Financial Chapter 7
Recording the disposition of PPE-
When recording the lost asset, consider the depreciation when considering loss (same goes for gain). Record depreciation expense and then do the math for the rest of it.
What validates impairment?
When the cash flows generated by the asset are less than the book value
When are assets capitalized?
When they have service potential over 1 year.
Can natural resources be restored or replaced?
Yes, but by an act of nature. Replanting and growth. Depends on the natural resources.
How long are operating assets held by a company?
Until their service potential has been exhausted.
What happens with the use of a higher usage life and higher residual?
It will lower the annual amount of depreciaiton expense recognized on the income statement
What is NOT subject to depreciation?
Land
What is considered PPE?
Land, Land improvements, Buildings, and Equipment.
What is the Straight Line Depreciation Equation?
(Cost-Residual Value)/Expected Useful Life
What are the three categories of operating assets?
1) PPE 2) Intangible assets 3)Natural Resources
What is the Straight Line Rate?
1/Useful Life
What is the most common multiplier in the declining balance rate method?
2
How do you get the current book value of an asset?
Subtracting the accumulated depreciation from the asset .
What does the historical cost principle require regarding recording the cost of a fixed asset?
A company must record its fixed assets at the exchange price at the time the asset is purchased.
What is accumulated depreciation recorded as on the balance sheet?
A contra-asset
What type of process is depreciation?
A cost allocation process. NOT an attempt to measure the fair value or obtain some other measure of the assets value?
What is an impairment of an asset?
A permanent decline in the future benefit or service potential of an asset.
What is the total cost of an asset?
All expenses that go into allowing the asset to be used in operation. (Historical cost principle)
How much depreciation is allocated with the straight line method?
An equal amount is recorded in each period of the asset's life.
Why compute the depreciation expense using the units of production method?
As the service potential of a fixed asset declines, the cost of the asset is allocated as an expense among the accounting periods which the asset is used and benefits are received.
How are operating assets recorded?
At COST
How do you get the depreciable cost?
Cost of asset - residual value
What are the three aspects of an asset needed to examine when determining cost and depreciation?
Cost, useful life, residual value
What costs are capitalized?
Costs of preparation.
What is the journal entry when disposing of an asset?
Credit the asset account, debit the expense account. Account for loss, or gain if selling the asset. ACCOUNT FOR DEPRECIATION.
What is the declining balance depreciation expense?
DBDE= Declining Balance Rate X Book Value
What is the Depreciation Cost per Unit ratio?
DCpU= (Cost-Residual Value)/Expected Usage of the ASset
How do you record a journal entry for patents/trademark/copyright amortization?
Debit amortization expense, patent
How do you record a journal entry for depletion?
Debit inventory, credit accumulated depletion
How do you record a journal entry for impairment?
Debit loss from impairment, credit equipment
How do you journal straight line depreciation?
Debit to depreciation expense, credit to accumulated depreciation
What is the declining balance depreciation rate?
Declining Balance Rate = (m) X Straight-Line Rate
What is the process of allocating cost to natural resources?
Depletion
What is the equation for depletion expense?
Depletion = Depletion Rate X Units recovered
What is the depletion rate?
Depletion Rate=(Cost-Residual Value)/Recoverable Unites
When depreciation is recorded each period, what account is debited?
Depreciation expense
The average age of the fixed assets is computed by:
Dividing accumulated depreciation by the depreciation expense.
How is the depreciation spread out with the declining balance method?
It results in a larger amount of depreciation expense in the early years of an asset's life relative to the straight-line method. The accelerated methods result in a smaller amount of depreciation expense in the later years of an asset's life.
How does management differ between capital and revenue expendiutres?
Exercising professional judgement
What are revenue expenditures?
Expenditures that do not increase the future economic benefits ofthe asset.
What are expamples of capital expenditures?
Extraordinary or major repairs, additions, remodeling of buildings, and improvements.
What is the equation used to decide if an asset is impaired or not?
Fair Value - Book Value. If the value is negative, there is a loss from impairment.
What is impairment?
Impairment is a permanent decline in the future benefit or service potential of an asset. The assets book value should be reduced to reflect this reduction in service potential.
How does straight-line depreciation method allocate depreciation?
It allocates an equal amount of an assets cost to depreciation expense for each year of the asset's useful life.
When is revision in depreciation accounted for?
It can be accounted for in current and future periods
What happens are the service potential of an asset declines?
It is allocated as an expense- depreciation, amortization, and depletion.
Explain depreciation
It is the allocation of the cost of a tangible good of the life of the item, it is designed to capture the declining service potential of a fixed asset.
What are operating assets?
Long lived assets that are used by the company in the normal course of operations. Represent future economic benefits.
What is the method most companies use as far as tax depreciation goes?
MACRS
What factors does management use in selecting a depreciation method?
Management should select the method that best matches the pattern of decline in service potential of the asset. The method should be consistently applied over time.
How does depreciation for partial years work?
Months depreciated/12
What is the declining balance depreciation method?
Multiplying the declining book value of an asset by a constant depreciation rate.
Are salaries revenue or capital expenditure?
NEITHER
Is research and development an intangible asset?
NO
Does the method used for asset depreciation need to be the same as the tax return?
NOPE
Does residual value matter in the double declining method?
NOPE, not until the end.
What are considered intangible assets?
Patents, copyrights, trademarks, franchises, goodwill
How is the units of production method measured?
Potential is proportional to the usage of the asset and asset usage is gauged by a measure of productive capacity.
Are small repairs revenue or capital expenditure
Revenue
Normal repair and maintenance of an asset is an example of what?
Revenue expenditure
What are the three patterns of depreciation?
Straight line, declining balance, units of production
Choosing between the depreciation methods:
Straight line- constant amount of depreciation Declining- accelerates the assignment of an asset's cost to depreciation expense Unit- measuring an asset's use in each period
What is the difference between straight-line and declining balance method?
The SLM applies a depreciation rate to the depreciable cost of the asset. The declining balance method multiplies a depreciation rate by the book value of the asset.
How do historical cost principles apply to recording the cost of a fixed asset?
The amount is generally the cash paid- if not, fair value of asset.
What happens to any expenditures that are not included as part of the cost?
The are expensed immediately.
Why must a lower amount of depreciation expense by recorded in the last year of the asset's life?
The book value cannot be depreciated below its residual value.
What should a company do with an impaired asset?
The company should reduce the asset's book value to its fair value in the year the impairment occurs.
How is the cost allocated regarding natural resources?
The cost is allocated to each unit of natural resouce removed.
What is the cost of a fixed asset?
The cost is any expenditure necessary to acquire the asset and to prepare the asset for use.
What happens with the cost of natural resources when acquired?
The costs are capitalized.
What is it called when the multiplier is 2?
The double declining balance method.
What is depreciation?
The process of allocating in a systematic and rational manner, the cost of a tangible fixed asset to expense over the assets useful life.
When are revenue expenditures expensed?
The same period the expenditure is made.
The cost principle requires that companies record fixed assets at:
Their historical cost
What happens to recurring costs that benefit a period of time, not the assets life?
They are expensed instead of capitalized.
What are capital expenditures?
They extend the life of the asset, expand the productive capacity, increase efficiency, and imporve the quality of the product.
What happens with the cost of capital expenditures?
Theya re added to an asset account and are subject to depreciation- relatively large dollar amounts.
How are tax depreciation rules designed?
To stimulate investment in operating assets and, therefore, are not guided by the matching principle. Tax depreciation rules enable companies to save cash by delaying the payment of taxes.
Why would an asset be impaired?
Too little depreciation expense being recorded in previous years, or obsolescence of the asset.
How is the depreciation cost per unit expense measured?
UPDE= Depreciation Cost per Unit X Actual Usage of the asset
What is the fair value of an asset?
the estimated amount of cash that would be required to acquire the asset.
