Accounting Chapter 7
trademark
a word, slogan, or symbol that distinctively identifies a company, product, or service (10 years)
companies record lower taxable income using
accelerated method (MACRS)
copyright
an exclusive right of protection given by the U.S. Copyright Office to the creator of a published work such as a song, film, painting, autograph, book, or computer software
patent
an exclusive right to manufacture a product or to use a process (20 years)
intangible assets with an indefintie useful life (goodwill and most trademarks)
are not amoritized
goodwill recorded
as an intangible asset in the balance sheet ONLY when purchased as a part of the aquisition of another company
reporting purchased intangibles
at their original cost + all other costs, such as legal and filing fees, necessary to get the asset ready for use
improvement (cost of replacing a major component of an asset)
capitalize it to the Equiptment account - usually increases future benefits
addition (when we ass a new major component to an exisiting asset)
capitalize the cost of additions - because they increase, rather than maintain, the future benefits from the expenditure
double-declining (comparison)
creates more depreciaiton in earlier years and less depreciation in later years
declining-balanceand straight-line will result in
same total depreciation over the asset's service life
basket purchase
sometimes companies purchase more than one asset at the same time for one purchase price
companies record higher net income using
straight-line
most common method
straight-line method
net assets (in good will)
tangible and intangible assets minus the fair calue of liabilities used
residual value (salvage value)
the amount the company expects to receive from selling the asset at the end of its service life
depreciation
to decribe process when applied to property, plant, and equiptment
depletion
to describe the cost allocation process when it applies to natural resources
depreciation expense
depreciable cost/service life
depreciation rate per unit =
depreciable cost/total units expected to be produced
because land's service life never ends it is NOT
depreciated
capitalize
describes the recording of as expenditure as an asset
Goodwill
difference between purchase price of a company and the fair calue of all its identifiable net assets
book value
equals the original cost of the asset minus the current balance in Accumulated Depreciation (by increasing accumulated depreciation each period, we are reducing the book value of equiptment)
repairs and maintenance expenditures (to continue its productive activity)
expense - because they maintain a given level of benefits in the period incurred
advertising and research & development
expense these intangible assets as we incur them
reporting intangible assets that are developed internally
expense to the income statement most of the costs for internally developed intangible assets as we incur those costs
amortization
intangible assets being (depreciated/depleted)
capitalized interest
interest costs we ass to the asset account rather than recording them as interest expense (in keeping with the matching principle - expenses are to be matched with revenues (included on the same income statement)
material
item said to be " " if it is large enough to influence a decision
We record a long term asset as...
its cost + all expenditures necessary to get the asset ready for use
*Tangible assets include
land, land improvements, buildings, equiptment, and natural resources
franchises
local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area
exchange
occurs when two companies trade assets
natural resources
oil, natural gas, timber, salt (we can physically use up, or deplete)
*Intangible assets include
patents, trademarks, copyrights, franchises, and goodwill (lack of physical substance)- legal contract
asset
probable future benefit
Depreciation (of property, plant and equiptment)
process of allocating to an expense the cost of as asset over its service life
recording the cost of a frachise
records the initiale fee as an intangible asset and then expenses that cost over the life of the franchise agreement
goodwill
represents the value of a company as a whole, over and above the value of its identifiable net assets
expenses
typically benefit onlu current period
activity-based (comparison)
varies depending on the miles driven each year
depletion
we allocate resources to expense through this process
retirement
when a long-term asset is no longer useful but cannot be sold
accelerated depreciation method
with higher depreciation in the earlier years of the asset's life and lower depreciation in later years
capital expenditures
(recorded as assets) benefit future periods
land improvements
(adding parking lots, sidewalks, driveways, landscaping, lighting systems, fences, sprinklers, and smiliar additions
depreciation methods
- straight-line - declining-balance - activity-based
long-term asset
-sale -retirement -exchange
legal defense of intangible assets
-succesfully defends an intangible right: capitalize the litigation costs and amortize them over the remaining useful life of the related intangible - unsucessful defense of an intangible right: firm should expense the litigation costs as incurred (because provide no future benefit)
sale
...
intangible assets are aquired in two ways..
1. they purchase intangible assets like patents, copyrights, trademarks, or franchise rights from other entities 2. they create intangible assets internally, by developing a new product or process and obtaining a protective patent
to properly report - 3 things
1. which amounts to include in their cost 2. how to expense their costs while using them 3. how to record their sale or disposal at the end of their useful life
tangible (also referred to as)
Property, Plant, and Equiptment
depreciable cost
The asset's cost minus its estimated residual value
accumulated deprectiation
a contra asset account, meaning that it reduces an asset account
activity-based method
allocate an asset's cost based on its use
straight-line method
allocate an equal amount of depreciable cost to each year of the asset's service life
amortization
allocating the cost of intangible assets
depreciation (accounting definition)
allocation of an asset's cost to an expense over time
declining balance method
an accelerated depreciation method
accumukated amoritzation
contra account
straight-line (comparison)
creates an equal amount of depreciation each year
intangible assets
have no physical substance
declining balance will be higher than straight line in " " years and lower in " " years
higher- earlier lower- later
service life (useful life)
how long the company expects to receive benefits from the asset before disposing of it
We expense an expenditure...
if it benefits only the current period
We capitalize an expenditure as an asset...
if it increases future benefits
record a gain
if we sell asset for more than its book value - credit balance account (like revenue accounts)
record a loss
if we sell the asset for less than its book value -debit balance account (like expense accounts)