Chapter 7 ACG 2021

Buildings

Administrative offices, retail stores, manufacturing facilities, storage warehouse (includes: realtor commissions, legal fees, and purchase price)

Capitalized Interest

interest costs we add to the asset account rather than recording them as interest expense. Goes with the matching principle

Improvement

the cost of replacing a major component of an asset we should capitalize it to the Equipment account.

How do companies acquire intangible assets?

(1) They purchase intangible assets like patents, copyrights, trademarks, or franchise rights from other entities, or (2) they create intangible assets internally, by developing a new product or process and obtaining a protective patent.

Depreciation Expense

(asset's coat - residual value)/ service life = depreciation cost / service life

Gain

(credit) when selling a long term asset

If we retire a long term asset how do we perceive it?

(debit) accumulated depreciation (debit) loss from getting rid of it (credit) equipment purchase price

The method of amortization should reflect the pattern of use of the asset in generating benefits. Most companies use straight-line amortization for intangibles. Also, many companies credit amortization to the intangible asset account itself rather than to accumulated amortization. However, using a contra account such as Accumulated Amortization also is acceptable

(debit) amortization

Record depreciation

(debit) depreciation expense (credit) accumulation depreciation

If we exchange a long term asset how do we perceive it?

(debit) equipment purchase/ trade price (debit) accumulated depreciation (credit) cash the amount you have to pay (credit) equipment that you gave away (credit) gain, the amount increase overall

What are the two types of Return on Assets?

1. Profit Margin 2. Asset Turnover

Long terms assets

1. Tangible assets 2. Intangible assets

2 step impairment process

1. Test for impairment 2. If impaired, record the loss as such: (debit) loss (credit) loss value

2 primary strategies for increasing their return on assets

1. pursue a high sales volume by charging lower prices 2. higher profit margin through product differentiation and premium pricing

3 depreciation methods

1. straight-line 2. declining-balance 3. activity-based

Patent

A patent is an exclusive right to manufacture a product or to use a process

Depreciation

Allocation of an asset's cost to an expense over time. An asset provides benefits (revenues) to a company in future periods. To properly match the cost (expense) with the revenues it helps to generate, we allocate a portion of the asset's cost to an expense in each year that the asset provides a benefit.

Land

Capitalize (record as asset) to Land all expenditures necessary to get the land ready for its intended use (purchase price, fees for attorney, recording fees, extra tasks to clean the land up, cash received for scraps from the land, back taxes not property taxes of the current year because you record them as an expense) Land's life is indefinite

How do you record intangible assets

Depends if they are purchased or acquired

What are the different types of declining-balance rate?

Double-declining-balance method (2x the straight-line rate)

Two unusual features of declining-balance depreciation

First, we multiply the rate by book value (cost minus accumulated depreciation), rather than by the depreciable cost (cost minus residual value). Second, in year 5 we are not able to record depreciation expense for the entire $5,184 times 0.40, because doing so would cause the book value to fall below the expected residual value. Instead, depreciation expense in the final year is the amount that reduces book value to the expected residual value

Goodwill

Goodwill often is the largest, yet the most confusing, intangible asset recorded in the balance sheet. represents the value of a company as a whole, over and above the value of its identifiable net assets We record goodwill as an intangible asset in the balance sheet only when we purchase it as part of the acquisition of another company.

Declining-Balance Method

Higher depreciation in the earlier years of the asset's life and lower depreciation in later years. Accelerated Depreciation Method However, both declining-balance and straight-line will result in the same total depreciation over the asset's service life.

Legal Defense of Intangible Assets

If a firm successfully defends an intangible right, it should capitalize the litigation costs and amortize them over the remaining useful life of the related intangible. However, if the defense of an intangible right is unsuccessful, then the firm should expense the litigation costs as incurred because they provide no future benefit.

Material

It is said to be this if it is large enough to influence a decision

Tangible Assets

Land Land Improvements Buildings Equipment Natural Resources

Impaired Relationship

Largest: Book Value Middle: Future Cash Flow Smallest: Fair Value

Normal relationship

Largest: future cash flows Middle: Fair value Smallest: Book value

Intangible Assets

Patents Trademarks Copyrights Franchise Goodwill

Expenditure

Repairs and Maintenance Additions Improvements Legal Defense of Intangible Assets Materiality

What to do when we no longer use a long-term asset

Sale Retirement Exchange

Tax Depreciation

Service's prescribed accelerated method (called MACRS3) for income tax purposes. Thus, companies record higher net income using straight-line depreciation and lower taxable income using MACRS depreciation.

Capitalize

The recording of an expenditure as an asset

Franchise

These are 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

Recording a franchise

To record the cost of a franchise, the franchisee records the initial fee as an intangible asset and then expenses that cost over the life of the franchise agreement.

The most valuable intangible asset

Trademark

U.S. GAAP requires that we expense all research and development expenditures in the period incurred.

Under IFRS, research expenditures are expensed in the period incurred, consistent with U.S. GAAP. However, development costs that benefit future periods can be recorded as an intangible asset.

How do you record an expenditure?

We capitalize an expenditure as an asset if it increases future benefits. We expense an expenditure if it benefits only the current period

Intangible Assets not Subject to Amortization

We don't depreciate land because it has an unlimited life. Similarly, we do not amortize intangible assets with indefinite useful lives Goodwill is the most common intangible asset with an indefinite useful life.

Repairs and Maintenance

We expense repairs and maintenance expenditures because they maintain a given level of benefits in the period incurred. We capitalize as assets more extensive repairs that increase the future benefits of the delivery truck, such as a new transmission or an engine overhaul.

If we sell a long term asset how do we perceive it?

We record a gain if we sell the asset for more than its book value. Similarly, we record a loss if we sell the asset for less than its book value. A gain is a credit balance account like other revenue accounts; a loss is a debit balance account like other expense account (debit) cash sold for (debit) accumulated depreciation (credit) equipment purchase price (credit) gain from selling it

If they are purchased intangible assets then you...

We record purchased intangible assets at their original cost plus all other costs, such as legal and filing fees, necessary to get the asset ready for use.

Recording patents

When a firm purchases a patent, it records the patent at its purchase price plus such other costs as legal and filing fees to secure the patent. In contrast, when a firm develops a patent internally, it expenses the research and development costs as it incurs them. An exception to this rule is legal fees. The firm will record in the Patent asset account the legal and filing fees to secure the patent, even if it developed the patented item or process internally

What are your choices when recording an expenditure?

You can report in the current period as an expense or as an asset and then allocate the cost as an expense over future periods (it depends on how it will benefit the company)

What is the rule for recording long-term tangible assets

You record it at its cost plus all expenditures necessary to get the asset ready for use

Accumulated Depreciation

a contra asset account, meaning that it reduces an asset account

Trademark

a word, slogan, or symbol that distinctively identifies a company, product, or service. The firm can register its trademark with the U.S. Patent and Trademark Office to protect it from use by others for a period of 10 years The registration can be renewed for an indefinite number of 10-year periods Indefinite Life Names can lose their trademarked status if their owners fail to prevent improper use by others. All of the following were once valuable trademarks in the United States: aspirin, escalator, cellophane, zipper, shredded wheat, corn flakes, and kerosene.

Amortization

allocating the cost of intangible assets to expense

Copyright

an exclusive right of protection given by the U.S. Copyrights are protected by law and give the creator (and his or her heirs) the exclusive right to reproduce and sell the artistic or published work for the life of the creator plus 70 years

Depreciation rate per unit

depreciable cost/ total units expected to be produced

Return on Assets

equals net income divided by average total assets.

Book Value

equals the original cost of the asset minus the current balance in Accumulated Depreciation

Service Life "useful life"

how long the company expects to receive benefits from the asset before disposing of it. We can measure service life in units of time or in units of activity

Equipment

machinery used in manufacturing, computers and other equipment, vehicles, furniture, and fixtures. The only thing you expense is the recurring cost of equipment (annual property insurance, and taxes)

Sustainability

meeting the needs of the present without compromising the ability of future generation to meet their own needs

Profit Margin

net income divided by net sales

Asset Turnover

net sales divided by average total assets.

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. We can physical deplete natural resources Sustainability

Overstated assets mean?

overstated income balance

Land Improvements

parking lots, sidewalks, driveways, landscaping, lighting systems, fences, sprinklers, and similar additions. Land Improvements life = definite (depreciates)

Basket Purchases

purchases more than one asset at the same time for one purchase price

Materiality

relates to the size of an item that is likely to influence a decision.

What is a more comparable way to judge companies?

return on assets

Depletion

the allocation of natural resources like oil, natural gas, and timber

Residual Life "Salvage life"

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

Depreciation cost

the asset's cost minus its estimated residual value

Back taxes

unpaid taxes from previous year

Straight-Line Depreciation Method

we allocate an equal amount of the depreciable cost to each year of the asset's service life.

The most intangible assets have a finite useful life that we can estimate

we estimate the intangible asset's service life and its residual value

If they are developed internally...

we expense to the income statement most of the costs for internally developed intangible assets as we incur those costs

Activity-Based Method

we instead allocate an asset's cost based on its use We first compute the average depreciation rate per unit by dividing the depreciable cost (cost minus residual value) by the number of units expected to be produced

Addition

when we add a new major component to an existing asset. We should capitalize the cost of additions because they increase, rather than maintain, the future benefits from the expenditure