ACCT2291 CH. 7 (McGowan, Troy University)

what are the two ways we categorize fixed assets/long term assets

tangible and intangible

what are tangible assets

physical; assets in this category include land, land improvements, buildings, equipment, natural resources, etc

what are intangible assets

lack of physical substance; existence based on legal contract; patents, trademarks, copyrights, franchises, goodwill, etc

How do we report the cost of PPE at the time of acquisition?

we record them at the ORIGINAL COST OF THE ASSET + ALL EXPENDITURES NECESSARY TO GET THE ASSET READY TO USE

T/F: most fixed assets are typically purchased with cash

FALSE: most are typically purchased using loans

what falls under PPE (property, plant, and equipment)

land, land improvements, buildings, equipment, natural resources

What does it mean to capitalize?

Report/account for an expenditure as an asset - it will be expensed OVER TIME as the asset is used in company operations

what does it mean to expense an expenditure?

account for the full expenditure as an expense immediately

what does the land account represent?

represents land a company is using in its operations; when we capitalize land, we include the cost of the land and all expenditures necessary to get the land ready for its intended use

what are some examples of expenditures that would be spent to get land ready?

real estate, commission fees, back property taxes, clearing, filling, and levelling land are all examples

what does the land improvement account represent?

Improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation. They are IMPROVEMENTS because they have limited useful lives.

what does the building account represent?

includes administrative offices, retail stores, manufacturing facilities, and storage warehouses. Cost of acquiring a building usually includes realtor commissions and legal fees, and sometimes remodeling costs

what does the equipment account represent? what makes up the cost of equipment

includes machinery used in manufacturing, computers, and other office equipment, vehicles, furniture, and fixtures. the cost of equipment is the actual purchase price plus ALL OTHER COSTS necessary to prepare the asset for use - these can be a variety of other costs including sales tax, shipping, delivery insurance, assembly, installation, testing and even legal fees incurred to establish title.

How do you determine whether to add a cost to the asset account or report it as an expense of the current period?

Ask: Is this a cost of ACQUIRING the asset and getting it READY TO USE or is it a RECURRING COST that benefits the company in the current period

what is a basket purchase?

Purchase of more than one asset at the same time for one purchase price; (ex. purchasing land, building, and equipment all together for one price - however, these have to be reported separately)

What is the fair value?

its estimated stand-alone selling price

what does the natural resources account represent? what makes up the cost of natural resources

Assets like oil, natural gas, and timber that we can physically use up or deplete; distinguished from PPE by the fact that we can physically use these up and once they are used, they are GONE. They DEPLETE. They are recorded at their initial cost plus all other costs necessary to get the natural resource ready for intended use (think purifying oil)

Natural resources don't depreciate, they....

DEPLETE

Intangible assets don't depreciate, they....

ammortize

what are intanginble assets and how do we account for them?

assets with no physical substance that generally represent exclusive rights that provide benefits to owners; purchased intangibles are recorded at their original cost plus all other costs to get them ready for use; assets in this category include: patents, traddemarks, copyrights, franchises, and goodwill

what does the research and development account represent? what makes up the cost of r&d

represents the costs incurred to conduct research and to develop a new product or process which ARE NOT REPORTED AS AN INTANGIBLE ASSET IN THE BALANCE SHEET but rather are expensed directly in the income statement- we do this due to difficulty in determining the portion of R&D that benefits future periods

How can companies acquire intangible assets? how are they accounted for?

1. they purchase assets like patents, copyrights, trademarks, or franchise rights from other companies - we account purchased intangible assets at their original cost plus all other costs such as legaln fees necessary to get the asset ready for use

2. they develop intangible assets internally, for instance by developing anew product or process, and obtaining a protective patent - 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 THESE COSTS

how is advertising reported?

it is recorded as an EXPENSE in the income statement in the period incurred because of the difficulty to estimate benefits in future periods

what are patents and how are they recorded?

IA - the exclusive right to manufacture a product or use a pricess and is granted for 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

what are copyrights and how are they recorded?

exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software; protected by law and give the creator (and heirs) the exclusive right to reproduce and sell the artistic or published work for the life of the creator plus 70 years. allows the holder to pursue legal action against anyone who attempts to infringe the copyright. accounting of copyrights is the basically the same as patents (so record the purchase price plus other costs such as legal and filing fees)

what are trademarks and how are they recorded?

a word, slogan or symbol that distinctively identifies a company, product, or service; renewable for an indefinite number of 10 year periods; firms often acquire through acquisition - capitalize legal fees and registration fees

what are franchises and how are they recorded?

Local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area; they can help people start their own businesses since theyre already established franchises - to report the cost, 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

what is goodwill and how are they recorded?

the largest and most unique intangible asset in the balance sheet; it is ONLY REPORTED WHEN ONE COMPANY ACQUIRES ANOTHER COMPANY and is reported by the acquiring company for the amount that the purchase price exceeds the fair value of the acquired company's identifiable net assets (take fair value of assets minus fair value of liabilities so like its the equity ig?)

what are expenditures after acquition and how do we account them?

when owners incur additional expenditures associated with the asset after its been acquired. One of Two Things can be Done:

1. Capitalize an expenditure as an asset if it increases FUTURE benefits

2. Expense an expenditure if it only benefits the current period

A truck gets an oil change and engine tune up. How do we account these expenditures

We would expense them because they allow the truck to continue its productive activity in the current period and are also likely to recur again in the following period

We add a refrigeration unit to a delivery truck which increases the capability of the truck beyond that originally anticipated. How do we account this expenditure

we should capitalize it because it increases future benefits

what is an addition?

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

what is an improvement

the cost of replacing a major component of an asset; can be a new component with the same characteristics as the old component or new with enhanced operating capabilities.

Define depreciation

allocation of an asset's cost to an expense over it's service life

what is amortization?

allocation of an asset's cost to an expense over time for intangible assets

define service life. how can it be measured

How long the company expects to receive benefits from the asset before disposing of it. Also, useful life - can be measured in units of time or activity. (ex. the estimated service life of a delivery truck could be 5 years or 100,000 miles)

define residual value

The amount the company expects to receive from selling the asset at the end of its service life. Also, salvage value - the selling price or trade-in value of the asset

define depreciation method. name the three types

The pattern in which the asset's depreciable cost (original cost minus residual value) is allocated over time.

- straight line

- double-declining balance

- unity activity based

define accumulated depreciation

A contra asset account representing the total depreciation taken to date.

define book value

an asset's original cost less/minus accumulated depreciation, also known as carrying value

define the straightline depreciation method - how do we do it?

this method allocates an equal amt of depreciation to each year. the implication is that the asset is used evenly over its service life

DEPRECIATION EXPENSE = assets cost - residual value / service life = depreciable cost / service life

what is the depreciable cost?

the asset's cost minus its estimated residual value; represents the total depreciation to e take over the assets service life

T/F: we do not report depreciation for land

TRUE - land provides value indefinitely and can be repurposed if needed

define the double-declining balance depreciation method - how do we do it?

An accelerated depreciation method that reports more depreciation in earlier years and less depreciation in later years.

STEPS:

(1) take 100 and divide it by the useful life in years. turn that number into a percent (ex: 100/5 = 20 ---> 20%)

(2) take that percent and double it (40%)

(3) multiply that number by the cost

then repeat and change the original number for each year until the asset has reached residual value (?)

T/F: double declining balance and straightline depreciation will not result in the same total depreciation over the asset's service life

FALSE: no matter what allocation method we use, the total depreciation over the asset's service life will be equal to the depreciable cost (asset cost minus the residual value)

define the activity based depreciation method - how do we do it?

Allocates an asset's cost based on its use rather than time. Also, units of production or units of output.

STEPS

(1) divide depreciable cost by total units expected to be produced (this equals depreciable value per unit)

(2) then multiply units of activity by the depreciable value per unit

T/F: the expected residual value of most intangible assets is zero

TRUE; not always the case, but typically

T/F: many companies use straight line ammortization for intangible assets

TRUE

T/F: the legal life of intangible assets (like patents) are always the service life of the asset

FALSE even though the legal life may be 20 years, the full 20 years may not always be useful

what are some intangible assets NOT subject to amortization?

we do not amortize intangible assets with indefinite/unknown useful lives (ex: trademarks, goodwill, domain names w/ indefinite life, licenses w indefinite life)

what are some intangible assets subject to amortization

patents, computer software, copyrights, domain names w finite life, franchises, licenses with finite life, royalty agreements, customer lists

What are the two methods of asset disposal?

Sale and Retirement

Define Sale as an Asset Disposal Method

the transferring ownership of a long-term asset and receiving cash in return; involves a transaction in which cash is received for the asset given up.

has to do with gaining and losing

a gain occurs when we sell asset for more than its book valye; the cash received is greater than the book value of the asset sold - thee amt of gain equals the net increase in assets and gains like revenues are reported as an increase to net income

a loss occurs when we sell an asset for less than its book value, in this case, the cash received is less than the book value of the asset sold; decreases net income

Define Retirement as an Asset Disposal Method

disposing of a long-term asset that is no longer useful but cannot be sold or exchanged