Long run fixed assets Flashcards
Explain tangible assets with examples
Tangible assets are physical items you can see and touch Land - infinite asset tangible Natural resources Buildings Equipment
Explain intangible assets with examples
intangible assets are not physical in natures consisting of contractual or legal rights or economic benefits Patents Trademarks Copyrights Intellectual property
What is something different about Land in how its treated
Land is reported at its historical cost in the financial records and is not depreciated
Explain depreciation
allocation of the cost of buildings, machinery and equipment
Explain depletion
allocation of the cost of natural resources
Explain amortisation
allocation of the cost of intangible assets
What are two things accounting for intangible assets depends on
Whether the assets is acquired externally or developed internally
Whether the assets has an assumed finite or infinite life
Define patents
granted by the federal government to the inventor of a product or process, bestowing the exclusive right to produce and sell a given product, or use a process for up to 20 years
Define copyrights
are exclusive rights to reproduce and sell a book, musical composition, film or similar creative iterm for the life of the creator plus 70 years
Define trademarks
are distinctive identifications of a manufactured product or a service, taking the form of a name, sign, slogan logo or emblem
Define franchise and licenses
Legal contracts that grant the buyer the right to sell a product or service in accordance with specified conditions ex: Mc donalds
Define a leasehold
the right to use a fixed asset for a specified period of time beyond one year
Define leasehold improvements
Leasehold improvements: occur when one spends money to improve leased property right to use a fixed asset for a specific period of time above a year
Why does intangible assets acquired externally or internally matter
Company’s balance sheet lists an intangible asset only if the company purchased the rights to the asset from an external party
Ex: Patent costs are capitalised as asset but internally developed R&D costs (may lead to patents) are expensed
How are R and D costs expensed - is there a point where it is capitalized
R&D for computer software companies is expensed up to time of technological feasibility thereafter it is capitalised - nothing happened until this.
Technologically feasible means software is something more than a piece of paper. This involves a lot of judgement.
Define acquisition cost
Acquisition cost of long-lived assets is the cash equivalent purchase price - includes incidental costs to complete the purchase, transport and prepare asset for use
Define non metary exchange
An exchange of goods and services in which assets or liabilities exchanged are not cash is called a nonmonetary exchange: exchange one of our assets for another asset. Ex: trading in a car is a nNME
A nonmonetary exchange is recorded at the fair market value of the consideration received (new car value) or the fair market value of the consideration given up (car we give up/trade in) , whichever is more clearly determinable
Define Fair market value
Fair market value: Assets price for which a company could sell the asset to an independent third party
Explain a basket purchase or bundle purchase and in general how is it treated
The acquisition of two or more types of asset for a mup-sum cost is sometimes called a basket purchase - bundle purchase
The acquisition cost of a basket purchase is split among assets according to some estimate of relative sales value for the assets
We allocate the value using the relative fair values
Explain accrual accounting
Accrual accounting initially capitalises the cost then allocates it in the form of depreciation over the periods the asset is used
More effectively matches expenses with revenues produced
Define depreciable value
Depreciable value is the difference between total acquisition cost and estimates residual value - It is the amount of the acquisition cost to be depreciated or allocated over the total useful life of the asset
Define residual value
The residual value is the amount the company expects to receive from sale or disposal of a long-lived asset at the end of its useful life ex:(ox scrap value could be positive. Or ox funeral could be negative
Define useful life
The useful life is the shorter of the physical life of the asset or the economic life of the asset (before it becomes obsolete)
Define depreciation schedule
A list of depreciation amounts for each year of an asset’s useful life is a depreciation schedule - how much depreciation in each year
What is the formula and basis of straight line depreciation
Spreads the depreciable value evenly over the useful life of an asset (Cost-Residual)/no.of years
What is the formula and basis of depreciation based on untis
When physical wear and tear determines the useful life of an asset, depreciation may be based on units of service or units of production instead of units of time (years)
Depreciation expense per unit of service = (Cost-Residual)/no.of years
Expense total = units x depreciation per unit
Explain DDB method of depreciation and how it is computed
Double declining balance (DDB) method is an accelerated method
Computed by:
Computing straight line rate by dividing 100% by the useful years of life AND Multiplying by 2
To compute depreciation ignore the residual value at the beginning of the year and multiply the asset’s NBV at start of the year by the DDB rate
DDB RATE IS DOUBLE STRAIGTH LINE RATE
What happens if salvage value or residual value is not what it should be at the end of the year for DDB method
For DDB does not include any information about the salvage value/residual value
We need to adjust when using DDB method - stick in a balancing charge to get us down to the residual value
What happens if If new information presents itself on the residual value or estimated useful life
Depreciation expense is recomputed for the period in which the estimate is revised and all future periods. We adjust the depreciation prospectively . We don’t undo the past but changes are forward looking
How does depreciation relate to cash flow
Depreciation does not generate cash.
It allocates the original cost of an asset to the periods of use
It is a deductible non cash expense for income tax purposes
Higher tax depreciation results in lower taxable income and lower taxes keeping more cash in the business
How is depletion of natural resources measured and recorded
Measured on a units of production basis
Annual depletion may be a direct reduction of the asset or accumulated in a separate contra account
How are intangible assets treated based on if they have a finite life vs infinite life
Costs of intangible asset with finite lives are amortised over their useful lives
Companies do not amortise intangible assets with infinite lives - They are subject to a periodic asset impairment test
Wat does it mean if an asset is impaired
Asset is impaired when it ceases to have economic value as large as the book value ex: plant is impaired if its damaging to environment and we decide its not right to pollute (change in company plan) or laws changed
what are the steps in seeing the impairment of assets held for use
Step 1 Recoverability test - if undiscounted expected cash flow< book value, impairment exists
Step 2: Impairment loss = Book value -fair value
Assets held for resale can be written up following an impairment loss only to the net book value at the time of impairment
How is an impairment loss Recorded
Loss on impairment DR
Accumulated depreciation CR
What is the impairment loss for the impairment of assets to be disposed of
Impairment loss = Book value - (fair value - cost to sell)
Explain goodwill
Arises when a company buys another company. Is equal to excess of cost of acquired company over sum of the fair market value of its identifiable individual assets less the liabilities
Goodwill = cash paid - assets and liabilities we paid for (what’s their worth)
Define repairs vs maintenance
Repairs include Costs of breakdowns, accidents or damage
Maintenance includes routine costs of oiling, polishing and painting and adjusting
Explain improvements
Improvements are expenditures that increase the future benefits provided by a fixed asset they are capitalised assets
Explain deregonition
Disposal required removal of assets book value from Equipment and accumulated depreciation accounts. Remember accumulated depreciation is a contra asset account
What constitutes a gain vs a loss on tangible assets sale
Cash received > book value = gain
Cash received < book value = loss
What are Asset sales stated as on the SOCF
Sales of fixed asset are investing activities of SOCF
Indirect method:
Net income includes gains and losses, which do not affect cash flows
Gains are subtracted and losses are added to net income in the operating section
Direct method:
Gains and losses are ignored
