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accounting > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

plant assets

A

Resources that have physical substance (a definite size and shape), are used in operationso fa business, and are not intended for sale to customers

AKA PPE, and fixed assets

Expected to provide service to the company for a number of years

Decline in service potential over useful lives (except for land)

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2
Q

Cost principle

A

Requires that companies record plant assets at cost

*Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use

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3
Q

Example: cost of factory machinery

A

Purchase price

Freight costs by purchaser

installation costs

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4
Q

Revenue expenditures

A

Expenditures that are immediately charged against revenues as an expense

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5
Q

Capital expenditures

A

Expenditures that increase the company’s investment in plant assets

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6
Q

Cost is measured by:

A

cash paid in a cash transaction or by the cash equivalent price paid when companies use noncash assets in payments

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7
Q

Cash equivalent price

A

The fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable

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8
Q

IFRS: asset valuation

A

IFRS is flexible regarding asset valuation

Companies revalue to fair value when they believe this information is more relevant

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9
Q

Land improvements

A

Structural additions made to land, such as driveways, parking lots, fences, landscaping, and underground sprinklers

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10
Q

lease

A

a contractual agreement in which the owner of an asset allows another party to use the asset for a period of time at an agreed price

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11
Q

Lessor

A

The owner of the asset

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12
Q

lesse

A

the other party who uses the asset for a period of time at an agreed price

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13
Q

Operating leases

A

Allow the lesse to account for the transaction as a rental, with neither an asset nor a liability recorded

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14
Q

Capital lease

A

Lesses show up both the asset and the liability on the balance sheet

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15
Q

Advantages of leasing an asset versus purchasing:

A
  1. Reduced risk of obsolescence
  2. Little or no down payment
  3. Shared tax advantages
  4. Assets and liability not reported
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16
Q

Depreciation

A

The process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner

*cost allocation designed to properly match expenses with revenues*

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17
Q

Book value

A

Cost less accumulated depreciation

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18
Q

Depreciation applies to three classes of plant assets:

A

Land improvements

Buildings

Equipment

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19
Q

Depreciable asset

A

The usefulness to the company and the revenue-producing ability of each class decline over the asset’s useful life

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20
Q

Depreciation does not apply to land

A

Because its usefulness and revenue-producing ability generally remain intact as long as the land is owned

*in fact, uusefulness of land can increase because of scarcity of good sites

Land is NOT a depreciable asset

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21
Q

Obsolescence

A

The process by which an asset becomes out of date before it physically wears out

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22
Q

Factors in computing depreciation

A
  1. Cost
  2. Useful life
  3. Salvange value
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23
Q

Cost

A

All expenditures necessary to acquire the asset and make it ready for intended use

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24
Q

Useful life

A

Estimate of the expected life based on need for repair, service life, and vulnerabliity to obsolescence

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25
Salvage value
Estimate of the asset's value at the end of its useful life
26
Helpful hint: depreciation
Depreciation expense reported on income statement Accumulated depreciation is reported on the balance sheet as a deduction from plant assets
27
Depreciation methods
1. Straight-line 2. Declining-balance 3. Units-of-activity
28
Straight-line method
A method in which companies expense an equal amount of depreciation for each year of the asset's useful life \*used for 95% of U.S. companies
29
Depreciable cost
The total amount subject to depreciation Cost of the plant asset less its salvage value
30
Declining balance method
A depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation epxnse over the asset's useful life
31
accelerated-depreciation method
A depreciation method that produces higher depreciation expense in the early years than the straight-line approach
32
double-declining balance method
Applying the declining-balance approach at different rates, which results in varying speeds of depreciation
33
Units-of-activity method
A depreciation method in which useful life is expressed in terms of the total units of production or use expected from the asset
34
Uses for units-of-activity:
Factory machinery Delivery equipment (miles drive, hours in use)
35
Depreciation expense
_Cost - Salvage value_ Useful life
36
Large corporations use:
Straight-line depreciation in their financial statements in order to maximize net income Use aspecial accelerated depreciation method on their tax returns in order to minimize their incomee taxes
37
Special accelerated-depreciation method
Modified accelerated cost recovery system
38
Revising periodic depreciation in current and future years but not to prior periods
Company does not correct previously recorded depreciation expense Revises depreciation expense for current and future years \*rationale = to not adversely affect users' confidence in financial statements
39
Extending an asset's estimated life.......
reduces depreciation expense and increases current period income
40
Ordinary repairs
Expenditures to maintain the operating efficiency and expected productive life of the unit ex. tune ups, oil changes, painting, Debited to maintenance and repairs expense as incurred
41
Additions and improvements
Costs incurred to increase the operating efficiency, productive capacity, or expected useful life of a plant asset Debitted to plant asset affected capital expenditures
42
impairment
a permanent deccline in the fair value of an asset
43
Eliminating book value
Debit accumulated depreciation Credit asset account for the cost of the asset
44
Methods of plant asset disposal
Sale - equipment sold to another party Retirement - equipment is scrapped or discarded Exchange - exisitng equipment is traded for new equipment
45
Gain on disposal
If the proceeds from the sale exceed the book value of the plant asset
46
Loss on disposal
if the proceeds from the sale are less than the book value of the plant asset sold
47
Journal entry for retirement of plant assets
Debit Accmulated depreciation Credit asset account for original of the asset gain is not possible loss = asset's book value on the date of retirement
48
Return on assets ratio
Indicates amount of net income generated by each dollar of assets _Net Income_ Average Total Assets
49
Marketing ROI (return on investment)
Profit generated by a marketing intivative divided by the investment in that initiative
50
Asset turnover ratio
Indicates how efficiently a company uses its assets to generate sales _Net Sales_ Average Total Assets
51
Return on assets =
Profit margin x Asset turnover _Net income_ Average Total Assets
52
Intangible assets
Rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance ex. ipod, nike swoosh
53
intangible with limited life
Company allocates its cost over the asset's useful life using amortization
54
Amortization
The process of allocating to expense the cost of an intangible asset
55
Journal entry for amortization of intangible asset
Amortization expense XXX Intangible asset XXX
56
Patent
An exclusive right issued by the U.S. patent office that enables the receipient to manufacture, sell, or otherwise control an inventrion for a 20 year period from the date of the grant
57
Research and development costs
Expenditures that may lead to patents, copyrights, new processes, and new products seen as an expense when incurred
58
Copyrights
Give the owner the exclusive right to reproduce and sell an artistic or published work lasts for life of creator plus 70 years consists of cost of acquiring and defending it
59
Trademark or trade name
A word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or pdouct ex. Wheaties, Coca-Cola, Jeep
60
Franchise
A contractural arrangement under which the franchisor grants the franchisee the right to sell certain products, to provide specific services, or to use certain trademarks or trade names, usually within a designated geographic area
61
Liscences
Operating rights to use public property, granted by a governmental agency to a business
62
Goodwill
The value of all favorable attributes that relate to a company that are not attributable to any other specifi casset
63
When do companies record goodwill?
Only when there is an exchange transaction that involves the purchase of an entire business Goodwill is the excess of cost over the fair value of the net assets acquired
64
Costs of Land
Cash purchase price Closing costs such as title and attorney's fees Real estate brokers' commissions Accrued property taxes Clearing, draining, filling, and grading Demolition and removal costs **- Proceeds from salvage value**
65
Land improvements costs: parking lot
paving, fencing, and lighting
66
What does Debt to Total Assets show?
Measures the amount of financing by creditors instead of stockholders The higher, the riskier
67
Building Costs when constructed
Contract price architects' fees building permits excavation costs interest costs **during construction**
68
Equipment costs
Cash purchase price sales taxes freight charges insurance during transit paid by the purchaser assembling, installing, and testing the unit **Not included = motor vehicle licences, and accident insurance**
69
What does Times interest earned ratio show?
Provides an indication of a company's ability to meet interest payments as they come due
70
Building costs when purchased
Purchase price Closing costs (attorney fees, title insurance) Real estate broker's commission Remodeling rooms and offices, etc
71
Why would a company retire bonds before maturity?
A company may decide to retire bonds before maturity to reduce interest cost and remove debt from its balance sheet. A company will retire debt early only if it has sufficient cash resources.
72
What are the steps to retire a bond before maturity?
When bonds are retired before maturity, it is necessary to eliminate the carrying value of the bonds at the redemption date and recognize a gain or loss on redemption. The gain or loss is the difference between the cash paid and the carrying value of the bonds.
73
Journal entry to correct error in deposit
A/R XXX Cash XXX
74
Journal entry to correct error in recording check
A/P XXX Cash XXX

accounting (31 decks)

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