chapter 9 accounting 101a

Items that are classified and recorded as fixed assets include

land, buildings, or equipment.

expenditures are revenue expenditures and are recorded as

as increases to Repairs and Maintenance Expense

The cost and related accumulated depletion of mineral rights are normally shown as part of the

"Fixed assets" section of the balance sheet.

annual depreciation =

(cost-residual value)/useful life

The three factors that determine the depreciation expense for a fixed asset are as follows:

1. The asset's initial cost 2.The asset's expected useful life 3.The asset's estimated residual value

The three depreciation methods used most often are as follows:

1.Straight-line depreciation 2.Units-of-activity depreciation 3.Double-declining-balance depreciation

businesses can protect their trademarks by registering them for

10 year periods

accelerated depreciation method

A depreciation method that provides for a higher depreciation amount in the first year of the asset's use, followed by a gradually declining amount of depreciation.

trademark

A name, term, or symbol used to identify a business and its products.

Goodwill

An intangible asset that is created from such favorable factors as location, product quality, reputation, and managerial skill.

revenue expenditures

Costs that benefit only the current period or costs incurred for normal maintenance and repairs of fixed assets.

Two common misunderstandings that exist about depreciation as used in accounting include:

Depreciation does not measure a decline in the market value of a fixed asset. Instead, depreciation is an allocation of a fixed asset's cost to expense over the asset's useful life. Thus, the book value of a fixed asset (cost less accumulated depreciation) usually does not agree with the asset's market value. This is justified in accounting because a fixed asset is for use in a company's operations rather than for resale. Depreciation does not provide cash to replace fixed assets as they wear out. This misunderstanding may occur because depreciation, unlike most expenses, does not require an outlay of cash when it is recorded.

The accounting for intangible assets is similar to that for fixed assets. The major issues are:

Determining the initial cost. Determining the amortization, which is the amount of cost to transfer to expense.

patents

Exclusive rights to produce and sell goods with one or more unique features.

After a fixed asset has been placed into service, costs may be

incurred to extend the asset's useful life.

Intangible assets

Long-term assets that are used in the operations of a business, are not held for sale, and are without physical qualities.

Some businesses own natural resources such as timber, minerals, or oil. The characteristics of natural resources are as follows:

Naturally Occurring: An asset that is created through natural growth or naturally through the passage of time. For example, timber is a natural resource that naturally grows over time. Removed for Sale: The asset is consumed by removing it from its land source. For example, timber is removed for use when it is harvested, and minerals are removed when they are mined. Removed and Sold over More Than One Year: The natural resource is removed and sold over a period of more than one year.

trade-in allowance

The amount a seller allows a buyer for a fixed asset that is traded in for a similar asset.

capital expenditures

The costs of acquiring fixed assets, adding to a fixed asset, improving a fixed asset, or extending a fixed asset's useful life.

depreciable cost

The difference between a fixed asset's initial cost and its residual value

assume that a fixed asset is fully depreciated, has no residual value, and is discarded

The discarded asset and its accumulated depreciation are removed from the accounts and ledger.

expected useful life

The estimated length of time an asset will be used in normal business operations.

copyright

The exclusive right to publish and sell a literary, artistic, or musical composition.

The two parties to a lease contract are as follows:

The lessor is the party who owns the asset. The lessee is the party to whom the rights to use the asset are granted by the lessor.

Depletion Expense

The process of transferring the cost of natural resources to an expense account.

initial cost

The purchase price of an asset plus all costs to obtain and ready it for use.

undeveloped land acquired for future resale would be classified and reported as an

investment, not land.

Fixed assets have the following characteristics:

They exist physically and, thus, are tangible assets. They are owned and used by the company in its normal operations. They are not offered for sale as part of normal operations.

the following costs are included as an expense:

Vandalism Mistakes in installation Uninsured theft Damage during unpacking and installing Fines for not obtaining proper permits from governmental agencies

A lease is

a contract for the use of an asset for a period of time.

Such costs are capital expenditures and are recorded as a

a decrease in an accumulated depreciation account.

Estimates of residual values and useful lives of fixed assets may change due to

abnormal wear and tear or obsolescence.

If a trademark is purchased from another business, its cost is recorded as

an asset

Costs related to the ordinary maintenance and repairs of a fixed asset are recorded as

an expense of the current period.

revised depreciation expense=

book value-residual value/revised remaining useful life

Accumulated depreciation accounts are called

contra accounts, or contra asset accounts

depreciation per unit=

cost-residual value/ total estimated units of activity

The initial cost of a purchased patent, including any legal fees, is

debited to an asset account

For short-term leases (the lease term is 12 months or less), the lessee records lease payments by

debiting Rent Expense and crediting Cash.

Recording the cost of fixed assets as an expense is called

depreciation

The units-of-activity method computes

depreciation expense using an activity rate and the activity level for the period.

depreciation expense=

depreciation per unit x units of activity for period

If a fixed asset is no longer used and has no residual value, it is

discarded

Fixed assets that are no longer useful may be

discarded or sold

A fixed asset may be purchased and placed in service other than the

first month of an accounting period.

A cost that has been incurred may be classified as a

fixed asset, an investment, or an expense.

he double-declining-balance method provides

for a declining periodic expense over the expected useful life of the asset.

The straight-line method provides

for the same amount of depreciation expense for each year of the asset's useful life.

If the selling price is more than the book value of the asset, a

gain is recorded

costs may be incurred for

improving an asset or for extraordinary repairs that extend the asset's useful life

If a fixed asset is still being used, its cost and accumulated depreciation should remain

in the ledger even if the asset is fully depreciated

Fixed assets are

long-term or relatively permanent assets such as equipment, machinery, buildings, and land. Other descriptive titles for fixed assets are plant assets or property, plant, and equipment.

If the selling price is less than the book value, a

loss is recorded.

When the double-declining-balance method is used, the estimated residual value is

not considered

Functional depreciation factors include

obsolescence and changes in customer needs that cause the asset to no longer provide services for which it was intended. For example, equipment may become obsolete due to changing technology.

residual value (scrap value)

of a fixed asset is the estimated value of the asset at the end of its useful life

Depreciation can be caused by

physical or functional factors.

Like straight-line depreciation, if an asset is used for only part of a year, the annual double-declining-balance depreciation is

prorated based on the number of months the asset is in service.

Under the straight-line method, depreciation is

prorated based on the number of months the asset is in service.

All three methods allocate a portion of the total cost of an asset to an accounting period, while never depreciating an asset below its

residual value.

The straight-line method reports the

same amount of depreciation expense each year

he units-of-activity method provides the

same amount of depreciation expense for each unit of activity of the asset

On the income statement, depreciation and amortization expense should be reported

separately or disclosed in a note.

Depletion is determined as follows

step 1: depletion rate= cost of resource/ estimated total units of resource step 2: Multiply the depletion rate by the quantity removed from the resource during the period. depletion expense= depletion rate x quantity removed

classifying a cost involves the following steps:

step 1: Is the purchased item long-lived? If yes, the item is recorded as an asset on the balance sheet, either as a fixed asset or an investment. If no, the item is classified and recorded as an expense. step 2: Is the asset used in normal operations? If yes, the asset is classified and recorded as a fixed asset. If no, the asset is classified and recorded as an investment.

The double-declining-balance method is applied in the following three steps:

step1: Determine the straight-line percentage, using the expected useful life. step 2:Determine the double-declining-balance rate by multiplying the straight-line rate (from Step 1) by 2. step 3: Compute the depreciation expense by multiplying the double-declining-balance rate (from Step 2) times the book value of the asset.

Patent amortization is normally computed using the

straight-line method

The difference between the fixed asset account and its related accumulated depreciation account is called

the asset's book value or net book value of the asset.

Physical depreciation factors include

wear and tear during use or from exposure to weather.