Accounting ch 9 – Flashcards

expensive, full cost invested can be a challenge to determine, last several years, may be sold or traded in

assets whose physical characteristics define their utility or usefulness, such as buildings, desks, and equipment

assets whose value is not derived from their physicality (ex. software programs on a CD, physical CD is not the value, trademark, patent, goodwill)

assets that come from the ground and can ultimately be used up (oil, diamonds, and coal)

buildings, machinery, equipment, furniture, fixtures -- tangible property, plant, and equipment other than land

natural resources

intangible assets

amount paid for the asset

sum of all the costs incurred to bring the asset to its intended purpose, net of all discounts

purchase price, taxes paid, amounts paid to ready the asset for its intended use, purchase commissions

includes following costs paid by the purchaser: purchase price, brokerage commission, survey and legal fees, property taxes in arrears, taxes assessed to transfer the ownership, cost of clearing land and removing unwanted buildings // cost does NOT include: fencing, paving, sprinkler systems, lighting, signs

asset account was debited (increased) for an asset

cost of a building includes: architectural fees, building permits, contractor charges, payments for material labor and overhead

purchase price less any discounts, transportation charges, insurance while in transit, sales and other taxes, purchase commission, installation costs, cost of testing the asset before it is used

includes basic cost of each asset less any discounts, plus all other costs to ready asset for intended use (desk, chair, file cabinets, display racks, shelving)

company pays a single price for several assets as a group

total cost (100%) is divided among the assets according to their relative sales values

capital expenditures & expenses

debited to an asset account because they increase the assets capacity or efficiency, or extend the assets useful life

a capital expenditure because it extends the assets capacity or useful life (major engine or transmission overhaul, modification for new use, addition to storage capacity)

debited to repair and maintenance expense (repair of transmission or engine, oil change, lubrication, replacement of tires or windshield, paint job) -- would be EXPENSED

treating cap. exp. as an expense creates error -- if company expenses the cost of replacing an engine by debiting repair and maintenance, rather than capitalizing it (debiting the asset) -- overstates repair and maintenance exp, understates net income, retained earnings, and equipment on the balance sheet

incorrectly capitalizing an expense (minor repair of replacing water pump on truck) = results in expenses being understated and net income being overstated, balance sheet would overstate the truck assets by the amount of the repair bill

allocation of a plant asset's cost to expense over its useful life --wear out as they are used, may become obsolete before they wear out--is NOT a process of valuation and does not meant that the business sets aside cash to replace an asset when it is used up

cost, estimated useful life, estimated residual value

the length of the service period expected from the asset - expressed in years, units, output, or miles

the asset's expected cash value at the end of it's useful life (ex. delivery trucks useful life may be 100,000 miles)

straight line, units of production, declining balance -- all work differently in HOW they derive the yearly depreciation amount, but also result in the same total depreciation over total life of asset

allocates an EQUAL amount of depreciation to each year -- as an asset is used, acc depr increases and book value decreases -- at the end, asset is to be fully depreciated

allocates a FIXED amount of depreciation to each unit of output (unit of output can be miles, unites, hours, or output)

main accelerated method of depreciation--residual (or salvage) value is NOT included, it is ignored until the last year

use for asset that generates revenue evenly over time - each period shows an equal amount of depreciation - ex. depreciating a building

use for asset that depreciates due to wear and tear rather than obsolescence - more use causes greater depreciation - ex. depleting natural resources like oil or coal, vehicles (miles), and machinery (hours)

use for asset that produce more revenue in their early years - higher depreciation in the early years is matched against the greater revenue - ex. depreciating computers

for a change in either estimated asset life or residual value, the asset's remaining depreciation book value is spread over the asset's remaining life

fully depreciated means asset has reached the end of its estimated useful life - no more depr. recorded - asset is disposed of if no longer useful - asset account and its accum. depr remain on the books - asset NEVER goes below RESIDUAL VALUE

purpose is to capture all the depreciation taken to date on plant assets

payment is expensed that should be recorded as equipment = expenses are UNDERSTATED. // if payment is capitalized that should be an expense = assets are OVERSTATED

used to determine if there is a gain or loss on a disposal of an asset, you must compare:

a purchased patent must be capitalized and amortized over 20 years or less

due within one year or one operating cycle, whichever is longer

shown on the balance sheet as a current liability

FICA, FUTA, and SUTA

federal income taxes and FICA taxes are deducted in arriving at an employees net pay

pay stated as a percentage of a sale amount

record with a credit to employee income taxes payable

note payable due in 23 months

advantage of issuing stock rather than issuing bond is that issuing stock generally results in higher earnings per share