Chapter 9: Accounting for Long-Lived and Intangible Assets Flashcards
What is the expanded accounting equation?
Assets = liabilities + common stock - dividends + revenue - expenses
What are the three categories of long-lived assets?
Plant assets, intangible assets, and natural resources
What are plant assets?
Assets that refer to a company’s property plant and equipment
What are examples of plant assets?
Land, buildings, equipments, furniture and fixtures
Define intangible assets
Economic resources that benefit the company, but lack physical substance
What are examples of intangible assets?
Copyrights, trademarks, patents, franchises
Define natural resources
Resources supplied by nature
What are examples of natural resources?
Timber stands, mineral deposits, oil and gas deposits
What are 4 accounting issues for long-lived assets?
- Account for the acquisition cost
- Expense the asset’s cost over time
- Determine the treatment of future expenditures on the original assets
- Account for the disposal of assets
What 2 things are needed to calculate acquisition cost?
Purchase price components, related expenditures
What makes up purchase price components?
Gross invoice price - cash discount + sales tax
What makes up related expenditures?
Freight charges + installation costs + testing of installed machine
What 5 things are needed to bring the land into condition for use?
- Property taxes on purchase
- Insurance on purchase
- Legal fees on purchase
- Fees to remove old buildings
- Special assessments
Define depreciation
An asset’s useful life, which may differ from its physical life
3 methods to calculating depreciation expense
- Straight line
- Declining balance
- Units-of-production
How do you calculate annual depreciation using the straight-line method?
Annual depreciation = acquisition cost - salvage value / estimated useful life
An example of using the annual depreciation equation for the straight-line method is.
Assume equipment costs $5,000 with a 3 year useful life and a $500 salvage value
$5,000 - $500 / 3 years = $1,500
How to record depreciation expense for the year using straight-line method. Say the depreciation value is $1,500
Debit Depreciation expense
Credit Accumulated depreciation
How to calculate depreciation per unit using units-of-production method
Depreciation per unit = acquisition cost - salvage value / total estimated units of production
Define impaired
When the value of a plant asset suddenly falls so severely that its future cash flows are estimated to be less than its current book value, the asset is deemed to be impaired and an impairment loss is then recorded.
How do you record impairment loss?
Debit impairment loss
Credit accumulated depreciation
What are the two types of expenditures?
Revenue expenditures and betterments
What are disposals?
Can be sales, retirements, or exchanges
To record disposal…
Remove asset costs
Remove accumulated depreciation
Record proceeds
Record any gain or loss
How to calculate current assets
cash and cash equivalents + accounts receivable + inventories + prepaid expense and other current assets
How to calculate total assets
current assets + property and equipment - depreciation + construction in progress + timber and timberlands a cost - depletion + mineral and mineral rights - depletion + goodwill + other assets
What is the equation for return on assets?
Return on assets = net income / average total assets
Define the rate of return on the company’s asset.
A commonly used measure of the overall company health
Define asset turnover
Evaluates a company’s effective use of its assets
What is the equation of asset turnover
Asset turnover = net sales / average total assets
What account is supplies?
Assets
What account is cash?
Assets
What account is accounts receivable?
Assets
What account is prepaid rent expense?
Assets
What accounts is prepaid insurance expense?
Asset
What account is unearned revenue?
Unearned revenue
What account is the equipment?
Assets
What account do owned buildings fall under?
Asset
What accounts do building improvements fall under?
Asset
What account does land fall under?
Asset
What account do land improvements (sidewalks, landscaping, etc.) fall under?
Assets
What four things are needed to calculate depreciation expense?
- The cost of the asset
- The useful life
- The salvage value
- The depreciation method selected
True/False: Land is a depreciable asset.
False. It doesn’t have a useful life.
Only exception is when land is depleted of it’s natural resources
How to calculate acquisition cost?
Acquition cost = Invoice + sales tax + delivery fee + testing fee
How do you journal acquisition cost?
Debit equipment
Credit cash
Who decides useful life?
Managment
Who decides salvage value?
Management
How do you calculate depreciation cost?
Depreciation cost = acqusition cost - salvage value
Ex:
Acquisition cost (22,000)
Salvage value (2,000)
=
Depreciation cost = 20,000
What account is depreciation expense?
Expense account (Stockholders equitable)
Does an expense account usually have a credit or debit value?
Debit
What type of account is depreciation expense?
Asset (contra-asset)
When there is an increase in accumulated depreciation expense, is it debited or credited?
Credited
Does accumulated depreciation usually have a credit or debit value?
Credit
What balance does equipment usually have?
Debit balance
When depreciation expense is debited, which account is credited?
Accumulation expense
T/F: You can only depreciate up to the acquisition cost
True
How to calculate depreciable cost per unit
Depreciable cost per units = acquisition cost / total amount of units produced
Ex:
Acquisiton cost: $10,000
Units produced (lifetime): $200,000
Depreciable cost per unit = $10,000 / $200,000
Depreciable cost per unit = $0.05
How do you calculate depreciation expense using the unit-of-production method?
Units produced x depreciation cost per unit
Ex:
Units produced: 80,000
Depreciation cost per unit: $0.05
Depreciation expense: units produced x depreciation cost per unit
Depreciation expense: 80,000 x 0.05 = 4,000
Depreciation expense = $4,000
How is the annual depreciation rate calculated using the declining-balance method?
Straight line depreciation rate x 2
Ex:
Straight line depreciation rate = 20
x 2
Declining-balance method = 20 x 2
Declining-balance method = 40
How to calculate book value
Equipment - accumulated depreciation
Example:
Equipment: 11,000
Accumulated depreciation: 1,000
Book value = 11,000 - 1,000
Book value = 10,000
