Chapter 9: Plant and Intangible Assets

Straight-Line Depreciation

Depreciation expense is calculated by taking cost minus residual value and dividing by the years of useful life. A method of depreciation that allocates the cost of an asset's cost expected to be recovered through sale or trade-in of the sale asset at the end of its useful life.

Plant Assets

Long-lived assets that are acquired for use in business operations rather than for resale to customers. Represent a bundle of future services, and can be thought of as long-term prepaid expenses. The cost of plant assets is the advance purchase of services. As years pass, and the services are used, the cost is transferred to depreciation expense. Three types; Tangible Plant Assets, Intangible Assets, & Natural Resources. Plant assets represent a bundle of future services, and can be thought of as long-term prepaid expenses. They are tangible assets that are used actively in the operations of an entity. It's fully expected that these assets, sometimes referred to as property, plant, and equipment, will benefit future periods. When a plant asset is acquired, it is recorded at its historical cost. Once the asset is placed in service, a portion of the asset's cost is allocated to depreciation expense as the asset becomes older.

Noncash Charge or Expense

A charge against earnings - either an expense or a loss - that does not require a cash expenditure at or near the time of recognition. Thus, the charge reduces net income but does not affect cash flows (except, perhaps, for income tax payments). Ex: are deprecation and the write-off of asset values because an asset has become impaired.

Units-Of-Output

A depreciation method in which cost (minus residual value) is divided by the estimated units of lifetime output. The unit depreciation cost is multiplied by the actual units of output each year to compute the annual depreciation expense.

Sum-Of-The-Years'

A long-established but seldom-used method of accelerated depression. Usually produces results that lie in between the 200 percent - and the 150 percent-declining-balance methods.

Revenue Expenditures

Expenditures that will benefit only the current accounting period. Expenditure for ordinary repairs and maintenance.

Trademarks (Trade Names)

A trademark or trade name is any symbol, name, phrase, or jingle that is identified with a company, product, or service. No other party may use the trademark or trade name without the permission of the holder. Many trademarks are extremely valuable. The name "Mercedes-Benz" is quite valuable, as is the name "Harley-Davidson." We normally amortize the cost of trademarks over a short period of time using the straight-line method.

Capitalize

A verb with two different meanings in accounting. The first is it is to debit an expenditure to an asset account, rather than a directly to expenses. The second is to estimate the value of an investment by dividing the annual returns by the investor's required rate of return.

Depletion

Allocating the cost of a natural resource to the units removed as the resource is mined, pumped, cut, or otherwise consumed.

Fixed- Percentage-Of-Declining- Balance Depreciation

An accelerated method of deprecation in which the rate is a multiple of the straight-line rate and is applied each year to the underappreciated cost of the asset. The most commonly used rate is a double the straight-line rate.

Goodwill

An intangible asset that can be created when one company buys another company. If the purchase price of the company is greater than the fair value of the net assets acquired, goodwill is associated with the transaction. The present value of expected future earnings of a business in excess of the earnings normally realized in the industry. Recorded when a business entity is purchased at a price in excess of the fair value of its net identifiable assets less liabilities.

Intangible Assets

Are non-current assets with no physical substance. Examples include patents, copyrights, trademarks, franchises, and goodwill. Intangible assets lack physical substance, and that makes it difficult to determine the asset's useful life or any residual value. Many intangible assets involve exclusive rights or privileges Those assets that are used in the operation of a business but that have no physical substance and are non-current.

Capital Expenditures

Costs incurred to acquire a long lived asset. Expenditures that will benefit several accounting periods. Any material expenditure that will benefit several accounting periods. To capitalize an expenditure means to charge it to an asset account.

Half-Year Convention

In the year of acquisition, record six months of depreciation. The practice of taking six months' depreciation in the year of acquisition and in the year of disposition, rather than computing deprecation for a partial periods to the nearest month. This method is widely used and is acceptable for both income tax reporting and financial reports, as long as it is applied to all assets of a particular type acquired during the year. The half-year convention generally is not used for buildings.

Depreciation

Is a process of cost allocation. The cost of an asset is allocated to expense over its useful life in some rational and systematic manner. Do not confuse asset valuation, an economic concept, with allocation. The unused portion of the asset's cost appears on the balance sheet. A portion of the cost is allocated to expense on the income statement each accounting period. The system allocation of the sort of an asset to expense over the years of its estimated useful life.

Natural Resources

Mines, oil, fields, standing timber and similar assets that physically consumed and converted into inventory. Are a type of plant assets. Are acquired for extracting valuable resources to be used in the business. Examples include oil reserves, timber, and other minerals. There are accounting issues associated with oil, coal, timber, gold, gravel, and a wide variety of other natural resources. In general, natural resources can be thought of as anything extracted from our natural environment. Accountants report natural resources at their cost less accumulated depletion.

Tangible Plant Assets

Plant assets that have physical substance but that are not natural resources. Ex: land, buildings, and all types of equipment. Are long-term assets that have physical substance. Examples include land, buildings, equipment, furniture, and fixtures. To expense an expenditure means to charge it to an expense account. Depreciation / Expense per Year = Cost - Residual Value / Years of Useful Life

MACRS

The Modified Accelerated Cost Recovery System. The accelerated deprecation is based on prescribed recovery periods and depreciation rates.

Present Value

The amount that a knowledgeable investor would pay today for the right to receive future cash flows. The present value is always less than the sum of the future cash flows because the investors requires a return on the investment.

Book Value

The cost of a plant asset minus the total recorded depreciation, as shown by the Accumulated Depreciation account. The remaining under appreciated cost is also known as carrying value.

Residual (Salvage) Value

The portion of an asset's cost expected to be recovered through sale or trade-in of the asset at the end of its useful life.

Amortization

The systematic write-off in the cost of an intangible asset over the periods of its economic usefulness. Amortization is the systematic write-off of the cost of an intangible asset over its useful or legal life, whichever is shorter. Amortization is the same concept as depreciation only it's called a different name because it refers to intangible assets.

Net Identifiable Assets

The total of all assets minus liabilities. Gives the holder the exclusive right to manufacture and sell an item or process for twenty years. Patents are amortized (a process just like depreciation) using the straight-line method over their useful lives, but never more than twenty years. Most companies amortize patents over a very short period of time.

Impairment Assets

Those assets that are used in the operation of a business but that have no physical substance and are non-current.