Accounting chapter 9

The legal life of most patents is:

20 years

Noncash charge or expense

A charge against earnings—either an expense of a loss—that does not require a cash expenditure at or near the time of recognition. The charge reduces net income but does not require a cash expenditure at or near the time of recognition. The charge reduces net income but does not affect cash flows (except, perhaps, for income tax payments). Examples are depreciation and the write-off of asset values because an asset has become impaired

Units-of-output

A depreciation method in which cost (minus residual value) is divided by the estimated units of life time output. The unit depreciation cost is multiplied by the actual units of output each year to compute the annual depreciation expense.

Straight-line depreciation

A method of depreciation that allocates the cost of an asset (minus any residual value) equally to each year of its useful life

Sum-of-the-years' digits (SYD) depreciation

A seldom-used method of accelerated depreciation. Usually procedures results that lie in between the 200 % and 150 % declining balance methods

Capitalize

A verb with two different meanings in accounting. The first is to debit an expenditure to an asset account, rather than directly to expense. The second is to estimate the value of an investment by dividing the annual return by the investor's required rate of return

All of the following may be considered intangible assets except:

Accounts receivables.

Which of the following would not be considered part of the cost of equipment recently purchased?

All three are capitalized costs

Depletion

Allocating the cost of a natural resource to the units removed as the resource is mined, pumped, cut, or otherwise consumed

Fixed-percentage-of-declining-balance depreciation

An accelerated method of depreciation in which the rate is a multiple of the straight-line rate and is applied each year to the undepreciated cost of the asset. The most commonly used rate is double the straight-line rate

Capital expenditures are recorded as:

An asset.

Revenue expenditures are recorded as:

An expense.

Capital expenditures

Costs incurred to acquire a long-lived asset. Expenditures that will benefit several accounting periods

Revenue expenditures

Expenditures that will benefit only the current accounting period

Intangible assets are assets used in business operations but which:

Lack physical substance.

Which of the following assets is not subject to depreciation and whose usefulness does not decline over time?

Land.

Plant assets

Long-lived assets that are acquired for use in business operations rather than for resale to customers

Natural resources

Mines, oil fields, standing timber, and similar assets that are physically consumed and converted into inventory

The application of the matching principle to depreciation of plant and equipment can best be described as:

Offsetting revenue of an accounting period with the portion of the cost of plant and equipment estimated to have been used up during the accounting period.

Tangible plant assets

Plant assets that have physical substance but that are not natural resources. Examples include land, buildings, and all types of equipment

An accelerated depreciation method:

Recognizes more depreciation expense in the early years of an asset's useful life and less in the later years.

For financial reporting purposes, the gain or loss on the sale of a plant asset is determined by comparing the asset's:

Sales price with its book value.

Which depreciation method is most commonly used among publicly owned corporations?

Straight-line

MACRS

The Modified Accelerated Cost Recovery System. The accelerated depreciation method permitted in federal income tax returns for assets required after December 31, 1986. Depreciation is based on prescribed recovery periods and depreciation rates

Goodwill

The amount of expected future earnings of a business in excess of the earnings normally realized in the industry. Recorded when a business entity is purchased at a price in excess of the fair value of its net identifiable assets less liabilities

Present value

The amount that a knowledgeable investor would pay today for the right to receive future cash flows. The present value is always less than the sum of the future cash flows because the investor requires a return on the investment

Residual (salvage) value

The portion of an asset's cost expected to be recovered through sale or trade-in of the asset at the end of its useful life

Half-year convention

The practice of taking six months' depreciation in the year of acquisition and in the year of disposition, rather than computing depreciation for partial periods to the nearest month. This method is widely used and is acceptable for both income tax reporting and financial reports, as long as it is applied to all assets of a particular type acquired during the year

Depreciation

The systematic allocation of the cost of an asset to expense over the years of its estimated useful life

Net identifiable assets

The total of all assets minus liabilities

Impairment loss

The write-down of a long-lived asset for the difference between its carrying amount less its fair value

Intangible assets

Those assets that are used in the operation of a business but that have no physical substance and are noncurrent

If an asset is determined to be impaired, it should be:

Written down to its fair market value.