Chapter 9 Powerpoint

Question 1

Purchase of long lived assets

Answer 1

Recognized as capital expenditures - on balance sheet as asset

recognize when ownership passes to the buyer

Purchased for use in the business to generate future cash flows

Question 2

Recognize periodic deprectiation expense during____________________________

Answer 2

periods in which assets are used to generate revenue

Question 3

_______________ is used to measure long-lived assets at net book value

Answer 3

Accmulated depreciation

Question 4

Two types of costs incurred during the useful life of a plant asset:

Answer 4

1. Ordinary repairs that maintain the operating efficiency and expected productive life of a plant asset
   - expensed as incurred
2. Additions and improvements that increase the operating efficiency, productive capacity, or useful life of a plant asset

*both accounted for as capital expenditures

Question 5

U.S GAAP requires companies to record plant assets at _______________

Answer 5

cost

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

**Consistent with the concept of conservatism

Question 6

No ______________ is allowed in the future

Answer 6

upward revaluation

Question 7

If a capitalized expenditure is listed as a revenue expenditure

Answer 7

income will be understated

Question 8

Factors used in computing depreciation

Answer 8

Cost

Useful life

Salvage value

Question 9

Depreciable cost =

Answer 9

Cost - Salvage Value

Question 10

Straight line method example

Answer 10

Cost - Salvage Value = Depreciable Cost

Depreciable Cost / Useful Life = Depreciation expense

13,000 - 1,000 = 12,000

12,000 / 5 = 2400

Question 11

Journal entry for depreciation expense

Answer 11

Depreciation expense XXX

               Accmulated depreciation XXX

Question 12

Declining - Balance

Answer 12

Accelerated method

Decreasing annual depreciation expense over the asset’s useful life

Double declining-balance rate is double the straight-line rate

Rate applied to book value

Question 13

Units-of-Activity

Answer 13

Companies estimate total units of activity to calculate depreciation cost per unit

Expense varies based on units of activity

Depreciable cost is cost less salvage value

Question 14

Units-of-Activity formula

Answer 14

Depreciable Cost / Total Units of Activity = Depreciation cost per unit

Depreciation Cost per unit / Units of Activity during the year = depreciation expense

Question 15

Why is each method of depreciation acceptable?

Answer 15

Because each recognizes the decline in service potential of the asset in a rational and systematic manner

Question 16

Changes in estimates related to factors used in computing depreciation ________________________________

Answer 16

impact current and future periods, but not prior periods

*change in salvage value, change in estimated useful life

Question 17

If the proceeds exceed the book value, the company recognizes a _______________

Answer 17

gain on disposal

Question 18

If the proceeds are less than the book value, the company recognizes a ________________

Answer 18

loss on disposal

Question 19

Gains and Losses on Disposal are reported ___________________________

Answer 19

seperately from Revenue and Expense in the income statement

Question 20

3 types of disposals of plant assets

Answer 20

Retirement

Sale

Exchange

Question 21

Journal entry for eliminating asset

Answer 21

Accmulated Depreciation X

Loss* (if applicalbe) Y- X

                                   Plant Asset Y

                               Gain\* (If applicable) X - Y

Question 22

Impairment

Answer 22

A permanent decline in the market value of an asset below its book value may result in a large difference between book value and fair value

• example of accounting conservatism

Implication of write-downs in lower depreciation expense in future years - “Big Bath”

Question 23

If an asset is impaired, a company must _________________________________

Answer 23

write-down the asset to its fair value in the year the decline in value occurs

Question 24

Recognizing intangible assets

Answer 24

Recognized on balance sheet but because they have economic substance

Question 25

Asset

Answer 25

"Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events"

Question 26

Copyrights and Patents

Answer 26

Recognized when granted Legal fees to successfully defend them are also capitalized

Question 27

Research and Development Costs (R&D)

Answer 27

Expensed as incurred due to the uncertainties in identifying the extent and timing of future benefits of these expenditures

Question 28

Goodwill

Answer 28

ONLY recognized in an exchange transaction that involves the purchase of an entire business due to measurement difficulties

Question 29

Intangible Assets - Measurement

Answer 29

Initial Costs: The initial cost of acquiring an intangible is recognized as an asset on the balance sheet Costs to Defend: The costs incurred to **successfully** defend a patent or copyright are capitalized to the respective intangible asset and amortized over the **remaining useful life**

Question 30

Initial Costs

Answer 30

The initial cost of acquiring an intangible is recognized as an asset on the balance sheet

Question 31

Costs to Defend

Answer 31

The costs incurred to successfully defend a patent or copyright are capitalized to the respective intangible asset and amortized over the remaining useful life

Question 32

Goodwill

Answer 32

Measured as the excess of purchase price over the fair value of net assets acquired in a business acquisition

Question 33

Goodwill impairment

Answer 33

The amount recorded as Goodwil must be written down if a company determines the value of goodwill has permanently declined

Question 34

Intangibles with limited lives are amortized over their \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Answer 34

usefull lives (shorter of legal life or useful life)

Question 35

Intangible assets have either a _____________ or an \_\_\_\_\_\_\_\_\_\_\_\_\_\_

Answer 35

limited life; indefinite life

Question 36

Patents legal life

Answer 36

20 years

Question 37

Copyrights legal life

Answer 37

Life of creator plus 20 years

Question 38

Intangible assets with indefinite lives are \_\_\_\_\_\_\_\_\_\_\_

Answer 38

not amortized ex. trademarks/tradenames, goodwill)

Question 39

Franchises and liscences can have either\_\_\_\_\_\_\_\_\_\_\_

Answer 39

a limited life or an indefinite life

Question 40

Amortization is recorded directly to\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Answer 40

intangile assets accounts; no contra asset account is used

Question 41

Research and Development Costs

Answer 41

U.S. GAAP requires all R&D costs to be expensed as incurred IFRS allows capitalization of some "development" costs but require expensing of "research" costs

Question 42

Lease

Answer 42

Contractual agreement in which the owner of an asset (lessor) allows another party (lessee) to use the asset for a period of time at an agreed price

Question 43

Advantages of leasing:

Answer 43

1. Reduced risk of obsolescence 2. Little or no down payment 3. Shared tax advantages 4. Assets and liabilities are not reported for an operating lease (recorded as rental) Capital lease: lessees show both the asset and the liability on the balance sheet

Question 44

Recognizing long- lived assets on balance sheet impacts

Answer 44

Profitability analysis - ROA and Assets Turnover Ratio Solvency Analysis (leases) - debt to total assets ratio

Question 45

Return on Assets (ROA)

Answer 45

Net Income / Average Total Assets

Question 46

Asset Turnover Ratio =

Answer 46

Net Sales / Average Total Assets

Question 47

Debt to total assets ratio =

Answer 47

Total liabilities / Total Assets