Accounting Chapter 7

trademark

a word, slogan, or symbol that distinctively identifies a company, product, or service (10 years)

companies record lower taxable income using

accelerated method (MACRS)

copyright

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, autograph, book, or computer software

patent

an exclusive right to manufacture a product or to use a process (20 years)

intangible assets with an indefintie useful life (goodwill and most trademarks)

are not amoritized

goodwill recorded

as an intangible asset in the balance sheet ONLY when purchased as a part of the aquisition of another company

reporting purchased intangibles

at their original cost + all other costs, such as legal and filing fees, necessary to get the asset ready for use

improvement (cost of replacing a major component of an asset)

capitalize it to the Equiptment account - usually increases future benefits

addition (when we ass a new major component to an exisiting asset)

capitalize the cost of additions - because they increase, rather than maintain, the future benefits from the expenditure

double-declining (comparison)

creates more depreciaiton in earlier years and less depreciation in later years

declining-balanceand straight-line will result in

same total depreciation over the asset's service life

basket purchase

sometimes companies purchase more than one asset at the same time for one purchase price

companies record higher net income using

straight-line

most common method

straight-line method

net assets (in good will)

tangible and intangible assets minus the fair calue of liabilities used

residual value (salvage value)

the amount the company expects to receive from selling the asset at the end of its service life

depreciation

to decribe process when applied to property, plant, and equiptment

depletion

to describe the cost allocation process when it applies to natural resources

depreciation expense

depreciable cost/service life

depreciation rate per unit =

depreciable cost/total units expected to be produced

because land's service life never ends it is NOT

depreciated

capitalize

describes the recording of as expenditure as an asset

Goodwill

difference between purchase price of a company and the fair calue of all its identifiable net assets

book value

equals the original cost of the asset minus the current balance in Accumulated Depreciation (by increasing accumulated depreciation each period, we are reducing the book value of equiptment)

repairs and maintenance expenditures (to continue its productive activity)

expense - because they maintain a given level of benefits in the period incurred

advertising and research & development

expense these intangible assets as we incur them

reporting intangible assets that are developed internally

expense to the income statement most of the costs for internally developed intangible assets as we incur those costs

amortization

intangible assets being (depreciated/depleted)

capitalized interest

interest costs we ass to the asset account rather than recording them as interest expense (in keeping with the matching principle - expenses are to be matched with revenues (included on the same income statement)

material

item said to be " " if it is large enough to influence a decision

We record a long term asset as...

its cost + all expenditures necessary to get the asset ready for use

*Tangible assets include

land, land improvements, buildings, equiptment, and natural resources

franchises

local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area

exchange

occurs when two companies trade assets

natural resources

oil, natural gas, timber, salt (we can physically use up, or deplete)

*Intangible assets include

patents, trademarks, copyrights, franchises, and goodwill (lack of physical substance)- legal contract

asset

probable future benefit

Depreciation (of property, plant and equiptment)

process of allocating to an expense the cost of as asset over its service life

recording the cost of a frachise

records the initiale fee as an intangible asset and then expenses that cost over the life of the franchise agreement

goodwill

represents the value of a company as a whole, over and above the value of its identifiable net assets

expenses

typically benefit onlu current period

activity-based (comparison)

varies depending on the miles driven each year

depletion

we allocate resources to expense through this process

retirement

when a long-term asset is no longer useful but cannot be sold

accelerated depreciation method

with higher depreciation in the earlier years of the asset's life and lower depreciation in later years

capital expenditures

(recorded as assets) benefit future periods

land improvements

(adding parking lots, sidewalks, driveways, landscaping, lighting systems, fences, sprinklers, and smiliar additions

depreciation methods

- straight-line - declining-balance - activity-based

long-term asset

-sale -retirement -exchange

legal defense of intangible assets

-succesfully defends an intangible right: capitalize the litigation costs and amortize them over the remaining useful life of the related intangible - unsucessful defense of an intangible right: firm should expense the litigation costs as incurred (because provide no future benefit)

sale

...

intangible assets are aquired in two ways..

1. they purchase intangible assets like patents, copyrights, trademarks, or franchise rights from other entities 2. they create intangible assets internally, by developing a new product or process and obtaining a protective patent

to properly report - 3 things

1. which amounts to include in their cost 2. how to expense their costs while using them 3. how to record their sale or disposal at the end of their useful life

tangible (also referred to as)

Property, Plant, and Equiptment

depreciable cost

The asset's cost minus its estimated residual value

accumulated deprectiation

a contra asset account, meaning that it reduces an asset account

activity-based method

allocate an asset's cost based on its use

straight-line method

allocate an equal amount of depreciable cost to each year of the asset's service life

amortization

allocating the cost of intangible assets

depreciation (accounting definition)

allocation of an asset's cost to an expense over time

declining balance method

an accelerated depreciation method

accumukated amoritzation

contra account

straight-line (comparison)

creates an equal amount of depreciation each year

intangible assets

have no physical substance

declining balance will be higher than straight line in " " years and lower in " " years

higher- earlier lower- later

service life (useful life)

how long the company expects to receive benefits from the asset before disposing of it

We expense an expenditure...

if it benefits only the current period

We capitalize an expenditure as an asset...

if it increases future benefits

record a gain

if we sell asset for more than its book value - credit balance account (like revenue accounts)

record a loss

if we sell the asset for less than its book value -debit balance account (like expense accounts)