Financial Accounting - Ch. 7

Property, Plant and Equipment

Tangible assets that can be seen and touched. Depreciated over the accounting periods in which the asset is used and benefits are received

Intangible asset,

if the intangible asset has an indefinite life, it is not amortized but is reviewed at least annually for impairment.

Depletion

process of allocating the cost of the natural resource to each period in which the resource is used. FIRST calculate depletion rate: (COST - RESIDUAL VALUE) / RECOVERABLE UNITS, SECOND depletion is calculated: DEPLETION RATE X UNITS RECOVERED

Intangible operating assets

represent future economic benefit to the company, but lack physical substance. Example: patents, copyrights, trademarks, leaseholds, organization costs, franchises, and goodwill. The cost of developing the asset is EXPENSED as incurred and normally recorded as research and development expense.

Impairment

when fair value of the asset falls significantly below the book value of the asset. permanent decline in the future benefit or service potential of an asset. May be due to numerous factors including too little depreciation expense being recorded in previous years or obsolescence of the asset.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded for an asset since the asset was acquired

Depletion rate

(COST - RESIDUAL VALUE) / RECOVERABLE UNITS

Depreciation

A process of cost allocation, not an attempt to measure the fair value of an asset

Book Value

Cost of the asset - its accumulated depreciation

Depletion calculation

DEPLETION RATE X UNITS RECOVERED

Intangible Asset

Do not have physical substance. Generally result from legal and contractual rights

Accumulated depreciation/depreciation expense

Investors are concerned with the condition and age of a company's Fixed Assets. Which of the following would help an investor estimate the average age of a company's Fixed Assets?

Fixed asset turnover ratio

NET SALES/ AVERAGE FIXED ASSETS - which measures efficiency in the use of fixed assets. the more efficiently a company uses its fixed assets, the higher the number will be.

Natural Resources

Naturally occurring materials that have economic value

Balance sheet as a contra-asset

On which financial statement is accumulated depreciation reported and how is the account classified?

Residual Value

The amount of cash or trade-in consideration that the company expects to receive when an asset is retired from service

the exchange price at the time the asset is purchased.

The historical cost principle requires that a company record its Fixed Assets at:

Useful Life

The period of time over which the company anticipates deriving benefit from the use of the asset

$833.33

The straight-line depreciation method allocates an equal amount of an asset's cost to depreciation for each year of the asset's life. Assume an asset costs $100,000, has an expected useful life of 10 years, and a residual value of zero. Using straight-line depreciation, how much depreciation expense will be recognized for one month? (Asset cost - residual value)/useful life = depreciation expense for the period. ($100,000 - $0)/(10 years x 12 months per year) = $833.33 depreciation expense for one month.

The book value of the asset is less than the proceeds received from disposal.

When a fixed asset is disposed of, the asset's book value (cost and accumulated depreciation) are removed from the accounting records. At that time, any gain or loss on disposition of the asset is recognized. Which of the following statements describes a gain?

Matching principle

Which accounting principle provides the conceptual basis for measuring and recognizing depreciation?

None, since under all depreciation methods, the maximum amount of accumulated depreciation cannot exceed depreciable cost

Which depreciation method will always result in the total amount of depreciation expense (accumulated depreciation) equal to the historical cost of the asset?

A loss from impairment is recognized.

Which of the following statements is always true of the accounting procedure when an operating asset is found to be impaired?

the Internal Revenue Code.

While a company will choose between the three depreciation methods as it prepares its financial statements, the depreciation method used in preparing the tax return is specified by

debit

a loss on disposal of equipment will be recorded as a

Intangible assets are recorded as

any expenditure necessary to acquire the asset and to prepare the asset for use.

Amortization

cost of intangible asset with a finite life is allocated to accounting periods over the life of the asset to reflect the declining in service potential.

Organizational Costs

costs related to legal fees, stock issuance, accounting fees, and promotional fees. Costs are treated as an EXPENSE in the period the cost is incurred.

disposal of building sold for cash

debit cash and accumulated depreciation(to remove the amount associated with the building) and credit the building account.

Revenue Expenditures

expenditures that do not increase the future economic benefits of the asset. expensed in the same period the expenditure was made. Example: ordinary repair and maintenance of an asset.

Capital Expenditures

expenditures that extend the life of an asset, expand the productivity capacity, increase efficiency or improve the quality of the product. added to asset account and are subject to depreciation. Example: extraordinary or major repairs, additions, remodeling or buildings, and improvements sometimes called betterments.

Involuntary disposal

occurs when assets are lost or destroyed through theft, acts of nature, or by accident.

Voluntary disposal

occurs when the company determines that the asset is no longer useful.