Chapter 9

Straight-line depreciation is calculated as:

(Acquisition cost - Salvage value) / Estimated useful life [in either months or years]

depreciation per unit is calculated as

(acquisition cost - salvage value) / total estimated units of production

What are two common types of revenue expenditures?

1. expenditures for ordinary maintenance and repairs of existing plant assets 2. expenditures to acquire low-cost items that benefit the firm for several periods

Calculating asset turnover

Asset Turnover = net income / average total assets

The journal entry to record the impairment loss is

Debit impairment loss on equipment and credit accumulated deprecation (equipment)

historical cost

Long-lived assets initially recorded on a balance sheet at their acquisition cost. represents the amount expanded when asset was originally acquired

Capital Expenditures

increase the book value of long-lived assets... capitalize an amount means to increase an asset's book value by that amount

What are two typical capital expenditures related to property, plant, and equipment?

initial acquisitions and additions, betterments

Accelerated depreciation method

a depreciation method in which the amounts of depreciation expense taken in the early years of an asset's life are greater than the amounts expensed in later years.

plant assets

a firm's property, plant, and equipment; also called fixed assets

Return on assets (ROA)

a measure of profitability; focuses on a firm's financial health.

Modified accelerated cost recovery system (MACRS)

a system of accelerated depreciation for US income tax purposes; it prescribes depreciation rates by asset-life classification...establishes eight asset classes with prescribed useful lives ranging from 3 years to 31.5 years...provides larger depreciation deductions during an asset's earlier years than was previously possible. INTEREST FREE... allow the firm to pay less income tax in early years of an asset's life and more in the later years

Units of production method

allocates depreciation in proportion to an asset's use in operations.

depreciation accounting

attempt to allocate in a systematic and rational manner, the difference between an asset's acquisition cost and its estimated salvage value over the estimated useful life of the asset. Convenient expedients for estimating asset utilization and should not be considered precise

Double declining balance is calculated as

book value at beginning of year * double-declining balance rate

Depreciation and Amortization

both refer to the process of allocating a portion of an asset's acquisition cost to expense on the income statement to reflect the consumption of the asset as it produces revenue for a business

maintenance costs

charged to expense as they are incurred

Examples of intangible assets

copyrights, franchises and patents

Journal entry to record the annual depreciation expense is

debiting depreciation expense - equipment AND crediting accumulated depreciation - equipment

to find the asset's annual depreciation expense

depreciation per unit * units of production for the period

straight-line method

easiest depreciation method to understand and calculate. most widely used depreciation method by US businesses. an equal amount of depreciation expense is allocated to each period of an asset's useful life.

Why was MACRS introduced into US tax law?

encourage companies to invest in plant assets.

asset turnover

evaluates a company's effective use of its assets . This ratio measures how effectively a firm uses its assets to generate sales revenue

patent

exclusive privilege granted to an inventor by the US patent office for a period of 20 years from the date the patent application is filed. Patent holders have the right to exclude others from making, using, or selling the invention. Changes in technology or consumer tastes may shorten a patents economic life. patents are accounted for conservatively by MOST businesses. most businesses amortize patents over a shorter period than 20 years.

Franchise

exclusive rights to operate or sell a specific brand of products in a given geographic area. may be for definite or indefinite periods.

Useful live

expected period of economic usefulness to a business. The period from the date of acquisition to the expected date of disposal

Research and development costs

expenditures for the research and development of products or processes. These costs are almost always expensed rather than capitalized....software development companies may capitalize some costs associated with the development of software.

Leasehold improvements

expenditures made by a lessee to alter or improve leased property

revenue expenditures

expenditures relating to plant assets that are expensed when incurred

Betterments

expenditures that extend the useful life of an asset, improve the quality and/or quantity of the asset's output, or reduce the asset's operating expenses.

Land improvements

improvements with limited useful lives made to land sites. (paved parking lots and driveways)

declining-balance method

is an accelerated depreciation method. it calculates a company's depreciation expense as a constant percentage of an asset's book value as of the beginning of each period. Overtime, an asset's book value declines as asset is used up. Decreasing depreciation expense. Asset's salvage value is NOT considered in the calculation of declining-balance depreciation. The constant depreciation percentage it uses is a multiple of the straight line depreciation rate.

impairment loss

is calculated as the difference between the asset's current book value and its current fair value

Asset's acquisition cost

is often the amount of cash paid when the asset is acquired and readied for use by a business

sometimes a change in the circumstances relating to a depreciable asset is so severe that the future cash flows from the asset's use and disposal are estimated to be..

less than its current book value

What intangible assets are amortized?

not ALL intangible assets are amortized... some intangible assets have a limited life because of legal or regulatory restrictions. Intangible assets classified as having a limited life are amortized over their expected useful life. indefinite life intangible assets are not amortized

Expense must be allocated to the periods of asset use and matched with sales revenue. Failure to do so would...

overstate the company's net income for these periods

amortization

periodic expensing of the asset's cost over the term of its expected useful life. amortization of intangible assets typically entails (1) determining the asset's cost (2) estimating th period over which it will benefit a company (3) allocating the cost in equal amounts to each accounting period involved.

Depreciation

process of allocating the cost of building, equipment, and vehicles to expense over the time periods benefiting from their use.

copyright

protects its owner against the unauthorized reproduction of a specific written work, recorded work, or artwork. Lasts for the life of the author plus 70 years...purchase price of valuable copyrights can be substantial, and proper measurement and amortization are necessary for valid business income determination.

intangible assets

refer to those economic resources that benefit a company's operations but which lack the physical substance that characterizes pant assets

trademarks and trade names

represent the exclusive and continuing right to use certain terms, names, or symbols, usually to identify a brand or family of products. registered with the US federal government for a nominal cost. The cost of a trademark or trade name is material the amount is debited to an appropriate intangible asset account

Good will

represents the amount paid by one company in the acquisition of another company, above the amount that can be attributed to the identifiable net assets of the acquired company, including the other intangibles. Measurement of goodwill is complex because it can stem from many factors

Salvage value (residual value)

the expected net recovery when a plant asset is sold or removed from service

Site Land

the land on which a business is operated... has an indefinite useful life and therefore does not require any periodic write-off expense.

Depreciation Expense when referring to plant assets, and amortization expense when referring to intangible assets

the portion of an sect's cost that is consumed or used up in any given period.

Intangible assets

various resources that benefit a business's operations but lack physical characteristics