Chapter 7: Plant Assets, Natural Resources, and Intangible Assets

Vocabulary flashcards covering the acquisition, capitalization, depreciation, disposal, depletion, amortization, and financial analysis of plant assets, natural resources, and intangible assets.

Capitalization

The accounting process of recording costs, such as purchases or major repairs, as an asset on the balance sheet rather than expensing them immediately on the income statement.

Capitalized Acquisition Cost

The total recorded cost of an asset, defined under the working rule as the sum of all costs incurred to bring the asset to its intended use.

Land Improvements

Enhancements made to land—such as driveways, fences, sprinkler systems, signage, and lighting—that are recorded in a separate asset account from land and depreciated over their useful lives.

Relative-Sales-Value Method

An accounting technique used for lump-sum or basket purchases of multiple assets acquired together for a single price, allocating total cost based on the individual assets' relative market values.

Ordinary Repairs

Routine repair expenditures incurred to maintain an asset or restore it to good working order, which are debited to Repair Expense and expensed immediately on the income statement in the period incurred.

Capital Expenditures

Substantial costs and overhauls that increase an asset's capacity or extend its useful life, recorded by debiting a plant asset account and expensed over future periods through depreciation.

Long-Lived Assets and Related Expense Matching

The systematic matching of long-lived balance sheet asset accounts to their specific income statement expense accounts: Land corresponds to none; Buildings, Machinery, Equipment, Furniture and Fixtures, and Land Improvements correspond to Depreciation Expense; Natural Resources correspond to Depletion Expense; and Intangibles correspond to Amortization Expense.

Depreciation

The accounting process of allocating a plant asset's cost to expense over its useful life to match the cost of the asset with the revenues it helps generate; it is a process of cost allocation rather than asset valuation, and it does not establish a cash replacement fund.

Depreciable Cost

The portion of a plant asset's cost subject to depreciation, calculated as: $\text{Asset Cost} - \text{Estimated Residual Value}$.

Accumulated Depreciation

A contra asset account whose credit balance accumulates over time as depreciation is recorded, reported on the balance sheet as a reduction from the related asset account.

Book Value

The net dollar amount of an asset reported on the balance sheet, calculated as: $\text{Asset Cost} - \text{Accumulated Depreciation}$.

Estimated Useful Life

The expected total service period a business expects to obtain from an asset, which may be stated in years, units of output, or miles driven.

Estimated Residual Value

Also called scrap value or salvage value; the expected cash value of an asset at the end of its useful life, which is excluded from depreciable cost and not depreciated.

Straight-Line Method

The most common depreciation method, assigning an equal amount of depreciation expense to each full accounting period by dividing the depreciable cost by the asset's useful life in years.

Units-of-Production Method

A depreciation method best suited for assets that decline due to physical use, assigning a fixed per-unit depreciation rate ($\text{Depreciable Cost} / \text{Useful Life in Units}$) multiplied by the actual units produced in each accounting period.

Double-Declining-Balance Method

The most frequently used accelerated depreciation method, which writes off a larger amount of cost early in the asset's life by applying twice the straight-line rate to the asset's declining book value at the beginning of each year without subtracting residual value in the percentage rate.

Annual Depreciation Expense Patterns

The comparative graphic profiles of depreciation methods over time: Straight-Line yields a constant annual expense line; Units-of-Production yields variable stepped annual amounts matching output; and Accelerated (Double-Declining-Balance) yields an expense curve that declines sharply over time.

MACRS (Modified Accelerated Cost Recovery System)

An accelerated depreciation method specified by the IRS for tax purposes, allowing businesses to claim large initial depreciation deductions on newly acquired property, plant, and equipment assets to lower taxable income and save on income taxes paid.

Gain on Sale of Equipment

An income statement account credited when the cash proceeds received from disposing of a plant asset exceed the asset's net book value at the date of sale.

Loss on Sale of Equipment

An income statement account debited when the cash proceeds received from disposing of a plant asset are less than the asset's net book value at the date of sale.

Natural Resources

Long-term physical assets extracted from the earth—such as iron ore, oil, and timber—that are physically consumed and reduced over time through depletion.

Depletion Expense

The systematic allocation of the acquisition cost of a natural resource over its extraction life, calculated similarly to the units-of-production method and expensed through cost of goods sold when the resource is sold.

Intangible Assets

Long-term assets with no physical substance that convey special legal rights and economic privileges, including patents, copyrights, franchises, trademarks, and goodwill.

Amortization Expense

The periodic expensing of an intangible asset's cost over the shorter of its legal life or expected useful life, typically calculated via the straight-line method and credited directly to the intangible asset account without a contra account.

Goodwill

A special intangible asset recorded only when a business acquires another company and pays a purchase price exceeding the fair market value of the acquired company's net identifiable assets ($\text{Assets} - \text{Liabilities}$).

Research and Development (R&D) Costs

Expenditures incurred to discover, design, and create new products or processes; under U.S. GAAP, these costs cannot be capitalized on the balance sheet and must be expensed on the income statement as incurred.

Net Profit Margin

A profitability ratio measuring the amount of net income earned per $\$1$ in sales revenue, computed as: $\frac{\text{Net Income}}{\text{Sales Revenue}}$.

Total Asset Turnover

An efficiency ratio measuring the dollar volume of sales revenue generated per $\$1$ of assets, computed as: $\frac{\text{Sales Revenue}}{\text{Average Total Assets}}$.

Return on Assets (ROA)

A profitability ratio assessing how efficiently and profitably management uses assets provided by stockholders and creditors, computed as: $\frac{\text{Net Income}}{\text{Average Total Assets}} = \text{Net Profit Margin} \times \text{Total Asset Turnover}$.