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Chapter 9: Long-Lived Tangible and Intangible Assets
Terms in this set (39)
define long-lived assets
resources owned by a business that enable it to produce the goods or services that are sold to customers; they are not intended for resale
What are the two major types of long-lived assets. Give examples
1) Tangible: land, buildings, machinery, vehicles, etc. Aka fixed assets
2) Intangible assets: brand names, logos, trademarks (the existence of most of these is indicated by legal docs that describe their rights)
to record a cost as an asset, rather than as an expense (requires some judgement)
What is the general rule for all tangible assets under the cost principle?
all reasonable and necessary costs to acquire and prepare an asset for use should be recorded as the a cost of the asset
How does capitalizing cost impact the financial statements?
it increases assets and decreases expenses
What are some cost that should be capitalized with land, buildings, and equipment?
-Land: purchase cost, legal fees, survey fees, title search fees,
-Buildings: purchase/construction cost, legal fees, appraisal fees, architect fees
-Equipment: purchase/construction cost, sales taxes, transportation costs, installation costs
-Demolition, renovation, and repair cost would also be capitalized
What are some costs that should be expensed when incurred rather than capitalized:?
insurance for fixed assets in use, interest on loans to purchase fixed assets, and ordinary repairs and maintenance
define ordinary repairs and maintenance
Expenditures for routine operating upkeep of long-lived assets; they are recorded as expenses (sometimes called revenue expenditures)
define extraordinary repairs
Expenditures that extend the useful life of a tangible asset or improve its output in the future; they are recorded as increases in asset accounts, not as expenses (sometimes called capital expenditures)
How should you determine whether you are going to expense or capitalize an expenditure?
decide if it adds usefulness. If it extends the life, then capitalize. If it does not increase usefulness then it's an expense
the allocation of the depreciable cost of long-lived tangible assets over their productive lives using a systematic and rational method.
define book (or carrying) value
the acquisition cost of an asset less accumulated depreciation
What 3 things are depreciation calculations based on?
Asset cost, Useful Life, Residual value
define residual value
the estimated amount to be recovered at the end of the company's estimated useful life of an asset
define depreciable cost
the portion of the asset's cost that will be used in generating revenue; calculated as asset cost minus residual value
When should a company record depreciation
Each year of its useful life until its total accumulated depreciation equals its depreciable cost. After that the company should report no additional depreciation expense, even if the company continues to use the asset
How should a depreciation method be chosen?
The depreciation method chosen for each type of property, plant, and equipment should reflect the pattern in which it is used up
define straight-line depreciation method
allocates the depreciable cost of an asset in equal periodic amounts over its useful life
Give the straight line formula
(cost - residual value) x (1/useful life) = Depreciation expense
What are three aspects of the straight line method?
-Depreciation Expense is a constant amount each year
-Accumulated Depreciation increases by an equal amount each year
-Book Value decreases by the same equal amount each year
define units-of-production method
allocates the depreciable cost of an asset over its useful life based on the relationship of its output during the period to its total estimated output
Give the units-of-production formula
(cost - residual value) x (actual production this period/estimated total production) = depreciation expense
define declining-balance depreciation method
assigns more depreciation to early years of an asset's life and less depreciation to later years
Give the double-declining balance formula
(Cost - Accumulated Depreciation) x (2/useful life) = Depreciation Expense
How does the depreciation method used affect net income and total amount of depreciation?
-The amount of Net Income reported can vary based on the depreciation method used.
-However, at the end of an asset's life, after it has been fully depreciated, the total amount of depreciation will equal the asset's depreciable cost regardless of the depreciation method used
Which depreciation method does not require partial year depreciation calculations and why?
Partial year modifications are not required in the units-of-production method because that method is based on actual production for the period
occurs when the cash to be generated by an asset is estimated to be less than the carrying value of that asset
How is impairment recorded?
- Book value should be written down to the amount that the asset is worth (fair value) with the amount of the write-down reported as an impairment loss
- Impairment losses are reported as an operating expense
What are the 2 accounting adjustments required with the disposal of a depreciable asset?
- Update the Depreciation Expense and the Accumulated Depreciation accounts
- Record the disposal
How are disposals recorded?
all disposals of long-lived assets require that you account for (1) the book value of the items given up (2) the value of the items received on disposal, and (3) any differences between the two amounts, which reflects a gain or loss on the disposal to be reported on the income statement
define gain (or loss) on disposal
-represents the difference between the proceeds from selling the asset and the asset's book value (BV)
-Gains on disposal are on the income statement
a contractual right to sell certain products or services, use certain trademarks, or perform activities in a certain geographical region
the premium a company pays to obtain the favorable features associated with another company (most frequently reported tangible asset)
When are intangible assets recorded?
The cost of intangible assets are recorded as assets only if they have been purchased
define net assets
the shorthand term used to refer to assets - liabilities
define unlimited life
Intangibles with unlimited or indefinite lives (trademarks and most goodwill) are not amortized
define limited life
The cost of intangible assets with a limited life (copyrights, patents, licensing rights, and franchises) is spread on a straight line basis over each period of useful life in the amortization process
What is the formula for fixed asset turnover ratio
(Net revenue/average net fixed assets)
What does the fixed asset turnover ratio tell you
- Indicates dollars of revenue generated for each dollar invested in fixed assets (long-lived tangible assets)
- A higher ratio implies greater efficiency
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