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accounting > Chapter 9 Powerpoint > Flashcards

Chapter 9 Powerpoint Flashcards

1
Q

Purchase of long lived assets

A

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

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2
Q

Recognize periodic deprectiation expense during____________________________

A

periods in which assets are used to generate revenue

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3
Q

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

A

Accmulated depreciation

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4
Q

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

A
  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

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5
Q

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

A

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

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6
Q

No ______________ is allowed in the future

A

upward revaluation

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7
Q

If a capitalized expenditure is listed as a revenue expenditure

A

income will be understated

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8
Q

Factors used in computing depreciation

A

Cost

Useful life

Salvage value

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9
Q

Depreciable cost =

A

Cost - Salvage Value

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10
Q

Straight line method example

A

Cost - Salvage Value = Depreciable Cost

Depreciable Cost / Useful Life = Depreciation expense

13,000 - 1,000 = 12,000

12,000 / 5 = 2400

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11
Q

Journal entry for depreciation expense

A

Depreciation expense XXX

               Accmulated depreciation XXX
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12
Q

Declining - Balance

A

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

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13
Q

Units-of-Activity

A

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

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14
Q

Units-of-Activity formula

A

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

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

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15
Q

Why is each method of depreciation acceptable?

A

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

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16
Q

Changes in estimates related to factors used in computing depreciation ________________________________

A

impact current and future periods, but not prior periods

*change in salvage value, change in estimated useful life

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17
Q

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

A

gain on disposal

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18
Q

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

A

loss on disposal

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19
Q

Gains and Losses on Disposal are reported ___________________________

A

seperately from Revenue and Expense in the income statement

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20
Q

3 types of disposals of plant assets

A

Retirement

Sale

Exchange

21
Q

Journal entry for eliminating asset

A

Accmulated Depreciation X

Loss* (if applicalbe) Y- X

                                   Plant Asset Y

                               Gain\* (If applicable) X - Y
22
Q

Impairment

A

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”

23
Q

If an asset is impaired, a company must _________________________________

A

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

24
Q

Recognizing intangible assets

A

Recognized on balance sheet but because they have economic substance

25
Q

Asset

A

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

26
Q

Copyrights and Patents

A

Recognized when granted

Legal fees to successfully defend them are also capitalized

27
Q

Research and Development Costs (R&D)

A

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

28
Q

Goodwill

A

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

29
Q

Intangible Assets - Measurement

A

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

30
Q

Initial Costs

A

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

31
Q

Costs to Defend

A

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

32
Q

Goodwill

A

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

33
Q

Goodwill impairment

A

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

34
Q

Intangibles with limited lives are amortized over their ________________

A

usefull lives (shorter of legal life or useful life)

35
Q

Intangible assets have either a _____________ or an ______________

A

limited life; indefinite life

36
Q

Patents legal life

A

20 years

37
Q

Copyrights legal life

A

Life of creator plus 20 years

38
Q

Intangible assets with indefinite lives are ___________

A

not amortized

ex. trademarks/tradenames, goodwill)

39
Q

Franchises and liscences can have either___________

A

a limited life or an indefinite life

40
Q

Amortization is recorded directly to________________________

A

intangile assets accounts; no contra asset account is used

41
Q

Research and Development Costs

A

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

42
Q

Lease

A

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

43
Q

Advantages of leasing:

A
  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

44
Q

Recognizing long- lived assets on balance sheet impacts

A

Profitability analysis - ROA and Assets Turnover Ratio

Solvency Analysis (leases) - debt to total assets ratio

45
Q

Return on Assets (ROA)

A

Net Income / Average Total Assets

46
Q

Asset Turnover Ratio =

A

Net Sales / Average Total Assets

47
Q

Debt to total assets ratio =

A

Total liabilities / Total Assets

48
Q
A

accounting (31 decks)

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