Chapter 9: Reporting and Analyzing Long‐Lived Assets

Question 1

Accelerated‐depreciation method

Answer 1

A depreciation method that produces higher depreciation expense in the early years than the straight‐line approach.

Question 2

Additions and improvements

Answer 2

Costs incurred to increase the operating efficiency, productive capacity, or expected useful life of a plant asset.

Question 3

Amortization

Answer 3

The process of allocating to expense the cost of an intangible asset.

Question 4

Asset turnover

Answer 4

Indicates how efficiently a company uses its assets to generate sales; calculated as net sales divided by average total assets.

Question 5

Capital expenditures

Answer 5

Expenditures that increase the company’s investment in plant assets.

Question 6

Capital lease

Answer 6

A contractual agreement allowing one party (the lessee) to use another party’s asset (the lessor); accounted for like a debt‐financed purchase by the lessee.

Question 7

Cash equivalent price

Answer 7

An amount equal to the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable.

Question 8

Copyright

Answer 8

An exclusive right granted by the federal government allowing the owner to reproduce and sell an artistic or published work.

Question 9

Declining‐balance method

Answer 9

A depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation expense over the asset’s useful life.

Question 10

Depreciable cost

Answer 10

The cost of a plant asset less its salvage value.

Question 11

Depreciation

Answer 11

The process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner.

Question 12

Franchise

Answer 12

A contractual arrangement under which the franchisor grants the franchisee the right to sell certain products, to perform specific services, or to use certain trademarks or trade names, usually within a designated geographic area.

Question 13

Goodwill

Answer 13

The value of all favorable attributes that relate to a company that are not attributable to any other specific asset.

Question 14

Impairment

Answer 14

A permanent decline in the fair value of an asset.

Question 15

Intangible assets

Answer 15

Rights, privileges, and competitive advantages that result from the ownership of long‐lived assets that do not possess physical substance.

Question 16

Lessee

Answer 16

A party that has made contractual arrangements to use another party’s asset for a period at an agreed price.

Question 17

Lessor

Answer 17

A party that has agreed contractually to let another party use its asset for a period at an agreed price.

Question 18

Operating lease

Answer 18

A contractual agreement allowing one party (the lessee) to use the asset of another party (the lessor); accounted for as a rental by the lessee.

Question 19

Ordinary repairs

Answer 19

Expenditures to maintain the operating efficiency and expected productive life of the asset.

Question 20

Patent

Answer 20

An exclusive right issued by the U.S. Patent Office that enables the recipient to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant.

Question 21

Plant assets

Answer 21

Resources that have physical substance, are used in the operations of a business, and are not intended for sale to customers.

Question 22

Research and development costs

Answer 22

Expenditures that may lead to patents, copyrights, new processes, and new products; must be expensed as incurred.

Question 23

Return on assets

Answer 23

A profitability measure that indicates the amount of net income generated by each dollar of assets; computed as net income divided by average total assets.

Question 24

Revenue expenditures

Answer 24

Expenditures that are immediately charged against revenues as an expense.

Question 25

Straight‐line method

Answer 25

A depreciation method in which companies expense an equal amount of depreciation for each year of the asset’s useful life.

Question 26

Trademark (trade name)

Answer 26

A word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product.

Question 27

Units‐of‐activity method

Answer 27

A depreciation method in which useful life is expressed in terms of the total units of production or use expected from the asset.