Ch. 7 Long-Term Assets Flashcards
1
Q
Capitalize
A
- Record an expenditure as an asset
- We record a long-term asset at its cost PLUS all expenditures necessary to get the asset ready for use. Thus, the initial cost of a long-term asset might be more than just its purchase price
- We capitalize an expenditure as an asset if it increases future benefits. We expense an expenditure if it benefits only the current period.
2
Q
Land improvements
A
- Improvements to land such as paving, lighting, and landscaping that, unlike land itself, ARE SUBJECT TO DEPRECIATION.
- Land is an asset we do not depreciate because its life is indefinite.
- Because land improvements have limited lives, WE RECORD THEM SEPARATELY FROM THE LAND ITSELF.
3
Q
Capitalized interest
A
- Interest costs recorded as assets rather than interest expense.
- The cost of an asset includes ALL costs of making the asset ready for its intended use. If a company borrows money to finance the construction of an asset, the interest paid to borrow the funds logically is part of the asset’s cost.
- Capitalizing interest also is in keeping with the matching principle.
4
Q
Basket purchase
A
- Purchase of more than one asset at the same time for one purchase price.
- ie purchasing land, building, and equipment together for $900,000.
- How much should we record in the separate accounts for the land, the building, and the equipment? We allocate the total purchase price of $900,000 based on the estimated fair values of each of the individual assets.
- The difficulty, though, is that the estimated fair values of the individual assets often exceed the total purchase price.
5
Q
Natural resources
A
- Assets like oil, natural gas, and timber, and even salt that we can physically use up or deplete.
- ie: ExxonMobil maintains oil and natural gas deposits on 6 of the world’s 7 continents. (oil reserves)
- Wyerhaeuser is the largest pulp and paper companies in the world with major investments in soft timber forests.
- Even salt is a natural resource, with the largest supply in the US mined directly under the Great Lakes.
- Primary concern is sustainability. Companies need ways of replenishing natural resources used
6
Q
Intangible assets
A
- Long-term assets that lack physical substance, and whose existence is often based on a legal contract.
- Includes Patents, trademarks, copyrights, franchises, and goodwill.
- Many intangible assets are NOT recorded on the balance sheet at their estimated values. (The reason why is in the “Trademarks” section) (advertising expense related to the trademark is not recorded in B/S)
- Companies acquire intangible assets in two ways:
(1) They PURCHASE intangible assets right from other entities,
(2) They CREATE intangible assets internally, by developing a new product or process and obtaining a protective patent. - The reporting rules for intangible assets vary depending on whether the company purchased or acquired the asset.
7
Q
Patent
A
- An exclusive right to manufacture a product or to use a process.
- The U.S. Patent and Trademark Office grants this right for a period of 20 years.
- When a firm purchases a patent, it records the patent at its purchase price plus such other costs as legal and filing fees to secure the patent.
- When a firm develops a patent internally, it expenses the R&D costs as it incurs them. An exception to this rule is legal fees. (This would be recorded in the Patent asset account)
- Holders of patents often need to defend their exclusive rights in court. The costs of successfully defending a patent, including attorneys’ fees, are added to the Patent account.
- Some may choose to have the patent for less than 20 years (apple ipad because of new technology causing things to become outdated)
8
Q
Copyright
A
- An exclusive right of protection given to the creator of a PUBLISHED WORK such as a song, film, painting, photograph, book, or computer software.
- Protected by law and give the creator (and his/her heirs) the exclusive right to reproduce and sell the work for the life of the creator plus 70 years.
- Accounting for the costs of copyrights is virtually identical to that of patents.
9
Q
Trademark
A
- A word, slogan, or symbol that distinctively identifies a company, product, or service.
- Protected from use by others for a period of 10 years. The registration can be renewed for an indefinite number of 10-year periods, so a trademark is an example of an intangible asset whose useful life can be indefinite.
- Advertising costs can factor into the cost of a trademark in a big way… This is how Coca-Cola can have a trademark valued at $67 billion, but reported in the balance sheet at only $2 billion. THE ESTIMATED VALUE OF THE TRADEMARK IS NOT REPORTED IN THE BALANCE SHEET; instead, only the legal, registration, and design fees are recorded. The advertising costs that create value for the trademark are recorded as advertising expense.
10
Q
Franchises
A
- Local outlets that pay for the exclusive right to use the franchisor company’s name and to sell its products within a specified geographical area.
- Many popular retail businesses such as restaurants, auto dealerships, and hotels are set up as franchises.
- To record the cost of a franchise, the franchisee records the initial fee as an intangible asset and then expenses that cost over the life of the franchise agreement. -Additional periodic payments to the franchisor usually are for services the franchisor provides on a continuing basis, and the franchisee will expense them as incurred.
11
Q
Goodwill
A
- The value of a company as a whole, over and above the value of its identifiable net assets.
- Goodwill equals the purchase price less the fair value of the net assets acquired. The fair value of the net assets is equal to the value of all identifiable assets acquired, minus the value of all liabilities assumed.
- Often the largest, yet most confusing, intangible asset recorded in the balance sheet.
- While most long-term assets, even intangible ones, can be separated from the company and sold individually, goodwill cannot.
- This value can emerge from a company’s reputation, trained employees and management team, its favorable business location, and any other unique features that we are unable to associate with a specific asset.
- We record goodwill as an intangible asset in the B/S ONLY WHEN WE PURCHASE IT AS PART OF THE ACQUISITION OF ANOTHER COMPANY.
12
Q
Repairs and maintenance
A
- Expenses that maintain a given level of benefits in the period incurred. (cost of an engine tune-up or the repair of an engine part for a delivery truck)
- We capitalize as assets more extensive repairs that increase the future benefits of the delivery truck, such as new transmission or an engine overhaul.
13
Q
Addition
A
- Occurs when a new major component is added to an existing asset.
- We should capitalize the cost of additions because they increase, rather than maintain the future benefits from the expenditure.
14
Q
Improvement
A
- The cost of replacing a major component of an asset.
- The cost of the improvement usually increases future benefits, and we should capitalize it to the Equipment account.
15
Q
Material
A
- Large enough to influence a decision.
- Materiality is an important consideration in the “capitalize vs expense” decision.
- Companies generally expense all costs under a certain dollar amount, say $1,000, regardless of whether future benefits are increased. (ie: a stapler may have a 20-year service life, but it would not be practical to capitalize and then allocate that small of a cost to expense over 20 years.
16
Q
Depreciation
A
Allocation of the cost of a TANGIBLE asset over its service life. This term applies to property, plant, and equipment.
- Depletion: describes the cost allocation applying to natural resources
- Amortization: describes the cost allocation applying to intangible assets.
17
Q
Accumulated Depreciation
A
- A contra asset account representing the total depreciation taken to date.
- By increasing accumulated depreciation each period, we are reducing the book value of equipment.
- Accumulated Depreciation account allows us to reduce the book value of assets through depreciation, while maintaining the original cost of each asset in the accounting records.
