ch 10
franchises: a contractual arrangement under which the franchisor grants the franchisee the exclusive right to use the franchisor's ____and may include product and formula rights, within a geographical area, usually for a specified period of time.
trademark
the requirement to expense RD immediately leads to assets being ___ and expenses being ___
understated overstated
Goodwill: costs can't be directly associated with any specifically identifiable right and is NOT separable from the company itself. what does it represent?
unique value of a company as a whole over and above its identifiable tangible and intangible assets
Software development costs: technological feasibility refers to the point in time
when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements"
GAAP requires that total RD expense incurred must be disclosed either as a line item in the income statement or in a disclosure note
yes
are intangibles subject to asset impairment rules?
yes
because goodwill can't be separated from a company, it's not possible for a buyer to acquire it without also acquiring the whole company or a goodwill will appear as an asset in a balance sheet only when it is purchased in connection with the acquisition of control over another company.
portion of it.
cost of land: any expenditures such as clearing, filling, draining, and even removing, old buildings that are needed to prepare the land for its intended use are part of land's cost
proceeds from the sale of salvaged materials from old buildings torn down after purchase reduce the cost of land.
PPE and intangible assets can be acquired through
purchase, exchange, lease, donation, self-construction, or a business combination.
in general, RD costs pertain to activities that occur prior to the start of commercial production. what does commercial production refer to?
refers to the point in time where the company has no other plans to materially change the product prior to beginning production for intended sales to customers
unlike those of natural resources, equipment land and buildings physical characteristics usually ____ ____ during their useful lives.
remain unchanged
goodwill: the fair value of the net assers equals the fair value of all identifiable intangible and tangible assets less the fair value of any liabilities. Goodwill is a ____ asset, it's the amount left after other assests are ___ and ____
residual identified and valued
donated assets: GAAP requires that donated assets be recorded as
revenue
most purchased intangibles are ____ ____ . That is, cost can be directly associated with a specific intangible right. the exception is
specifically identifiable goodwill
the franchise capitalizes as an intangible asset the initial franchise fee plus any legal costs associated with the contract agreement. the franchise asset is then amortized over the life of the franchise agreement what about periodic payments?
the periodic payments usually relate to services provided by the franchisor on a continuing basis and are expensed as incurred
land improvements: how are these costs accounted for
these assets are separately identified and capitalized. we depreciate their cost over periods benefited by their use
general and admin costs should not be included in RD unless
they are clearly related to RD activity
Name the four types of non cash acquistions:
1. Deffered payments (notes payable) 2. issuance of equity securities 3. donated assets 4. exchanges of nonmonetary assets for other assets
There are three types of costs related to RD that are capitalized ( recorded as an asset). what are these exceptions:
1. Development costs for software that has reached the point of technological feasibility 2. RD perfomed by the company for sale to others 3. RD purchased in a business acquistion
types of assets:
1. PPE ( naturual resources included here) 2. intangible assets
in the situation of developing the natural resource, the initial valuation will include:
1. acquisition cost 2. exploration costs 3. development costs 4. restoration costs
Self - constructed assets: Qualifying assets: interest is capitalized during the construction period for:
1. assets built for a company's own use as well as for 2. assets constructed as DISCRETE projects for sale or lease (a ship or real estate development)
Self - constructed assets: the two difficulties with assigning costs to self-constructed assets
1. determining the amt of the company's indirect manufacturing costs (overhead) to be allocated to the construction 2. deciding the proper treatment of interest incurred during construction
RD costs include
1. salaries, wages, other labor costs for personnel engaged in the activites 2. costs of materials consumed 3. equipment 4. facilities 5. intangiblea used 6. the costs of services performed by others in connection with RD activities 7. reasonable allocation of indirect costs related to those activities
Exchanges: the amount of cash given or received has __ effect on the amount of gain or loss recognized
NO
Software development costs: any costs incurred after the software release date generally are expensed but not part of
RD
any costs incurred after the start of commercial production are not classified as ___ ___. these costs would be either expensed or treated as mfq overhead and included in the cost of ___
RD costs inventory
copyright: exclusive right of protection given to a creator of a published work. life of creator plus 70 years
accounting for the costs of copyrights is virtually identical to that of patents
for purchased intangible asset we value it at its original cost which includes its purchase price and
all other costs necessary to bring it to condition and location for intended use.
Cost of Natural Resources acquisition costs exploration costs
amounts paid to acquire the rights to explore for undiscovered natural resources or to extract proven natural resources. are expenditures such as drilling a well , or excavating a mine, or any other costs of searching for natural resources
trademarks: exclusive right to display a word, slogan, a symbol, or an emblem that distinctively identifies a company, a product, or a service. can renew every 10 years
an INDEFINITE asset
in the case of purchasing another company, goodwill will appear as an ___ in the __ ___ in that case, the capitalized cost of goodwill equals the
asset, BS fair value of the consideration exchanged ( acquisition price) for the company less the fair value net assets acquired
issuance of equity securities: because the common shares are not publicly traded, it's difficult to determine their fair value. in that case, the fair value of the ___ received by the corporation is probably the better indicator of the transaction's exchange value
assets
Cost of land: should include expenditures needed to get the land ready for its intended use. These include the purchase price plus closing costs such as: if the property is subject to back taxes, liens, mortgages, or other obligations, these amounts are included also
attorney fees real estate commissions title and title search recording
issuance of equity securities: most common situation in which equity securities are issued for PPE and intangible assets occurs when small companies incorporate and the owner/owners contribute assets to the new corporation in exchange for
ownership securities, usually common stock
payments to the franchisor usually include an initial payment plus
periodic payments over the life of the franchise agreement
Companies are required to expense all the costs related to a company's start up and organization activities in the period incurred rather than
capitalize those costs as an asset.
Self - constructed assets: interest capitalization the company must be financed in some way during this construction. in keeping with the historical cost principle, all costs during this period, including interest, should be ____
capitalized
Software development costs: if we purchase computer software for internal use, those costs are generally
capitalized
the costs of an asset that produce future benefits are
capitalized
Software development costs: Costs incurred after technological feasibility but before the software is available for general release to customers are these costs include items such as further coding and testing and the production of product masters. what kind of asset?
capitalized as an intangible asset
for in process RD from a business acquistion, GAAP requires
capitlixation at fair value but its viewed as an indefinite life intangible asset and we do not amortize
intangible assets: the issue involved in accounting for them are similar to PPE. one key difference is that the future benefits that we attribute to intangible assets usually are much less
certain than those attributed to tangible assets
Exchanges: a nonmonetary exchange is considered to have commercial substance if future cash flows will ___ as a result of the exchange
change
good will can emerge from a company's ___ and ____, its trained employees and management team, its favorable business location, and any other unique features of the company that can;'t be associated with a specific ___
clientele, reputation asset
Software development costs: much easier to determine revenues for software
comapred to other indistry
Exchanges: to prevent a company from exchanging an asset whose fair value is greater than book value for the sole purpose of recognizing a gain, fair value can be used only in gain situations that have
commercial substance
Cost of Equipment: The cost of equipment includes the purchase price plus any sales tax, transportation costs, expenditures for installation, testing, legal fees to establish title, and any other costs of bringing the asset to its to the extent that these costs can be identified and measured, they should be included in the asset's initial valuation rather than
condition and location for use expensed currently
Deferred payments: discount on not payable is a
contra liability account
an intangible should be recognized as an asset apart from goodwill if it arises from
contractual or other legal rights or is capable of being separated from the acquired entity such as patents, copyrights, employee contracts, license agreements
Land improvements: examples of land improvements include costs of these assets are separately identified and capitalized. we depreciate their cost over periods benefited by their use.
costs of establishing parking lots, driveways, and private roads and costs of fences and lawn and garden sprinkler systems.
cost of natural resources: include timber tracts, mineral deposits, and oil and gas deposits. they can be distinguished from other assets by the fact that their benefits are derived from their ___ ___
physical consumption
sometimes a company buys natural resources from another company. in that case, initial valuation is simply the purchase price plus any other costs necessary to bring the asset to condition and location for use. more frequently, the company will ___ the natural resource.
develop
Cost of Equipment: some costs are difficult. for example, the costs of training personnel to operate machinery could be considered a cost necessary to make the asset ready for use. however since it is diffiuclt to measure the amount of training costs associated with specific assets, these costs usually are
expensed
Software development costs: GAAP establishes a timeline for purposes of accounting for software development costs. Any software costs incurred from initial development activity until technological feasibility of the software are treated like other RD costs: ____ as ___
expensed as incurred
the costs of an asset that produce benefits only in the current period are recorded as
expesnes
Exchanges: the basic principle followed in these nonmonetary asset exchanges is to value the asset received at
fair value
Non cash acquisitions: the controlling principle in each of these situations is that in any noncash transaction, the asset acquired is recorded at its
fair value
Even though the costs to develop the patented product are expensed, the
filing and legal costs for the patent are capitalized and amortized in future periods
exchanges: when fair value is not determinable, fair value cannot be used to record the asset being received. The asset is simply recorded
for the book value of the asset given, adjusted for the effects of any cash exchanged
Self - constructed assets: overhead allocation generally accepted method is the
full cost approach. its based on the relative amount of a chose cost drive ( labor hours)
our objective in identifying the costs of an asset is to distinguish the expenditures that produce ___ benefits from those that produce benefits only in the
future current periods
Patent: an exclusive right to manufacture a product or use a process. granted for a period of 20 years
if a patent is purchased from and inventor or another individual or company, the amount paid is its initial valuation. the cost might also include such other costs as legal and filing fees to secure the patent. any attorney fees and other costs of successfully defending a patent are added to the patent account
Research and Development: FASB takes a conservative approach and requires R&D costs to be expensed ___
immediately
if an asset is purchased specifically for a single RD project, its cost is considered RD and expensed ___. However, the cost of an asset that has an alternative future use beyond the current RD project is __ a current RD expense instead the depreciation or amortization of these alternative use assets are included as RD expense in the current and futre periods the assets are used for RD activities
immediately not
Cost of Natural Resources development costs restoration costs
incurred after the resource has been discovered but before production begins. they include a variety of costs such as expenditures for tunnels, wells, shafts these are costs to restore land or other property to its original condition after extraction of the natural resource ends
good will is a ____ asset so we do not ___ goodwill
indefinite amortize
land improvements: important to distinguish between the cost of land and the cost of land improvements because land has an ____ life and land improvements usually have useful lives that are ___
indefinite estimable
patent: when a patent is developed internally, the R&D costs of doing so are expensed as incurred and we capitalize legal and filing fees to secure the patent even if
internally developed
exchanges: losses in exchanges that lack commercial substance are fully recognized regardless of cash received or paid
just like losses when fair value is determinable
intangible assets: this uncertainty is a discriminating characteristic of intangible assets that perhaps better distinguished them from tangible assets than their
lack of physical substance
Self - constructed assets: the critical accounting issue in these instances is identifying the cost of the self- constructed asset. it is difficult because there is
no external transaction to establish exchange price
Cost of Buildings: the cost of acquiring a building usually includes realtor commissions and legal fees in addition to the purchase price. quite often a building mist be refurbished, remodeled, or otherwise modified to suit the needs of the new owner. These reconditioning costs are part
of the building's acquisition cost