Accounting Unit 3

Natural Resources

naturally occurring materials that have economic value.

When plant assets are reported, the current period's depreciation expense is shown as a deduction from the original cost on the balance sheet.

False

Acquisition cost includes all the costs that are normal and necessary to acquire and maintain a plant asset over its useful life.

False Not to maintain, but to prepare for use

All intangible assets are subject to amortization.

False Research & Development = Expensed Trademark = Capitalize ONLY Goodwill = Capitalize ONLY Patent, Copyright, & Franchise = Capitalize & Amortize

If new equipment purchased during the year is reported on the balance sheet at December 31 as a long-term asset, there will be no related item on the income statement for the year ended December 31.

False There will be one balance sheet account and one income statement account affected.

Why do we revise the deprecation of an asset during its life?

If there is a change in an estimate or have added something to the asset (overhaul, addition).

Why is land not depreciated?

It has an infinite (unlimited) useful life.

Which statement is true concerning operating assets? a. Operating assets are used over two or more periods to generate revenues. b. Operating assets have no physical properties. c. A company's operating assets are important to its short-term liquidity. d. All operating assets are reported on the income statement.

Operating assets are used over two or more periods to generate revenues.

Gain or (Loss)

Proceeds - Book Value

Categories of Long-Term Assets

Property, plant, and equipment (PP&E), intangible assets, and natural resources.

A company determined that it had incorrectly estimated the useful life of the equipment it had purchased 2 years ago. It must now depreciate the asset's remaining book value over the current and future accounting periods.

True

Costs incurred to keep plant assets in normal operating condition are called revenue expenditures.

True

Depreciation has an effect on the company's income taxes.

True

If a company uses the same depreciation method as other firms in the same industry, investors will have enhanced comparability of the financial reporting results.

True

The FASB allows companies to use different depreciation methods so they can capture the declining service potential of an operating asset.

True

To revise depreciation expense, the accountant should compute depreciation expense using the asset's remaining book value, revised useful life, and new residual value.

True

Contingent Liabilities

a potential obligation that depends on a future event arising from a past transaction or event

Company A has equipment that costs $5,250,000 and has accumulated depreciation of $500,000, while Company B has equipment that costs $4,600,000 and has accumulated depreciation of $4,400,000. Both companies use straight-line depreciation and estimated useful lives of 40 years with $100,000 residual values, which of the following statements is true?

a. Both companies have similarly aged equipment. b. Company A's equipment is newer than Company B's. c. Company B's equipment has a higher book value than Company A's. d. Both companies have the same annual depreciation expense. Company A's equipment is newer than Company B's. We know this because the accumulated depreciation is much lower than that of Company B's, meaning through the straight-line method, their equipment has been in use for much shorter.

On the balance sheet, the cumulative amount of plant and equipment already expensed is reported in an account called...

accumulated depreciation.

Current Liabilities

obligations that require the firm to pay cash or another current asset, create a new current liability, or provide goods or services within the longer of 1 year or one operating cycle.

Property, Plant, and Equipment (PP&E)

operating assets that are tangible.

Liability

probable future sacrifices of economic benefits.

Double-Declining-Balance Depreciation

((Cost - Residual Value) / Expected Useful Life) x 2

Depreciation Cost per Unit

(Cost - Residual Value) / Expected Usage of the Asset

Depreciation Formula

(Cost - Residual Value) / Expected Useful Life

Straight-Line Depreciation

(Cost - Residual Value) / Expected Useful Life

Depletion Rate

(Cost - Residual Value) / Recoverable Units

Recognition of Liabilities

1. when goods or services are received, or money is borrowed. 2. when a liability depends on a future event, depends on how likely the occurrence of the event is and whether a good estimate of the payment amount can be made.

What is the accounting life of an intangible asset?

lower of the legal life or the useful life.

Which of the following statements regarding accounts payable is false? a. Accounting for accounts payable is really just the flip side of accounts receivable. b. Accounts payable arise when a business promises to purchase goods or services in the future. c. Accounts payable seldom require the payment of interest. d. Accounts payable arise when a business purchases goods or services on credit.

Accounts payable arise when a business promises to purchase goods or services in the future.

What is the definition of depreciation?

Allocating the cost of a fixed asset over its useful life

Book Value

Cost - Accumulated Depreciation

Depletion

Depletion Rate x Units Recovered

Units-of-Production

Depreciation Cost per Unit x Actual Usage of the Asset

An expenditure that does not increase the future economic benefits of the asset is referred to as a capital expenditure.

False

If a company is concerned about minimizing its income tax burden, it would use the straight-line depreciation method to accomplish this objective.

False

On the balance sheet, a company reports plant assets by subtracting residual value from the original cost of the plant asset.

False

Additions

adding a new or major component to an existing asset. Capitalized and depreciated.

How are research and development costs treated?

all are expensed at the time that they are incurred.

Intangible Operating Assets

assets that provide a benefit to a company over a number of years but lack physical substance.

Equipment

assets used in operations. Depreciated.

The effect of recording depreciation for the year is a...

decrease in assets and a decrease in net income.

Which of the following accounts would not be reported in the Property, Plant, and Equipment section of a balance sheet? a. buildings b. accumulated depreciation-building c. land d. depreciation expense-building

depreciation expense-building

How are intangibles disclosed on the Balance Sheet?

disclosed at their net. They are lowered until they reach 0.

Extraordinary or Major Repairs

expenditures that extend the asset's useful life. Capitalized and depreciated.

Ordinary Repairs and Maintenance

expenditures that keep an asset in normal operating condition. Expensed in the current period.

Interest Due

interest due from the loan date to the end of the year. ((Principal x Interest Rate) / 12) x Months Outstanding

What does interest payable include?

interest that is currently owed on amounts borrowed in the past.

A constant rate of decline in a fixed asset's service potential is the underlying assumption of the:

straight-line depreciation method.

Land Improvements

structural additions or improvements to land. Depreciated.

Buildings

structures used in operations. Depreciated.

Depreciation is a process by which...

the cost of plant and equipment is allocated to expense over the time periods that benefit from the use of the asset.

Which of the following sets of factors is needed to calculate depreciation on plant and equipment? a. the asset's replacement cost, its estimated life, and its estimated residual value. b. the asset's acquisition cost, its replacement cost, and its estimated residual value. c. the estimated residual value of the asset, its replacement cost, and its market value. d. the estimated life of the asset, its acquisition cost, and its estimated residual value.

the estimated life of the asset, its acquisition cost, and its estimated residual value.

Operating Assets

the long-lived assets that are used by the company in the normal course of operations. Held until their service potential has been exhausted.

Amortization

the process whereby companies systematically allocate the cost of their intangible operating assets as an expense among the accounting periods in which the asset is used and the benefits are received.

Improvements (or Betterments)

the replacement of a component of an asset with a better one the increases efficiency or productivity. Capitalized and depreciated.

Land

the site of manufacturing facility or office building used in operations. Not depreciated.

Equipment has a cost of $37,000, an estimate life of 5 years, and an estimated residual value of $7,000. A full year's depreciation expense is to be recorded in 2021. The equipment was used for 20,000 hours during 2021 and 24,000 hours during 2022. The number of expected hours over 5 years is 100,000. By what amount would the total double-declining-balance depreciation exceed the total straight-line depreciation of the equipment?

total depreciation expenses under double-declining-balance and straight-line depreciation are equal.

Intangible Assets

typically result from legal and contractual rights, do not have physical substance.

Fitness Depot purchased a building on a tract of land and allocated the entire cost of the purchase to the building. Normally, the company depreciates buildings over 40 years using the straight-line method with zero residual value and does not depreciate land. Because of the improper accounting treatment of the purchase, the company's income for the next 20 years...

will be understated.

Land is not depreciated because it...

will provide future benefits for a company for an unlimited period of time.

Can we have different depreciation methods for book and tax?

yes, because there are different reasons for presenting information. Financial statement goal is to get investors and creditors while tax goal is to save income taxes.