Chapter 9 Powerpoint Flashcards
Purchase of long lived assets
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
Recognize periodic deprectiation expense during____________________________
periods in which assets are used to generate revenue
_______________ is used to measure long-lived assets at net book value
Accmulated depreciation
Two types of costs incurred during the useful life of a plant asset:
- Ordinary repairs that maintain the operating efficiency and expected productive life of a plant asset
- expensed as incurred - Additions and improvements that increase the operating efficiency, productive capacity, or useful life of a plant asset
*both accounted for as capital expenditures
U.S GAAP requires companies to record plant assets at _______________
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
No ______________ is allowed in the future
upward revaluation
If a capitalized expenditure is listed as a revenue expenditure
income will be understated
Factors used in computing depreciation
Cost
Useful life
Salvage value
Depreciable cost =
Cost - Salvage Value
Straight line method example
Cost - Salvage Value = Depreciable Cost
Depreciable Cost / Useful Life = Depreciation expense
13,000 - 1,000 = 12,000
12,000 / 5 = 2400
Journal entry for depreciation expense
Depreciation expense XXX
Accmulated depreciation XXX
Declining - Balance
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
Units-of-Activity
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
Units-of-Activity formula
Depreciable Cost / Total Units of Activity = Depreciation cost per unit
Depreciation Cost per unit / Units of Activity during the year = depreciation expense
Why is each method of depreciation acceptable?
Because each recognizes the decline in service potential of the asset in a rational and systematic manner
Changes in estimates related to factors used in computing depreciation ________________________________
impact current and future periods, but not prior periods
*change in salvage value, change in estimated useful life
If the proceeds exceed the book value, the company recognizes a _______________
gain on disposal
If the proceeds are less than the book value, the company recognizes a ________________
loss on disposal
Gains and Losses on Disposal are reported ___________________________
seperately from Revenue and Expense in the income statement
3 types of disposals of plant assets
Retirement
Sale
Exchange
Journal entry for eliminating asset
Accmulated Depreciation X
Loss* (if applicalbe) Y- X
Plant Asset Y
Gain\* (If applicable) X - Y
Impairment
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”
If an asset is impaired, a company must _________________________________
write-down the asset to its fair value in the year the decline in value occurs
Recognizing intangible assets
Recognized on balance sheet but because they have economic substance
Asset
“Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events”
Copyrights and Patents
Recognized when granted
Legal fees to successfully defend them are also capitalized
Research and Development Costs (R&D)
Expensed as incurred due to the uncertainties in identifying the extent and timing of future benefits of these expenditures
Goodwill
ONLY recognized in an exchange transaction that involves the purchase of an entire business due to measurement difficulties
Intangible Assets - Measurement
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
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
Goodwill
Measured as the excess of purchase price over the fair value of net assets acquired in a business acquisition
Goodwill impairment
The amount recorded as Goodwil must be written down if a company determines the value of goodwill has permanently declined
Intangibles with limited lives are amortized over their ________________
usefull lives (shorter of legal life or useful life)
Intangible assets have either a _____________ or an ______________
limited life; indefinite life
Patents legal life
20 years
Copyrights legal life
Life of creator plus 20 years
Intangible assets with indefinite lives are ___________
not amortized
ex. trademarks/tradenames, goodwill)
Franchises and liscences can have either___________
a limited life or an indefinite life
Amortization is recorded directly to________________________
intangile assets accounts; no contra asset account is used
Research and Development Costs
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
Lease
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
Advantages of leasing:
- Reduced risk of obsolescence
- Little or no down payment
- Shared tax advantages
- 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
Recognizing long- lived assets on balance sheet impacts
Profitability analysis - ROA and Assets Turnover Ratio
Solvency Analysis (leases) - debt to total assets ratio
Return on Assets (ROA)
Net Income / Average Total Assets
Asset Turnover Ratio =
Net Sales / Average Total Assets
Debt to total assets ratio =
Total liabilities / Total Assets
