TEST 2 but chapter 8 Flashcards
have physical substance (tangible assets)
are used in the operations of a business
are not intended for sale to customers
plant assets are resources that:
plant assets are recorded at(______). cost consists of ______ necessary to acquire the asset and make it ready for its intended use
-historical cost principle
-all expenditures
the cost of land includes:
cash purchase price
closing costs such as title and attorneys fees
real estate brokers commissions
all necessary costs incurred in making land ready for its intended use
-clearing, draining, filling and grading vacant land
-demolition and removal of old building
land is ______ depreciated (has an indefinite useful life)
NOT
when a building is purchased costs include all _______ _____ relating to the purchase or construction of a building
necessary expenditures
when a building is purchased, what are the necessary expenditures that relate to the purchase or construction of a building
purchase price
closing costs
attorneys fees
title insurance
real estate broker’s commissions
when a building is constructed, costs include the following items that become part of the _________ value of the building on the balance sheet
constructed
when a building is constructed, what’re the costs that become part of the capitalized value on the BS
-contract price plus payments made by the owner for architects’ fees
-building permits
-excavation costs
-capitalized interest expense(limited to the construction period
the cost of equipment consists of the
-cash purchase price
-sales tax
-freight-in charges
-insurance during transit
-assembling, installing and testing the unit
what is the general rule
one-time costs generally include(insurance during transit) recurring costs not included(yearly insurance)
most assets require substantial expenditures during their lives to maintain or enhance their productive capacity
repairs, maintenance, and additions
ordinary repairs and maintenance (expense)
expenditures for normal operating upkeep of long-lived assets
reccuring in nature
involve small amounts at each occurence
do not lengthen the useful life of the asset
Ordinary repairs and maintenance
infrequent expenditures that increase an assets economic usefulness in the future
additions and improvements (capitalized)
-infrequent in nature
-involve large amounts of money
-increase an assets economic usefulness
additions and improvements
the decision to capitalize or expense is subjective-
think about balance sheet and income statement effects
land has a_____
an unlimited life
a long-lived asset with a limited useful life(airplane) represents….
a prepaid cost of a bundle of future services or benefits
Why do we need to allocate a portion of the asset’s cost as an expense in the same period that revenues are generated by its use?
because of depreciation
____ is the process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method
depreciation
depreciation is NOT the process of ……..
determining an assets current market value
______ is the amount of depreciation expense accumulated since the ________. (contra-account)
accumulated depreciation
-acquisition date
depreciation cost is an ______
estimate
what are the three amounts required for each depreciable asset:
-acquisition cost
-estimated useful life
-estimated residual(or salvage) value
the expected service life of the asset
estimated useful life
estimated amount to be recovered by the company at the end of the assets estimated useful life
estimated residual
important note: with all of the method, the net book value should not be ____ below the ____
depreciated
residual value
What are three methods to calculate depreciation
-straight line (used by > 98% of companies)
-units of production
-declining balance(conceptually)
allocates the cost of an asset in equal periodic amounts over its useful life. So depreciation expense is a ________
straight line method
-constant amount each year
straight line formula:
depreciation expense= (cost-residual value)/useful life
allocates the cost of an asset over its useful life based on the relation of its periodic output to its total estimated output
units-of-production method
units-of-production formula:
depreciation expense= (cost-residual expense)-estimated total production *actual production
allocates the cost of an asset over its useful life based on a multiple of the straight-line rate (often two times).
declining-balance method
if the asset is more efficient or productive when it is newer, matches higher depreciation expense with higher revenues in the early years of an assets life and lower depreciation expense with lower revenues in the later years
accelerated depreciation method
double-declining balance formula
depreciation expense=(cost-accumulated depreciation)/ useful life *2
companies recognize a loss for the difference between the assets book value and its fair value
asset impairment
what is step 1 in asset impairment
test for impairment
-if net book value > estimated future cash flows, then the asset is impaired
what is step 2 in asset impairment
computation of impairment loss
impairment loss= net book value - fair value
what two entires does the disposal of a depreciable asset usually require?
-an adjusting entry, this updates the depreciation expense and accumulated depreciation accounts
-an entry to record the disposal; the cost of the asset and any accumulated depreciation at the date of disposal must be removed from the accounts
any difference between any resources received on disposal of an asset and its book value at the date of disposal is treated as a…..
gain or loss on the disposal of the asset
these are rights, priviledges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance
intangible assets and amortization
intangible assets are capitalized and recorded at historical cost only if they have been purchased
acquisition
-if developed internally by the company, they are expensed when inccured
upon acquisition, managers determine whether the separate intangibles have:
definite or indefinite lives
-intangible assets with indefinite lives are not amortized
-instead, these assets are to be test at least annually for possible impairment, and the asset’s book value is written down (decreased) to its fair value if impaired
indefinite life (goodwill)
impairment loss formula
impairment loss= Book value - fair value
types of intangible assets:
-goodwill
-trademark
-copyright
-technology
-patenets
-franchises
-license and operating rights
- gaap
-The favorable reputation that a company has with its customers. It arises from factors such as customer confidence, reputation, and financial standing. company builds ___ over time
-calculated as the excess of the purchase price of a business over the fair market value of the business assets and liabilities
-reported as an asset only if another business is purchased(if this is not internally generated it is not recorded as an asset)
considered to have an indefinite life; must be reviewed at least annually for possible impairment
Goodwill, goodwill
When was AOL time warner merger created
when AOL purchased time warner for US $147bn
-at this time, the fair market value of time warner was much less than that($65bn)
-in the first quarter of 2002, AOL time warner incurred a $54 billion goodwill impairment loss
an exclusive legal right to use a special name, image, slogan
Trademark
the exclusive right to publish, use, and sell a literary, musical, artistic work
copyright
includes costs for computer software and web development
technology
An exclusive right granted by the federal government for a period of 20 years, typically granted to a person who invents a new product or discovers a new process
patents
a contractual right to sell certain products or services, use certain trademarks, or perform activities in a geographical region
franchises
obtained through agreements with governmental units or agencies, permit owners to use public property in performing their service
licenses and operating rights
Not an intangible assets under US GAAP. intangible assets are capitalized when acquired
Research and development expense
-cost of an intangible asset with a definite life is allocated on a straight line basis over a period over its useful life in a process called amortize (similar to depreciation)
-most companies do not estimate a residual value for their intangible assets
-amortization expense is included on the income statement each period
-intangible assets are reported at cost less accumulated amortization on the balance sheet
the amortization period of an intangible asset is the lower between its useful life and legal life
definite life (patent, copyright, trademark)
