Ch. 10

The cost of a natural resource includes what 4 things?

1) Acquisition costs 2) Exploration costs 3) Development costs 4) Restoration costs

Interest is capitalized during the construction period for what 2 types of assets?

1) Asset build for a company's own use, and 2) Assets constructed as discrete projects for sale/lease (like a ship or real estate development)

In what 4 situations do companies acquire assets without paying cash at time of purchase?

1) Deferred payments (notes payable) 2) Issuance of equity securities 3) Donated assets 4) Exchanges of nonmonetary assets for other assets

What 2 difficulties arise in connection with assigning costs to self-constructed assets?

1) Determining the amount of the company's indirect manufacturing costs (OH) to be allocated to the construction 2) Deciding on the proper treatment of interest (actual or implicit) incurred during construction

What 3 types of costs related to R&D that are capitalized (recorded as an asset) instead of being expensed immediately?

1) Development costs for software that has reached the point of technological feasibility 2) R&D performed by the company for sale to others 3) R&D purchased in a business acquisition

Current accounting principles require the use of fair value in recording nonmonetary asset exchanges, except in what 2 situations?

1) Fair value not determinable 2) Lack of commercial substance

What are the 2 approaches to determining the cost of a self-constructed asset, and which is GAAP approved?

1) Incremental (asset's cost includes only those additional costs that are incurred because of the decision to construct the asset) 2) Full-cost approach (allocate OH costs both to production and self-constructed assets based on the relative amount of a chosen cost driver incurred) -Full-cost = GAAP approved

What are the 2 types of expenditures relating to property, plant, and equipment and intangible asset whose accounting treatment has generated considerable controversy?

1) Interest costs pertaining to self-constructed assets 2) Amounts spent for research and development

What 2 categories are long-lived, revenue-producing assets typically classified in?

1) Property, Plant, and Equipment 2) Intangible Assets

What are the 2 ways that companies acquire intangible assets?

1) Purchase from other companies (patents, copyrights, trademarks, or franchise rights) 2) Develop internally (like by developing a new product or process and obtaining a protective patent

What are the 4 steps in recording nonmonetary asset exchanges?

1) Record the new asset at fair value 2) Remove the book value of the nonmonetary asset given (book value = recorded cost of old asset - accumulated depreciation) 3) Record any cash received or paid (to equalize the fair values of the nonmonetary assets) 4) Record any gain or loss (Fair value - book value)

What are the 2 generally accepted methods that companies can use to account for oil and gas exploration costs?

1) Successful efforts method 2) Full-cost method

Franchise

A contractual arrangement under which the franchisor grants the franchisee the exclusive right to use the franchisor's trademark (as well as possibly product and formula rights) to operate a business within a geographical area and usually for a specified period of time

What does a lump sum purchase refer to?

A group of assets being acquired for a single sum

If expenditures for a self-constructed asset are not incurred evenly throughout the period, a simple average is insufficient. What do you use in that case?

A weighted average, determined by time-weighting individual expenditures or groups of expenditures by the number of months from their incurrence to the end of the construction period

Trademark (tradename)

A word, slogan, or symbol that distinctively identifies a company, product, or service

Average ________________ expenditures approximates the average debt necessary for construction.

Accumulated

Expected Cash Flow Approach

Adjusts the cash flows, not the discount rate, for the uncertainty or risk of those cash flows

Full-Cost Method

Allows costs incurred in searching for oil and gas within a large geographical area to be capitalized as assets and expensed in the future as oil and gas from the successful wells are removed from that area

Acquisition costs

Amounts paid to acquire the rights to explore for undiscovered natural resources or to extract proven natural resources

Copyright

An exclusive right of protection given to the creator of a published work

Patent

An exclusive right to manufacture a product or use a process; 20 year right

How are assets acquired by issuing common stock valued?

At fair value of securities or the fair value of the assets, whichever is more clearly evident

In any situation where assets are acquired in noncash transactions, how are the assets valued?

At fair value of the assets given or the fair value of assets received, whichever is more clearly evident

Why are R&D costs expensed in the periods incurred?

Because they entail a high degree of uncertainty of future benefits and are difficult to match with future revenues

Most purchased intangibles are specifically identifiable. What does that mean?

Cost can be directly associated with a specific intangible right

Land Improvements

Cost of parking lots, driveways, and private roads and the costs of fences and lawn and garden sprinkler systems

Organization Costs

Costs related to organizing a new entity, such as legal fees and state filing fees to incorporate; expensed in period incurred

Restoration Costs

Costs to restore land or other property to its original condition after extraction of the natural resource ends

Technological Feasibility

Established when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements

Exploration Costs

Expenditures like drilling a well, excavating a mine, or any other costs of searching for natural resources

How are any costs incurred after the software release date generally treated?

Expensed but not as part of R&D

How are start-up costs treated?

Expensed in period incurred

How are the costs of internally-developed intangible assets usually treated?

Expensed in the period incurred

An asset retirement obligation is measured at ___________ and is recognized as a ____________ and corresponding increase in asset valuation.

Fair value; liability

Specific Interest Method

For interest capitalization, rates from specific construction loans to the extent of specific borrowings are used before using the average rate of other debt

Weighted-Average Interest Method

For interest capitalization, weighted-average rate on all interest-bearing debt, including all construction loans, is used

____________ operations are among the most common ways of doing business.

Franchise

The capitalized cost of ____________ is the excess of the fair value of the consideration given (acquisition price) over the fair value of the identifiable net assets acquired.

Goodwill

_____________ can only be purchased through the acquisition of another company.

Goodwill

What is the critical accounting issue in the controversies surrounding self-constructed assets?

Identifying the cost of the self-constructed asset (no external transaction to establish an exchange price)

In a business combination, an intangible asset must be recognized as an asset apart from goodwill under what circumstances?

If it arises from contractual or other legal rights or is separable (patents, trademarks, copyrights, franchise agreements, etc)

How is the allocation of a lump-sum purchase made?

In proportion to the individual assets' relative fair values

To the extent that the costs of equipment (purchase price, sales tax, transportation costs, testing, etc.) can be identified and measured, how should they be treated?

Included in asset's initial valuation rather than expensed currently

Development Costs

Incurred after the resource has been discovered but before production begins; includes costs like expenditures for tunnels, wells, and shafts

How are the initial payment and the periodic payments to a franchisor treated?

Initial payment plus any legal fees are capitalized as an intangible asset and then amortized over the life of the franchise agreement; the periodic payments are expensed as incurred

Restoration expenditures occur later in the process (after production begins), so how are they treated?

Initially represent an obligation incurred in conjunction with an asset retirement

____________ assets generally represent exclusive rights that provide benefits to the owner.

Intangible

What's the difference between the life of land and land improvements?

Land has an indefinite life, land improvements usually have useful lives that are estimable

Fixed Asset Turnover Ratio

Measures a company's effectiveness in managing property, plan, and equipment; Indicates the level of sales generated by the company's investment in fixed assets

What is the formula for fixed-asset turnover ratio?

Net sales / Average fixed assets (usually book value - depreciation)

What is it called when a company acquires a new asset by giving up an existing asset?

Nonmonetary asset exchange

Asset Retirement Obligations (AROs)

Obligations associated with the disposition of an operational asset

Natural Resources

Oil and gas deposits, timber tracts, mineral deposits

What costs of equipment are usually expensed?

Ones that are more difficult to measure

To prevent a company from exchanging an asset whose fair value is greater than book value for the sole purpose of recognizing a gain, fair value can be only in what gain situations?

Ones that have commercial substance

Intangible Assets

Operational assets that lack physical substance -Patents, copyrights, franchises, goodwill

Research

Planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique or in brining about a significant improvement to an existing product or process

________________ intangible assets are valued at their original cost plus other necessary costs.

Purchased

How do proceeds from the sale of salvaged materials from old buildings torn down after purchase affect the cost of land?

Reduces it

Successful Efforts Method

Requires that exploration costs that are known not to have resulted in the discovery of oil or gas be included as expense in the period the expenditures are made

When a company receives assets through a donation, _____________ is credited for the amount paid by an unrelated party.

Revenue

Property, Plant, and Equipment

Tangible, long-lived assets used in the operations of the business -Land, buildings, equipment, machinery, furniture, vehicles, natural resources

How is a lump-sum purchase treated?

The acquisition price needs to be allocated among the items

If a patent is purchased from an inventor or another individual or company, what amount is considered its initial valuation?

The amount paid

How do you record a nonmonetary asset exchange when there's a lack of commercial substance?

The asset received is valued at the book value of the asset given up

How would a company acquire assets through a donation?

The donation is usually an enticement to do something that benefits the donor; like a developer of an industrial park may pay some of the costs of building a manufacturing facility to entice a company to locate in its park

Accretion Expense

The increase in an asset retirement obligation that accrues as an operating expense

Capital Budgeting

The process of evaluating the purchase of operational assets

What does the initial cost of PPE and intangible assets include?

The purchase price and all expenditure necessary to bring the asset to its desired condition and location for use

Development

The translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use

What does it mean to capitalize a cost?

To record it initially as an asset and then expense it in future periods

T/F: Goodwill, along with other intangible assets with indefinite useful lives, is not amortized.

True

T/F: R&D expense includes the depreciation and amortization of assets used in R&D activities.

True

T/F: The cost of land should also include expenditures need to get the land ready for its intended use (real estate agent commissions, mortgages, clearing, filling).

True

How do you record a nonmonetary asset exchange when the fair value of either assets is not determinable?

Use the book value + cash given; no gain or loss is recognized

When does the interest capitalization period begin for self-constructed assets?

When construction begins and the first expenditure (materials, labor, OH) is made as long as the interest costs are actually being incurred

When does commercial substance occur?

When future cash flows change as a result of the exchange

Describe the most common situation in which equity securities are issued for property, plant, and equipment and intangible assets.

When small companies incorporate and the owner(s) contribute assets to the new corporation in exchange for ownership securities, usually common stock

Start-Up Costs

Whenever a company introduces a new product or service, or commences business in a new territory or with a new customer, it incurs one-time costs that are expensed in the period incurred

Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land? (Select all that apply.) a. real estate agent commissions b. costs to remove an old building c. legal fees to secure title d. current year's property taxes

a, b, c

Which of the following costs should be capitalized in the costs of acquiring a building? (Select all that apply.) a. remodeling building b. insurance on the building c. current year property taxes d. realtor commissions e. legal fees to obtain title

a, d, e

Which of the following is TRUE regarding a nonmonetary exchange of assets? a. A gain or loss is recognized for the difference between the fair value and the book value of the asset given up b. The new asset is recorded at the book value of the old asset c. The gain or loss recognized is the difference between the historical cost of the asset given up and the fair value of the new asset received d. The new asset is recorded at the book value of the old asset + cash paid

a. A gain or loss is recognized for the difference between the fair value and the book value of the asset given up

When a company acquires assets by issuing debt or equity securities, the first indicator of fair value is the: a. fair value of the debt or equity securities given b. fair value of the assets received c. net present value of assets received d. book value of the assets received

a. fair value of the debt or equity securities given

________________ are physically diminished as minerals and other materials are extracted from the ground and are sold or used in the production process, whereas equipment, land, and buildings have physical characteristics that remain unchanged. a. natural resources b. operating assets c. intangible assets d. fixed assets

a. natural resources

A company acquires equipment by signing an interest-bearing note payable. If the interest rate is realistic, the company will record the equipment at the: a. present value of the note payable (face amount of note) b. future value of payments on the note payable c. retail selling price of the equipment d. net present value of future cash flows of the equipment

a. present value of the note payable (face amount of note)

Costs incurred __________ the start of commercial production would be either expensed or included in the cost of inventory.

after

Accounting for land improvements requires that the costs of land improvements are: (select all that apply) a. expensed in the current period b. depreciated or amortized over the periods benefited c. capitalized d. included in the cost of land

b & c

An asset is exchanged for another asset and NO cash is exchanged in the transaction. The fair value of the assets are not determinable. At what amount should the new asset be recorded? a. Book value of the asset received b. Book value of the asset given c. Historical cost of the asset given d. The difference between the book values of the two assets

b. Book value of the asset given

When assets are exchanged and the transaction lacks commercial substance, the asset received is valued at the: a. NPV of the asset given up b. Book value of the asset given up c. Fair value of the asset received d. Fair value of the asset given up

b. Book value of the asset given up

An asset is exchanged for another asset and cash is received in the transaction. The fair value of the assets is not determinable. At what amount should the new asset be recorded? a. Cash received + book value of the asset given up b. Book value of the asset received - the cash received c. Historical cost of the asset given up - cash received d. Book value of the asset given up - cash received

b. Book value of the asset received - the cash received

A company issues its equity securities to purchase land. The common stock is NOT PUBLICLY TRADED. The best indicator of fair value is the: a. estimated value of the stock b. appraised value of the land

b. appraised value of the land

Superior Mining Inc. purchases a large piece of land with rich mineral deposits and plans to start extracting the mineral-rich ore immediately. The cost of the piece of land should be reported in this category: a. intangible asset - mineral rights b. natural resources c. land

b. natural resources

Costs incurred ___________ the start of commercial production are expensed as R&D.

before

When recording a nonmonetary asset exchange, a loss is recognized when the _______ value of an asset given is more than its _________ value.

book; fair

The basic principle for valuing assets in a nonmonetary exchange is to value the asset received at: a. Book value of the asset given up b. Book value of the asset received + cash received c. Fair value d. Book value + cash given

c. Fair value

Costs incurred after technological feasibility but before product release are ____________. (further coding and testing, production of product masters)

capitalized (as an intangible asset)

In business acquisitions, the fair value of ___________________ is capitalized as an finite-life intangible asset.

developed technology

Only assets that are constructed as __________ projects qualify for interest capitalization.

discrete

Donated assets are recorded at their __________ value.

fair

When assets are acquired in a noncash transaction, if the fair value of the noncash items given is not clearly evident, then the ___________ value of the assets received is used to record the assets.

fair

When recording nonmonetary asset exchanges, when the fair value of the asset given is less than its book value, we always use __________ value to record the exchange.

fair

Noncash transactions are recorded at the ___________ value of the items exchanged.

fair (either of the asset or the note payable)

When recording a nonmonetary asset exchange, a gain is recognized when the _______ value of an asset given is more than its _________ value.

fair; book

If the actual restoration costs are less than the probability weighted expected cash outflow, we recognize a ______________ on retirement of the obligation for the difference.

gain

In business acquisitions, the fair value of ___________________________ is capitalized as an indefinite-life intangible asset.

in-process R&D

Trademarks often are considered to have ____________ useful lives.

indefinite

If the actual restoration costs are more than the probability weighted expected cash outflow, we recognize a ______________ on retirement of the obligation for the difference.

loss

In situations where equity securities are exchanged for PPE and intangible assets, what is the best indication of fair value for the stock?

market value of the shares

Goodwill

represents the unique value of a company as a whole over and above its identifiable tangible and intangible assets