Chapter 11 Flashcards
(23 cards)
Capital expenditures
PP&E costs to keep them in good order
IF
Future economic benefits result from expenditure
- asset life is prolonged
- quantity of services expected is increased
- quality of service is improved
Revenue Expenditure
does not meet criteria for capital expenditure
expensed as incurred
Replacement
meets condition of capitalization because it enhances service life/quality
How to record capital expenditure
debit: accumulated depreciation
credit: cash
why: increase the net book value by reducing it’s accumulated depreciation
Betterment
improve asset beyond original condition
capitalize by debiting the assault account directly
Betterment
improve asset beyond original condition
meets conditions for capitalization
debit: equipment/building
credit: cash
Ways for disposal
abandonment
sale
exchange
steps to record disposal
update depreciation calculations first
Asset is being scraped/abandoned
includes:
- elimination of the cost of the asset from the books
- removal of related accumulated depreciations
- potentially recording a loss to balance- loss reflects the new book value that was not previously depreciated
Journal entry for scraped/abandoned
Debit:
Accumulated Depreciation
Loss
Credit;
Equipment
abandoned equipment costing $100,000
it was 75% depreciated
Journal entry for scraped/abandoned
Debit:
Accumulated Depreciation 75,000
Loss 25,000
Credit;
Equipment 100,000
abandoned equipment costing $100,000
it was 75% depreciated
Asset is disposed at sale
includes:
- proceeds of sale
- depreciation
- loss
Journal entry for sale - loss
Debit:
Accumulated Depreciation 75,000
Loss 15,000
Cash 10,000
Credit: Equipment 100,000
sold equipment costing $100,000 for $10,000
it was 75% depreciated -loss for $15,000 as net book is $25,000
Journal Entry for sale - gain
Debit:
Accumulated Depreciation 75,000
Cash 30,000
Credit:
Gain 5,000
Equipment 100,000
sold equipment costing $100,000 for $30,000
depreciated 75%
net book value $30,000
Journal entry for scraped/abandoned
Debit:
Accumulated Depreciation 75,000
Loss 25,000
Credit;
Equipment 100,000
abandoned equipment costing $100,000
it was 75% depreciated
net book $25,000
exchange transaction
Trading one asset for another; to be booked at fair value if the transaction has commercial substance
exchange transaction
Trading one asset for another; to be booked at fair value if the transaction has commercial substance
aren’t always taxable events
Commercial Substance
The quality of an exchange transaction such that it changes the future cash flow potential of the entity
Boot
Boot is the term used to describe additional monetary consideration that may accompany an exchange transaction
Impairment
When the carrying amount of an asset is not recoverable from its future cash flow
Natural Resource
Oil and gas reserves, mineral deposits, thermal energy sources, and standing timber are just a few examples of such assets that a firm may own
depletion
The process used to allocate the cost of a natural resource asset to the accounting periods benefited
Depletion equation
cost of resource - expected residual value / estimated units in resource deposit= depletion per unit
