Exam #3
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The credit portion of the entry removes from the balance sheet that portion of the asset's cost estimated to have been used up during the current period. The debit portion of the entry allocates this expired cost to expense.
in an intangible asset account
where do you record patents
Accountable events
1. acquisition 2. allocation of the acquisition 3. sale or disposal
Depreciation
A decrease or loss in value
natural resources
A site acquired for the purpose of extracting or removing some valuable resource such as oil, minerals, or timber is classified as a natural resource, not as land. This type of plant asset is gradually converted into inventory as the natural resource is extracted from the site.
depletion
Allocation of the cost of a natural resource over its service life
Net Asset =
Assets - Liabilities and/or OE
"expensing" an item
Charging an expenditure directly to an expense account
capital expenditures
Expenditures for the purchase or expansion of plant assets and are recorded in asset accounts.
Allocation of a Lump-Sum Purchase
Several different types of plant assets may be purchased at one time. Separate asset accounts are maintained for each type of plant asset, such as land, buildings, and equipment.1 When land and buildings (and perhaps other assets) are purchased for a lump sum, the purchase price must be allocated among the types of assets acquired. An appraisal may be needed for this purpose.
Debit Amortization Expense Credit Intangible Asset
The accounting entry for amortization
Revenue expenditure
The payment of an operating expense necessary to earn revenue recorded on the expense account
accumulated depreciation
a contra-asset account, representing that portion of the asset's cost that has already been allocated to expense
higher; lower; reduce
accelerated depreciation leads to _____ charges early on and _______ Net Income but can ________ taxable income, this is used for tax returns
debit asset, credit expense account
accounting entry for good will
net identifiable assets
all assets except goodwill, minus liabilities
depreciation of a tangible asset kinda =
amortization of an intangible asset kinda =
Investing Activities
cash flows relating to acquisition and disposals of plant assets are classified as...
reduce; no; less
depreciation and amortization _____ net income but have ___ effect on Cash flows, this results in Net Income being ____ than Net Cash flows from operating activities
Accounts receivable
has no physical substance but is still a current asset
financial statement disclosures
estimates of residual value and useful life, differs from company to company and must be for reasonable cause --> consistency principle
sum-of-the-years'-digits method
form of accelerated depreciation which falls between double declining balance and the 150% declining balance methods. Rarely used today and especially not in smaller businesses
any amortization cost is written off immediately
if a trademark is discontinued or becomes doubtful what is done
no gain or loss
if cash = book value
record a loss (debit)
if cash is < Book value
...
the charge to an expense account is based on the assumption that the benefits from the expenditure will be used up in the current period, and therefore the cost should be deducted from the revenue of the period in determining the net income.
Good will
the difference when a business is sold above its market value
Requirement of revaluation
the fair market value can reliably measured and be applied to an entire class of plant assets
Fair Market Value
the price a willing buyer would pay a willing seller in a free market
normal return
the rate of return that investors demand in a particular industry to justify purchasing a business at fair market value
Amortization
the reduction of a loan balance through payments made over a period of time
Amortization (2)
the systematic write off to expense of the cost of an intangible assets over its useful life
no immediate effect on cash flows
the write down of impaired assets is an example of a non - cash charge or expense against income has what effect on cash flows
depletion of a natural resource
they do not depreciate, but gradually depletiated as the resource is extracted, once everything it taken out it is fully depleted
the assets cost, estimated residual value, and the estimated useful life
three variables to know when calculating depreciation
Book value; proceeds
to determine gain or loss on disposal of an asset compare ____ ____ to _____ from disposal
Revaluation process
under international standards, companies have an option to follow a ______ process in stead of historical costs during an assets life
MACRS
used by many businesses to help with income tax returns, also helps with smaller businesses so they do not have to compute depreciation and multiple ways. however, GAAP does not accept this method for publicly traded companies
intabgible assets
used in operation but has no physical qualities
cost
valuation of intangible asset
evidence of future benefit
what makes an expenditure an intangible asset
Cost of Plant Assets
includes all expenditures that are reasonable and necessary for getting the asset to the desired location and ready for use
double declining balance depreciation
Depreciation computations that produce larger amounts of depreciation in the early years of an asset's life and progressively smaller amounts as the asset ages.
revenue expenditure example
Expenditures for ordinary repairs, maintenance, fuel, and other items necessary to the ownership and use of plant and equipment
Research and development cost
Expenditures that may lead to patents, copyrights, new processes, and new products; must be expensed as incurred.
on the balance sheet in its own subgroup, but only is of significant value other wise it is recorded as an ordinary cost
How are intangible assets classified in financial statements
record a gain (credit)
If cash is > book value
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In brief, any material expenditure that will benefit several accounting periods is considered a capital expenditure. Any expenditure that will benefit only the current period or that is not material in amount is treated as a revenue expenditure.
1. recording cash received (Debit) 2. Removing accumulated depreciation (debit) 3. recoding a gain (credit) or loss (debit) 4. removing the asset cost (credit)
Journalize disposal of plant and equipment by
Modified Accelerated Cost Recovery System
MACRS stands for
straight line depreciation; higher
Most companies choose ______ ______ which shows a _____ Net Income, this is shown in financial statments
Causes of Depreciation
Physical deterioration and obsolescence
When this situation arises, a revised estimate of useful life should be made and the periodic depreciation expense decreased or increased accordingly.
What should be done if, after a few years of using a plant asset, management decides that the asset actually is going to last for a longer or shorter period than was originally estimated?
expenses; revenues
The units of output depreciation method makes matching ____ and ____ easier because of the the ability to determine total units with accuracy
when the cost is small it can be charged to an expense account immediately when the cost is large it will be amortized over its useful life and should not exceed the expected revenue period
What is done differently when the franchise has a small cost versus significant cost
capital expenditure (2)
all expenditures before the beginning of the generation of revenue
straight line depreciation
allocates an equal portion of depreciation expense to each period of the asset's expected useful life (cost - salvage value) / useful life
Patents
an exclusive right granted by the federal government for the manufacture and sales of a good
why is land not subject to depreciation
because of its unlimited term of existence and utility does not decline over time
Below; low; no
in the double declining balance method the good cannot depreciation _____ the book value, which lead to _____ or __ costs in its final years.
declining balance method
better matches depreciation with revenue generated , start by calculating straight line depreciation, then multiply that by two to get the double-declining rate, finally determine the depreciation expense by doing double-declining rate x Book value
"capitalize"
charging an expenditure to an asset account rather than to an expense account
usually minor so it is charged to an expense account when paid
charging copy right cost
units-of-output method
depreciation is based on output instead of the passage of time
1. Update depreciation to the date of disposal 2. journalize the disposal
disposal of plant and equipment
tangible assets
have physical substance, property subject to depreciation and the expense is stretched over its useful life
Impairment of Plant Assets
if the book value of an asset cannot be efficiently used up, the cost of the asset should be marked back down to the fair market value
International lil fact for ya
if the book value of an asset is increased because of revaluation, the increase is recorded in other comprehensive income and accumulated equity
treat them as operating expenses or an expense for the current period
if there is uncertainty what do companies determine for intangible expenditures
debit depreciation expense, credit accumulated depreciation
journal entry to record a depreciation expense
tangible asset not subject to depreciation
land
natural resources (2)
materials that are physically removed from their natural environment and converted into inventory
Accelerated methods of depreciation
methods of depreciation that result in higher depreciation charges in the first year; charges gradually decline in amount over the lives of fixed assets. Sum-of-the-years' digits and double declining balance are accelerated methods of depreciation
put on the balance sheet and are classified as property, plant, + equipment, once they are removed they represent inventory
natural resource accounting
notes payable or receivable
non-cash investing activities
example of intangible assets
patent, trademark, franchise
20; amortization should exceed that many years
patents usually last __ years which means what for amortization
the depreciation process drawn out
purchase cost --> as assets are purchases --> Balance sheet (Assets: Plant and equipment) --> as the services are received --> Income statement (Expenses: depreciation)
half-year convention
record one-half of a full year's depreciation in the year of acquisition and another half year in the year of disposal.
plant assets
represent a bundle of future services, long term prepaid expenses
Book Value
represents the portion of the asset's cost that remains to be allocated to expense in future periods. (cost - accumulated depreciation)
incidental costs
sales taxes on the purchase price, delivery costs, and installation costs.
Over the entire life of the asset, both the straight-line method and accelerated methods recognize the same total amount of depreciation.
straight line vs accelerated depreciaiton
The depreciation process
the allocation of the cost of a good over its useful life
the present value of future cash flows
the amount that a knowledgable investor would pay to receive that cashflow
more depreciation is noticed in periods where the asset is used to produce more output
what is the relation between depreciation and output in the units of output depreciation
when purchased from an existent owner
when are copy right costs material
when incurred, it is capitalized and amortized over a period of time
when do you record the expense for a trademark
at or near the end of the useful life
when does residual value = boo value
Acquisituon
when one company purchases most or all of another company's shares to gain control of that company
the asset should be written down to its fair market value and an impairment loss recognized
when the impairment of plant assets occurs, how is the worth of the asset recorded
balance sheet
where does the unused portion of assets be recorded
