Accounting: Chapter 9

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neKen
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246954
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Accounting: Chapter 9
Updated:
2013-11-15 03:24:03
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Accounting
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Chapter 9 - Reporting and interpreting long-lived tangible and intangible assets
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  1. 2 types of long-live assets
    Tangible and intangible assets
  2. Tangible assets (fixed assets)
    • - assets that are physical substance such as land, building, machinery, vehicles, office equipment, and furniture.
    • - on the balance sheets these assets are group into property, plant, and equipment
  3. Intangible assets
    • - assets that have no physical substance, like most of them are indicated only by legal documents that describe their rights
    • - for example brand name, trademark, and licensing rights
  4. Land improvement
    • - different from land, where as land is assumed to last forever while land improvement deteriorate over time
    • - anything to improving the land such as sidewalks, pavement, landscaping, fencing, lighting, and sprinkler system
  5. construction in progress
    • - cost of constructing new buildings and equipment
    • - when construction is complete, these costs are moved from this account into the building or equipment account
  6. general rule for tangible assets under the cost principle
    all reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset (capitalize)
  7. Capitalize
    To record a cost as an asset, rather than an expense
  8. When to capitalize assets?
    • - Land: purchase cost, legal fees, survey fees, title search fees
    • - Building: purchase/construction cost, legal fees, appraisal fees, architect fees
    • - Equipment: Purchase/construction cost, sales taxes, transportation costs, installation costs

    • - These are capitalize because they are required to prepare the asset for use
    • - not all fixed assets are capitalize like small dollar amount equipment
  9. 2 type of maintenance
    ordinary repair and maintenance and extraordinary repairs, replacements, and additions
  10. ordinary repair and maintenance
    • - expenditures for the routine maintenance and upkeep of long-lived assets
    • - small expenditures that do not directly increase an asset's usefulness 
    • - these cost occur frequently to maintain the asset's productive capacity for a short time, they are recorded as expenses in the current period
    • - are sometime called revenue expenditures
  11. extraordinary repairs, replacements, and additions
    • - occur infrequently, involve large expenditures and increase an asset's  economic usefulness through enhanced efficiency, capacity, or life span
    • - are sometime called capital expenditures
  12. amortization calculations are based on the following 3 items
    asset cost, residual value, and useful life
  13. asset cost
    includes all of the asset's capitalized costs, including the purchase cost, sales tax, legal fees, and other costs needed to acquire and prepare the asset for use
  14. residual value
    • - estimate of the amount the amount the company will receive when it disposes of the asset
    • - either sell them as it is or sell them part by part
  15. useful life
    • - estimate of the asset's useful economic life to the company 
    • - can be expressed in terms of years or units of capacity
  16. the basic idea of amortization is to match the economic benefit
    asset cost - residual value = the period in which the asset will be used to generate revenue (useful life) or amortizable cost

    - should record amortization each year of an asset's useful life until its total accumulated amortization equals its amortizable cost
  17. 3 most common amortization methods
    straight-line, units-of-production, and declining-balance
  18. straight-line method
    - used it if they want to report an equal amount of amortization in each period of the asset's estimated useful life



    • 1. amortization expense is a constant amount each year
    • 2. accumulated amortization increase by an equal amount each year
    • 3. book value decreases by the same equal amount each year
  19. unit-of-production method
    • chosen if the amount of asset production varies significantly from period to period
    • - define in terms of kilometres, products, or machine-hours

  20. change in amortization estimates
    • - based on 2 estimates, useful life and residual value - made at the time asset is acquired
    • - as you experience with the asset, 1 or both of these initial estimates may need to be revised + extraordinary repairs and additions may be added to the original acquisition cost at some time during the asset's use
    • - when is clear that either estimate has change, amortization is revised for the remaining years of the asset's estimate life

    - formula for change (S-L-M) = book value - new residual value * 1/remaining life = amortization expense
  21. impairment 
    • occurs when the cash to be generated by an asset is estimated to be less than the carrying value of that asset 
    • - if an asset's estimated future cash flows are less than its book value, the book value should be written down to what the asset is worth - fair value
    • - impairment loss is reported as operating expense on the income statement
  22. disposal of tangible assets
    • - either trade asset for a new one, sell them, or retire them to a junkyard
    • - involuntary disposal: assets are damage or destroyed in storms, fires, or accidents
  23. disposal of an amortizable asset requires 2 accounting adjustment
    • 1. update the amortization expense and accumulated amortization accounts
    • 2. record the disposal
  24. update the amortization expense and accumulated amortization accounts
    if a long-lived asset is disposed of during the year, it should be amortized to the date of disposal using the partial-year calculation
  25. record the disposal
    • all long-lived assets require that you account for:
    • 1. the book value of the items given up
    • 2. the value of hte items received on the disposal
    • 3. any difference between the 2 amounts, which reflects a gain or loss on the disposal - included on the income statement when calculating
  26. trademark
    • a special name, image, or slogan identified with a product or company
    • TM indicates an unregistered trademark and R for registered trademark with the Canadian intellectual property office
  27. Copyright
    • a form of protection provided to the original authors of literary, musical, artistic, dramatic, and other works of authorship
    • not exceeding 50 years after the author's death
  28. Patents
    • a right to exclude others from making, using, selling, or importing an invention
    • granted by federal government for a period of 20 years
    • encourage people to be inventive because it prevents others from simply copying innovations until after the inventor has had time to profit from the new product or process
  29. licensing rights
    the limited permission to use property according to specific terms and conditions set out in a contract
  30. franchises 
    • a contractual right to sell certain products or services, use certain trademarks, or perform activities in a certain geographical region
    • for example, business can buy franchise rights that allow them to use the name, recipe, store format and ingredients by paying a franchise fee
  31. goodwill
    • the premium a company pays to obtain the favorable reputation associated with another company
    • established customer base, a great reputation, and successful business operations
    • GAAP do not allow it to be reported as an intangible asset on the balance sheet unless it has been purchased from another company
  32. acquisition
    • the costs of intangible assets are recorded as assets only if they have been purchased 
    • if an intangible asset is being self-constructed, its costs generally are reported as research and development expenses
    • it is report as an expenses not a asset because it is easy for people to claim that they've developed a valuable intangible asset - required some evidence that they actually worth something, only happen when someone purchase it
  33. use on intangible assets
    depend on whether the intangible asset has limited or unlimited life
  34. limited life on intangible assets
    • copyrights, patents, licensing right, and franchises is amortized, usually on a straight-line basis, over each period of useful life
    • intangible assets have no value at the end of their useful lives
  35. unlimited life on intangible assets
    • trademarks and goodwill are not amortized
    • all intangible assets are tested at least annually for possible impairment - if impaired, its book value is written down to its fair value and the amount of the reduction is reported as an expense
  36. disposal of intangible assets
    results in gain or losses if the amounts received on disposal are greater than or less than their book values

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