CH. 7 & 8 ACCT 2110 Miller Exam 3

Declining Balance Depreciation Expense Formula

Declining Balance Depreciation Expense = Declining Balance Rate X Book Value

customer deposits

A similar long-term liability, called _______________, is recorded when customers make advance payments or security deposits that are not expected to be earned or returned soon enough to qualify as current liabilities.

interest-bearing notes

Notes payable normally specify the amount to be repaid indirectly, by stating the amount borrowed (the principal) and an interest rate. These notes are called ________________________ because they explicitly state an interest rate.

amortization

Once an intangible asset is recorded, companies must determine if the asset has a finite life or an indefinite life. The cost of an intangible asset with a finite life, like the cost of a tangible asset, is allocated to accounting periods over the life of the asset to reflect the decline in service potential. This process is referred to as _______________.

fixed asset turnover ratio

One measure of how efficiently a company is using its fixed assets is the ______________________. It is calculated as: _____________________ = Net Sales / Average Net Fixed Assets

units-of-production depreciation

The __________________________________ method is based on a measure of the asset's use in each period, and the periodic depreciation expense rises and falls with the asset's use.

average age of fixed assets

The age of a company's fixed assets also can provide an indication of a company's capital replacement policy and assist managers in estimating future capital expenditures. A rough estimate of the ___________________ can be computed as: Average Age of Fixed Assets = Accumulated Depreciation / Depreciation Expense

depreciation expense

The amount of depreciation recorded each period; is reported on the income statement

depreciable cost

The cost of the asset minus its residual value gives an asset's _____________. The ______________ of the asset is the amount that will be depreciated (expensed) over the asset's useful life.

double-declining-balance method

The multiple (m) is often 2, in which case the declining balance method is called the _______________________

accrued liabilities

Unlike accounts payable, which are recognized when goods or services change hands, _____________________ are recognized by adjusting entries at the end of a period.

Liabilities

___________ are probable future sacrifices of economic benefits. These commitments, which arise from activities that have already occurred, require the business to transfer assets or provide services to another entity sometime in the future.

Natural resources

_______________ are naturally occurring materials that have economic value. They include timberlands and deposits such as coal, oil, and gravel. _______________, such as coal deposits, oil reserves, and mineral deposits, make up an important part of the operating assets for many companies.

Depreciation methods

are the standardized calculations required to determine periodic depreciation expense. The most common are: straight-line declining balance units-of-production

Unearned revenue

_________________ is the liability created when customers pay for goods or services in advance. In such instances, the amount of the prepayment is a liability for the seller. This liability is discharged either by providing the goods or services purchased (at which time revenue is recognized) or by refunding the amount of the prepayment.

Current liabilities

____________________ are 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.

Intangible operating assets

__________________________, like tangible assets, represent future economic benefit to the company, but unlike tangible assets, they lack physical substance. Patents, copyrights, trademarks, leaseholds, organization costs, franchises, and goodwill are all examples of intangible assets.

Depreciation

is the process of allocating, in a systematic and rational manner, the cost of a tangible fixed asset (other than land) to expense over the asset's useful life. is a cost allocation process. It is not an attempt to measure the fair value of the asset or obtain some other measure of the asset's value. is not an attempt to accumulate cash for the replacement of an asset. is a cost allocation process that does not involve cash.

Involuntary disposal

occurs when assets are lost or destroyed through theft, acts of nature, or by accident.

Voluntary disposal

occurs when the company determines that the asset is no longer useful. The disposal may occur at the end of the asset's useful life or at some other time. For example, obsolescence due to unforeseen technological developments may lead to an earlier than expected disposition of the asset.

Property, plant, and equipment (PP&E)

often called fixed assets or plant assets, are operating assets that are tangible (e.g., can be seen and touched). They include, among other things, land, land improvements, buildings, and equipment

operating assets

which are the long-lived assets that are used by the company in the normal course of operations

Intangible assets

which generally result from legal and contractual rights, do not have physical substance. They include patents, copyrights, trademarks, licenses, and goodwill.

capitalized

which means that they are reported as long-term assets with a service potential of greater than 1 year

Accumulated depreciation

which represents the total amount of depreciation expense that has been recorded for an asset since the asset was acquired, is reported on the balance sheet as a contra-asset

impairment

An _____________ is a permanent decline in the future benefit or service potential of an asset.

impairment

An _______________ is a permanent decline in the future benefit or service potential of an asset

account payable

An __________________ arises when a business purchases goods or services on credit. It is really just the flip side of an account receivable—when you have a payable, the business you owe has a receivable.

sales taxes

At the time of a sale, most retail businesses collect _____ ________, usage taxes, or excise taxes for various state, local, and federal taxing authorities.

warranty

A __________ usually guarantees the repair or replacement of defective goods during a period (ranging from a few days to several years) following the sale.

note payable

A ________________ typically arises when a business borrows money or purchases goods or services from a company that requires a formal agreement or contract (like when you sign a loan contract to buy a car).

book value (or carrying value)

Accumulated depreciation is deducted from the cost of the asset to get the asset's

withholding and payroll taxes

Businesses are required to withhold taxes from employees' earnings and to pay taxes based on wages and salaries paid to employees. These _____________ _______________ are liabilities until they are paid to the taxing authority.

revenue expenditures

Expenditures that do not increase the future economic benefits of the asset are called ____________________ and are expensed in the same period the expenditure is made.

capital expenditures

Expenditures that extend the life of the asset, expand the productive capacity, increase efficiency, or improve the quality of the product are called _______________________

research and development (R&D) expense

For internally developed intangible assets, the cost of developing the asset is expensed as incurred and normally recorded as ______________________________

units-of-production depreciation method

However, when the decline in an asset's service potential is proportional to the usage of the asset and asset usage can be measured, depreciation expense can be computed using the _____________________________

indefinite life, it is not amortized

If an intangible asset is determined to have an _____________, _________________ but is reviewed at least annually for impairment.

organizational costs

It can be argued that these _____________________ are an intangible asset that provides a benefit to a company indefinitely.

long-term (debt)

Remember that current liabilities must be retired with existing current assets or creation of new current liabilities—a new ______________ issue is creation of a new ___________, not current, liability. When such refinancing is expected, the maturing obligation is not transferred to current liabilities but is left as a _______________.

useful life

The _____________ of an asset is the period of time over which the company anticipates deriving benefit from the use of the asset.

residual value (also called salvage value)

The ________________ is the amount of cash or trade-in consideration that the company expects to receive when an asset is retired from service.

straight-line depreciation

The ______________________ method produces a constant amount of depreciation expense in each period of the asset's life and is consistent with a constant rate of decline in service potential.

declining balance depreciation

The ____________________________ method accelerates the assignment of an asset's cost to depreciation expense by allocating a larger amount of cost to the early years of an asset's life.

declining balance depreciation method

The _______________________________ is an accelerated depreciation method that produces a declining amount of depreciation expense each period by multiplying the declining book value of an asset by a constant depreciation rate.

depletion

This process of allocating the cost of the natural resource to each period in which the resource is used is called _____________; ____________ Rate = Cost - Residual Value / Recoverable Units ; __________ = __________ Rate X Units Recovered ; increases the accumulated __________ account

contingent liability

When a liability depends on a future event (i.e.,___________________), such as the outcome of a lawsuit, recognition depends on how likely the occurrence of the event is and whether a good estimate of the payment amount can be made.

cost

the ________ of a fixed asset is any expenditure to acquire the asset and to prepare the asset for use.

straight-line depreciation method

the _______________________ allocates an equal amount of an asset's cost to depreciation expense for each year of the asset's useful life.

intangible assets purchased from outside the company

the primary element of the cost is the purchase price. Costs such as registration, filing, and legal fees are considered necessary costs and are capitalized as part of the intangible asset.