CH. 9

Trademark (trade name)

A word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product.

Additions and improvements

Costs incurred to increase the operating efficiency, productive capacity, or expected useful life of a plant asset.

The cost of intangible assets with indefinite lives (should or should not) be amortized.

should not

Intangible assets are typically amortized on a ________________

straight-line basis.

Three factors affect the computation of depreciation,

Cost, useful life, salvage value

three ways in which companies make plant asset disposals.

sale, retirement, exchange

advantages of leasing an asset versus purchasing it

1.Reduced risk of obsolescence. 2.Little or no down payment. 3.Shared tax advantages.

Lease

A contractual agreement allowing one party (the lessee) to use the asset of another party (the lessor) for a period of time at an agreed price.

Franchise

A contractual arrangement under which the franchisor grants the franchisee the right to sell certain products, to perform specific services, or to use certain trademarks or trade names, usually within a designated geographic area.

Straight-line method

A depreciation method in which companies expense an equal amount of depreciation for each year of the asset's useful life.

Units-of-activity method

A depreciation method in which useful life is expressed in terms of the total units of production or use expected from the asset.

Declining-balance method

A depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation expense over the asset's useful life.

Accelerated-depreciation method

A depreciation method that produces higher depreciation expense in the early years than the straight-line approach.

Lessor

A party that has agreed contractually to let another party use its asset for a period at an agreed price.

Lessee

A party that has made contractual arrangements to use another party's asset for a period at an agreed price.

Impairment

A permanent decline in the fair value of an asset.

Return on assets

A profitability measure that indicates the amount of net income generated by each dollar of assets; computed as net income divided by average total assets.

The allocation to expense of the cost of an intangible asset over the asset's useful life.

Amortization

To record amortization of an intangible asset, a company increases (debits) _____________ and decreases (credits) the ____________-

Amortization Expense, specific intangible asset.

Cash equivalent price

An amount equal to the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable.

Copyright

An exclusive right granted by the federal government allowing the owner to reproduce and sell an artistic or published work.

Patent

An exclusive right issued by the U.S. Patent Office that enables the recipient to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant.

expense pattern of the Straight-Line depreciation method

Constant Amount

An exclusive right granted by the federal government to reproduce and sell an artistic or published work.

Copyright

The formula for straight-line depreciation is:

Cost - Salvage Value / Useful Life (in years)

expense pattern of the Declining-Balance depreciation method

Decreasing amount

___________ stops when the asset's book value equals its expected salvage value.

Depreciation

Indicate the account title to which each expenditure should be debited. Paid $200 insurance to cover a possible accident loss on new factory machinery while the machinery was in transit.

Equipment

Indicate the account title to which each expenditure should be debited. Paid $250 to have the company name and slogan painted on the new delivery truck.

Equipment

Indicate the account title to which each expenditure should be debited. Paid $8,000 for installation of new factory machinery.

Equipment

Indicate the account title to which each expenditure should be debited. Paid $850 sales taxes on a new delivery truck.

Equipment

Revenue expenditures

Expenditures that are immediately charged against revenues as an expense.

Capital expenditures

Expenditures that increase the company's investment in plant assets.

Research and development costs

Expenditures that may lead to patents, copyrights, new processes, and new products; must be expensed as incurred.

Ordinary repairs

Expenditures to maintain the operating efficiency and expected productive life of the asset.

A right to sell certain products or services or to use certain trademarks or trade names within a designated geographic area.

Franchise

Asset turnover

Indicates how efficiently a company uses its assets to generate sales; calculated as net sales divided by average total assets.

Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.

Intangible assets

Indicate the account title to which each expenditure should be debited. Paid $7,000 of accrued taxes at the time the plant site was acquired.

Land

Indicate the account title to which each expenditure should be debited. Paid $21,000 for parking lots and driveways on the new plant site.

Land Improvements

Indicate the account title to which each expenditure should be debited. Paid $75 motor vehicle license fee on the new truck.

License Expense

___________ is the process by which an asset becomes out of date before it physically wears out.

Obsolescence

Indicate the account title to which each expenditure should be debited. Paid $900 for a 2-year accident insurance policy on the new delivery truck.

Prepaid Insurance

Costs incurred by a company that often lead to patents or new products. These costs must be expensed as incurred.

Research and development costs

Plant assets

Resources that have physical substance, are used in the operations of a business, and are not intended for sale to customers.

Intangible assets

Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.

3 depreciation methods

Straight-Line, Declining-Balance, Units-of-Activity

Depreciable cost

The cost of a plant asset less its salvage value.

Explain the accounting for plant asset expenditures.

The cost of plant assets includes all expenditures necessary to acquire the asset and make it ready for its intended use. Once cost is established, a company uses that amount as the basis of accounting for the plant asset over its useful life.

Depreciation

The process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner.

Amortization

The process of allocating to expense the cost of an intangible asset.

Goodwill

The value of all favorable attributes that relate to a company that are not attributable to any other specific asset.

T or F / in many cases, the usefulness of land increases over time because of the scarcity of good sites.

True

The ___________ helps users determine how effectively a company is generating sales from its assets.

asset turnover

Accumulated depreciation Reported on the ____________as a deduction from plant assets

balance sheet

When a change in an estimate is required, the company makes the change in

current and future years but not to prior periods.

Unlike other depreciation methods, the ________ ignores salvage value in determining the amount to which the declining-balance rate is applied.

declining-balance method

The ___________ remains constant from year to year, but the ________ to which the rate is applied declines each year.

depreciation rate, book value

Recognizing depreciation for an asset (does or does not) result in the accumulation of cash for replacement of the asset.

does not

•If proceeds exceed the book value, a _______n disposal occurs

gain

When an entire business is purchased, _______ is the excess of cost over the fair value of the net assets (assets less liabilities) acquired.

goodwill

companies record _________ only when there is an exchange transaction that involves the purchase of an entire business.

goodwill

Depreciation expense Reported on the __________

income statement

Depreciation does not apply to _______because its usefulness and revenue-producing ability generally remain intact as long as the land is owned.

land

Depreciation applies to three classes of plant assets:

land improvements, buildings, and equipment

•If proceeds are less than the book value, a ________on disposal occurs

loss

asset turnover formula

net sales/average total assets

A decline in revenue-producing ability may also occur because of ________

obsolescence.

Evaluating a company's amortization of intangibles helps users determine if net income is ___________

overstated.

Except for land, __________decline in service potential (ability to produce revenue) over their useful lives.

plant assets

resources that have physical substance (a definite size and shape), are used in the operations of a business, and are not intended for sale to customers

plant assets

t or f / The initial cost of a patent is the cash or cash equivalent price paid to acquire the patent.

true

expense pattern of the Units-of-Activity depreciation method

varying amount

•Cash equivalent price is

•Fair value of asset given up or •Fair value of asset received

Plant assets are resources that have

•physical substance (a definite size and shape), •are used in the operations of a business, •are not intended for sale to customers, •are expected to provide service to the company for a number of years, •decline in service potential over useful lives (except for land).