Accounting Ch. 7

Tangible assets

Assets in this category include land, land improvements, buildings, equipment, and natural resources. Krispy Kreme's land, buildings, and equipment fall into this category.

Intangible assets

Assets in this category include patents, trademarks, copyrights, franchises, and goodwill. We distinguish these assets from property, plant, and equipment by their lack of physical substance. The evidence of their existence often is based on a legal contract. Google's copyrights are intangible assets

residual value or salvage value

The amount the company expects to receive from selling the asset at the end of its service life. the depreciation process also requires accountants to estimate what an asset's value will be at the end of its service life. most intangible assets residual value is 0.

gain v. loss

We record a gain if we sell the asset for more than its book value. Similarly, we record a loss if we sell the asset for less than its book value

retirement.

When a long-term asset is no longer useful but cannot be sold For example, Little King Sandwiches might physically remove a baking oven that no longer works and also remove it from the accounting records through a retirement entry

Trademark

a word, slogan, or symbol that distinctively identifies a company, product, or service. Like the name Apple. The firm can register its trademark with the U.S. Patent and Trademark Office to protect it from use by others for a period of 10 years. The registration can be renewed for an indefinite number of 10-year periods, so a trademark is an example of an intangible asset whose useful life can be indefinite

amortization

allocating the cost of intangible assets to expense (Allocating the cost of property, plant, and equipment to expense is called depreciation.)

patent

an exclusive right to manufacture a product or to use a process. The U.S. Patent and Trademark Office grants this right for a period of 20 years. When a firm purchases a patent, it records the patent as an intangible asset at its purchase price plus other costs such as legal and filing fees to secure the patent. Filing fees include items such as the fee to record a patent with the U.S. Patent and Trading Office.

depreciation

decrease in value or selling price of an asset. allocation of an asset's cost to an expense over time/its service life. We use the term depreciation to describe that process when it applies to property, plant, and equipment. For intangible assets, the cost allocation process is called amortization

book value or carrying value

equals original cost of asset MINUS current balance in acc. dep. (residual value)

Goodwill

equals the purchase price less the fair value of the net assets acquired. often is the largest (and the most unique) intangible asset in the balance sheet. It is recorded only when one company acquires another company. Goodwill is recorded by the acquiring company for the amount that the purchase price exceeds the fair value of the acquired company's identifiable net assets. Most companies also create goodwill to some extent through advertising, training, and other efforts. However, as it does for other internally generated intangibles, a company must expense costs incurred in the internal generation of goodwill.

repairs and maintenance

expense these expenditures because they maintain a given level of benefits. We capitalize as assets more extensive repairs that increase the future benefits of the delivery truck, such as a new transmission or an engine overhau

copyright

is an exclusive right of protection given by the U.S. Copyright Office to the creator of a published work such as a song, film, painting, photograph, book, or computer software. Copyrights are protected by law and give the creator (and his or her heirs) the exclusive right to reproduce and sell the artistic or published work for the life of the creator plus 70 years. A copyright also allows the copyright holder to pursue legal action against anyone who attempts to infringe the copyright. Accounting for the costs of copyright is identical to that of patents

franchises

local outlets that pay for the exclusive right to use the franchiser company's name and to sell its products within a specified geographical area. popular retail businesses such as restaurants, auto dealerships, and hotels

addition

occurs when we add a new major component to an existing asset. We should capitalize the cost of additions if they increase, rather than maintain, the future benefits from the expenditure. For example, adding a refrigeration unit to a delivery truck increases the capability of the truck beyond that originally anticipated, thus increasing its future benefits

materiality

relates to the size of an item that is likely to influence a decision. An item is said to be material if it is large enough to influence a decision. Materiality is an important consideration in the "capitalize versus expense" decision. There often are practical problems in capitalizing small expenditures. For example, a stapler may have a 20-year service life, but it would not be practical to capitalize such a small amount. Companies generally expense all costs under a certain dollar amount, say $1,000, regardless of whether future benefits are increased. It's important for a company to establish a policy for treating these expenditures and apply the policy consistently

activity-based method

we instead allocate an asset's cost based on its use. For example, we could measure the service life of a machine in terms of its output (units, pounds, barrels). This method also works for vehicles such as our delivery truck, whose use we measure in miles

sale

most common method to dispose of an asset.

we record a long-term asset at...

... its cost PLUS all expenditures necessary to get the asset ready for use. The initial cost of a long-term asset might be more than just its purchase price.

3 of world's largest franchises; top 10 brands

Subway, McDonalds, KFC; Apple, Google, Coca-Cola, IBM, Microsoft

service life or useful life

how long the company expects to receive benefits from the asset before disposing of it. we can measure service life in units of time or activity.

exchange

occurs when two companies trade assets. In an exchange, we often use cash to make up for any difference in fair value between the assets

Capitalize

use this term to describe recording an expenditure as an asset. We capitalize an expenditure as an asset if it increases future benefits. We expense an expenditure if it benefits only the current period.

straight-line method

we allocate an equal amount of the depreciable cost to each year of the asset's service life. The depreciable cost is the asset's cost minus its estimated residual value. Depreciable cost represents the total depreciation to be taken over the asset's useful life. To calculate depreciation expense for a given year, we simply divide the depreciable cost by the number of years in the asset's life