section 8 Flashcards
t/f a capitalized expenditure is accounted for as an expense rather than an asset
false, when an expenditure is “capitalized” it means that it is accounted for as an asset rather than an expense
long term assets are also known as
non-current assets
capital assets
operating assets
long term assets might include
intangible assets
property, plant & equipment
natural resources
Depreciation Expense is applied to what type of long term assets?
property, plant and equipment
amortization expense refers to what kind of long term asset?
intangibles
depletion expense
natural resources
Intangible assets
represent rights that have future benefit such as
trademark
patent
franchise rights
copyrights
Under GAAP, R&D costs incurred in the development of what is hoped to be some future patentable product or tech are to be
expensed when incurred even if such costs may contribute to a patentable discovery
Goodwill is recorded as an asset only when
a business is purchased
Goodwill exists if the business is
actually worth more than the value of its assets less liabilities
Straight line depreciation
cost—salvage value (divided by) # yrs of useful life
Why is allocation of an operating asset’s cost over time necessary?
the matching principle a.k.a expense recognition principle
capitalizing an expenditure means that
the expenditure, usually in the form of a payment of cash, is made in the purchase of an asset
Long Term Assets aka
Non-Current Assets
Operating Assets
Capital Assets
property, plant, and equipment includes
land, improvements, buildings, machinery, and equipment with an expected useful life LONGER than ONE YEAR
intangible assets
includes patents, trademarks, copyrights, franchise rights and goodwill
natural resources
includes oil wells, mineral deposits, timber tracts, etc
basic accounting for operating assets (4)
- recording the acquisition of the asset
- allocating the cost of the asset to expense over its useful life
- recording any repairs or improvements to the asset
- recording the sale or disposal of the asset
In recording the acquisition of an operating asset, GAAP requires
all direct or incidental costs incurred in acquiring an asset and preparing it for ORIGINAL INTENDED USE to be capitalized a part of the cost of the asset
straight line depreciation
an equal amount of cost each year of its estimated useful life
book value is
the original capitalized cost minus accumulated depreciation
real accounts are
balance sheet accounts and never close
why use a contra-asset account rather than reduce the asset directly?
to provide better disclosure
GAAP requires any costs incurred in normal recurring repairs and maintenance of property, plant or equipment to be
expensed in the period incurred
GAAP requires any costs incurred in improvements to property, plant or equipment to be capitalized as
an increase in the original cost of the asset
Improvements are
1.costs that significantly increase the original productivity of an asset or
2. extend the useful life beyond what was originally estimated
What kind of account is gain on sale?
revenue, which appears on the income statement under OTHER revenues & expenses
What kind of account is loss on sale?
expense on income statement under other rev/exp
What kind of account is loss on disposal?
expense, under other on income statement
Trademarks are recorded as an asset only when
rights are purchased
patents are recorded as an asset if
patent rights are purchased
Under GAAP, R&D costs are to be
expensed when incurred even if such costs may contribute to a patentable discovery
Any legal fees and court costs incurred in the successful defense of copyrights or trademarks should be
capitalized to the asset
any capitalized costs of intangibles reflected on the balance sheet must be
allocated to expense over its life
allocation of the cost of an intangible over its useful life is referred to as
amortization
what kind of account is accumulated amortization?
contra asset account
goodwill is recorded as an asset only when a business is
purchased
at the time a company is purchased, the amount of goodwill to be recorded as an asset on the purchasing company’s balance sheet
represents the costs associated with the purchase of the company in excess of the fair market value of its assets less any assumed liabilities
Purchase Price — (FMV—L)
Major equipment refurbishment costs that extend the equipment’s original anticipated useful life should be
capitalized in the period incurred
and
allocated to expense in the future periods of benefit
The fair market value refers to
the excess price above book value — liabilities
Goodwill =
Purchase Price + Liabilities — FMV
or
(FMV—L) — (Purchase Price—FMV)
at the time a company is purchased, the amount of goodwill to be recorded as an asset on the purchasing company’s balance sheet
represents the costs associated with the purchase of the company in excess of the FMV of it’s assets less any assumed liabilities
When is the value of goodwill NOT recorded?
when it increases
When is the value of goodwill recorded?
when it decreases it is recorded as a loss
major equipment refurbishment costs that extend the equipment’s original anticipated useful life should be
—capitalized in the period incurred
—allocated to expense in the future periods of benefit
