what is a patent/
An exclusive right issued by the federal government that enables the recipient to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the application. A patent protects new inventions, processes, or scientific creations
what is a copyright?
An exclusive right granted by the federal government allowing the owner to reproduce and sell an artistic or published work for a period extending over the life of the creator plus 50 years. copyright protects original works of authorship.
An intangible asset that is internally developed can be capitalized if an entity can demonstrate ALL of the following:
The product is technically feasible.
The company intends to complete the development of the product.
The company can sell or use the product.
The company has adequate resources to complete development of the product.
The company can reliably measure the costs incurred on the product.
A market exists for the product that will provide future economic benefits.
when does an intagbiel asset have an indefinite life?
when there is no foreseeable limit to the length of time over which a company expects the asset to generate economic benefits.
what is a trade mark?
A word, phrase, jingle, or symbol that distinguishes or identifies a particular business or product.
what is a franchise?
A contractual arrangement under which the franchisor grants the franchisee the right to sell certain products, to render specific services, or to use certain trademarks or trade names, usually within a designated geographic area
what is a license?
Operating right to use an asset that is granted by a government agency or other organization.
what is goodwill?
an asset representing the future economic benefits arising from the purchase of a business that do not relate to other identifiable assets, but rather, relate to the benefits provided by the business as a whole.
what does goodwill represent?
Goodwill represents the excess of cost over fair market value of net identifiable assets (assets less liabilities) acquired
should goodwill be amportized?
Goodwill should not be amortized but will be subject to annual test for impairment.
how do you calculate good will?
purchase pirce- fair value of net identifiable assets
on the balance sheet, how will a company present ling lived assets as non current
grouped together as ppe, intangible assets and goodwill
which long loved assets will be presented on the income statement
depreciation and amortization expense, gain or loss on disposal, impairment losses
what is the return on assets ratio?
measures overall prifoitbality. net income/ average total assets
what is the asset turnover ratio?
efficiently a company uses its assets; that is, how many dollars of sales are generated by each dollar invested in assets. sales /avergae total asstes
what is the profit margin ratio?
net income/ sales
