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Flashcards in Chapter 9 Deck (74):
1

plant assets

Resources that have physical substance (a definite size and shape), are used in operationso fa business, and are not intended for sale to customers

AKA PPE, and fixed assets

Expected to provide service to the company for a number of years

Decline in service potential over useful lives (except for land)

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Cost principle

Requires that companies record plant assets at cost

*Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use

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Example: cost of factory machinery

Purchase price

Freight costs by purchaser

installation costs

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Revenue expenditures

Expenditures that are immediately charged against revenues as an expense

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Capital expenditures

Expenditures that increase the company's investment in plant assets

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Cost is measured by:

cash paid in a cash transaction or by the cash equivalent price paid when companies use noncash assets in payments

7

Cash equivalent price

The fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable

8

IFRS: asset valuation

IFRS is flexible regarding asset valuation

Companies revalue to fair value when they believe this information is more relevant

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Land improvements

Structural additions made to land, such as driveways, parking lots, fences, landscaping, and underground sprinklers

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lease

a contractual agreement in which the owner of an asset allows another party to use the asset for a period of time at an agreed price

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Lessor

The owner of the asset

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lesse

the other party who uses the asset for a period of time at an agreed price

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Operating leases

Allow the lesse to account for the transaction as a rental, with neither an asset nor a liability recorded

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Capital lease

Lesses show up both the asset and the liability on the balance sheet

15

Advantages of leasing an asset versus purchasing:

1. Reduced risk of obsolescence

2. Little or no down payment

3. Shared tax advantages

4. Assets and liability not reported

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Depreciation

The process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner

*cost allocation designed to properly match expenses with revenues*

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Book value

Cost less accumulated depreciation

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Depreciation applies to three classes of plant assets:

Land improvements

Buildings

Equipment

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Depreciable asset

The usefulness to the company and the revenue-producing ability of each class decline over the asset's useful life

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Depreciation does not apply to land

Because its usefulness and revenue-producing ability generally remain intact as long as the land is owned

*in fact, uusefulness of land can increase because of scarcity of good sites

Land is NOT a depreciable asset

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Obsolescence

The process by which an asset becomes out of date before it physically wears out

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Factors in computing depreciation

1. Cost

2. Useful life

3. Salvange value

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Cost

All expenditures necessary to acquire the asset and make it ready for intended use

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Useful life

Estimate of the expected life based on need for repair, service life, and vulnerabliity to obsolescence

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Salvage value

Estimate of the asset's value at the end of its useful life

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Helpful hint: depreciation

Depreciation expense reported on income statement

Accumulated depreciation is reported on the balance sheet as a deduction from plant assets

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Depreciation methods

1. Straight-line

2. Declining-balance

3. Units-of-activity

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Straight-line method

A method in which companies expense an equal amount of depreciation for each year of the asset's useful life

*used for 95% of U.S. companies

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Depreciable cost

The total amount subject to depreciation

Cost of the plant asset less its salvage value

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Declining balance method

A depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation epxnse over the asset's useful life

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accelerated-depreciation method

A depreciation method that produces higher depreciation expense in the early years than the straight-line approach

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double-declining balance method

Applying the declining-balance approach at different rates, which results in varying speeds of depreciation

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Units-of-activity method

A depreciation method in which useful life is expressed in terms of the total units of production or use expected from the asset

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Uses for units-of-activity:

Factory machinery

Delivery equipment (miles drive, hours in use)

 

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Depreciation expense

Cost - Salvage value

Useful life

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Large corporations use:

Straight-line depreciation in their financial statements in order to maximize net income

Use aspecial accelerated depreciation method on their tax returns in order to minimize their incomee taxes

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Special accelerated-depreciation method

Modified accelerated cost recovery system

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Revising periodic depreciation in current and future years but not to prior periods

Company does not correct previously recorded depreciation expense

Revises depreciation expense for current and future years

*rationale = to not adversely affect users' confidence in financial statements

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Extending an asset's estimated life.......

reduces depreciation expense and increases current period income

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Ordinary repairs

Expenditures to maintain the operating efficiency and expected productive life of the unit

ex. tune ups, oil changes, painting,

Debited to maintenance and repairs expense as incurred

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Additions and improvements

Costs incurred to increase the operating efficiency, productive capacity, or expected useful life of a plant asset

Debitted to plant asset affected

capital expenditures

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impairment

a permanent deccline in the fair value of an asset

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Eliminating book value

Debit accumulated depreciation

Credit asset account for the cost of the asset

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Methods of plant asset disposal

Sale - equipment sold to another party

Retirement - equipment is scrapped or discarded

Exchange - exisitng equipment is traded for new equipment

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Gain on disposal

If the proceeds from the sale exceed the book value of the plant asset

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Loss on disposal

if the proceeds from the sale are less than the book value of the plant asset sold

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Journal entry for retirement of plant assets

Debit Accmulated depreciation

Credit asset account for original of the asset

gain is not possible

loss = asset's book value on the date of retirement

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Return on assets ratio

Indicates amount of net income generated by each dollar of assets

Net Income

Average Total Assets

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Marketing ROI (return on investment)

Profit generated by a marketing intivative divided by the investment in that initiative

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Asset turnover ratio

Indicates how efficiently a company uses its assets to generate sales

Net Sales

Average Total Assets

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Return on assets =

Profit margin x Asset turnover

Net income

Average Total Assets

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Intangible assets

Rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance

ex. ipod, nike swoosh

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intangible with limited life

Company allocates its cost over the asset's useful life using amortization

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Amortization

The process of allocating to expense the cost of an intangible asset

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Journal entry for amortization of intangible asset

Amortization expense XXX

                          Intangible asset XXX

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Patent

An exclusive right issued by the U.S. patent office that enables the receipient to manufacture, sell, or otherwise control an inventrion for a 20 year period from the date of the grant

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Research and development costs

Expenditures that may lead to patents, copyrights, new processes, and new products

seen as an expense when incurred

 

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Copyrights

Give the owner the exclusive right to reproduce and sell an artistic or published work

lasts for life of creator plus 70 years

consists of cost of acquiring and defending it

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Trademark or trade name

A word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or pdouct

ex. Wheaties, Coca-Cola, Jeep

60

Franchise

A contractural arrangement under which the franchisor grants the franchisee the right to sell certain products, to provide specific services, or to use certain trademarks or trade names, usually within a designated geographic area

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Liscences

Operating rights to use public property, granted by a governmental agency to a business

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Goodwill

The value of all favorable attributes that relate to a company that are not attributable to any other specifi casset

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When do companies record goodwill?

Only when there is an exchange transaction that involves the purchase of an entire business

Goodwill is the excess of cost over the fair value of the net assets acquired

64

Costs of Land

Cash purchase price

Closing costs such as title and attorney's fees

Real estate brokers' commissions

Accrued property taxes

Clearing, draining, filling, and grading

Demolition and removal costs 

- Proceeds from salvage value

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Land improvements costs: parking lot

paving, fencing, and lighting

 

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What does Debt to Total Assets show?

Measures the amount of financing by creditors instead of stockholders

The higher, the riskier

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Building Costs when constructed

Contract price

architects' fees

building permits

excavation costs

interest costs during construction

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Equipment costs

Cash purchase price

sales taxes

freight charges

insurance during transit paid by the purchaser

assembling, installing, and testing the unit

Not included = motor vehicle licences, and accident insurance

69

What does Times interest earned ratio show?

Provides an indication of a company's ability to meet interest payments as they come due

70

Building costs when purchased

Purchase price

Closing costs (attorney fees, title insurance)

Real estate broker's commission

Remodeling rooms and offices, etc

71

Why would a company retire bonds before maturity?

A company may decide to retire bonds before maturity to reduce interest cost and remove debt from its balance sheet. A company will retire debt early only if it has sufficient cash resources.

 

72

What are the steps to retire a bond before maturity?

When bonds are retired before maturity, it is necessary to eliminate the carrying value of the bonds at the redemption date and recognize a gain or loss on redemption. The gain or loss is the difference between the cash paid and the carrying value of the bonds.

73

Journal entry to correct error in deposit

A/R XXX

             Cash XXX

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Journal entry to correct error in recording check

A/P XXX

              Cash  XXX