Chapter 10

Question 1

assets are _______

Answer 1

long lived and revenue producing

Question 2

PP&E consists of

Answer 2

land
buildings
equipment
machinery
furniture
autos/trucks

Question 3

intangible assets consist of

Answer 3

patents
copyrights
trademarks
franchises
goodwill

Question 4

natural resources consists of

Answer 4

oil and gas deposits
timber tracts
mineral deposits

Question 5

PP&E

Answer 5

productive assets that derive their value from long term use in operations rather than from resale

Question 6

how do we value PP&E

Answer 6

purchase cost + all expenditures necessary to get the asset in condition and location for its intended use

Question 7

equipment

Answer 7

broad term includes machinery, computers, and other office equipment, vehicles, furniture and fixtures

initial value: purchase cost (less discounts), plus: taxes, transportation, installation, testing, trial, runs, reconditioning, legal fees to establish title, any other costs to bring the asset to condition and location for use

NOTE: only taxes for first time purchase (insurance too) –> anything that is after or yearly is not included

you would include insurance during shipping

Question 8

land

Answer 8

real property used in ops

land held for speculative investment or future use is reported as investments or other assets

initial value: purchase price: attorney fees, title fees, recording fees, commissions, back taxes, mortgages, liens, clearing, filling, draining, and removing old buildings

(if it is property tax for the year - thats an expense)

current portion of property taxes are NOT included

proceeds from sale of salvaged materials after purchase reduce the cost of land

Question 9

delinquent property taxes

Answer 9

say listed in problem they are 4,000

if 2000 are in current fiscal year after the purchase date

property taxes are 6000-2000 = 4,000 of Delinquent property taxes

you include the 4,000 in delinquent PT but not the current

Question 10

land improvements

Answer 10

enhancements to property such as parking lots, driveways, private roads, fences, landscaping, and sprinkler systems

initial value: separately indentifiable costs and capitalized
(depreciated over periods benefited by their use)

useful lives that are estimable

Question 11

buildings

Answer 11

structures that include warehouses, plant facilities, and office buildings

IV: purchase price, attorney fees, commissions, reconditioning

Question 12

natural resources

Answer 12

productive assets that are physically consumed in operations such as timber, mineral deposits and oil/gas reserves

IV:
1) if purchased: acquisition + any other costs necessary…
2) acquisition costs exploration, development and restoration costs

benefits are derived from their physical consumption

Question 13

intangible assets

Answer 13

productive assets that lack physical substance and have long term but typically uncertain benefits

IV: purchase price + all expenditures necessary to get the asset in condition and location for its intended use

Question 14

patents

Answer 14

exclusive 20yr right to manufacture a product or use a process

purchase price, legal fees, filing fees, not including R&D

Question 15

copyrights

Answer 15

exclusive right to benefit for 70yrs + life of creator - from creative work - song, film, painting, photograph, or book

IV: purchase price, legal fees, filing fees, not including internal R&D

Question 16

trademarks (tradenames)

Answer 16

exclusive right to display a word, a slogan a symbol or an emblem that distinctively indentifies a co. product or service

10yrs

IV: purchase price, legal fees, filing fees, not including internal R&D

Question 17

franchises

Answer 17

a contractual agreement under which a franchisor grants the franchisee the exclusive right to use the franchisor’s trademark or tradename and certain product rights

IV: franchise fee (purchase price) plus any legal fees

some of these costs might be incurred monthly - which would be an expense

Question 18

software development costs

Answer 18

costs incurred to develop or purchase computer software to be sold, leased, or otherwise marketed (or to develop computer software to be used internally)

costs incurred after teach feaseibility but before product release (or costs incurred after application development stage is reached for intern software)

Question 19

acquired research and development

Answer 19

developed techs or in process R&D purchased in a business acquisition

IV: FV of R&D on the date of acquisition

Question 20

goodwill

Answer 20

the unique value of co. as a whole over and above all identifiable assets

IV: excess of FV of the consideration given for a co. over the FV of the identifiable net assets acquired

Question 21

what are ways assets can be acquired which would need to be capitalized

Answer 21

purchase

self construction

donation

business combination

lease

exchange

Question 22

ARO

Answer 22

asset retirement obligation

company may incur obligations associated with the disposition of PP&E and NR

gives rise to ARO –> existing legal obligation associated with the disposition/retirement of a tangible, long lived asset

ex: oil/gas exploration co might be required to restore land to its original condition after extraction is completed

Question 23

what does GAAP require for ARO

Answer 23

that an existing legal obligation associated with the retirement of a tangible, long-lived asset be recognized as a liability and measured at FV if value can be reasonably estimated

Question 24

provisions of standards to address ARO’s

Answer 24

scope:

recognition

measurement

Question 25

scope with AROS

Answer 25

only from legal obligations associated with the retirement of a tangible long lived asset that result from the acquisition, construction, development, normal operation a long lived asset

Question 26

recognition of ARO's

Answer 26

might arise at the inception of an assets life or during its operating life when value of ARO can be reasonably estimated

Question 27

measurement at ARO's

Answer 27

a company recognizes the fair value of an ARO's in the period its incurred - the amount of the liability increases the valuation of the related asset - usually the fair value is estimated by calculating the PV of estimated future cash outflows

Question 28

PVA calculations with ARO's

Answer 28

expected cash flow approach - adjust the cash flows, not the discount rate for the uncertainty or risk of those cash flows

Question 29

ARO problem

Answer 29

know how to do basically your restoration costs have to be calculated in a special way --> this is the ARO = PV of expected cash outflow trying to figure out the capitalization cost of the copper deposit

Question 30

ARO journal entries

Answer 30

Debit: Copper mine (capitalized amount) Credit: Cash (sum of purchase, exploration and development costs) Credit: Asset retirement liability (amount of ARO)

Question 31

accretion expense

Answer 31

know how to do debit: accretion expense Credit: Asset retirement liability (basically its like accumulated depreciation)

Question 32

what happens if actual restoration (what you are paying in cash), is greater than the estimated future costs of restoration costs (590,000)

Answer 32

loss JE: Debit: Asset retirement obligation 590,000 (what you estimated) Debit: loss 35,000 Credit: Cash: 625,000 (actual restoration costs)

Question 33

what happens if actual restoration costs (what pay in cash at end of 3yrs) are less than 590,000 (future value of estimated restoration costs)

Answer 33

gain Debit: asset retirement liability 590,000 Credit: gain 190,000 Credit: Cash 400,000

Question 34

intangible assets

Answer 34

represents exclusive rights that provide benefits to the owner lack physical substance difficult to anticipate the timing and the exsistence of future benefits attributable to many intangible assets

Question 35

what are two ways companies can obtain IA

Answer 35

1) purchase them from other entities: exsisting patents, copyrights, trademarks 2) develop them internally: develop a new product that is then patented

Question 36

finite useful lives of IA's are

Answer 36

amortized

Question 37

indefinite useful lives of IA's are

Answer 37

NOT amortized

Question 38

the cost of an IA

Answer 38

purchase price + all other costs necessary to get the asset ready for use

Question 39

patents

Answer 39

exclusive right to manufacture a product or to use a process granted by the US patent and trademark office for a period of 20yrs costs: purchase price, legal fees, filing gees, not including internal research and development

Question 40

copyrights

Answer 40

exclusive right of protection given to a creator of a published work song/film/book granted by the US Copyright Office for the life of the creator 70yrs

Question 41

trademarks

Answer 41

right to display a word, slogan, or a symbol that distinctly identifies a co., product or service registered with US Patent and Trademark Office for a period of 10yrs costs: purchase price, legal fees, filing fees, not including internal R&D

Question 42

franchises

Answer 42

exclusive right to franchisor to franchisee to use the franchisor's trademark/product franchisor grants it for a specified period of time to the franchisee Initial payment plus periodic payments over the life of the franchise agreement and any legal costs associated with the contract

Question 43

goodwill

Answer 43

unique value of a co. as a whole over and above its identifiable and intangible assets

Question 44

how can goodwill emerge

Answer 44

clientele and reputation trained employees and management team favorable business location

Question 45

can goodwill be separated from a company

Answer 45

no its not possible for the buyer to acquire it without also acquiring the whole company or portion of it this is where we figure out how to capitalize the cost of goodwill

Question 46

how to capitalize the cost of goodwill

Answer 46

Fair value of the consideration given in exchange for the company (acquisition price) - Fair value of net indentifiable net assets acquired

Question 47

what is the FV of identifiable net assets acquired for capitalizing the cost of goodwill

Answer 47

the fair value of all identifiable tangible and intangible assets (less) the fair value of any liabilities of the selling company assumed

Question 48

how to calculate goodwill (problem)

Answer 48

fair value of consideration given (cash) Less: FV of identifiable net assets acquired: FV of identifiable assets acquired Less: FV of liabilities assumed = Good will IGNORE book value

Question 49

sometimes you will have to find goodwill without them specifically telling you

Answer 49

it will give other assets and what you paid for them with cash and taking on the companies liabilities (assuming them) the goodwill is the difference

Question 50

lump sum purchases

Answer 50

acquisition of a group of assets for a single sum valuation of these assets differs when: each asset is indistinguishable why: assets have diff characteristics and diff useful lives

Question 51

what must happen to lump sum purchases with assets that have different characteristics and diff useful lives

Answer 51

allocate the lump sum acquisition price among the separate items

Question 52

lump sum purchases typically will be

Answer 52

less than the total with individual valuation costs of assets also fair values will be estimated by independent appraisals know how to do formula: JE: will be debit to all assets at initial valuations with credit to cash of total for lump sum

Question 53

noncash acquistions

Answer 53

companies can acquire assets without paying with them for cash 1) deferred payments (NP) 2) issuance of equity securities 3) donated assets 4) exchanges of nonmonetary assets for other assets

Question 54

how are non-cash acquisitions valued

Answer 54

at the fair value of the assets given or the fair value of the assets received, whichever is more clearly evident

Question 55

noncash acquisitions - deferred payments

Answer 55

NP - obligation to make payment in future know how to do problems 1) note indicative of FV but interest bearing note 2) asset acquired with debt - PV of note indicative of FV 3) non interest bearing note indicative of FV

Question 56

just a deferred payment

Answer 56

if gives equipment cost on date sign NP - then that is the PV - acquisition: Debit: Equipment Credit: NP - dec 31, 2024 D: Interest expense C: Interest Payable - dec 31, 2025L D:Interest expense 4545 (calculated by the 4132 + 41323) D:interest payable 4132 (from previous period) D:NP (original cost of equipment) C: Cash 50,000

Question 57

if the question gives the Fair value (future value of the note) that you are exchanging for equipment

Answer 57

non- interest bearing note requiring 50,000 in two years if borrowing cash --> bank requires 10% interest rate equipment is custom built so Fair value (cash price) unavailable Debit: equipment 41323 (what you have to solve for) Debit: Discount on NP Credit: NP (face amount of 50,000 due in 2yrs) interest would be: Dec 31, 2024: D: interest expense 4132 (41323 x .10) C: Disct on NP 4132 Dec 31, 2025 D: Interest expense 4545 [(41323 + 4132) x .10] C: disct on NP 4545 D: NP 50,000 C: Cash 50,000 NOTE: your discount payable is decreasing and your interest expense is increasing with payments on dec 31 of 24/25

Question 58

noninterest bearing note but unsure of interest rate

Answer 58

requires co. to pay 100,000 on Dec 31 2026 unsure of interest rate price lists indicate equipment could have been purchased for cash price at 79,383 D: Equipment (cash price) 79,823 D: Disct on NP 20,167 C: NP (face amount) 100,000 solving for interest rate of PV so take 79823/100,000 = .79383 PV of $1 --> n=2, i = ??? basically 8%

Question 59

issuance of equity securities

Answer 59

can occur when small co.s incorporate and the owner or owners contribute assets to the new corporation in exchange for owners securities

Question 60

transactions exchange value either (for issuance of equity securities)

Answer 60

1) the FV of the assets received by the corporation 2) the market value of the shares of corporations whose stock is actively traded

Question 61

JE for issuance of equity securities

Answer 61

Land 200,000 Common Stock 200,000 issued 10,000 shares of no par common stock $20 per share 20 x 10,000

Question 62

donated assets

Answer 62

usually is an enticement to do something that benefits the donor recorded at their fair value based on either an available market price or an appraisal value revenue is credited

Question 63

example of asset donation

Answer 63

company decided to relocate its office to the city of Westmont. City agreed to pay 20% of the $20 million cost of building the headquarters in order to entice co. to relocate. the building was completed on May 3, 2024, co. paid its portion of the cost of the building in cash debit: building 20,000,000 (cost of building) Credit: cash (difference) - what you pay the rest of Credit: revenue - donation of asset (part that the city agreed to pay, so helps you out with expenses, so that reveneue)

Question 64

decision makers perspective (capital budgeting)

Answer 64

capital budgeting: decisions pertaining to acquisitions of property, plant and equipment and intangiable assets requires management to forecasts all future net cash flows generated by the assets you want your present value of future net cash flows > initial acquisition cost

Question 65

fixed asset turnover ratio

Answer 65

indicates the level of sales generated by the co.'s investment in fixed assets = net sales/average fixed assets (beg and end of period) you look at the book value or carrying value/amount is the cost - AD and depletion

Question 66

exchanges

Answer 66

an asset received in an exchange of non-monetary assets generally is valued at fair value old asset at fair value traded in new asset acquired at fair value (difference is the paid in cash or other asset) gain or loss is recognized in these transactions for the difference between the fair value and the book value of the asset given

Question 67

steps for exchanging an asset

Answer 67

1) record the new asset at fair value - FV is determined based on the fair value of the assets given up or the fair value of the asset received (in a normal exchange these would be equal) 2) remove the book value of the nonmonetary asset given (book value equals the recorded cost of the old asset minus its accumulated depreciation 3) record any cash received or paid - cash is used to equalize the fair values of the nonmonetary assets in the exchange 4) record gain or loss: the difference between the fair value and book value of the old asset

Question 68

recording gain or loss in dealing with exchanging nonmonetary assets

Answer 68

if FV < BV (loss) if FV > BV (gain) also the net increase or decrease in total assets from the exchange

Question 69

what happens if the fair value is not determinable in nonmonetary asset exchange

Answer 69

old equipment has BV of 100,00 (cost of 500,000 - AD of 400,000) FV of both new and old equipment is not determinable 430,000 was paid in cash Debit: Equipment - new 530,000 (this is based off of the BV of the old asset and the cash paid --> because there is no FV) Debit: AD 400,000 Credit: Equipment - old 500,000 Credit: Cash 430,000 no gain or loss is recognized

Question 70

exchanges that lack commercial substance

Answer 70

commercial substance is when future cash flows change as a result of the exchange example: newer models of equipment can increase production or improve manufacturing efficiency causing an increase in rev or a decrease in operating costs with a corresponding increase in future cash flows gain: BV of old asset is used to record the exchange loss: Fair value of old asset is used to record the exchange (unlkikely situation)

Question 71

journal entry for lacking commercial substance at a gain

Answer 71

you do NOT recognize the gain old land has BV of 2,500,000 and a fair value of 4,500,000 paid 500,000 in cash exchange lacks commercial substance Debit: Land - new: 3,000,000 (so new land is still cash + BUT its the BV of old asset not FV) Credit: Land old: 2,500,000 Credit: Cash 500,000 ignore fair value and original cost

Question 72

what happens in an exchange if you receive cash

Answer 72

you subtract it from the new equipment

Question 73

self constructed assets

Answer 73

company might decide to construct an asset for its own use rather than buying an exsisting one identifying the cost is difficult because there is no eternal transaction to establish an exchange price

Question 74

what are the two critical issues with self constructed assets

Answer 74

determining the amount of indirect manufacturing costs (overhead) to be allocated to the construction deciding on the proper treatment of interest (actual or implict) incurred during construction

Question 75

overhead allocation for self constructed assets

Answer 75

- inclusion of only the incremental overhead costs - full cost approach (GAAP)

Question 76

interest capitalization for self constructed assets

Answer 76

capitalized and then allocated as depreciation

Question 77

qualifying assets for IC

Answer 77

assets constructed for a co's own use as well as discrete projects for sale or lease only interest incurred during the construction period is eligible for capitalization

Question 78

period of capitalization for IC

Answer 78

begins when construction begins and the 1st expenditure is made as long as interest costs are actually being incurred

Question 79

what is average accumulated expenditures

Answer 79

approximates the average debt necessary for construction - if evenly incurred construction expenditures = average - if not evenly incurred construction expenditures = weighted average so for specific interest method - EIC: is just beg + end / 2 - NEIC: is the loans you have to find the average percentage between the other debt - the construction loan itself is always evenly incurred weighted average interest method is where you use the fractions to find the average accumulated expenditures (would not even / 2)

Question 80

steps for IC

Answer 80

determine weighted average accumulated expenditures calculate the amount of interest to be capitalized - for specific interest method will have to find the average % between the other two loans - for weighted average interest method will be given % in construction loan and multiply by your average accumulated expenditure NOTE: remember we are yes calcualting IC, but that itself represents an expenditure --> so whatever you find for IC, that expenditure is added to the cost of the self constructed asset to get to accumulated expenditures at Dec 31, 2024 - compare the calc interest with the actual interest incurred (the calculated interest was from step 2) - the actual interest was the % x construction loan and then if you ONLY multiply the % by each of the other debt loans (so in this case your actual interest is where you other debt loans (not SB) do not have the average % calculated interest is what you are capatlizing actual interest is the interest when you multiply the loan by the specific %

Question 81

R&D

Answer 81

research - planned search/critical investigation to discover new knowledge that helps developing a new product or service or a new process of technique or improving exsisting product/processes development - translation of research findings into a plan or design for a new product or process or improving exsisting product or processes whether intended for sale or use

Question 82

determining R&D costs

Answer 82

includes costs relevant to R&D projects: - salaries, wages and other labor costs of R&D personnel - costs of materials consumed, equipment, faciltiies, intangibles used in R&D projects - costs of services performed by others - reasonable allocation of indirect costs related to R&D activities

Question 83

determining R&D costs also includes:

Answer 83

asset purchased for single R&D project - cost is considered R&D and expenses immediately in the current year asset purchased for more than a single R&D project - depreciation or amortization of these assets is included as R&D expenses only in the periods the assets are used for R&D activities

Question 84

examples of R&D costs: costs incurred are R&D costs

Answer 84

Laboratory research aimed at discovery of new knowledge. * Searching for applications of new research findings or other knowledge. * Design, construction, and testing of preproduction prototypes and models. * Modification of the formulation or design of a product or process.

Question 85

examples of non R&D costs - costs incurred are non R&D costs

Answer 85

Engineering follow-through in an early phase of commercial production. * Quality control during commercial production including routine testing of products. * Routine ongoing efforts to refine, enrich, or otherwise improve on the qualities of an existing product. * Adaptation of an existing capability to a particular requirement or customer’s need as a part of a continuing commercial activity

Question 86

what is an expense not to be included in R&D expenses

Answer 86

salaries, wages and payments to others

Question 87

patent filing and legal costs

Answer 87

are not R&D expenses, part of patent valuation itself

Question 88

equipment with R&D costs

Answer 88

do NOT include in R&D expenses BUT the depreciation on the equipment for the R&D is INCLUDED D: R&D expense C: AD - equipment

Question 89

so you can have total expenditures of

Answer 89

R&D expense capitalized as equipment capitalized as patent