Chapter 7

general rule in accounting for costs associated with LT assets

1. cost that provide benefit in the future are recorded as ASSET-->capitalized 2. costs that provide benefit only in current period are recorded as EXPENSE--> expenses

Land

title search fee title transfer fee back taxes real estate commissions legal fees surveying clearing and grading

depreciation for accounting is the "allocation of an assets cost to an expense over time

as the asset provides benefits

long term assets are reported on the balance sheet

at historical cost less depreciation, called accounting book value

The retirement of a long-lived asset differs from a sale in that upon retirement, no _____ is received

cash

reported on the balance sheet

cash prepaid assets/supplies-report amount purchased but not yet used accounts receivable- report at NRV=Acct rec- allowance Inventory- report at lower of cost or NRV

3 basic types of expenditures after acquisition

1. repairs and maintenance- if maintain given level of benefit, record as expense...if increase future benefit, record as asset 2. additions-record as asset 3.improvements-record as asset

Straight-line, activity-based, and declining balance refer to accounting methods commonly used to ______ PPE

Depreciate

a retirement or abandonment of an asset is different from a sale of an asset because

a loss must be recognized for the remaining book value no consideration is received

which of the following are commonly used depreciation methods

activity-based straight-line declining-balance

which of the following are expenditures for assets subsequent to acquisition

additions improvements repairs and maintenance

buildings (construction of new)

building permits architect fees construction interest incurred during construction

which of the following items typically are classified as equipment

computers and printers used in office machinery used in manufacturing furniture and fixtures

depreciation expense

cost - residual value/ estimated useful life

depreciation rate per unit

cost-RV/ # of units to be produced

book values of a PPE asset

cost-accumulated depreciation

depreciation expense/year=

depreciation rate X current years production

Machines used in manufacturing, computers, printers, vehicles, furniture and fixtures generally are classified as

equipment

copyright

exclusive right of protection to creator of published work like song, film, painting, book, software, granted for the length of creators life plus 70 years

patent

exclusive right to manufacture/use/process for 20 years

franchises

exclusive right to sell franchisor company's products within specified geographical area for specific period- contract

trademark/tradename

exclusive right to use symbol, word, slogan for indefinite number of 10 year periods

The key factor in classifying items as repairs and maintenance is that

future benefits are not provided beyond those originally anticipated from the asset

Acquisition cost

includes purchase price and any costs necessary to acquire asset and get it ready for use

acquisition cost

purchase price + expenditures necessary to ready asset for use includes cost of attorneys fees, filing, registration, successful legal defense of right to use intangible assets, design work for trademarks/ tradenames

when a PPE asset is disposed of:

record any additional depreciation for the current year record an entry for the disposition to" 1. remove assets book value 2.increase cash or other assets received in transaction 3.record gain or loss = sales amount- book value

goodwill is an intangible asset that is

recorded ONLY when a company is purchased by another AND the purchase price is greater than fair/market value of the net assets (Asset-liability) purchased

gain if

sale amount is greater than Book value increase in NI closed to retained earnings

loss if

sale amount is less than book value

equipment

sales tax shipping costs installation and testing cost

2 major categories

tangible assets intangible assets

The residual value of an intangible asset is usually

zero

acquisition cost of long term asset=

purchase price + any cost incurred necessary to get asset reach for use

Buildings (existing)

repair costs back taxes real estate commission

if intangible asset is developed internally by the company

research and development costs for patentable product and advertising costs using trademark/trade name are EXPENSED because of the uncertainty about whether the amounts will provide future benefits