Acc. Ch. 9 -

goodwill

An intangible asset that is created from such favorable factors as location, product quality, reputation, and managerial skill.

depletion is determined as follows

Step 1. Determine the depletion rate as follows: cost of resources / estimated total units of resource Step 2. Multiply the depletion rate by the quantity removed from the resource during the period. depletion rate x quantity removed

trade-in allowance

The amount a seller allows a buyer for a fixed asset that is traded in for a similar asset.(may be greater or less)

removed for sale

The asset is consumed by removing it from its land source. For example, timber is removed for use when it is harvested, and minerals are removed when they are mined.

construction in progress

The direct costs incurred in the construction, such as labor and materials, should be capitalized as a debit to an account entitled Construction in Progress. When the construction is complete, the costs are reclassified by crediting Construction in Progress and debiting the proper fixed asset account such as Building.

two parties to a lease contract are as follows

The lessor is the party who owns the asset. The lessee is the party to whom the rights to use the asset are granted by the lessor.

removed and sold over more than one year

The natural resource is removed and sold over a period of more than one year.

depletion expense

The process of transferring the cost of natural resources to an expense account.

boot

The remaining amount a buyer owes after the trade-in allowance when a fixed asset is traded in for a similar asset. (tax name of the remaining balance)

examples of costs that are considered an expense:

Vandalism Mistakes in installation Uninsured theft Damage during unpacking and installing Fines for not obtaining proper permits from governmental agencies

a cost that has been incurred may be classified as a ______, _____, or ____

fixed asset, investment, expense

examples of fixed assets? how long do they last? how are they used?

land, buildings, or equipment more than a year used in normal operations of a business

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) recently completed a project to merge U.S. and international standards on ___________

leasing

what should be in the lease disclosure in the financial statement?

length of the lease, termination rights, and renewal options.

what are investments? how are they recorded on balance sheets?

long-lived assets that are not used in the normal operations and are held for future resale investments

intangible assets

long-term assets that are used in the operation of a business, are not held for sale and are without physical qualities

fixed assets

long-term or relatively permanent assets such as equipment, machinery, buildings, and land PPE

fixed asset turnover ratio

measures the number of sales dollars earned per dollar of fixed assets. The higher the ratio, the more efficiently a company is using its fixed assets in generating sales. The ratio is computed as follows: sales/ average book value of fixed assets

straight line method

provides for the same amount of depreciation expense for each year of the asset's useful life

In addition to ________, the costs of acquiring fixed assets include all amounts spent getting the asset in place and ready for use

purchase price

initial cost

purchase price of the asset plus all costs to obtain and ready it for use

the steps to classifying costs

step 1 purchased item long lived : no = expense yes = step 2 is the asset used in normal operations : no = investment yes = fixed asset

amortization

the amount of cost to transfer to expense

assets depreciable cost

the difference between a fixed asset's initial cost and its residual value -assets cost that is allocated over its useful life as depreciation expense(if fixed asset has no residual value, then its entire cost should be allocated to depreciation)

residual value

the estimated value of the asset at the end of its useful life (estimated at the asset is placed into service) aka crap value, salvage value trad-in value

copyright

the exclusive right to publish and sell a literary, artistic, or musical composition

what is the advantage of leasing an asset?

the lessee has access to an asset without having to spend funds or obtain financing to buy the asset -expenses such as maintenance and repair costs may be the responsibility of the lessor. the risk of incurring additional cost because the asset becomes obsolete before the end of its useful life can be mitigated by leasing an asset.

what is critical to the success of a business?

their fixed assets

t/f Regardless of the type of lease, lease terms should be disclosed in the notes to the financial statements.

true

t/f fixed asset may be sold but should not be offered for sale as part of normal operations

true

gain vs loss of exchange

????

accelerated depreciation method

A depreciation method that provides for a higher depreciation amount in the first year of the asset's use, followed by a gradually declining amount of depreciation.

double-declining-balance method

A method of depreciation that provides for a declining periodic depreciation expense over the expected useful life of an asset.

units of activity method

A method of depreciation that provides the same amount of depreciation expense for each unit of an asset's activity, which may be expressed in hours, miles driven, or quantity produced.

commercial substance

Accounting for the exchange of similar assets depends on whether the transaction has commercial substance. An exchange has commercial substance if future cash flows change as a result of the exchange. If an exchange of similar assets has commercial substance, a gain or loss is recognized. In such cases, the exchange is accounted for similar to that of a sale of a fixed asset.

naturally occurring

An asset that is created through natural growth or naturally through the passage of time. For example, timber is a natural resource that naturally grows over time.

how do you determine straight-line percentage?

dividing 100% by number of years of expected useful life

expected useful life

estimated length of time asset will be used in normal operations -estimated at time the asset is placed into service

patents

exclusive rights to produce and sell goods with one or more unique features

Unnecessary costs that do not increase the asset's usefulness are recorded as an ________

expense

the 2 steps of units of activity method

1. determine the depreciation per unit as follows depreciation per unit= cost-residual value/ total estimated units of activity 2. compute the depreciation expense as follows depreciation expense = depreciation per unit x units of activity for period

what are the 3 steps of the double-declining-balance method

1. determine the straight-line percentage, using the expected useful life 2. determine the double-declining-balance rate by multiplying the straight-line rate 3. compute depreciation expense by multiplying the double-declining-balance rate times the book value of asset

what are the two common misunderstandings that exist about depreciation as used in accounting include

1. does not measure a decline in the market value of a fixed asset. it is an allocation of the cost of a fixed asset to expense over the asset's useful life (thus, the book value of a fixed asset (cost less accumulated depreciation) usually does not agree with the asset's market value. This is justified in accounting because a fixed asset is for use in a company's operations rather than for resale.) 2. depreciation does not provide cash to replace fixed assets as they wear out. this misunderstanding may occur because depreciation unlike most expenses, does not require an outlay of cash when it is recorded

characteristics of assets

1. exist physically and thus are tangible assets 2. owned and used by the company in its normal operations 3. not offered for sale as part of normal operations

characteristics of natural resources

1. naturally occurring 2. removed for sale 3. removed and sold over more than one year

3 depreciation methods used most often are as follows

1. straight-line depreciation 2. units-of-activity depreciation 3. double-declining-balance depreciation

3 factors that determine the depreciation expense for a fixed asset are as follows

1. the asset's initial cost 2. the asset's expected useful life 3. the asset's estimated residual value

capital expenditures

Costs that benefit only the current period or costs incurred for normal maintenance and repairs of fixed assets.

revenue expenditures

Costs that benefit only the current period or costs incurred for normal maintenance and repairs of fixed assets.

what are the important properties of fixed assets that require management attention

Fixed assets require a long-term commitment. Mistakes in acquiring fixed assets can be very costly and difficult to reverse; thus, managers must take special care in acquiring fixed assets. Fixed assets wear out over time and need to be replaced. Managers must monitor fixed assets and know when to replace fixed assets due to wear and tear or obsolescence. Fixed assets need to be maintained during use. Managers need to develop maintenance programs to keep the investment in fixed assets productive. Fixed assets often require significant funds to purchase. Managers must acquire funding internally or by other sources to finance the purchase of fixed assets.

overtime fixed assets with the exception of land lose their ability to provide services which means should be recorded as ____________ over their useful lives

expense

depreciation can be caused by physical or functional factors

Physical depreciation factors include wear and tear during use or from exposure to weather. Functional depreciation factors include obsolescence and changes in customer needs that cause the asset to no longer provide services for which it was intended. For example, equipment may become obsolete due to changing technology.

what does goodwill allow

a business to earn a greater rate of return than normal

lease

a contract for the use of an asset for a period of time

trademark

a name, term, or symbol used to identity a business and its products

revised depreciation expense=

book value- revised residual value / revised remaining useful life

what are examples of related fixed asset accounts that are debited

building, machinery and equipment, land, and land improvements

what are accumulated depreciation account called?

contra accounts or contra asset accounts

annual depreciation =

cost - residual value / useful life

initial cost - residual value =

depreciable cost

recording the cost of fixed assets as an expense

depreciation

what do you do with fixed assets that are no longer useful

discard or sell