Accounting Chapter 7

Declining-Balance Depreciation

An accelerated depreciation method Will be higher than straight-line depreciation in earlier years, but lower in later years Measure based on time.

Tax Depreciation

An accelerated method that reduces taxable income more in the earlier years of an asset's life than straight-line.

Copyright

An exclusive right of protection given by the U.S. Copyright Office to the creator of a published work such as a song, film, painting, photograph, book, or computer software.

Patent

An exclusive right to manufacture a product or to use a process (normally granted for a period of 20 years).

Property, plant, and equipment.

Assets in this category include land, land improvements, buildings, equipment, and natural resources.

Intangible assets.

Assets in this category include patents, trademarks, copyrights, franchises, and goodwill. We distinguish these assets from property, plant, and equipment by their lack of physical substance.

Capitalize Costs

all expenditures necessary to get the land ready for its intended use. includes the purchase price of the land plus closing costs such as attorney fees; real estate commissions etc.

Amortization

allocating the cost of intangible assets to expense.

Trademark

A word, slogan, or symbol that distinctively identifies a company, product, or service. Can be registered for a period of 10 years. Registration can be renewed for an indefinite number of 10-year periods (useful life can be indefinite). Firms often acquire trademarks through acquisition. When a firm develops it internally through advertising, it records the advertising costs as expenses in the income statement. The firm can record attorney fees, registration fees, design costs, successful legal defense, and other costs directly related to securing the trademark as an intangible asset in the blank asset account.

Straight Line Depreciation

Allocates an equal amount of the depreciable cost to each year of the asset's service life

Activity-based method

Allocate an asset's cost based on use rather than time

Franchises

Local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area.

Addition

Occurs when we add a new major component to an existing asset

Basket Purchase

Purchasing more than one asset at the same time for one purchase price.

Goodwill

Represents the value of a company as a whole, over and above the value of its identifiable net assets. Recorded as an intangible asset in the balance sheet only when purchased as part of the acquisition of another company. Goodwill is equal to the purchase price minus the fair value of the net assets acquired.

Cost of a patent includes

When it is purchased - purchase price; legal and filing fees to secure the patent; any attorney fees and other costs of successfully defending the patent in court When it is internally developed - research and development costs (expensed as incurred); legal and filing fees to secure the patent (recorded in the patent asset account)

return on assets

equals net income divided by average total assets. It indicates the amount of net income generated for each dollar invested in assets.

Depreciation

in accounting is the process of allocating to an expense the cost of an asset over its service life.

Accumulated depreciation

is a contra-asset account representing the total depreciation taken to date.

The impairment loss

is equal to the difference between the asset's book value and its fair value.

Capitalize

to describe recording an expenditure as an asset.

Depletion

Allocating the cost of natural resources to expense

Book value

is equal to the original cost of the asset minus the current balance in accumulated depreciation.

Service life (or useful life

is how long the company expects to receive benefits from the asset before disposing of it; can be measured in units of time or in units of activity.

Residual value (or salvage value)

is the amount the company expects to receive from selling the asset at the end of its service life.

Impairment

occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation)

Natural Resources

oil, natural gas, timber, and even salt