ACCOUNTING CH 7

you better fucking get an A

Revenue Expenditures

Ordinary repaird that “maintain” operating efficiency and productive life

Capital Expenditures

Additions and improvements that “increase” the operating efficiency, productive capacity, or useful life of a long term asset

Repairs and Maintenance in the current period benfited

Expense

Repairs and Maintenance in the future period benefited

Capitalize

Tangible Assets

Physical substance, expensed via “depreciation”

Intangible Assets

Lack of physical substance, existence often based on legal contract, expensed via “amortization”

Costs to get ready to use Land

Real estate commissions and fees, back property taxes (not future) or other obligations, clearing filling and leveling the land, and cash received from selling salvaged building materials reduces the cost of land

Land improvements

amounts spent to improve the land, such as parking lots, sidewalks, driveways, landscaping, etc.

Buildings

Includes offices, retail stores, manufacturing facilities, warehouses, etc.

what do you do if the building is constructed?

interest during the construction period is capitalized

Equipment

Machinery used in manufacturing, computers, vehicles, furniture, and fixtures

Costs to get ready to use equipment

Sales tax, shipping, assembly

Costs to get ready to use buildings

realtor commissions, legal fees, remodeling

Historical Cost

Purchase Price + Expenditures (to get the asset ready for intended use)

Natural resources

includes oil, natural gas, timber, salt, can be physically used up or “depleted”

Purchased Intangible Assets

Capitalize at purchase price + all costs necessary to get it ready to use

Internally developed Intangible Assets

Expense in the period incurred

Patents

Exclusive right to manufacture a product or to use a process for 20 years

Purchased Patents

Capitalize the purchase price + legal and filing fees

Internally Developed Patents

Capitalize legal and filing fees only

Copyrights

Exclusive right of protection granted to a creator for their life plus 70 years

Trademarks

Word, slogan, or symbol that distinctively identifies a company, product, or service. renewable for an indefinite amount of 10 year periods

How to capitalize and expense a trademark

Capitalize legal, registration, and design fees. Expense advertising costs as incurred

Franchises

Local outlets that pay for the exclusive right to use the franchisors name and to sell its products

How to capitalize and expense franchises

Capitalize the initial fee as an intangible asset. Expense additional periodic payments to the franchisor as incurred

Goodwill

Recorded when one company acquired another company

How to calculate goodwill

Purchase Price - Fair Value of Identifiable Net Assets

Net Assets

Assets - Liabilities

Basket Purchases

Purchase of more than one asset at the same time for one purchase price

Depreciation

Process of allocating to expense the costs of an asset over its useful (service) life in a rational/systematic way

Depreciation methods

Straight-line, Declining-based, Activity-based

Depreciation - Cost

All expenditures necessary to acquire the asset and make it ready for intended use

Depreciation - Useful Life

Estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence

Depreciation - Salvage Value

estimate of the asset’s value at the end of its useful life

Test for asset impairment

Book Value > Undiscounted Expected Cash Flows

If an asset is impaired, how do you record the loss

Book value - fair value

Three methods of asset disposal

Sale, Retirement, Exchange