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Terms in this set (57)
Resources that have physical substance that is used on operation and not to be sold to a customer
Historical cost principle
requires companies to record plant assets at cost of the asset
what does cost consist of?
all expenditures necessary to acquire an asset and make it ready for its intended use
what is included in cost
everything except driver pay
What type of expenditure are costs that are included in land asset accounts
cash equivalent price
equal to the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable.
what is included in the cost of land?
1. cash purchase price
2. closing costs such as title and attorneys fees
3. real estate broker's commission
4. accrued property taxes and other liens on the land assumed by the purchaser
structural additions with limited lives that are made to land
(ex: parking lots)
-cost of land improvements include all expenditures necessary to make improvements ready for intended use
Costs included in purchasing a building
all costs relating to purchase the building and construct the building
Once construction has been completed is the interest incurred still added?
No, interest costs o construction are only counted during the time of construction
includes assets used in operations
(ex, check out counter, factory machinery, delivery trucks)
What does the cost of equipment include?
-cash purchase price
-sales taxes, freight charges, and insurance during transit paid by purchaser, assembly costs, installation costs, testing the unit costs.
expenditures to maintain operating efficiency
-debited as maintenance repair
additions and improvements
are meant to INCREASE efficiency
expense to better your efficiency
An improvement would improve efficiency and are debited to the plant asset effected
a contractual agreement in which the owner of the asset (lessor) allows the party (Lessee) to use the asset for a period of time at an agreed price
advantages to leasing
1. Reduced risk of obsolescence can trade in old for new. prevents attempting to sell obsolete asset( out of date asset)
2. Little or no down payment
3. Shared tax advantages - techniquely lessor owns asset, makes tax profits so the price for the lessee is less
4. Assets and liabilities not recorded - reporting low assets causes a bigger return on assets. fewer liabilities shows the company as less risky
allow lessee to account for the transaction as a rental with neither assets nor liabilities recorded
lessees show both the asset and the liability on the balance sheet.
-lessee shows leased item as an asset in balance sheet, and the obligation owed to the lessor as a liability.
process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and syste,atic manner
cost less accumulated depreciation
Is land a depreciate asset?
Three plant assets
- land improvements, buildings, and equipment
process by which an asset becomes out of date before it physically wears out
Factors in computing depreciation
2. useful life
3. salvage value
All expenditures necessary to acquire the asset and make it ready for intended use
estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence
Estimate of assets value at the end of its useful life
depreciable cost equal to?
cost of the asset minus salvage value
- expense an equal amount of depreciation each year of the assets useful life
How to: Cost- salvage value = Depreciable cost
Depreciable cost / useful life (years) = depreciation expense
note: 1/ useful life gives you the depreciation rate
declining balance method
- also called accelerated depreciation method because it results in higher depreciation in the beginning of its life
- computes depreciation using a constant rate applied to a declining book value
Double-declining balance rate
find rate: (1/ years)*2
book value * rate = annual depreciation
use new book value (book value minus annual depreciation) and then repeat
useful life is expressed in terms of the total units of production or the use expected from the asset
Best used for machinery
when revising periodic depreciation when does the change in depreciation start?
current and future years
permanent decline in the fair value of an asset
(ex: item not popular anymore)
Gain of disposal
when you sell a plant asset and proceeds from sale exceed book value of plant
Loss of disposals
when you sell a plant asset and proceeds from the sale are less that book value
not physical but it is a right
has limited life
allocating to expense the cost of intangible asset, a company increases (debits) amortization expense and decreases (credits) specific intangible asset
How long do companies amortize a patent
20 years or useful life whichever is quicker
exclusive right issued by the US patent office that enables the recipient to manufacture, sell, or control an invention for a period of 20 years from date of grant
What is the initial cost of patent
cash or cash equivalent price paid to get patent
Note: all costs of a patent are added. Ex: Infringement suit would be added and amortized with the patent
Reseacrh and development costs
expenditures that may lead to patents, copyrights, new processes.
How do they categorize Research and development cost
as an expense at the time incurred because it is not certain the benefits it will bring
exclusive right to reproduce and sell a product
How long do copyrights last
life of creator plus 70 years
Cost of copyright consists of?
cost of incurring it and defending it
word, phrase, jingle or symbol that distinguishes a particular enterprise.
Are trademarks amortized?
No they have an indefinite life
contractual arrangement under which franchisr grants the franchisee certain rights of the company
What is cost incured by a franchise labeled as?
value of all favorable attributes that relate to a company that are not attributable to any other asset. (ex: exceptional management, and desirable lotion)
When is the only time goodwill can be recorded?
When a whole business is bought because it cant have a money value without it.
= excess of cost over fair value and net assets (assets- liabilities)
return on assets
overall measure of profitability
= net income/ average total assets
= Profit margin X Asset turnover
indicates how efficiently a company uses its assets to generate sales ( how many dollars of sales a company generates for each dollar invested in assets)
= Net sales/ average total assets
= Net income/ net sales
Recommended textbook explanations
Glencoe Accounting: First Year Course
Horngren's Cost Accounting
Madhav Rajan, Srikant M. Datar
Cost Accounting: A Managerial Emphasis
Charles T. Horngren, Srikant M. Datar
Charles T. Horngren, Walter T Harrison, Walter T. Harrison Jr.
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