Chapter 7: Plant Assets, Natural Resources, and Intangibles

Average total assets =

(beginning total assets + ending total assets) / 2

steps for solving DDB

1. 1/useful life x 2 2. multiply rate x beginning book value (original cost) -remember to ignore the RV of the asset in computing depreciation, except during the last year 3. for the last year (original cost-RV) - DE - DE - DE - DE = x

List the 4 categories of plant assets and their associated expense accounts.

1. Land-None (never depreciates) 2. Buildings, machines, and equipment (depreciation expense) 3. Furnitures and fixtures (depreciation) 4. Land Improvements (depreciation)

3 main types of long-lived asset transactions appear on the statement of cash flows

1. acquisitions (investing) 2. sales (investing) 3. depreciation (operating) ----capital expenditures are under investing----

The cost of constructing a building includes: (5)

1. architectural fees 2. building permits 3. contractors' charges 4. payment for material, labor, and overhear (watchman to guard material or putting a toilet for workers to use) 5. interest on money borrowed to finance construction

cost of land improvements include (4) why are land improvements separated from land

1. driveway signs 2. fences 3. sprinkler systems 4. paving the road -because these assets although located on land are subject to decay (whereas land isnt) and therefore should be depreciated

intangible assets fall into 2 categories

1. finite lives: can be measured, we record amortization 2. indefinite lives: not amortized, rather checked annually for any loss in value (Called impairment) and record a loss when this occurs. Goodwill is the most prominent ex. of an intangible asset with an indefinite life

2 step impairment process:

1. impairment test: if net book val > estimated future cash flow, asset is impaired 2. impairment loss = net book val - fair value

6 ex of intangible assets

1. patents 2. copyrights 3. trademarks 4. franchises 5. leaseholds 6. goodwill

The cost of land includes: (7)

1. purchase price 2. back property taxes 3. brokerage commission 4. legal fees 5. survey fees 6. removing any unwanted buildings 7. expenditures for grading and clearing land

when an existing building is purchased, costs include (4):

1. purchase price 2. brokerage commission 3. sales and other taxes 4. all expenditures to repair and renovate the building for its intended purpose

What does the cost of equipment include

1. purchase price 2. transportation from seller 3. insurance while in transit 4. sales and other taxes 5. purchase commission 6. installation costs 7. any expenditures to test the asset before its placed in service 8. equipment cost will include the cost of any special platforms ---"oiling before service" is part of the equipment's cost but "oiling after service" is then a expense

DDB method differs from others in 2 ways

1. residual value is ignored until the end 2. final year depreciation is a "plug"

how do you find partial year depreciation

1. solve for 1 year depreciation 2. multiple val. by x months/12

3 main depreciation methods

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

What is the journal for disposing of a not fully depreciated asset for no proceeds?

Accumulated Depreciation DEBITED Loss on Disposal of Equipment DEBITED (amount of net book value) Equipment CREDITED

journalized disposing an asset after it is fully depreciated

Accumulated Depreciation- machinery DEBIT Machinery CREDIT

what 4 things are involved when journalizing goodwill?

Assets (debited) , liabilities (credited) , goodwill (debited) , cash (credited)

___ _____ increase the asset's capacity or extends its useful life

Capital expenditure

___ _ ___ is best for assets that generate more revenue earlier in their useful life

DDB

which depreciation method? race horses cars, computers office furniture, fixtures

DDB

___ ___ ___ is the length of service expected from using the asset. It is an estimated/known amnt.

Estimated useful life estimated

Depreciation expense is reported on which financial statement

IS

how do you journalize an impairment

Impairment Loss on Long-Term Asset DEBITED Long-term asset (-A) CREDITED

_____ assets are useful because of the special rights they carry.

Intangible

ROA formula

Net income/Average total assets

____ measures how profitably management has used the assets that stockholders and creditors have provided the company.

ROA return on assets

residential rental property which depreciation method?

SL

an ___ ____ method writes off a larger amount of the asset's cost near the start of its useful life than the straight line method does.

accelerated depreciation method

Depreciation decreases the asset (through ___ ___) and decreases equity (through ___ ___)

accumulated depreciation depreciation expense

*** as an asset is used in operations.....

accumulated depreciation increases and the book value of the asset decreases

If an asset is impaired, the company is required to ___ the __ value downward to fair value

adjust the carrying -where fair value is based on the asset's estimated market value at the date of the impairment test

What is the related expense account with intangible assets?

amortization expense

Plant assets are recorded on the balance sheet at their ____ ____.

book value

______ means that the cost is added to an asset account rather than being expense immediately

capitalized

______ give the holder exclusive rights to reproduce and sell a book, musical comp., film, or other work of art

copyrights -granted by federal govt. -extend 70 yrs beyond the authors life

what 3 things must we know to begin to measure depreciation for a plant asset

cost estimated useful life estimated residual value

units of production formula

cost-RV/useful life, in units of production

formula for straight-line depreciation per year

cost-RV/useful life, in years

What is the formula for book value

cost-accumulated depreciation

because natural resources are physically used up, they undergo a process called ____

depletion

What is the related expense account associated with natural resources?

depletion expense (through cost of goods sold)

Leasehold improvements are ____ or ____ over the lease term

depreciated or amortized

Process of allocating a plant assets' cost to expense over its life

depreciation

The cost of land does/does not include the cost of paving, fencing, security systems, and lighting.

does not

the ____ ____ method computes annual depreciation by multiplying the asset's declining book value at the beginning of the year by a constant percentage

double declining balance

__ ___ ___= is the expected cash value of an asset at the end of its useful life.

estimated residual value

costs that maintain the asset to restore it to working order, rather than extending the asset's capacity or useful life, are recorded as _______

expenses

____ and ___ are privileges granted by a private business to sell a product or service in accordance with specified conditions.

franchise or license -resturant chains and sports organ.

when selling an asset, if cash received > Nbv, there is a

gain

a purchaser is willing to pay for ____ when the purchaser buys another company that has abnormal earning power

goodwill

the excess of the cost of purchasing another company over the sum of the market values of the acquired company's net assets

goodwill

____ occurs when the expected future cash flows (which approx. the expected future benefits) from a long-term asset fall below the asset's net book value

impairment

franchises often have finite/indefinite lives?

indefinite lives, so not amortized

Goodwill is/is not amortized because the goodwill of many entities increases in value

is not

The cost of land does not include the cost of paving, fencing, security systems, and lighting. Instead, these plant assets are called ____ _____ and they are subject to _______ expense.

land improvements, depreciation

improvements made to leased property

leasehold improvement

FedEx paints a logo on delivery trucks. These improvements are assets of FedEx even though the company may not own the truck. This is an example of

leasehold improvements

when selling an asset, if cash received < Nbv, there is a

loss

___ ___ such as oil, gas, coal mines, and timber are accounted for as long-term assets when they are purchased or developed. As the ___ ___ is extracted, its cost is transferred to inventory.

natural resources

tracks the flow of a ___ ___ from its raw state, through inventory, to cost of goods sold

natural resources ,depletion

DDB rate formula

net book value x 2/useful life

___ are federal govt. grants that give the holder the exclusive right for 20 years to produce and sell an invention

patents -intangible resource

___ ____ are long-lived tangible assets

plant assets

The cost of a plant asset includes what 4 things

purchase price taxes commissions other costs to make the asset ready for use

goodwill is only recorded when it is....

purchased, never when created

Depreciation in plant assets allocates cost against _____ it helps earn each period

revenue

Instead of amortization, companies with goodwill on their financial statements are required to perform ____ _____ test for goodwill

special impairment test

___ ___ method is best for plant assets that generate revenue evenly over time

straight line

most comapnies use _____ _____ depreciation for financial reporting, but the ______ method for tax purposes

straight line, DDB

in the __ _ method, depreciable cost divided by useful life to determine annual depreciation expense

straight-line

in the ___ __ method, an equal amount of depreciation is assigned to each year (or period) of asset use.

straight-line

If assets are disposed of for no proceeds before being fully depreciated...?

the company incurs a loss on the disposal in the amount of the asset's net book value

What is the working rule for measuring the cost of an asset?

the cost of any asset is the sum of all the costs incurred to bring the asset to its intended use.

distinctive identificiations of products or services -if definite useful life is set by a contract then.... -if indefinite life....

trademarks and tradenames or brand names -amortize cost over useful life -do not amortize

All expenses are expenditures. true or false

true but not all expenditures are expenses

In the ___ __ ____ method, a fixed amount of depreciation is assigned to each unit of output, or service, produced by the asset.

units of production

___ _ ___ is best for assets that wear out because of use

units of production

depreciation cost is divided by useful life in units to determine fixed amnt/unit

units of production method

Depreciation is caused as plant assets...

wear out, grow obsolete, and lose value over time