Chapter 8

Units-of-production formula

((cost-residual value) divided by estimated total production)) then this whole amount times actual production. very subjective

depreciation formula for revision of an estimate

(book value minus new residual value) multiplied by (1/remaining life).

Finding Accumulated Depreciation for double-declining

(cost times * Years in existence/useful life) plus (cost - previous amount) times (years in existence divided by estimated useful life.)

Needed to calculate remaining life

1) Acquisition cost. 2) Estimated useful life. 3) estimated salvage value. DEPRECIATION EXPENSE IS AN ESTIMATE.

Entries for a disposal

1) Adjusting entry to update depreciation expense and accumulated deprecation for the last year used. 2) Entry to record the disposal.

Testing for impairment

1) to see if it happens notice if estimated future cash flows are lower then the current book value. 2) if considered impaired must recognize a loss for the difference between the book and fair value.

Natural resources

Metal, wood. they occur in nature and are wasting assets.

Fixed asset turnover formula

Net sales divided by average net fixed assets

Purchasing property for equity

Or purchasing for fair value. Often trade stock but we need to determine the cash equivalent fair value of that stock. You would debit the new asset for the total amount. They credit common stock, additional paid in capital and cash.

Book value for approximate remaining life

We determine this by looking at the current book value to the original cost. Say we have an asset that is 10% of it's original cost so we can say that 10% of it's remaining life is still out there.

What to capitalize

anything that is reasonably necessary for getting an asset ready to go is subject to this treatment. Maintenance is not included as it will begin later.

Franchise

contract based right to use a name or sell products in a geographical region.

Ordinary repairs and maintenance

expenditures that are relatively frequent and reoccurring. these help maintain the ability to produce of an asset in the current period or time frame. they are recorded as expenses.

Improvements

expenditures that improve the assets long term efficiently, life or capacity and are usually infrequent. they are recorded as an increase in assets not as expenses.

Patent

granted by the government usually because of an invention or development. gives the right to use, create and sell the invention.

Fixed asset turnover

how effective is a company at using fixed assets to make revenue. lower may indicate expansion in anticipation of future sales but generally you want this ratio higher.

Estimated useful life

how long an asset is expected to actually be purposeful to an owner.

Technology

includes costs for computer systems and website creation. basically using and creating usable resources via modernization.

definite lives

intangible assets that will eventually expire. uses straight-line method. amortization

capitalized interest

interest expenditures included in the cost of a self-made asset. Balance sheet items that are required to get the asset usable.

Methods and Tax reporting

is is legal to report using different system for your taxes and financial statements. for taxes firms usually follow the least and latest rule.

Financing or Capital Leases

long-term, in essence these leases are an acquisition. they are listed on the balance sheet with all pertinent lease obligations.

Units-of-production Depreciation

method that allocates the depreciable cost of an asset over its useful life by comparing how the periodic output relates to the total estimated output.

Straight-Line formula

most used formula. (cost - residual value) times (1/Useful life rate) equals depreciation expense. Notice all changes remain consistent.

declining-balance depreciation

net book value of an asset is spread out over useful life using a multiple of the straight-line rate. more depreciation in early years.

Intangible assets

no physical form. usually amount to special rights.

indefinite lives

not amortized but you still need to review it for impairment. use qualitative factors to determine if less then fair value.

copyright

right to publish, use and sell a literary, musical or artistic work.

amortization

same thing as depreciation only for intangibles.

Operating leases

short-term leases and are very flexible. these are not reported on the balance sheet at all.

depletion

systematic use and allocation of natural resources over period we can exploit them.

Long-Lived assets

tangible and intangible that are going to used to keep operations going over a number of years.

Land

tangible asset used in operations. the only type of fixed asset that is not considered to depreciate.

Net book value

the estimated remaining value of a long lived asset less depreciation or amortization or depletion. (acquisition cost - any of those)

Goodwill

the excess prices of a business over the fair value of the acquired assets and liabilities. therefore we deal with this mostly in terms of mergers and acquisitions.

Trademark

the legal right to use a unique name, image, slogan or branding. Think mickey mouse or mcdonald's m. Unlimited life and are not amortized.

acquisition cost

the net cash equivalent amount paid or to be paid for an asset. It could be seen as invoice price minus discounts equals net cash paid then plus all fees to achieve total cost.

depreciation

the process of distributing cost of long lived assets over their useful lives using a rational system that allocates cost. does not apply to land.

straight-line depreciation

this tool allocates the depreciable cost of any asset equally over a set period known as useful life.

Declining-Balance method formula

used when asset is considered superior at the start of it's life. accelerated form of depreciation. (cost - accumulated depreciation) times (2/ useful life) equals depreciation expense.

Salvage value

what the company estimates or predicts can be recovered after disposal costs when an asset's useful life ends.

Basket purchases

when land, property and equipment are all purchased together. the cost is distributed to each asset in proportion to the individual assets market value.

Impairment

when the asset can no longer generate sufficient cash flows.

tangible assets

you can actually hold these assets our touch them.

Assets by construction

you can create your own assets in theory. costs include everything needed to build and the interest incurred during construction which is known as capital interest. The cost of building would include things like wages.

Licenses and Operating Rights

you get these through agency or government contracts. they permit owners to use a public property to do business.