Accounting Quiz 3: Ch 7+8

Patent

1. When purchased capitalize purchase price + legal fees + filing fees

2. When developed internally: capitalize legal and filing fees only

• Expense Research and Development costs as they are incurred

Exclusive right of protection given to the creator of a published work (Granted for the life of the creator plus 70 years)

Trademark

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

• capitalize legal, registration, and design fees

  • advertising costs are expenses as incurred

Copyright

accounting for copyrights is identical to that of patents

• exclusive legal rights granted by the government to a creator

Franchise

• franchisee records the initial fee as an intangible asset

  • addtl. periodic payments are usually expensed as incurred

Solving Basket Purchases Questions

Do: Estimated fair value / total estimated fair value → Get Allocation %

Multiply Allocation % * Amt of Basket Purchase = Recorded Amt

Straight Line Depreciation

Depreciation Expense = Original Cost - Residual Cost / Useful Service Life

Double Declining Method of Depreciation

Depreciation Expense = (Cost - Accumulated Depreciation) * 2/ Useful Service Life

Activity Based Depreciation

Depreciation = Original cost - Residual Value / Useful Service Life → Depreciation / unit → Multiply by units used

Goodwill

1. recognized when a business is purchased and the purchase price exceeds the fair value of net identifiable assets

Purchase Price

Less: Fair Value of Assets - Fair Value of Liabilities

Good will = Purchase Price - (Fair Value of Net identifiable assets)

Allocation of costs in a basket purchase

To find Recorded Amt:

Take estimated fair value / total estimated fair value → gives you allocation %

Multiply Allocation Percentage * Amt of basket purchase = Recorded Amt

Tangible Assets

recorded at cost + all costs necessary to get the asset ready for its intended use

Purchased intangible long term assets are

recorded at their purchase price plus all costs necessary to get the asset ready for use

Internally generated assets

(such as R & D and advertising) costs are expensed as incurred

Expenditures After Acquisition

• capitalize if it benefits future periods

• expense if it benefits only the current period

Return on Assets

Net Income / Average Total Assets

• indicates the amount of net income generated for each dollar invested in assets

ROA

= Profit Margin * Asset Turnover

profit margin - indicates the earnings per dollar of sales

asset turnover - measures sales per dollars of assets invested

Profit Margin

Net income / Net sales

Asset Turnover

Net sales / Avg total assets

Interest on NP

face value * annual interest rate * fraction of the year

Recording a contigent liability

dr. loss

cr. contigent liability

only recorded if the loss is probable and reasonably estimable

Accounting for Warranties

1st step: estimate warranty expense

1. dr. warranty expense

   1. cr. warranty liability

2nd step: record the actual warranty

2. dr. warranty liability

   1. cr. cash