Lecture 8

Question 1

Long lived assets are usually refrred to as

Answer 1

PPE:

Tangingle long lived assets: are usually referred to as ‘Property, plant and equipment”

Question 2

Characteritiics of tangible long lived asssets:

Answer 2

Characteritiics of tangible long lived asssets: Has a physical presence, expected to be used for more than a year, value comes primarily from use in operations

Question 3

Recording cost of long lived assets at qcquisiiton:

what is it called

Answer 3

IFRS requires that the amount recorded in the asset account upon acquisition include all

(1) ordinary and
(2) necessary costs to:
– Get the asset to its intended location
– Get the asset ready for its intended use

it is called cpaitlzied costs and its a debit to assets

Question 4

Examples of capitzlied expentures

Answer 4

Purchase price,closing costs,attorney fees,costs of clearing trees, draining out water, filling in holes with dirt, etc.

Question 5

Difference between ordinary repairs /maintence and imprivment?

Answer 5

For ordinary repairs/maintence its counted as a expense in the income stamtent

for improvments its counted as a cptiled cost hthereofre its an increase in asset

Question 6

Depreciable base,which includes:

Answer 6

– Historical cost of the asset
* What are all of the initial and subsequent capital expenditures?

Question 7

what is economic life?

Answer 7

It’s different from physical life, we might think a plane can live for 15 years but were only plan on using it for 10, that its economic life to us

Question 8

what is salvage value?

Answer 8

How much can we sell it for when we’re done usingit?

Question 9

what is not depreciated?

Answer 9

LAND as it’s sueful life is infinite

Question 10

Methods of allocation depreciation

Answer 10

Actictiy Based
Time based - (Striaght line method)
Time based - DEclinig balance

Question 11

Activity based:

Answer 11

Depreication expense in a given year is calculated by:
((Cost - salvage) / Expected total units ) * Units in period

ExpectedTotalUnits=Cost per unit
When does this make sense?
When pattern of use is variable and theres is an easily identifiable measure of inputs and ouputs units

Question 12

Straight line method

Answer 12

(Cost - salvage) / xpected life)

• When does this make sense?
• When benefits are fairly constant over the useful life

Question 13

Activity based vs Time based

Answer 13

ctivity-Based
– Also called “units of production”
– Allocation of cost based on units of input or outpu
Depreciation is based on the actual usage or production levels of the asset.

t
* Example: Engine hours on an aircraft, miles on a truck, units of output on a machine, etc.

• Time-Based
  – Allocation of cost based on passage of time

Depreciation is based on the passage of time, with the asset depreciating by a fixed amount each year.

– Possible methods we will discuss:
* Straight-line
* Declining Balance

Question 14

Declining balance method d0es the carrying value change

Answer 14

Begnning of the year fr caryying value

Carrying value * (2/Estimaeduseful life)

carrying valu = cost - accumalted dpreicaion

Carrying value benginnning of the year

• Every single period, carrying value will change because acuatled depreicaion will change

Question 15

what is salvage value also known as?

Answer 15

Residual alue

Question 16

how to find depreicaiton per unit?

Answer 16

By unsing the units of preoduction

depreication per unit = cost - salvage value) / total units

Question 17

when calculatin depreciation for units of production how does it differ?

Answer 17

first because you divide cost-resdual value by the total uiits you epxect. to produce

second because the year after you the carrying value from last year not the cost as in declining and straigh line

Question 18

Special case #1: Changes to depreication assumption

Sometimes managers’ estimates change regarding (1) estimated useful life or (2) estimated salvage value.
– If that happens, new estimates are applied ____

Example: McFiddich Distilleries has a distilling machine that originally cost $10,000 with an estimated useful life of five years and a salvage value of $800. The company uses straight- line depreciation.
a) Indicate the depreciation expense in year 3 if, after two years, management decides the salvage value will actually only be $200.

b) Indicate the depreciation expense in year 3 if, after two years, management decides the machine will actually last for eight years (for this part, assume the salvage value remains at the original $800).

Answer 18

– If that happens, new estimates are applied forward

A)
Set up by first figuring out value remaining.
(10,000 – 800)/5 = $1,840 per year initially.
10,000 – 1,840 – 1,840 = $6,320 at the end of year two.
Salvage value is now 200 instead of 800, so for Year 3, depreciation expense is calculated as (6,320 – 200)/3 years remaining = $2,040 (instead of $1840 as in years past).

B)
Remaining life is 8 years instead of 5, so there are 6 more years instead of 3. Depreciation expense is (6,320 – 800)/6 = $920.

Question 19

Special Case #2: Impairment of Assets

Answer 19

– Assume Southwest Airlines did a review and identified aircraft
with a net book value of $10,000,000 as potentially impaired.
– After further investigation, the Fair Value of the aircraft was determined to be $7,500,000.
– What journal entry would Southwest record to reflect the impairment?

Impairment Loss (+Loss, -SE) $2,500,000 A/D

• Aircraft Equipment (+xA) $2,500,000

Question 20

How to price pric vs reisdual value on depricated asset

Answer 20

Price = cost - a/d

redisfual vlaue is the estimaed value for the company

Question 21

What are some characteristics of intangible assets?

Answer 21

– Lack physical substance.
– Typically provide benefits by giving firms certain rights/privileges. – Often associated with value from ideas, services, and technology.

Question 22

Accounting for intangibles is conceptually similar to accounting for tangible Property, Plant and Equipment…

Answer 22

1. Decide which costs to capitalize
2. Then determine how and when those costs will be matched to revenues on the Income Statement

Question 23

Differnece between intangible asset and goodwill

Answer 23

Goodwill is a type of intangible asset that arises when a company acquires another business for more than the fair value of its net identifiable assets

Definition: Intangible assets are non-physical assets that have a useful life and are used in the operations of a business. They can be either identifiable or unidentifiable.

Question 24

Accounting for idenrtiable intangel assets, 2 ways to acquire intaingible assets

and how do we account for it

Answer 24

Can be purchased from another company or internally- developed.

• If purchased, we usually capitalize all acquisition costs. – Including purchase price, legal fees, etc.
• If internally-developed, we instead generally* expense all associated costs immediately. Why the difference?
  – Even if they are relevant, estimates of expected future benefits (if any) are too unreliable

Question 25

Aortization of intaingles:

Moe’s Southwest Grill spent $80,000 in early 2014 to purchase a patent for a special system of grilling its burritos. The patent has a remaining legal life of 10 years, but the management at Moe’s believe its will provide benefits for only 5 more years with no residual value.

What’s the journal entry to record the purchase of the patent for cash?

What’s the journal entry to record the first year of amortization
expense?

Answer 25

For the purchased intangible assets that are capitalized, we “amortize” their costs over time, so long as they have a definite life.

• Amorization of intaingbles is similar to depreication of tangbles assets
• Most common metho is striaght line amortization

What’s the journal entry to record the purchase of the patent for
Slide 29 of 38
cash?
What’s the journal entry to record the first year of amortization
expense?
Amort. Exp. (+E) $16,000 Accum. Amort. (+xA)
Patent (+A) $80,000 Cash (-A)
$80,000 $16,000

Question 26

A common intangile asset with an indetiit life is a __

How to record assers with indefeininte life

Answer 26

Trade mark

Assets with an indefinite life are not amortized, but instead periodically tested for impairment.
Loss on Impairment (+E, -SE) $XX Trademark (-A)
$XX

Question 27

Accounting for goodwill and what is net indeitifiable assets

characterieis of goodwill

Answer 27

Goodwill is equal to the excess of the purchase price paid over the fair value (not book value!) of the net identifiable assets (tangible and intangible) of the acquired company

goodwill = purchases price - fair value of net identifbale assets

Net indefitiable assets = asets - liabioties assumed

– Indefinite-lived
– Never amortized
– Tested periodically for impairment

Question 27

Can an assetfair value become lower than the carrying amount?