ACCT Ch 8

Question 1

Plant Assets are resources that:

Answer 1

1. Have physical substance
2. Are used in the operations of a business, and
3. Are not intended to be sold to customers

Plant assets are recorded at historical cost principle consisting of all expenditures necessary to acquire the asset and make it ready for intended use

Question 2

Land- the cost of land includes:

Answer 2

Land is NOT DEPRECIATED (it has an indefinite useful life)

1. Cash purchase price
2. Closing costs such as title and attorney feels
3. Real estate brokers commissions and
4. All necessary costs incurred in making the land ready for its intended use
   4a. Clearing, draining, filling, and grading vacant land
   4b. Demolition and removal of old building

Question 3

Buildings:

Answer 3

a. Purchase price
b. Closing costs
c. Attorney’s fees
d. Title insurance
e. Real estate broker’s commissions

Question 4

Equipment - the cost of equipment consists of the:

Answer 4

a. Cash purchase price
b. Sales tax
c. Freight-In Charges
d. Insurance during transit
e. Assembling, installing, and testing the unit
f. Capitalized - One-time costs are on the balance sheet and are generally included (like insurance during transit) Expense - recurring costs are on income sheet and are NOT included (like yearly insurance)

Question 5

Ordinary Repairs and Maintenance are Expensed

Answer 5

recurring costs like yearly insurance are on the Income sheet

Question 6

Additions and Improvements are Capitalized

Answer 6

one-time costs like adding a logo to the vehicle are on the Balance sheet

Question 7

Ordinary Repairs and Maintenance (Expensed)- expenditures for normal operating upkeep of long-lived assets

Answer 7

a. RECURRING in nature
b. involve small amounts at each occurrence
c. Do NOT LENGTHEN the USEFUL LIFE of the asset
d. JE to record:
Dr. Maintenancce and Repairs Expense (+E, +SE)
Cr. Cash (-A) or Accounts Payable (+L)

Question 8

Additions and Improvements (Capitalized) - infrequent expenditures that increase an asset’s economic usefulness in the future

Answer 8

a. INFREQUENT in nature
b. Involve large amounts of money
c. Increase an asset’s economic USEFULNESS
d. JE to Record:
Dr. Equipment (+A)
Cr. Cash (-A) or Accounts Payable (-L)

Question 9

JE to Record Capitalized (Additions and Improvements)

Answer 9

Dr. Equipment (+A)
Cr. Cash (-A) or Accounts Payable (-L)

Question 10

JE to Record (Ordinary Repairs and Maintenance)

Answer 10

Dr. Maintenancce and Repairs Expense (+E, +SE)
Cr. Cash (-A) or Accounts Payable (+L)

Question 11

Depreciation Definition

Answer 11

Depreciation is NOT a process of determining an asset’s current market value! It is however the process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method like Straight-line, Units-of-Production, Double Declining Methods

Question 12

Periodic Adjusting Entry for Depreciation

Answer 12

Dr. Depreciation Expense (+E, -SE) (Operating Expense in I/S)
Cr. Accumulated Depreciation (+XA, -A) (XA in B/S)

Question 13

Accumulated Depreciation Definition

Answer 13

the amount of depreciation expense accumulated since the acquisition date.

Question 14

How Accumulated Depreciation looks like in B/S

Answer 14

Automobile
(Accumulated Depreciation (Automobile)
= Total PP&E

Question 15

There are 3 amounts you need to calculate depreciation, what are they?

Answer 15

1. Acquisition cost
2. Estimated useful life - the expected service life of the asset
3. Estimated residual (or salvage) value- estimated amount to be recovered by the company at the end of the asset’s estimated useful life

Question 16

Estimated Useful Life definition

Answer 16

the expected service life of the asset

Question 17

Estimated Residual (or Salvage) value definition

Answer 17

estimated amount to be recovered by the company at the end of the asset’s estimated useful life
ex: Company buys a car, even at the end of the car’s useful life it will still be worth something

Question 18

Depreciation expense is an ______

Answer 18

estimate

Question 19

Straight-Line formula

Answer 19

Depreciation expense = (cost-residual value)/useful life

Question 20

Units of Production Formula

Answer 20

Depreciation Expense = ((cost-residual value)/estimated total production) * actual production

Question 20

Units of Production things to keep in mind:

Answer 20

1. Don’t multiply by number of months because your formula only considers units/hours the machine works

Question 21

B/S things to keep in mind for accumulated depreciation (A/D)

Answer 21

After the first year make sure to add Accumulated Depreciation from previous years for the Net Value of the asset

Question 22

Double-Declining Balance Method Formula

Answer 22

Depreciation Expense=((Cost-Accumulated Depreciation)/Usefulife)*2

Question 23

Things to note with the Double-Declining Method:

Answer 23

1. BECAREFUL: residual value is not in this formula so be careful for when it reaches its end of useful life as the numerator increases then the expense decreases
2. First year the accumulated depreciation is zero!
   2a. After the first year the Accumulated depreciation is the depreciation expense you found

Question 24

Finding Asset Impairment

Answer 24

1. Test for impairment. If net book value > Estimated future cash flows, then the asset is impaired 2. Computation of impairment loss: Impairment loss=Netbook value - fair value JE to record Dr. Asset Impairment (+E, -SE) Cr. Equipment (-A)

Question 25

JE to record Asset Impairment

Answer 25

Dr. Asset Impairment (+E, -SE) Cr. Equipment (-A)

Question 26

Disposal, Retirement, and Trading of PP&E

Answer 26

Usually requires two JE's: 1. An adjusting entry to update the depreciation expense and accumulated depreciation accounts 2. Remove asset and it's related Accumulated Depreciation. Collect cash any difference between book value (salvage value) and cash given when sold is either a gain or loss. 2a. If book value (salvage value < cash given then it's a gain on sale, gain on sale is credited. #1 JE to record Depreciation expense on the sale/disposal date: Dr. Depreciation Expense (+E, -SE) Cr. Accumulated Depreciation (+XA, -A) #2 JE to record if Netbook value < Cash given on disposal date Dr. Cash Dr. Accumulated depreciation (-XA, +A) Cr. Equipment Cr. Gain on Sale #2 JE to record in Netbook value > Cash given on disposal date: Dr. Cash Dr. Accumulated Depreciation (-XA, +A) Dr. Loss on sale Cr. Equipment

Question 27

Intangible Assets and Amortization

Answer 27

Intangible assets is assets that do not posses physical substance A. Acquisition (purchased externally)- intangible assets are capitalized (on the B/S) and recorded at historical cost only if they have been purchased. B. If developed internally by the company, they are expensed when inccured C. There are two types Definite Life and Indefinite Life

Question 28

Definite Life Definition

Answer 28

Assets- Trademark, Copyright, Technology, Patents, Franchises, Licenses and Operating Rights Formula to find Amortization is Total Cost/Useful Life * (#/12) months if given mid year Use etiher useful life or legal life whichever # is lower Cost of an intangible asset has a straight-line basis each period over it's useful life called Amortization (similar to depreciation) Amortization expense is on Income statement Intangible assets are represents at cost minus accumulated amortization on the B/S JE to record definite life of intangible asset amortization expense Dr. Amortization Expense (+E,-SE) Cr. Accumulated Amortization (+XA, -A)

Question 29

Indefinite Life (Good will)

Answer 29

Indefinite life assets are NOT AMMORTIZED instead they are tested annualy for possible impairment and assets book value is written down (decreased) to it's fair value Formula for Indefinite Life Impairment loss = Book value - Fair value

Question 30

Goodwill (Indefinite Life)

Answer 30

is the reputation that company has with it's customers It's formula Net Assets at fair value = Assets - Liabilities then Purchase price - Net asset at fair value It's reported as an asset ONLY if another business is purchased, now if it is internally generated it is not recorded as an asset JE to Record possible Impairment Dr. Goodwill Impariment (+E,-SE) Cr. Goodwill