chapter 9 reporting and analyzing long lived-assets

three characteristics of plant, property, and equipment

• tangible

• used to generates revenue

• not intended to be sold

historical costs

• the purchase price (ie. taxes and duties less any discounts)

• expenditures needed

• est. of future expenditures such as dismantling, removing, or restoring

operating expenditures

expenditures that benefit only current period. They are immediately charged against revenue as expenses

capital expenditure

expenditures that benefit future period. they are recorded (capitalized) as long-lived assets

asset retirement costs

the amount added to the cost of a long-lived asset that relates to obligations to dismantle, remove, or restore an asset when it is retired

Land costs

includes all costs incurred to get the land ready for use such as:

• purchase price

• closing costs such as survey, title search, and legal fees

• costs to prepare the land such as clearing, draining, excavating, and grading

• cost to demolish and remove unwanted building

land improvements

• adding driveways

• sidewalks

• fences

• lighting

two criterias for determining if such costs should be expesed

1. frequency of cost—one time or recurring

2. benefit period—the life of the asset or one year

cost model

a model for accounting for an asset that carries the asset at its cost less any accumulated depreciation or amortization

depreciaiton

the process of allocating cost, not determining an asset’s fair value

residual value

an estimate of the amount that a company would obtain from the disposal of an asset at the end of its useful life

three factors that affect depreciation

1. cost of the asset

2. useful life

3. residual value

three depreciation methods

1. straight-line

2. diminishing

3. units-of-production

straight-line-method

a depreciation method in which depreciation expense is calculated by dividing the depreciable amount by its useful life

impairment loss

the amount by which the carrying amount of an asset is greater than the fair value

amortization

the systematic allocation of the amortizable cost of a finite-life intangible asset over the shorter of the asset’s legal or useful life

amortizable amount

the cost of a finite-life intangible asset

intangible assets with finite-lives

• patents

• copyrights

• research and development costs

patent

an exclusive right issued by the federal government that enables the recipient to manufacture, sell, or otherwise control an invention for a period of 20 yrs from the date of the application

copyright

an exclusive right granted by the federal government allowing the owner to reproduce and sell an artistic or published work for 50 yrs or more

research and expenses

expenditures on an original panned investigation that is done to gain new knowledge and understanding

criterias in order for development costs to be recorded as an asset

1. product is feasible

2. company intends to complete development of product

3. the company can sell or use the product

4. has adequate resources to complete the product

5. can reliably measure the costs incurred

6. a market exists for the product

development costs

expenditures related to the application of research to plan or design for a new or improved product or process for commercial law

intangible assets with indefinite-lives

• trademarks

• franchises and licenses

trademarks

a word, phrase, or symbol that distinguishes or identifies a particular business or products

franchise

a contractual arrangement under which the franchisor grants the franchisee the right to sell certain products

licenses

operating right to use an asset that is granted by a government agency or other

goodwill

the value of favourable attributes related to a company as a whole when one business acquires another and pays more than the fair value

return on assets

measures overall profitability, the amount of net income generated by each dollar invested in assets

asset turnover

indicates how efficiently a company uses its assets to generate sales