Accounting - Chapter 7

Front 1

What are plant assets?

Back 1

Long-lived assets such as land, buildings, and equipment. Also called fixed asset. Besides land they all depreciate.

Front 2

What are intangible assets?

Back 2

An asset with no physical form, a special right to current and expected future benefits

Front 3

How to determine the cost of an asset?

Back 3

The cost of any asset is the sum of all the costs incurred to bring the asset to its intended use.

Front 4

What is not included in the cost of land?

Back 4

All land improvements such as paving and fencing.

Front 5

What is amortization?

Back 5

The depreciation on leasehold improvements

Front 6

What is the relative-sales-value method?

Back 6

The technique when the total cost is divided among the same assets according to their relative market value

Front 7

What is a capital expenditure?

Back 7

Expenditures that increase the asset's capacity or extend its useful life

Front 8

What are expenses for an asset?

Back 8

Costs that do not extend the asset's capacity or its useful life, but merely maintain the asset or restore it to working order.

Front 9

What is depreciation?

Back 9

A process in which we allocate a plant asset's cost to expense over its life.

Front 10

What is the estimated useful life?

Back 10

The length of service expected from using the asset

Front 11

What is estimated residual value?

Back 11

The expected cash value of an asset at the end of its useful life

Front 12

How is the depreciated cost measured?

Back 12

Depreciated cost= asset's cost - estimated residual value.

Front 13

What is the straight-line method?

Back 13

Depreciation method in which an equal amount of depreciation expense is assigned to each year of asset use.

Front 14

How to calculate the cost in straight-line?

Back 14

The cost minus the residual value divided by the useful life

Front 15

What is the units-of-production method?

Back 15

Method where a fixed amount of depreciation is assigned to each unit of output produced by the asset

Front 16

How to calculate expense in units-of-production method?

Back 16

Cost minus the residual value divided by the useful life in units of prodction

Front 17

How is the accelerated method different?

Back 17

It is different because it writes off a larger amount in the beginning

Front 18

What is the double-declining-balance method?

Back 18

Computes annual depreciation by multiplying the asset's declining book value by a constant percentage, which is 2 times the straight-line rate

Front 19

What is the first step in DDB?

Back 19

Compute the straight-line depreciation rate per year

Front 20

What is the second step in DDB?

Back 20

Multiply the straight-line depreciation rate times two

Front 21

What is the third step in DDB?

Back 21

Multiply the DDB rate by the period's beginning asset book value, ignore the residual value.

Front 22

What is the fourth step in DDB?

Back 22

Determine the final year's depreciation amount. The amount needed to reduce asset book value to its residual value

Front 23

What are the differences in DDB from the other methods?

Back 23

First the residual value is ignore the first year. Second the final year is the "plug" amount needed.

Front 24

What is straight-line method mostly used for?

Back 24

For assets that generate revenue evenly through time.

Front 25

What is the unit-of-production method mostly used for?

Back 25

For assets that wear out because of physical use rather than obsolescence.

Front 26

What is the DDB method mostly used for?

Back 26

For assets that generate more revenue earlier in their useful lives and less in later years

Front 27

How is DDB helpful for tax purposes?

Back 27

It provides the fastest deductions, thus decreasing immediate tax payments.

Front 28

What is the Modified Accelerated Cost Recovery System(MACRS)?

Back 28

In this method the assets are grouped into classes, and for a given class depreciation is computed by the DDB, the 150%DDB, and the straight-line method.

Front 29

For what group is the DDB method used?

Back 29

It is used for the four classes.

Front 30

For what group is the 150%DDB method used?

Back 30

For 15-year and 20-year assets

Front 31

For what group is the straight-line method used?

Back 31

For most real estate

Front 32

How to compute partial year depreciation?

Back 32

First compute the full year depreciation, then multiply it by the fraction of the year.

Front 33

What is the rule of thumb for partial year depreciation?

Back 33

Businesses do not record monthly depreciation for assets purchased after the 15th of the month and record full month depreciation for assets purchased on or before the 15th

Front 34

How to change the useful life of a depreciable asset?

Back 34

Use the current book value and divide it by the new estimated useful life remaining.

Front 35

What is a fully depreciated asset?

Back 35

It is an asset that has reached the end of its estimated useful life.

Front 36

What happens to fully depreciated assets?

Back 36

They may still be used but they do not accumulate more depreciation.

Front 37

What happens when disposing of an asset?

Back 37

The accumulated depreciation must match the cost of the asset.

Front 38

What happens when the asset is disposed before fully depreciated?

Back 38

The company must incur and record a loss and the remaining of the depreciation

Front 39

What happens when the assets is sold?

Back 39

If there is a gain or a loss they must be recorded. To determine if there was a gain or loss the price must be matched to the current book value

Front 40

What happens when assets are exchanged?

Back 40

The business simply transfers the book value of the old asset plus any cash payment into the new asset account

Front 41

What is a depletion expense?

Back 41

That portion of a natural resource's cost that is used up in a particular period. Depletion expense is computed in the same way as units-of-production depreciation.

Front 42

What is amortization?

Back 42

The systematic reduction of a lump-sum amount. Expense that applies to intangible assets in the same way depreciation applies to plant assets and depletion applies to natural resources.

Front 43

How does amortization work?

Back 43

It is calculated in straight-line bases, it doesn't have to be accumulated, and most intangibles do not have residual values.

Front 44

How does the amortization for patents works?

Back 44

Amortization for patents is recorded as an expense and reduces the value of the patent.

Front 45

How does the amortization for a copyright work?

Back 45

Because the useful is usually 2 or 3 years, each period's amortization amount is a high proportion of the copyright cost

Front 46

How does the amortization for a trademark work?

Back 46

If the trademark has an expected useful life it may be amortized but if it has an indefinite life it should not be amortized

Front 47

How is the amortization process for a franchise?

Back 47

Franchises have indefinite lives, therefore, they are not amortized

Front 48

How does goodwill work?

Back 48

Goodwill is the excess paid for acquiring a new company. It is an expense and it is not amortized

Front 49

What happens to assets with indefinite lives?

Back 49

If the value increases then the value may not be marked up, but if the value decreases then a loss is recorded.

Front 50

What happens with R&D?

Back 50

Costs for R&D need to be recorded as an expenses, and only one exception can occur to record it as an asset.