Ch. 9 - Long-Term Assets: Fixed and Intangible

A company may incur costs associated with constructing a fixed asset such as a new building. The direct costs incurred in the construction, such as labor and materials, should be capitalized as a debit to an account entitled ____________.

Construction in Progress

As natural resources are harvested or mined and then sold, a portion of their cost is debited to an expense account called ____________ Expense.

Depletion

For short-term leases (the lease term is 12 months or less), the lessee records lease payments by debiting Rent ____________ and crediting Cash. In some cases, like those illustrated in earlier chapters, Prepaid Rent is initially recorded with an adjusting entry at the end of the period to record Rent Expense. For purposes of this text, we assume that all leases are short-term leases.

Expense

____________ are long-term or relatively permanent assets such as equipment, machinery, buildings, and land.

Fixed assets

____________ costs and the costs of installing equipment are part of the asset's total cost.

Freight costs

___________ depreciation factors include obsolescence and changes in customer needs that cause the asset to no longer provide services for which it was intended.

Functional

____________ refers to an intangible asset of a business that is created from such favorable factors as location, product quality, reputation, and managerial skill.

Goodwill

The three factors that determine the depreciation expense for a fixed asset are as follows: ____________

The asset's initial cost The asset's expected useful life The asset's estimated residual value

For this reason, the double-declining-balance method is called an ____________ depreciation method.

accelerated

On the income statement, depreciation and ____________ expense should be reported separately or disclosed in a note.

amortization

Patent ____________ is normally computed using the straight-line method.

amortization

Unlike patents and copyrights, goodwill is not ____________. However, a loss should be recorded if the future prospects of the purchased firm become impaired.

amortized

If a trademark is purchased from another business, its cost is recorded as an ____________.

asset

The initial cost of a purchased patent, including any legal fees, is debited to an ____________ account.

asset

The difference between a fixed asset's initial cost and its residual value is called the ____________.

asset's depreciable cost

The difference between the fixed asset account and its related accumulated depreciation account is called the asset's ____________ or ____________ value of the asset.

book value or net book value of the asset

The remaining balance—the amount owed—is either paid in cash or recorded as a liability. It is normally called ____________, which is its tax name.

boot

Costs that improve the asset or extend its useful life are ____________.

capital expenditures

Depreciation does not provide ____________ to replace fixed assets as they wear out. This misunderstanding may occur because depreciation, unlike most expenses, does not require an outlay of cash when it is recorded.

cash

The entry to record the sale of a fixed asset is similar to the entry for discarding an asset. The only difference is that the receipt of ____________ is also recorded.

cash

Like the accumulated depreciation account, Accumulated Depletion is a ____________ asset account.

contra

The exclusive right to publish and sell a literary, artistic, or musical composition is granted by a ____________.

copyright

It is reported on the balance sheet as a deduction from the ____________ of the mineral deposit.

cost

After a fixed asset has been placed into service, costs may be incurred to extend the asset's useful life. For example, the engine of a forklift that is near the end of its useful life may be overhauled at a cost of $4,500, extending its useful life by eight years. Such costs are capital expenditures and are recorded as a ____________ in an accumulated depreciation account.

decrease

Because land has an unlimited life, it is not ____________.

depreciated

Recording the cost of fixed assets as an expense is called ____________.

depreciation

If a fixed asset is no longer used and has no residual value, it is ____________.

discarded

As shown in Exhibit 7, the ____________ method has higher depreciation in the first year of the asset's life, followed by declining depreciation amounts.

double-declining-balance

The ____________ method provides for a declining periodic expense over the expected useful life of the asset.

double-declining-balance

However, the asset should not be depreciated below its ____________.

estimated residual value

The ____________ life of a fixed asset is the estimated length of time the asset will be used in normal operations

expected useful

Costs related to the ordinary maintenance and repairs of a fixed asset are recorded as an ____________ of the current period. Such expenditures are revenue expenditures and are recorded as increases to Repairs and Maintenance Expense.

expense

The new FASB standard distinguishes between ____________ leases and ____________ leases. Under both finance and operating leases, the lessee records an asset and liability similar to having purchased the asset. However, the amount of depreciation expense and interest expense will differ for each type of lease.

finance leases and operating leases

A cost that has been incurred may be classified as a ____________, ____________, or ____________.

fixed asset, an investment, or an expense.

Estimates of residual values and useful lives of fixed assets may change due to abnormal wear and tear or obsolescence. When new estimates are made by management, they are used to determine the depreciation expense in ____________ periods. The depreciation expense recorded in earlier years is not affected.

future

The loss of $1,200 is recorded because the book value of the asset ($6,000 - $4,800) is ____________ than the amount received for the asset ($0).

greater

After a fixed asset has been placed into service, costs may be incurred to improve the asset. For example, the service value of a delivery truck might be improved by adding a $5,500 hydraulic lift to allow for easier and quicker loading of cargo. Such costs are capital expenditures and are recorded as ____________ to the fixed asset account.

increases

Long-term assets that are used in the operations of the business, but do not exist physically, are called ____________ assets.

intangible

A ____________ is a contract for the use of an asset for a period of time.

lease

Depreciation does not measure a decline in the ____________ value of a fixed asset. Instead, depreciation is an allocation of a fixed asset's cost to expense over the asset's useful life.

market value

Like straight-line depreciation, if an asset is used for only part of a year, the annual double-declining-balance depreciation is prorated based on the number of ____________ the asset is in service.

months

Some businesses own ____________ resources such as timber, minerals, or oil.

natural

Assets may also be placed in service other than the first day of a month. In such cases, assets placed in service during the first half of a month are normally treated as having been purchased on the first day of that month. Likewise, asset purchases during the second half of a month are treated as having been purchased on the first day of the ____________month.

next

Investments are long-lived assets that are not used in the ____________and are held for future resale.

normal operations

Thus, trademarks are ____________ amortized. Instead, trademarks are reviewed periodically for impaired value. When a trademark is impaired, the trademark should be written down and a loss recognized.

not

When the double-declining-balance method is used, the estimated residual value is ____________.

not considered

The initial cost of a fixed asset is the purchase price of the asset plus all costs to ____________.

obtain and ready it for use

Manufacturers may acquire exclusive rights to produce and sell goods with one or more unique features. Such rights are granted by ____________, which the federal government issues to inventors. These rights continue in effect for 20 years.

patents

The amortization is recorded by debiting an amortization expense account and crediting the ____________account. A separate contra asset account is usually not used for intangible assets.

patents

Other descriptive titles for fixed assets are ____________, ____________, and ____________.

plant assets or property, plant, and equipment.

A fixed asset may be purchased and placed in service other than the first month of an accounting period. In such cases, depreciation is ____________ based on the month the asset is placed in service.

prorated

Fixed assets have the following characteristics: ____________

1. They exist physically and, thus, are tangible assets. 2. They are owned and used by the company in its normal operations. 3. They are not offered for sale as part of normal operations.

The following costs are included as an expense: ____________

1. Vandalism 2. Mistakes in installation 3. Uninsured theft 4. Damage during unpacking and installing 5. Fines for not obtaining proper permits from governmental agencies

Under federal law, businesses can protect their trademarks by registering them for ____________ years and renewing the registration for 10-year periods.

10

Just because a fixed asset is fully depreciated, however, does not mean that it should be ____________ from the accounts.

removed

The ____________ value of a fixed asset is the estimated value of the asset at the end of its useful life.

residual

Costs that benefit only the current period are called ____________.

revenue expenditures

Residual value is sometimes referred to as ____________ value, salvage value, or trade-in value.

scrap

However, standby equipment for use during peak periods or when other equipment breaks down is ____________ classified as a fixed asset, even though it is not used very often. In contrast, fixed assets that have been abandoned or are no longer used in operations are not classified as fixed assets.

still

The ____________ method provides for the same amount of depreciation expense for each year of the asset's useful life.

straight-line

The ____________ method provides for the same periodic amounts of depreciation expense over the life of the asset. The units-of-activity method provides for periodic amounts of depreciation expense that vary, depending on the amount the asset is used. The double-declining-balance method provides for a higher depreciation amount in the first year of the asset's use, followed by declining amounts.

straight-line

Under the ____________ method, depreciation is prorated based on the number of months the asset is in service.

straight-line

MACRS is beneficial for tax purposes since depreciation is accelerated, thus creating faster tax deductions. Therefore, most companies use ____________ for their financial statements and ____________ for their tax accounting.

straight-line depreciation MACRS

The amount a seller allows a buyer for a fixed asset that is traded in for a similar asset. ____________

trade-in allowance

A ____________ is a name, term, or symbol used to identify a business and its products.

trademark

The ____________ method provides the same amount of depreciation expense for each unit of activity of the asset.

units-of-activity

Only costs necessary for preparing the fixed asset for ____________ are included as a cost of the asset. Unnecessary costs that do not increase the asset's usefulness are recorded as an expense.

use

Physical depreciation factors include ____________ and ____________ during use or from exposure to weather.

wear and tear

The two parties to a lease contract are as follows: ____________

1. The lessor is the party who owns the asset. 2. The lessee is the party to whom the rights to use the asset are granted by the lessor.

The accounting for intangible assets is similar to that for fixed assets. The major issues are:____________

1. Determining the initial cost. 2. Determining the amortization, which is the amount of cost to transfer to expense.

The three depreciation methods used most often are as follows: ____________

1. Straight-line depreciation 2. Units-of-activity depreciation 3. Double-declining-balance depreciation

The Internal Revenue Code uses the ____________ to compute depreciation for tax purposes

Modified Cost Recovery System (MACRS)