MGT Chapter 8

What is the accumulated amortization recorded on?

balance sheet

trademark or trade name

a symbol, name, phrase, or jingle identified with a company, product, or service.

indefinite life(intangible)

meaning that no legal, regulatory, contractual, competitive, economic, or other factors limit its useful life—it is not amortized.

land improvements

additions to land and have limited useful lives.

intangible assets

nonphysical assets (used in operations) that give companies long-term rights, privileges, or competitive advantages.

Examples of ordinary repairs

normal costs of cleaning, lubricating, changing oil, and replacing small parts of a machine.

Examples of goodwill

superior management, skilled workforce, quality products or services, or other competitive advantages.

plant assets

tangible assets used in a company's operations that have a useful life of more than one accounting period. also called plant and equipment; property, plant and equipment (PP&E); or fixed assets percentage of total assets for several companies

Depreciation

the process of allocating the cost of a plant asset to expense while it is in use. Depreciation does not measure the decline in the asset's market value or its physical deterioration.

What are the factors in computing depreciation?

(1) cost (2) salvage value (3) useful life.

Revised Straight-Line Depreciation Formula

(Book value−Revised salvage value)/ (Revised remaining useful life)

limited life

(See useful life.) Limited life for intangible assets can be caused by laws, contracts, or other reasons.

straight line depreciation formula

(cost - salvage value) / useful life

What are the three steps to compute the depreciation?

1) Compute the asset's straight-line depreciation rate. 2) Double the straight-line rate. 3) Compute depreciation by multiplying this rate by the asset's beginning-period book value.

What is the most common accelerated method?

A depreciation rate is the most common accelerated method.

straight line depreciation steps

A two-step process: 1) Compute the depreciable cost of the asset(aka cost to be depreciated.) It is computed as asset total cost minus salvage value. 2) The depreciable cost is divided by the number of accounting periods in the asset's useful life.

Is it TRUE or FALSE: The book value of the asset when using straight-line is always greater than the book value from using double-declining-balance, except at the beginning and end of the asset's useful life, when it is the same.

ANSWER: TRUE The book value of the asset- Always greater than the book value from using double-declining-balance. Except at the beginning and end of the asset's useful life, when it is the same.

Impairment

An intangible asset that is not amortized is tested annually for impairment—if necessary, an impairment loss is recorded.

Examples of Franchises and licenses (intangible assets)

Anytime Fitness, Firehouse Subs, and Major League Baseball

Asset Book Value (aka Book Value) formula

Asset's acquisition costs minus accumulated depreciation

Change in an accounting estimate

Change in an accounting estimate that results from new information, subsequent developments, or improved judgment that impacts current and future periods.

Formula for DDB(double-declining-balance ) depreciation

DDB depreciation = (2 × Beginning-period book value)/Useful life.

extradordinary repairs example

Delta Air Lines reports, "modifications that ... extend the useful lives of airframes or engines..."

Give an example of a units of production method

EX: A builder might use a piece of equipment for a month and then not use it again for several months.

What is goodwill recorded as? Is it amortized?

Goodwill is recorded as an asset, and it is not amortized. Instead, goodwill is annually tested for impairment.

Are all assets that lack physical substance imply that it is an intangible asset? Give examples based on your answer.

Lack of physical substance does not necessarily imply an intangible asset. Notes and accounts receivable- lack physical substance but are not intangibles.

examples of trademark or trade name

Nike Swoosh, Marlboro Man, Big Mac, Coca-Cola, and Corvette.

lump-sum price(aka group, bulk, or basket purchase)

Plant assets sometimes are purchased as a group in a single transaction allocate the cost to the assets acquired based on their relative market (or appraised) values.

Depletion

Process of allocating the cost of natural resources to periods when they are consumed.

Accounting for Disposals of Plant Assets

Record depreciation up to the date of disposal—this also updates Accumulated Depreciation. Record the removal of the disposed asset's account balances—including its accumulated depreciation. Record any cash (and/or other assets) received or paid in the disposal. Record any gain or loss—equal to the value of any assets received minus the disposed asset's book value.

If our estimate of an asset's useful life and/or salvage value changes, what should we do?

Revising an estimate of the useful life or salvage value of a plant asset(aka a change in an accounting estimate.) Only affects current and future financial statements. Do NOT go back and restate (change) prior years' statements. Applies to all depreciation methods.

impairment

The diminishment of an asset value/ A permanent decline in the fair value of an asset relative to its book value.

Asset Book Value (aka Book Value)

The net balance sheet amount

units of production method

The use of some plant assets varies greatly from one period to the next. When equipment use varies from period to period--> units-of-production depreciation method- better match expenses with revenues. Units-of-production depreciation charges a varying amount for each period depending on an asset's usage.

Cost determination

To be recorded as part of the cost of a plant asset, an expenditure must be normal, reasonable, and necessary in preparing it for its intended use. If an asset is damaged during unpacking, the repairs are not added to its cost. Instead, they are charged to an expense account. Costs to modify or customize a new plant asset are added to the asset's cost.

Goodwill

a company's value exceeds the value of its individual assets and liabilities.

What is a depreciation rate?

a depreciation rate- a multiple of the straight-line rate. a common depreciation rate(aka double-declining-balance (DDB))- double the straight-line rate.

What is amortization similar to?

amortization is similar to depreciation

salvage value(aka residual value or scrap value)

an estimate of the asset's value at the end of its useful life. The amount the owner expects to receive from disposing of the asset at the end of its useful life. If the asset is expected to be traded in on a new asset, its salvage value is the expected trade-in value.

capital expenditures (aka balance sheet expenditures)

are costs of plant assets that provide benefits for longer than the current period. They increase the asset on the balance sheet.

ordinary repairs

are expenditures to keep an asset in good operating condition are revenue expenditures- means that their costs are reported as expenses on the current-period income statement.

straight line depreciation

charges the same amount to each period of the asset's useful life.

Machinery and Equipment

consist of all costs normal and necessary to purchase them and prepare them for their intended use.

What is accumulated depreciation and cost recorded on? cost and accumulated depreciation of plant assets on the balance sheet.

cost and accumulated depreciation of plant assets on the balance sheet. accumulated depreciation- on balance sheet, contra asset account

Examples of cost

cost of a machine: includes invoice cost minus any discount, plus necessary shipping, assembling, installing, and testing costs. EXS of Cost: The costs of building a base for a machine, installing electrical hookups, and testing the asset before using it in operations.

Building Costs

costs of purchasing or constructing a building that is used in operations.

Revenue expenditure(aka income statement expenditures)

costs that do not materially increase the plant asset's life or capabilities. They are recorded as expenses in the current period's income statement.

Land Account

earth's surface and has an indefinite (unlimited) life.

patent

exclusive right granted to its owner to manufacture and sell a patented item or to use a process for 20 years. If the owner engages in lawsuits to successfully defend a patent, the cost of lawsuits is debited to the Patents account; if the defense is unsuccessful, the book value of the patent is expensed. However, the costs of research and development leading to a new patent are expensed when incurred. A patent's cost is amortized over its estimated useful life (not to exceed 20 years)

extradordinary repairs

expenditures that extend the asset's useful life beyond its original estimate.

Betterments (Improvements)

expenditures that make a plant asset more efficient or productive involves adding a component to an asset or replacing an old component with a better one and does not always increase useful life.

copyright

gives its owner the exclusive right to publish and sell a musical, literary, or artistic work during the life of the creator plus 70 years, although the useful life of most copyrights is much shorter. identifiable cost of many copyrights is the fee paid to the Copyright Office. Identifiable costs of a copyright are capitalized (recorded in an asset account) and amortized by debiting an account called Amortization Expense—Copyrights.

What is measured as the excess of the cost of an aquired entity over the value of the aquired net assets?

goodwill

Which of the following intangible assets is not amortized using the straight line amortization? goodwill leasehold copyright patent

goodwill is not amortized using the straight line amortization

accelerated depreciation method

has more depreciation in the early years and less depreciation in later years.

Building Costs Examples

include its purchase price, brokerage fees, taxes, title fees, and attorney fees. includes all expenditures to ready it for its intended use, including any necessary repairs or renovations. Costs of construction also include design fees, building permits, and insurance during construction. However, costs such as insurance to cover the asset after it is placed in use are operating expenses.

Land Account Cost Examples

includes costs necessary to make it ready for its intended use. land is purchased for a building site- cost includes: the total amount paid for the land including any real estate commissions title insurance fees, legal fees accrued property taxes paid by the purchaser. Payments for surveying, clearing, grading, and draining also are included in the cost of land. Other costs include government assessments, whether incurred at the time of purchase or later, for items such as public roadways, sewers, and sidewalks. Reason included- permanently add to the land's value (and are not depreciated as they are not the company's responsibility). Land purchased as a building site can include unwanted structures. The cost of removing those structures, less amounts recovered through sale of salvaged materials, is charged to the Land account.

Cost

includes expenditures necessary to get an asset in place and ready for use.

What is depreciation expense recorded on?

income statement

Amortization

its cost is expensed over its estimated useful life

useful life(aka service life)

of a plant asset- the length of time it is used in a company's operations. Useful life- might not be as long as the asset's total productive life.

When is goodwill recorded?

only when an entire business is purchased

land improvements examples

parking lot surfaces, driveways, walkways, fences, landscaping, and lighting systems. Also includes costs necessary to make those improvements ready for their intended use.

limited life examples

patents, copyrights, and leaseholds.

intangible assets examples

patents, copyrights, licenses, leaseholds, franchises, goodwill, and trademarks.

Machinery and Equipment Costs Examples

purchase price taxes transportation charges insurance while in transit installing, assembling, and testing of the machinery and equipment.

What is amortization recorded as?

recorded in a contra account (Accumulated Amortization).

What does the disposal of an intangible asset involve?

removing its book value, recording any other asset(s) received or given up, and recognizing any gain or loss for the difference.

Betterments (Improvements) examples

replacing manual controls on a machine with automatic controls. One special type of betterment is an addition, such as adding a new wing or dock to a warehouse.

Franchises and licenses (intangible assets)

rights that a company or government grants an entity to sell a product or service under specified conditions. costs of franchises and licenses are debited to a Franchises and Licenses asset account and are amortized over the life of the agreement