College Accounting I Chapter 10, Fixed Assets and Intangible Assets

What are two common misunderstandings regarding depreciation?

1. Depreciation does not measure a decline in the market value of a fixed asset. 2. Depreciation does not provide cash to replace fixed assets as they wear out.

What are the three factors in computing depreciation expense for a fixed asset?

1. The asset's initial cost. 2. The asset's expected useful life 3. The asset's estimated residual value

How long is a patent good for?

20 years

A cost that has been incurred may be classified as what?

A fixed asset, an investment, or an expense

What is a trademark?

A unique name, term, or symbol used to identify a business and its products

In addition to the purchase price, cost of acquiring fixed assets include what?

All amounts spent in getting the asset in place and ready for use

How would undeveloped land acquired for future resale be classified on the balance sheet?

An asset in the investment section not the land section

How would a cost related to a fixed asset to improve the asset such as adding a hydraulic lift to a truck making it easier and quicker for loading of cargo be classified?

As a capital expenditure because of the added value to the truck

How is the purchase of a patent journalized?

As a debit to ammoritization expense and a credit to the asset account patent accounts

How is the adjusting entry to record depreciation journalized?

As a debit to depreciation expense and a credit to the contra asset account Accumulated depreciation or allowance for depreciation

How would a cost related to ordinary maintenance and repairs such as a tune-up to a delivery truck be journalized?

As a debit to repairs and maintenance expense (increasing it) and a credit to cash (decreasing it)

How would a cost related to a fixed asset to improve the asset such as adding a hydraulic lift to a truck making it easier and quicker for loading of cargo be journalized?

As a debit to the asset Delivery truck and a credit to cash decreasing it

If a long lived purchase is used during normal operations how is it classified?

As a fixed asset

How are cost related to the ordinary maintenance and repairs of a fixed asset classified?

As a revenue expenditure

If a purchase is not long lived than how is it classified?

As an expense

Unnecessary cost that do not increase the asset's usefulness are recorded how?

As an expense

If a long lived purchase is not used during normal operations, how is it classified?

As an investment

How are the costs of acquiring a fixed asset recorded?

By debiting the related fixed asset, such as land, building, land improvements, or machinery and equipment

When figuring Annual depreciation using the striaght line method, how can the useful life be simplified in the formula?

By taking the number of expected years of useful life and converting it to its staight-line equivalency. For instance, 5 years= 100% divided by 5 =20%; 10 years = 100% divided by 10= 10%

How is annual depreciation calculated?

Cost les residual value divided by useful life

What is the book value of a fixed asset?

Cost less accumulated depreciation

Define Revenue Expenditures

Cost that benefit only the current period

Define Capital Expenditures

Cost that improve the asset or extend its useful life

If a Capital Expenditure is an extraordinary repair that extends the asset's useful life then what should be debited?

Debit accumulated depreciation and then revise depreciation for current and future periods

If a Capital Expenditure improves the fixed asset and adds service value to the asset then what should be debited?

Debit the fixed asset

With a increase to a fixed asset due to capital expenditure, what other account will be affected?

Depreciation for the fixed asset will also change over the remaining useful life of the asset.

How is a patent classified?

In an account titled Ammoritization Expense - patent

Define goodwill

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

What are some examples of intangible assets?

Intangible assets are not a physical being such as a patent, coptright, or trademark

How long is a copyright good for?

It extends 70 years beyond the author's death

If a fixed asset such as a forklift is near the end of its useful life and the engine is overhauled thereby extending its useful life an additional eight year, how is the asset classified and recorded?

It is classified as a capital expenditure and is recorded by debiting the contra asset account accumulated depreciation (decreasing it)and crediting cash (decreasing it)

How is the expected useful life of a fixed asset figured?

It is estimated at the time the asset is placed into service. Estimates of expected useful lives are available from industry trade associations. The IRS also publishes guidelines for useful lives.

If an asset is used for only part of the year then how is it calculated?

It is prorated by taking the depreciable value and multiplying it by the number of months divided by 12 months

If a purchased item is long lived than how is it classified?

It is recorded as an asset on the balance sheet as either a fixed asset or an investment

What are some examples of items classified and recorded as fixed assets?

Land, buildings, or equipment

Over time, fixed assets lose their ability to provide services, with the exception of which fixed asset?

Land. It has an unlimited life and is not depreciated

What are fixed assets?

Long term or relatively permanent assets such as equipment, machinery, buildings, and land

Can a car dealership classify their automobiles for sale as fixed assets?

No, although fixed assets can be sold, they should not be offered for sale as part of normal operations

Functional depreciation factors include what?

Obsolescence and changes in customer needs that cause the asset to no longer provide services for which it was intended. Technology is a good example of functional depreciation

Fixed assets normally last more than what length of time?

One year

Depreciation can be caused by what?

Physical or functional factors

What are some other names for fixed assets?

Plant assets or property, plant, and equipment

Which value of a fixed asset at the end of its useful life is estimated at the time the asset is placed into service? It is also sometimes referred to as scrap value, salvage value, or trade-in value.

Residual value

What are the three methods most often used to compute depreciation?

Straight-line depreciation, Units-of production depreciation, and Double declining-balance depreciation

When the useful life of a fixed asset has changed due to extraordinary repairs and the remaining useful life changes as a result, what other account will also be affected?

The depreciation account based on the new book value of the asset

Depreciable Cost

The difference between a fixed assets initial cost and its residual value

What is a patent?

The exclusive right granted by the government to produce and sell goods with one or more unique feature.

What is a copyright?

The exclusove right by the federal government to publish and sell a literary, artistic, or musical composition.

The use of a contra asset account for accumulation of depreciation allows what?

The original cost to remain unchanged of the fixed asset in the accounting records

Depreciation

The periodic recording of the cost of fixed assets as an expense

The straight-line method provides for the same amount of depreciation expense how frequently?

The same amount for each year of the asset's useful life

Of the three methods for figuring depreciation, which one is the most widely used one?

The straight-line depreciation

How are cost related to the ordinary maintenance and repairs of a fixed asset recorded?

They are recorded as an expense to the current period

What are the characteristics of fixed assets?

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

If a company incurs a cost associated with constructing a fixed asset such as a new building, how should those direct cost such as labor and materials be recorded?

They should be capitalized as a debit to an account entitled Construction in progress. When the construction is complete, the cost should be reclassified by crediting construction in progress and debiting the proper related fixed asset account such as building.

How long is a trademark good for?

Trademarks can be registered for 10 years and renewed for 10 year periods thereafter.

Does the book value and the market value equal the same amounts?

Usually not

What are some examples of unnecessary cost that are recorded as an expense verses being an addition to the asset?

Vandalism, mistakes in installation, uninsured theft, damage during unpacking and installing, and fines for not obtaining proper permits from governmental agencies

Physical depreciation factors include what?

Wear and tear during use or from exposure to weather

When is depreciation used?

With fixed assets

When is ammoritization used?

With intangibles

Can a tow truck used during normal operations of a car dealership be classified as a fixed asset?

Yes

Can a company use one method for computing depreciation for one fixed asset and a different method for another?

Yes different methods may be used

In addition to fixed assets normally lasting more than one year, are they used in normal operations?

Yes they are used during normal operations

If a fixed asset has no residual value then its entire cost should be allocated to what?

depreciation

The depreciable cost is the amount of an asset's cost that is allocated over its useful life as what?

depreciation expense

The fixed asset less depreciable cost equals

the residual value