ACC 2102 Chapters 7 & 8

What are the two major categories of long-term assets? How do these two categories differ?

The two major categories are tangible assets (such as land, buildings, and equipment) and intangible assets (such as patents and trademarks). Tangible assets have physical substance, while intangible assets lack physical substance and their existence is often based on legal contracts

Explain how we initially record a long-term asset

A long-term asset is recorded at its original cost plus all expenditures necessary to get the asset ready for its intended use.

If University Hero initially records an expense incorrectly as an asset, how does this mistake affect the income statement and the balance sheet?

This mistake understates expenses and overstates net income on the income statement for the current period. On the balance sheet, it overstates assets and stockholders' equity (through the higher net income)

King acquires land and an old building... what costs might the firm incur to make the land ready for its intended use?

Necessary costs include the purchase price, real estate commissions, legal fees, back property taxes, and costs for clearing, filling, and leveling the land

Why don’t we depreciate land? What are land improvements? Why do we record land and land improvements separately?

Land is not depreciated because it is not "used up" and its service life never ends. Land improvements include items like parking lots, sidewalks, and landscaping. They are recorded separately because, unlike land, they have limited useful lives and must be depreciated

Equipment includes machinery... what costs might we incur to get equipment ready for use?

Costs include the purchase price, sales tax, shipping, assembly, and any other expenditures necessary to prepare the asset for its intended use

Where in the balance sheet do we report natural resources? Provide three examples of natural resource assets.

Natural resources are reported under tangible assets (property, plant, and equipment). Examples include oil, natural gas, and timber

Explain how the accounting treatment differs between purchased and internally developed intangible assets.

Purchased intangibles are recorded as long-term assets at their purchase price plus preparation costs. Internally developed intangibles, such as research and development (R&D) and advertising, are generally expensed in the period incurred because it is difficult to determine their future benefit

What are the differences among a patent, a copyright, and a trademark?

A patent is an exclusive 20-year right to a manufacture or process. A copyright protects a published work for the life of the creator plus 70 years. A trademark is a symbol or slogan identifying a company and can be renewed indefinitely for 10-year periods

What is goodwill and how do we measure it? Can we sell goodwill separately from the business?

Goodwill is the portion of a purchase price that exceeds the fair value of identifiable net assets when acquiring another company. It represents the value of the business as a whole and cannot be sold separately from the business

How do we decide whether to capitalize (record as an asset) or expense a particular cost?

A cost is capitalized if it provides benefits to future periods and expensed if it benefits only the current period

Explain the usual accounting treatment for repairs and maintenance, additions, and improvements.

Routine repairs and maintenance are expensed. Additions (new major components) and improvements (replacements of major components) are capitalized because they increase future benefits

Are litigation costs to defend an intangible asset capitalized or expensed?

hey are capitalized if the defense is successful because it preserves the asset's future benefits; they are expensed if the defense is unsuccessful

How is the dictionary definition different from the accounting definition of depreciation?

The dictionary defines it as a decrease in value, but accounting defines it as the allocation of an asset’s cost to expense over the time periods benefited

What factors must we estimate in allocating the cost of a long-term asset over its service life?

companies must estimate the service life (useful life) and the residual value (salvage value)

What is the service life of an asset? How do we determine it under straight-line and activity-based methods?

Service life is the expected use a company gets from an asset. Under straight-line, it is measured in years; under activity-based, it is measured in units of use (like miles)

What is residual value? How is it used in straight-line depreciation?

It is the estimated value of the asset at the end of its life. In the straight-line formula, it is subtracted from the cost: (Cost - Residual Value) / Service Life.

Contrast the effects of the straight-line, declining-balance, and activity-based methods.

Straight-line results in equal expense each year. Declining-balance is an accelerated method with higher expense in early years. Activity-based varies yearly based on actual usage

Explain the difficulties in comparing companies using different methods or lives.

Differences in methods or estimated lives change the annual depreciation expense, which directly affects net income and the asset's book value, making it harder to compare the true underlying performance of the companies

Which depreciation method is most common for financial reporting? Which for tax? Why?

Straight-line is most common for financial reporting because it is simple and consistent. Accelerated methods (MACRS) are used for tax reporting because they reduce taxable income more in the early years

Justin Time thinks firms amortize all intangible assets. Is he right?

No. Only intangibles with finite useful lives are amortized; those with indefinite lives (like goodwill) are not

What is book value? How do we compute the gain or loss on the sale of long-term assets?

Book value is the original cost minus accumulated depreciation. A gain occurs if the sale price is higher than book value; a loss occurs if it is lower

Describe return on assets, profit margin, and asset turnover

Return on assets (ROA) is Net Income / Average Total Assets. It is composed of Profit Margin (Net Income / Net Sales) and Asset Turnover (Net Sales / Average Total Assets)

Provide an example of a company with high profit margin and high asset turnover.

In the real-world comparison, Comcast outperformed Disney in both, showing a higher profit margin (4.4%) and a higher asset turnover (46 times)

Trademark

A word, slogan, or symbol that distinctively identifies a company, product, or service

Patent

An exclusive right to manufacture a product or to use a process

Copyright

An exclusive right of protection given to the creator or published work such as a song, film, painting, photograph, book, or computer software

Depreciation method

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

Franchise

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

Goodwill

The purchase price of an acquired company minus the fair value of the acquired company’s identifiable net assets

Impairment

Occurs when the expected future cash flows (expected future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation).

Improvement

The cost of replacing a major component of an asset

Intangible assets

Long-term assets that lack physical substance, and whose existence is often based on a legal contract.

Land improvements

Improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation

Material

Large enough to influence a decision

Profit margin

Net income divided by net sales; indicates the earnings per dollar of sales

Residual value

The amount the company expects to receive from selling the asset at the end of its service life. Also referred to as salvage value

Return on assets

Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets

Service life

How long the company expects to receive benefits from the asset before disposing of it. Also referred to as useful life

Straight-line method

allocates an equal amount of depreciation to each year of the asset’s service life