Chapter 9 Flashcards
revenue expenditure
costs incurred to acquire a plant asset that are expensed immediately
capital expenditures
costs included in a plant asset account
cash equivalent price
fair value of the asset given up or fair value of the asset received, whichever is more clearly determinable
Costs of land
cash purchase price ,closing costs, real estate brokers’ commissions, accrued property taxes and other liens on the land assumed by the purchaser
Land improvements
includes all expenditures necessary to make the improvements ready for their intended use (driveways, parking lots, fences, landscaping, and underground sprinklers) - keep in mind these improvements can depreciate
all costs of buildings
all costs related directly to purchase or construction-purchase costs (price, closing costs, brokers’ commissions, remodling/replacing/repairing floor, roof, electric, and plumbing)-construction costs (contract price and payments for architects’ fess, building permits, and excavation costs)
costs of equipment
all costs incurred in acquiring the equipment and preparing it for use (purchase price, sales tax, freight charges, insurance during transit paid by the purchaser, expenses required in assembling, installing and testing the unit)
journal entry for equipment costs
dr equipment
dr license expense
dr prepaid insurance
cr cash
ordinary repairs to ______ the operating efficiency/productive life of the unit is debited to the ________
maintain; maintenance and repairs expense account
additions and improvements costs
incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset (dr plant asset effected)
advantages of leasing
reduced risk of obsolescence
little or no down payment
shared tax advantages
assets/liabilities not reported
depreciation
process of allocating to expense the cost of a plant asset over its useful life in a rational systematic manner (applies to land improvements, buildings, and equipment)
factors of depreciation
cost, useful life, and salvage value
straight line method of depreciation
depreciable cost = cost-salvage value
depreciable cost/useful life (in yrs) =depreciation expense
depreciable cost x rate =annual expense
annual expense (straight line method)
depreciable cost x rate
depreciation expense (straight line method)
depreciable cost/useful life in years
depreciable cost (straight line method)
cost-salvage value
Journal entry for straight line method of depreciation
dr depreciation exp
cr accumulated depreciation
declining balance method of depreciation
accelerated method
decreasing annual depreciation expense over the asset’s useful life
declining balance rate is DOUBLE the straight line rate
calculate the rate (declining balance)
100/ useful life in years
annual expense (declining balance)
beginning book value x rate
units of activity method
companies estimate total units of activity to calculate depreciation cost per unit
expense varies based on units of activity
depreciable cost (units of activity)
cost- salvage value
depreciable cost per unit (units of activity)
depreciable cost/total units of activity
depreciation expense
depreciable cost per unit x units of activity
IRS ______ require tax payer to use the same depreciation method on the tax return that is used in preparing financial statements
does not
revising periodic depreciation
accounted for in the period of change and future periods
not handled retrospectively
not considered error
calculate the net book value when revising periodic depreciation
cost - original salvage value/ original useful life
calculate the remaining useful life when revising periodic depreciation
net book value - new salvage value
the ______ writes the asset down to its new _____ _______ during the year in which the _____ ___ ______ occurs
company; fair value; decline in value
disposal of plant assets
record depreciation up to date of disposal eliminate asset ( dr accumulated depreciation cr asset account)
gain
if proceeds exceed book value
loss
proceeds are less than book value
journal entry for a gain on disposal (sale)
dr cash (proceeds from sale)
dr accumulated depreciation (acc dep so far)
cr equipment (original cost)
cr gain on sale
journal entry for loss on disposal
dr cash (proceeds from sale)
dr accumulated depreciation
dr loss on disposal
cr equipment (original cost)
retirement
NO CASH RECEIVED
dr accumulated depreciation (full amount of dep taken over life of asset)
cr asset acct (original cost of asset)
limited life intangible assets
limited life (amortize to expense) cr asset acct
indefinite life intangible assets
no forseeable limit on time the asset is expected to provide cash flows
NO amortization
patents
20 year life
capitalize costs of purchasing
expense any r/d costs
legal fees incurred successfull defending a patent are capitalized to patent acct
copyrights
life of creator + 70 years
capitalize costs of acquiring and defending it
amortized to expense over useful life
trademarks
indefinite number of 20 year renewal periods
capitalize acquisition costs
no amortization
franchises
may have limited life (amortize) or indefinite life (no amortize)
goodwill
only recorded when an entire business is purchased
recorded as excess of purchase price over the FMV of the identifiable net assets acquired
internally created goodwill should not be capitalized
return on assets
net income/average total assets OR
profit margin x asset turnover
average total assets
beginning assets +ending assets/2
