chapter 7 long term assets

book value

Book value, also referred to as carrying value, equals the original cost of the asset minus the current balance in Accumulated Depreciation.

accounting definition of depreciation

Allocation of an asset's cost to an expense over time. Depreciation in accounting is not a valuation process. Rather, depreciation in accounting is an allocation of an asset's cost to expense over time.

addition

An addition occurs when we add a new major component to an existing asset. We should capitalize the cost of additions if they increase, rather than maintain, the future benefits from the expenditure. For example, adding a refrigeration unit to a delivery truck increases the capability of the truck beyond that originally anticipated, thus increasing its future benefits.

improvement

An improvement is the cost of replacing a major component of an asset. The replacement can be a new component with the same characteristics as the old component, or a new component with enhanced operating capabilities. the cost of the improvement usually increases future benefits, and we should capitalize it to the Equipment account.

Double declining balance method of depreciation

Beginning book value x Depreciation rate (2 / # of years) = Depreciation Expense

amortization

For intangible assets, the cost allocation process is called amortization.

goodwill

Goodwill often is the largest (and the most unique) intangible asset in the balance sheet. It is recorded only when one company acquires another company. Goodwill is recorded by the acquiring company for the amount that the purchase price exceeds the fair value of the acquired company's identifiable net assets.

develop patent

In contrast, when a firm develops a patent internally, it expenses the research and development costs as it incurs them. An exception to this rule is legal fees. The firm will record in the Patent asset account the legal and filing fees to secure the patent

Profit margin

Net Income / Net Sales = Profit Margin

asset turnover ratio

Net sales, divided by Average Total Assets = Asset Turnover. p.350

Tangible assets

Tangible assets. Assets in this category include land, land improvements, buildings, equipment, and natural resources.

investment land

land purchased for investment purposes is recorded in a separate investment account

calculate one asset within a lump sum purchase:

the amount allocated to the one asset would be: Cost of the asset / total fair value of the assets lump sum x purchase price.

Return on assets = Profit margin x Asset turnover

Return on assets = Profit margin x Asset turnover

copyright

A copyright is 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, photograph, book, or computer software. Accounting for the costs of copyrights is virtually identical to that of patents.

patent

A patent is an exclusive right to manufacture a product or to use a process. The U.S. Patent and Trademark Office grants this right for a period of 20 years. When a firm purchases a patent, it records the patent as an intangible asset at its purchase price plus other costs such as legal and filing fees to secure the patent.

trademark

A trademark, like the name Apple, is a word, slogan, or symbol that distinctively identifies a company, product, or service. The firm can register its trademark with the U.S. Patent andPage 330 Trademark Office to protect it

accumulated depreciation

Accumulated Depreciation Accumulated Depreciation: A contra asset account representing the total depreciation taken to date. is a contra asset account, meaning that it reduces an asset account. Rather than credit the Equipment account directly, we instead credit its contra account, which we offset against the Equipment account in the balance sheet. In this manner, a company can keep track of the amount originally paid for the equipment and the amount of depreciation taken on the asset so far.

materiality

An item is said to be material if it is large enough to influence a decision. Materiality is an important consideration in the "capitalize versus expense" decision. Companies generally expense all costs under a certain dollar amount, say $1,000, regardless of whether future benefits are increased.

Intangible assets

Intangible assets. Assets in this category include patents, trademarks, copyrights, franchises, and goodwill. We distinguish these assets from property, plant, and equipment by their lack of physical substance. The evidence of their existence often is based on a legal contract

Net income calculation

Net Income = Total sales - COGS - Tax Expense - Operating expense (minus everything in Income Statemnt

Net sales calculation

Net Sale = Gross Sales - Sales Discounts and Allowances

intangible assets as expense

Reporting intangible assets that are developed internally is quite different. Rather than reporting these in the balance sheet as intangible assets, we expense in the income statement most of the costs for internally developed intangible assets in the period we incur those costs. The reason we expense all R&D costs is the difficulty in determining the portion of R&D that benefits future periods. current U.S. accounting rules require firms to expense all R&D costs as incurred.

basket purchase

Sometimes companies purchase more than one asset at the same time for one purchase price. This is known as a basket purchase. For example, assume Olive Garden purchases land, building, and equipment together for $900,000. We need to record land, building, and equipment in separate accounts.

residual value

The depreciation process also requires accountants to estimate what an asset's value will be at the end of its service life. Called residual value, or salvage value, this value is the amount the company expects to receive from selling the asset at the end of its service life.

service life

The service life, or useful life, is how long the company expects to receive benefits from the asset before disposing of it. We can measure service life in units of time or in units of activity. For example, the estimated service life of a delivery truck might be either five years or 100,000 miles. We use the terms service life and useful life interchangeably, because both terms are used in practice.

franchise

To record the cost of a franchise, the franchisee records the initial fee as an intangible asset. Additional periodic payments to the franchisor usually are for services the franchisor provides on a continuing basis, and the franchisee will expense them as incurred.

capitalize vs expense

We capitalize an expenditure as an asset if it increases future benefits. We expense an expenditure if it benefits only the current period.

cost plus expenditures

We record a long-term asset at its cost plus all expenditures necessary to get the asset ready for use.

land is not depreciated

We record depreciation for land improvements, buildings, and equipment, but we don't record depreciation for land. Unlike other long-term assets, land is not "used up" over time.

capitalize

We use the term capitalize to describe recording an expenditure as an asset.