Test 4 Flashcards
What is a fixed asset?
Long-term tangible asset used to generate revenue (AKA property, plant, and equipment)
What are the 5 depreciation methods?
- Sum of the Year’s Digits
- Declining Balance
- Stright-line
- Activity-based
- Modified accelerated cost recovery system (MACRS, used for tax)
Can you make up your own depreciation method?
No. You must use one of FASB’s four
When do you start depreciating an asset?
When it is in use
If you stop using a fixed asset, it becomes…
An investment (do not depreciate)
A non-monetary exchange has commercial substance if:
It does not generate that same type of revenue (recognize gains and losses)
A non-monetary exchange is non-commercial if:
It earns the same type of revenue (some cash some gains)
When do you record a loss on a non-monetary exchange?
Always
Book Value =
Book Value = Asset Cost - Accumulated Depreciation
Depreciable Base =
Depreciable Base = Original Cost - Salvage Value
What does book value represent?
How much of the cost is left to be depreciated
What is impairment?
When the Fair Market Value of an asset is lower than the Book Value
What is depletion?
Depreciation of natural resources
Should depreciation expense be included in a company’s budget?
No. Depreciation is not a cash flow expense
Does FASB have a 1/2 year convention for its depreciation methods?
No, except for sum-of-the-year’s digits
MACRS does have 1/2 year convention
Which depreciation method is the most accurate?
Activity-based
How do you pick a depreciation method?
Pick one that matches most closely with how you generate revenue over time
Where are fixed assets located in the financial statements?
Balance Sheet
Where is depreciation located in the financial statements?
Income Statement
What are the 5 types of intangibles?
1) Marketing
2) Customers
3) Artistic Creations
4) Contracts
5) Technology
Examples of marketing-related intangibles
Trademarks or trade name, internet domains
Examples of customer-related intangibles
Customer lists, contractual/non-contractual relationships
Examples of artistic creation intangibles
Ownership rights to plays, music, pictures, etc., copyrights
Examples of contract-related intangibles
Franchises, licensing agreements
Examples of technology-related intangibles
Project patents, process patents
Goodwill =
Cost of purchase - Fair Value of Co. (i.e. assets - liabilities)
Is Goodwill amortized?
No, it has an indefinite life
Bargain Purchase
When a purchaser pays less than the fair value, the excess amount is recorded as a gain
Research and Development Costs
Expense as incurred, capitalize when it becomes “development”
What does it mean to capitalize an expense?
The expense transforms into an asset
What are computer software costs considered to be?
Selling and admin expense
What is the difference between depreciation and amortization expense?
Same methods, different journal entries:
Amortization Expense
Trademark
Depreciation Expense
Accumulated Depreciation
What is the legal/financial life of marketing intangibles?
Legal: Indefinite life, renewable every 10 years
Financial: no amortization
What is the only intangible that is not amortized?
Marketing
What is the legal/financial life of artistic creations?
Legal: Life of the creator plus 70 years
Financial: Amortize over useful life, which is usually shorter than legal life
What is the legal/financial life of contracts?
Legal: length of contract or indefinite
Financial: amortize if definite, no amortization if indefinite
What is the legal/financial life of technology?
Legal: 20 years
Financial: Amortize over legal life or useful life, whichever is shorter
You have a commercial transaction with a gain. Do you recognize the gain?
Yes
You have a non-commerical transaction with no cash received. Do you recognize the gain?
No, defer it
You have a non-commercial transaction with cash received that is greater than 25% of the value of the exchange. Do you recognize the gain?
Yes
You have a non-commercial transaction with cash received that is less than 25% of the value of the exchange. Do you recognize the gain?
You recognize the same percentage of gain as the percentage of cash of the value of the transaction
