ACCT 2110

(LO3) What are the two possible methods of accounting for expenditures made during the useful life of a fixed asset? How does one determine which method to apply?

8. The two possible methods of accounting for expenditures made during the useful life of a fixed asset include either expensing the expenditure (revenue expenditure) or adding it to the cost of the asset (capital expenditure). An expenditure will be considered a revenue expenditure and expensed if it maintains the expected useful life or productivity of the asset. An expenditure will be considered a capital expenditure and added to the cost of the asset if it increases the expected useful life or productivity of the asset.

(LO3) What does it mean for an asset to be considered "impaired?"

9. An asset is considered impaired if its market value falls materially below its net book value and the decline in value is deemed to be permanent.

(LO3) What action is taken when an asset is considered impaired?

10. When an asset is considered impaired, it should be written down to its market value by debiting a loss on impairment and crediting the fixed asset.

(LO4) List the steps required to calculate the disposal of a fixed asset.

11. To account for the disposal of a fixed asset, first record depreciation expense to date for the asset. Next, calculate the gain or loss on disposal. Finally, record the journal entry for the disposal.

(LO5) State the formula for fixed asset turnover ratio and describe what this ratio tells an analyst.

12. Fixed Asset Turnover Ratio = Total Revenues / Average Net Book Value of Fixed Assets. where average net book value is: [Beginning Net Book Value + Ending Net Book Value] / 2. This ratio indicates the productivity of every dollar invested in fixed assets. A higher ratio indicates that the company is using its fixed assets more effectively to produce more revenue.

(LO5) State the formula for the average age and average useful life of fixed assets and describe what they tell an analyst.

13. Average Age = Accumulated Depreciation / Depreciation Expense This number approximates the number of years that the assets have already been depreciated. A higher number means the assets are older. Average Useful Life = Cost of Fixed Assets / Depreciation Expense. This number approximates the number of years that it will take to fully depreciate the assets. A higher number represents a longer useful life.

(LO6) How is the cash paid for fixed assets reported on the statement of cash flows?

14. The cash paid for fixed assets is reported on the Statement of Cash Flows as a cash outflow in the investing activities section.

(LO7) What is normally included in the cost of an internally developed intangible asset? How are research and development costs treated?

15. An intangible asset that is developed internally is reported on the balance sheet at the legal and administrative costs incurred to establish the asset. Any related research and development costs are expensed.

(LO1) How and where are fixed assets recorded in the financial statements?

2. Fixed assets are recorded on the balance sheet at historical cost less accumulated depreciation to date (net book value). They are expensed as they are used in operations, and the depreciation expense is reported on the income statement.

(LO1) Define the term "depreciation."

3. Depreciation is the process of systematically and rationally allocating the cost of a fixed asset to expense over its estimated useful life.

(LO2) List the three methods of depreciation and state the formula for each method.

4. The three methods of depreciation are double declining balance, straight-line, and units of activity.Double declining balance: (Straight line rate x 2) x (Cost -Accumulated Depreciation) = depreciation expense. Straight-line: (Cost- Salvage Value) ÷ Useful life in years = depreciation expense. Units of activity: (Cost - Salvage Value) ÷ Useful life in units = depreciation expense per unit Depreciation expense per unit x Actual units of activity = depreciation expense.

(LO2) Compare and contrast the three methods of depreciation.

5. Double declining balance method results in more depreciation expense in the early years of an asset's life and less depreciation expense in the later years. Straight-line method results in an equal amount of depreciation expense for each full year of an asset's life. Units of activity method is a function of the actual usage of the asset's life and varies each year depending upon activity.

(LO3) A change in accounting estimate is said to be made "prospectively." What does this mean?

6. A change in accounting estimate is said to be made "prospectively", meaning that the change affects only the calculation of current and future depreciation expense.

(LO3) What is the effect of a change in estimate of the useful life of a fixed asset?

7. A change in estimate of the useful life of a fixed asset will require that the remaining depreciable cost of the asset be depreciated over the remaining estimated life after the change.

(LO1) Define the term "fixed asset."

A fixed asset is any tangible resource that is expected to be used in the normal course of business for more than one year and is not intended for resale.