Exam #3

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The credit portion of the entry removes from the balance sheet that portion of the asset's cost estimated to have been used up during the current period. The debit portion of the entry allocates this expired cost to expense.

in an intangible asset account

where do you record patents

Accountable events

1. acquisition 2. allocation of the acquisition 3. sale or disposal

Depreciation

A decrease or loss in value

natural resources

A site acquired for the purpose of extracting or removing some valuable resource such as oil, minerals, or timber is classified as a natural resource, not as land. This type of plant asset is gradually converted into inventory as the natural resource is extracted from the site.

depletion

Allocation of the cost of a natural resource over its service life

Net Asset =

Assets - Liabilities and/or OE

"expensing" an item

Charging an expenditure directly to an expense account

capital expenditures

Expenditures for the purchase or expansion of plant assets and are recorded in asset accounts.

Allocation of a Lump-Sum Purchase

Several different types of plant assets may be purchased at one time. Separate asset accounts are maintained for each type of plant asset, such as land, buildings, and equipment.1 When land and buildings (and perhaps other assets) are purchased for a lump sum, the purchase price must be allocated among the types of assets acquired. An appraisal may be needed for this purpose.

Debit Amortization Expense Credit Intangible Asset

The accounting entry for amortization

Revenue expenditure

The payment of an operating expense necessary to earn revenue recorded on the expense account

accumulated depreciation

a contra-asset account, representing that portion of the asset's cost that has already been allocated to expense

higher; lower; reduce

accelerated depreciation leads to _____ charges early on and _______ Net Income but can ________ taxable income, this is used for tax returns

debit asset, credit expense account

accounting entry for good will

net identifiable assets

all assets except goodwill, minus liabilities

depreciation of a tangible asset kinda =

amortization of an intangible asset kinda =

Investing Activities

cash flows relating to acquisition and disposals of plant assets are classified as...

reduce; no; less

depreciation and amortization _____ net income but have ___ effect on Cash flows, this results in Net Income being ____ than Net Cash flows from operating activities

Accounts receivable

has no physical substance but is still a current asset

financial statement disclosures

estimates of residual value and useful life, differs from company to company and must be for reasonable cause --> consistency principle

sum-of-the-years'-digits method

form of accelerated depreciation which falls between double declining balance and the 150% declining balance methods. Rarely used today and especially not in smaller businesses

any amortization cost is written off immediately

if a trademark is discontinued or becomes doubtful what is done

no gain or loss

if cash = book value

record a loss (debit)

if cash is < Book value

...

the charge to an expense account is based on the assumption that the benefits from the expenditure will be used up in the current period, and therefore the cost should be deducted from the revenue of the period in determining the net income.

Good will

the difference when a business is sold above its market value

Requirement of revaluation

the fair market value can reliably measured and be applied to an entire class of plant assets

Fair Market Value

the price a willing buyer would pay a willing seller in a free market

normal return

the rate of return that investors demand in a particular industry to justify purchasing a business at fair market value

Amortization

the reduction of a loan balance through payments made over a period of time

Amortization (2)

the systematic write off to expense of the cost of an intangible assets over its useful life

no immediate effect on cash flows

the write down of impaired assets is an example of a non - cash charge or expense against income has what effect on cash flows

depletion of a natural resource

they do not depreciate, but gradually depletiated as the resource is extracted, once everything it taken out it is fully depleted

the assets cost, estimated residual value, and the estimated useful life

three variables to know when calculating depreciation

Book value; proceeds

to determine gain or loss on disposal of an asset compare ____ ____ to _____ from disposal

Revaluation process

under international standards, companies have an option to follow a ______ process in stead of historical costs during an assets life

MACRS

used by many businesses to help with income tax returns, also helps with smaller businesses so they do not have to compute depreciation and multiple ways. however, GAAP does not accept this method for publicly traded companies

intabgible assets

used in operation but has no physical qualities

cost

valuation of intangible asset

evidence of future benefit

what makes an expenditure an intangible asset

Cost of Plant Assets

includes all expenditures that are reasonable and necessary for getting the asset to the desired location and ready for use

double declining balance depreciation

Depreciation computations that produce larger amounts of depreciation in the early years of an asset's life and progressively smaller amounts as the asset ages.

revenue expenditure example

Expenditures for ordinary repairs, maintenance, fuel, and other items necessary to the ownership and use of plant and equipment

Research and development cost

Expenditures that may lead to patents, copyrights, new processes, and new products; must be expensed as incurred.

on the balance sheet in its own subgroup, but only is of significant value other wise it is recorded as an ordinary cost

How are intangible assets classified in financial statements

record a gain (credit)

If cash is > book value

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In brief, any material expenditure that will benefit several accounting periods is considered a capital expenditure. Any expenditure that will benefit only the current period or that is not material in amount is treated as a revenue expenditure.

1. recording cash received (Debit) 2. Removing accumulated depreciation (debit) 3. recoding a gain (credit) or loss (debit) 4. removing the asset cost (credit)

Journalize disposal of plant and equipment by

Modified Accelerated Cost Recovery System

MACRS stands for

straight line depreciation; higher

Most companies choose ______ ______ which shows a _____ Net Income, this is shown in financial statments

Causes of Depreciation

Physical deterioration and obsolescence

When this situation arises, a revised estimate of useful life should be made and the periodic depreciation expense decreased or increased accordingly.

What should be done if, after a few years of using a plant asset, management decides that the asset actually is going to last for a longer or shorter period than was originally estimated?

expenses; revenues

The units of output depreciation method makes matching ____ and ____ easier because of the the ability to determine total units with accuracy

when the cost is small it can be charged to an expense account immediately when the cost is large it will be amortized over its useful life and should not exceed the expected revenue period

What is done differently when the franchise has a small cost versus significant cost

capital expenditure (2)

all expenditures before the beginning of the generation of revenue

straight line depreciation

allocates an equal portion of depreciation expense to each period of the asset's expected useful life (cost - salvage value) / useful life

Patents

an exclusive right granted by the federal government for the manufacture and sales of a good

why is land not subject to depreciation

because of its unlimited term of existence and utility does not decline over time

Below; low; no

in the double declining balance method the good cannot depreciation _____ the book value, which lead to _____ or __ costs in its final years.

declining balance method

better matches depreciation with revenue generated , start by calculating straight line depreciation, then multiply that by two to get the double-declining rate, finally determine the depreciation expense by doing double-declining rate x Book value

"capitalize"

charging an expenditure to an asset account rather than to an expense account

usually minor so it is charged to an expense account when paid

charging copy right cost

units-of-output method

depreciation is based on output instead of the passage of time

1. Update depreciation to the date of disposal 2. journalize the disposal

disposal of plant and equipment

tangible assets

have physical substance, property subject to depreciation and the expense is stretched over its useful life

Impairment of Plant Assets

if the book value of an asset cannot be efficiently used up, the cost of the asset should be marked back down to the fair market value

International lil fact for ya

if the book value of an asset is increased because of revaluation, the increase is recorded in other comprehensive income and accumulated equity

treat them as operating expenses or an expense for the current period

if there is uncertainty what do companies determine for intangible expenditures

debit depreciation expense, credit accumulated depreciation

journal entry to record a depreciation expense

tangible asset not subject to depreciation

land

natural resources (2)

materials that are physically removed from their natural environment and converted into inventory

Accelerated methods of depreciation

methods of depreciation that result in higher depreciation charges in the first year; charges gradually decline in amount over the lives of fixed assets. Sum-of-the-years' digits and double declining balance are accelerated methods of depreciation

put on the balance sheet and are classified as property, plant, + equipment, once they are removed they represent inventory

natural resource accounting

notes payable or receivable

non-cash investing activities

example of intangible assets

patent, trademark, franchise

20; amortization should exceed that many years

patents usually last __ years which means what for amortization

the depreciation process drawn out

purchase cost --> as assets are purchases --> Balance sheet (Assets: Plant and equipment) --> as the services are received --> Income statement (Expenses: depreciation)

half-year convention

record one-half of a full year's depreciation in the year of acquisition and another half year in the year of disposal.

plant assets

represent a bundle of future services, long term prepaid expenses

Book Value

represents the portion of the asset's cost that remains to be allocated to expense in future periods. (cost - accumulated depreciation)

incidental costs

sales taxes on the purchase price, delivery costs, and installation costs.

Over the entire life of the asset, both the straight-line method and accelerated methods recognize the same total amount of depreciation.

straight line vs accelerated depreciaiton

The depreciation process

the allocation of the cost of a good over its useful life

the present value of future cash flows

the amount that a knowledgable investor would pay to receive that cashflow

more depreciation is noticed in periods where the asset is used to produce more output

what is the relation between depreciation and output in the units of output depreciation

when purchased from an existent owner

when are copy right costs material

when incurred, it is capitalized and amortized over a period of time

when do you record the expense for a trademark

at or near the end of the useful life

when does residual value = boo value

Acquisituon

when one company purchases most or all of another company's shares to gain control of that company

the asset should be written down to its fair market value and an impairment loss recognized

when the impairment of plant assets occurs, how is the worth of the asset recorded

balance sheet

where does the unused portion of assets be recorded