Chapter 8 Accounting for Long-Term Assets

Straight-Line Formula

(100%) / Useful Life

Computing Revised Straight-Line Depreciation

(Book value - revised salvage value) / Revised remains useful life

Depletion Per Unit Formula

(Cost - Salvage Value) / Total units of capacity

Depletion Expense

(Depletion per unit) x (Units extracted and sold in period)

Depreciation Expense Formula

(Depreciation per unit) x (Units produced in period)

Depreciation Expense

(Doubling-declining-balance rate) x (beginning period book value)

Capital Expenditures

Additional costs of plant assets that provide material benefits extending beyond the current period; also called balance sheet expenditures.

Indefinite Life

Asset life that is not limited by legal, regulatory, contractual, competitive, economic, or other factors.

Asset Book Value

Asset's acquisition costs less its accumulated depreciation (or depletion, or amortization); also sometimes used synonymously as the carrying value of an account.

Change in an Accounting Estimate

Change in an accounting estimate that results from new information, subsequent developments, or improved judgment that impacts current and future periods.

Inadequacy

Condition in which the capacity of plant assets is too small to meet the company's production demands.

Obsolescence

Condition in which, because of new inventions and improvements, a plant asset can no longer be used to produce goods or services with a competitive advantage.

Lease

Contract specifying the rental of property.

What is the entry for cash purchase of land improvements?

Debit to Land Improvements Credit to Cash

Salvage Value

Estimate of amount to be recovered at the end of an asset's useful life; also called residual value or scrap value.

Trademark or Trade (Brand) Name

Symbol, name, phrase, or jingle identified with a company, product, or service.

Plant Assets

Tangible long-lived assets used to produce or sell products and services; also called property, plant and equipment (PP&E) or fixed assets.

Straight-Line Depreciation Formula

(cost - salvage value) / useful life

Depreciation per unit formula

(cost- salvage value) / total units of production

Double Decling Balance Method

1. Compute the asset's straight-line depreciation rate. 2. Double the straight-line rate. 3. Compute depreciation by multiplying this rate by the asset's beginning period book value.

Accounting for Disposals of Plant Assets

1. Record depreciation up to the date of disposal - this also updates Accumulated Depreciation 2. Record the removal of the disposed asset's account balances - including its accumulated depreciation. 3. Record any cash ( and/or other assets) received or paid in the disposal. 4. Record any gain or loss - equal to the value of any assets received minus the disposed asset's book value.

Double-Declining-Balance Rate

2 x (straight-line rate)

Cost

All normal and reasonable expenditures necessary to get an asset in place and ready for its intended use.

Lease Improvements

Alterations or improvement to leased property such as partitions and storefronts

Goodwill

Amount by which a company's (or a segment's) value exceeds the value of its individual assets less its liabilities.

Natural Resources

Assets physically consumed when used; examples are timber, mineral deposits, and oil and gas fields ; also called wasting assets.

Land Improvements

Assets that increase the benefits of land, have a limited useful life, and are depreciated.

Modified Accelerated Cost Recovery System (MACRS)

Depreciation system required by federal income tax law.

Patent

Exclusive right granted to its owner to produce and sell an item or to use a process for 20 years.

Revenue Expenditures

Expenditures reported on the current income statement as an expense because they do not provide benefits in future periods; also called income statement expenditures.

Limited Life

Length of time an asset will be productively used in the operations of a business; also called service life or limited life.

Useful Life

Length of time an asset will be productively used in the operations of a business; also called service life or limited life.

Intangible Assets

Long-term assets (resources) used to produce or sell products or services; usually lack physical form and have uncertain benefits.

Extraordinary Repairs (Replacements)

Major repairs that extend the useful life of a plant asset beyond prior expectations ; treated as capital expenditure.

Total Asset Turnover

Measure of a company's ability to use its assets to generate sales; computed by dividing net sales by average total assets.

Straight-Line Depreciation

Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.

Units-of-Production Depreciation

Method that charges a varying amount to depreciation expense for each period of an asset's useful life depending on its usage.

Declining-Balance Method

Method that determines depreciation charge for the period by multiplying a depreciation rate (often twice the straight-line rate) by the asset's beginning-period book value.

Accelerated Depreciation Method

Method that produces larger depreciation charges in the early years of an asset's life and smaller charges in its later years.

Lessor

Party to a lease who grants another party (the lessee) the right to possess and use its property.

Lesee

Party to a lease who secures the right to possess and use the property from another party (the lessor).

What are the types of intangibles?

Patent Copyright Franchises Licenses Trademark Trade Name Goodwill

Impairment

Permanent diminishment of an asset's value.

Franchises

Privileges granted by a company or government to sell a product or service under specified conditions.

Licenses

Privileges granted by a company or government to sell a product or service under specified conditions; also called franchises.

Amortization

Process of allocating the cost of an intangible asset to expense over its estimated useful life.

Depletion

Process of allocating the cost of natural resources to periods when they are consumed and sold.

Ordinary Repairs

Repairs to keep a plant asset in normal, good operating condition; treated as a revenue expenditure and immediately expensed.

Research and Development Costs

Research expenditures are those incurred in gaining new knowledge, and development expenditures are the application of knowledge before commercial production or use; examples of research costs are tests of new vaccines or any other scientific or technical knowledge, and examples of development costs are plans or designs for improved materials, devices, processes, or services.

Copyright

Right giving the owner the exclusive privilege to publish and sell musical, literary, or artistic work during the creator's life plus 70 years.

Leasehold

Rights the lessor grants to the lessee under the terms of a lease.

What is the two-step process for computing units-of-production depreciation?

Step 1: Depreciation per unit Step 2: Depreciation Expense

Capital expenditures

are additional costs of plant assets that provide benefits extending beyond the current period and increase or improve the type of amount of service an asset provides.

Book Value Equation

cost - accumulated depreciation

Betterments (Improvements)

expenditures to make a plant asset more efficient or productive

The useful life of a new plant asset

might be estimated based on the experience of others or on engineering studies and judgement if the company does not have past experience with a similar asset

Total Asset Turnover Ratio

net sales/average total assets

The double-declining-balance and straight-line depreciation methods:

produce the same amount of total depreciation over an asset's useful life

The acquisition cost of a plant asset does not include

repair costs resulting from damage to the plant asset while it was being unpacked.