Long run fixed assets

Question 1

Explain tangible assets with examples

Answer 1

Tangible assets are physical items you can see and touch
Land - infinite asset tangible
Natural resources
Buildings
Equipment

Question 2

Explain intangible assets with examples

Answer 2

intangible assets are not physical in natures consisting of contractual or legal rights or economic benefits
Patents
Trademarks
Copyrights
Intellectual property

Question 3

What is something different about Land in how its treated

Answer 3

Land is reported at its historical cost in the financial records and is not depreciated

Question 4

Explain depreciation

Answer 4

allocation of the cost of buildings, machinery and equipment

Question 5

Explain depletion

Answer 5

allocation of the cost of natural resources

Question 6

Explain amortisation

Answer 6

allocation of the cost of intangible assets

Question 7

What are two things accounting for intangible assets depends on

Answer 7

Whether the assets is acquired externally or developed internally
Whether the assets has an assumed finite or infinite life

Question 8

Define patents

Answer 8

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

Question 9

Define copyrights

Answer 9

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

Question 10

Define trademarks

Answer 10

are distinctive identifications of a manufactured product or a service, taking the form of a name, sign, slogan logo or emblem

Question 11

Define franchise and licenses

Answer 11

Legal contracts that grant the buyer the right to sell a product or service in accordance with specified conditions ex: Mc donalds

Question 12

Define a leasehold

Answer 12

the right to use a fixed asset for a specified period of time beyond one year

Question 13

Define leasehold improvements

Answer 13

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

Question 14

Why does intangible assets acquired externally or internally matter

Answer 14

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

Question 15

How are R and D costs expensed - is there a point where it is capitalized

Answer 15

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.

Question 16

Define acquisition cost

Answer 16

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

Question 17

Define non metary exchange

Answer 17

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

Question 18

Define Fair market value

Answer 18

Fair market value: Assets price for which a company could sell the asset to an independent third party

Question 19

Explain a basket purchase or bundle purchase and in general how is it treated

Answer 19

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

Question 20

Explain accrual accounting

Answer 20

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

Question 21

Define depreciable value

Answer 21

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

Question 22

Define residual value

Answer 22

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

Question 23

Define useful life

Answer 23

The useful life is the shorter of the physical life of the asset or the economic life of the asset (before it becomes obsolete)

Question 24

Define depreciation schedule

Answer 24

A list of depreciation amounts for each year of an asset’s useful life is a depreciation schedule - how much depreciation in each year

Question 25

What is the formula and basis of straight line depreciation

Answer 25

Spreads the depreciable value evenly over the useful life of an asset (Cost-Residual)/no.of years

Question 26

What is the formula and basis of depreciation based on untis

Answer 26

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

Question 27

Explain DDB method of depreciation and how it is computed

Answer 27

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

Question 28

What happens if salvage value or residual value is not what it should be at the end of the year for DDB method

Answer 28

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

Question 29

What happens if If new information presents itself on the residual value or estimated useful life

Answer 29

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

Question 30

How does depreciation relate to cash flow

Answer 30

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

Question 31

How is depletion of natural resources measured and recorded

Answer 31

Measured on a units of production basis

Annual depletion may be a direct reduction of the asset or accumulated in a separate contra account

Question 32

How are intangible assets treated based on if they have a finite life vs infinite life

Answer 32

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

Question 33

Wat does it mean if an asset is impaired

Answer 33

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

Question 34

what are the steps in seeing the impairment of assets held for use

Answer 34

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

Question 35

How is an impairment loss Recorded

Answer 35

Loss on impairment DR

Accumulated depreciation CR

Question 36

What is the impairment loss for the impairment of assets to be disposed of

Answer 36

Impairment loss = Book value - (fair value - cost to sell)

Question 37

Explain goodwill

Answer 37

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)

Question 38

Define repairs vs maintenance

Answer 38

Repairs include Costs of breakdowns, accidents or damage

Maintenance includes routine costs of oiling, polishing and painting and adjusting

Question 39

Explain improvements

Answer 39

Improvements are expenditures that increase the future benefits provided by a fixed asset they are capitalised assets

Question 40

Explain deregonition

Answer 40

Disposal required removal of assets book value from Equipment and accumulated depreciation accounts. Remember accumulated depreciation is a contra asset account

Question 41

What constitutes a gain vs a loss on tangible assets sale

Answer 41

Cash received > book value = gain

Cash received < book value = loss

Question 42

What are Asset sales stated as on the SOCF

Answer 42

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