Chapter 9 Plant Assets, Natural Resources, and Intangibles Flashcards
How does a business measure the cost of a plant asset?
Plant assets are long-lived, tangible assets used in the operation of a business. Plant assets are recorded at historical cost- the amount paid for the asset. This includes the purchase price plus taxes, purchase commissions, and all other amounts paid to ready the asset for its intended use. A lump-sum purchase involves paying a single price for multiple assets. the cost of each purchased must be identified on the relative-ma often incurred market-value method
what are the 2 additional types of expenditures that are often incurred on plant assets
capital expenditures - debited to an asset account because it increases the asset’s capacity or efficiency or extends the asset’s useful life.
Revenue expenditures - debited to repairs and maintenance expense because they are incurred to maintain the asset in working order
What is depreciation and how is it computed?
depreciation is the allocation of a plant asset’s cost to expense over its useful life
Modified accelerated cost recovery system (MACRS) is used for tax purposes
Occasionally a business may change its estimated residual value or estimated useful life of a depreciable asset. this change requires depreciation to be recalculated in the year of change and moving forward
Plant assets are reported on the balance sheet at book value (cost - accumulated depreciation)
What are the 3 methods of depreciation?
3 methods: straight-line method - allocates an equal amount of depreciation to each year; Units of production method - allocates a varying amount of depreciation each year based on an asset’s usage; double declining balance method - an accelerated depreciation method that computes annual depreciation by multiplying the depreciable asset’s book value by a constant percent that is two times the straight line rate
How are the disposals of plant assets recorded?
4 steps to recording disposals: 1. bring the depreciation up to date; 2 remove the old, disposed-of asset and associated accumulated depreciation from the books; 3 record the value of any cash received (or paid) for the asset; 4 determine the amount of any gain or loss. (market value of assets received compared to the book value of the asset disposed of)
How are natural resources accounted for?
Natural resources are assets that come from the earth and are consumed
depletion is the process by which businesses spread the allocation of a natural resource’s cost over its usage
Depletion expense is computed by the units of production formula
How are intangible assets accounted for?
Intangible assets are assets that have no physical form and are valuable because of special rights they carry
Amortization is the process by which businesses spread the allocation of an intangible asset’s cost over its useful life
Amortization expense is computed by the straight-line formula
How do we use the asset turnover ratio to evaluate business performance?
The asset turnover ratio measures the amount of net sales generated for each average dollar of total assets invested
Net sales / Average total assets
How are exchanges of plant assets accounted for?
Exchanges that have commercial substance require the recording of any gain or loss on the transaction
Exchanges that lack commercial substance ignore any gain or loss on the transaction except in a few limited cases
define accelerated depreciation method
a depreciation method that expenses more of the asset’s cost near the start of its useful life and less at the end of its useful life
define amortization
the process by which businesses spread the allocation of intangible asset’s cost over its useful life
define asset turnover ratio
measures how efficiently a business uses its average total assets to generate sales. Net sales / Average total assets
Define book value
a depreciable asset’s cost minus accumulated depreciation
define capital expenditure
an expenditure that increases the capacity or efficiency of a plant asset or extends its useful life. Capital expenditures are debited to an asset account
define capitalize
recording the acquisition of land, building, or other assets by debiting (increasing) an asset account
Commercial substance
a characteristic of a transaction that causes a change in future cash flows
define copyright
exclusive right to reproduce and sell a book, musical composition, film, other work of art, or intellectual property
define cost principle
a principle that states that acquired assets and services should be recorded at their actual cost
define depletion
the process by which businesses spread the allocation of a natural resource’s cost over its usage
define double declining balance method
an accelerated depreciation method that computes annual depreciation by multiplying the depreciable asset’s decreasing book value by a constant percent that is two times the straight-line depreciation rate
define depreciable cost
the cost of a plant asset minus its estimated residual value
define depreciation
the process by which businesses spread the allocation of a plant asset’s cost over its useful life
define extraordinary repair
repair work that generates a capital expenditure because it extends the asset’s life past the normal expected life
define franchise
privilege granted by a business to sell a product or service under specified conditions
define goodwill
excess of the cost of an acquired company over the sum of the market values of its net assets (assets minus liabilities)
define impairment
a permanent decline in asset value
define intangible asset
an asset with no physical form that is valuable because of the special right it carries
define land improvement
a depreciable improvement to land, such as fencing, sprinklers, paving, signs, and lighting
define license
privilege granted by a government to use public property in performing services
define MACRS
Modified accelerated cost recovery system, a depreciation method that is used for tax purposes
define natural resource
an asset that comes from the earth and is consumed
define obsolete
an asset is considered obsolete when a new asset can perform the job more efficiently than the old
define patent
an intangible asset that is a federal government grant conveying an exclusive 20-year right to produce and sell a process, product, or formula
define plant asset
long-lived, tangible asset, such as land, buildings, and equipment, used in the operation of a business
define relative market value
a method of allocating the total cost (100%) of multiple assets purchased at one time. Total cost is divided among the assets according to their relative market values
define residual value
the expected value of a depreciable asset at the end of its useful life
define revenue expenditure
an expenditure that does not increase the capacity or efficiency of an asset or extend its useful life. Revenue expenditures are debited to an expense account
define straight line method
a depreciation method that allocates an equal amount of depreciation each year (Cost - residual value) / Useful Life
Define Trademark
an asset that represents distinctive identification of a product or service
define units of production method
a depreciation method that allocates a varying amount of depreciation each year based on an assets usage
define useful life
length of the service period expected from an asset, may be expressed in time, such as months or years, or usage, such as units produced, hours used (for machinery), or miles driven (for a truck)
