Accounting 7

  1. Noncurrent Assets
    longer than one year
  2. Tangible Assets
    assets that can be touched

    usually labeled as fixed assets or property plant and equipment (PPE) (this does not include land)

    ex: buildings, equipment and furniture

    assets are expected to be useful for longer than one year
  3. Intangible Assets
    assets that have no physical substance (other than pieces of paper) but give the entity valuable rights

    ex: prepaid expenses, notes payable and goodwill
  4. Asset Measurement Concept
    when PPE is acquired, it is recorded in the accounts at its cost

    this is because it is a nonmonetary cost

    the cost of an asset includes all costs incurred to make the asset ready for its intended use
  5. Capital lease
    a lease for a long period of time (almost the whole life of the asset) 

    is recorded as an asset (regular short term leases are not recorded)

    the amount recorded for a capital lease is the amount the entity would have paid if it had purchased the item rather than leasing it.
  6. Depreciation
    Land continues to be reported on the balanse sheet at its acquisition cost

    - the portion of the asset that is used up in each year of its life, until it is sold or scrapped or useless (wear out physically or become obsolete- called obsolesence). Listed as an expense.

    NOT related to the changes in the market value of an asset
  7. service life
    the period of time over which a plant asset is estimated to be of service to the company

    includes both physical wear and obsolesense (but the shorter of the two periods)
  8. Obsolesense
    loss of usefullness because of the development of improved equipment, changes in stylem and other causes not related to the physical condition of the asset
  9. residual value
    the amount an entity expects to be able to sell the plant asset for at the end of its service life

    - does not appear on accounts. it is merely an estimated number used to calculate depreciation
  10. Depreciable Cost
    the difference between the cost of a plant asset and its residual value

    • Total cost= 22,000
    • Residual Value= 2,000
    • Depreciable Cost= 20,000
  11. Factors relevant to the depreciation of an asset
    • original cost
    • residual value
    • service life

    • factors 1&2= depreciable cost
    • all 3 used to calculate depreciation expense for a given year
    • factors 2&3 are estimates
  12. Depreciation Methods
    • Units of production
    • straight line
    • accelerated
  13. Units of production depreciation
    a cost per unit of production is calculated and depreciation expense for a year is found by multplying this unit cost by the number of units that the asset produced in that year

    • ex: truck purchased in 2011 for $44K, est service for 100K miles and residual value of $4K
    • depreciable cost= $40K
    • est cost per mile= $.40 (40k/100)

    in 2012 the truck was driven 15k miles. the depreciation expense in 2012 was $6k (.40*15k)
  14. Straight Line Depreciation
    annual depreciation expense as a function of time is a straight line. Charging off an equal fraction of the asset cost each year

    *most companies use this method

    % of cost charged off each year is called the depreciation rate= (1/# of years of service life)

    depreciation expense= multiplying the depreciable cost by the depreciation rate, if the dep cost os $9k and the rate is 20%, the dep expense is $1,800
  15. Accelerated Depreciation
    writes off the cost of an asset faster than straight line depreciation. More depreciation expense is reported in the early years of the asset's service life and therefore less in the later years.

    the total amount of depreciation expense is the same as in the straight line method

    - principally used in calculating taxable income
  16. Deferred Income Taxes
    the difference between the income tax paid and the income tax expense

    liability on the balance sheet
  17. accounting for depreciation
    debit the expense account, credit the asset account

    • recognize the appropriate amount of expense
    • recognize an equal decrease in the amount of the asset (decreases in PPE are not shown as direct reduction in the asset amount, instead, decreases in the asset amount of PPE asset because of depreciation expenses are accumulated in a seperate account called Accumulated depreciation, a contra asset account)

    • a decrease in an asset is always a credit
    • accumulated depreciation is a decrease in an asset and therefore has a credit balance
  18. Accumulated depreciation
    deduction from the original cost of the asset, the remaining amount is called Book Value. Book value does NOT report the fair value of the asset.

    • Ex:
    • PPE= 10K
    • Less accumulated dep= 4K
    • Book Value= 6K
  19. After the cost of an asset has been completely written off as depreciation expense, no more depreciation is recorded, even though the asset continues to be used
  20. Gain (or Loss) on disposition of PPE
    the difference between the book value and the amount actually realized from a sale of a plant asset

    • ex:
    • book value 10K is sold for 12K, 2K is the gain on the disposition of PPE and is reported on the income statement
  21. Sale of a PPE Asset
    asset cost 40K, accumulated dep 30K and sold for 12K

    • Cash                                     12,000
    • Accumulated Dep                30,000
    •        PPE                                            40,000
    •        Gain on disposition of PPE         2,000  
  22. purpose of depreciation
    to write off a fair share of the cost of the asset in each year in which it provides service

    depreciation expense does NOT represent a decrease in the asset's real value or usefullness during the year
  23. Accounting for PPE
    • original cost is known
    • service life is an estimate
    • residual value is an estimate
    • book value represents that portion of the cost NOT yet expensed
  24. Wasting Assets
    natural resources, such as coal, oil and other minerals

    ex: natural gas, an iron ore mine and oil well
  25. depletion
    the name of a process of writing off the cost of wasting assets

    similiar to depreciation of PPE, BUT in depletion the asset account is reduced DIRECTLY. Therefore, an accumulated depletion account is not normally used

    calculated by multplying the quantity of the resource used in a period by a unit cost
  26. intangible assets
    intangible items are not treated as assets unless they have been acquired at a measureable cost

    when they are recognized as assets, their cost is written off over their service life

    • max life of a patent is 17 years
    • max life of an intagible asset is 40 years
  27. amortization
    the process of writing off the cost of intangible assets
  28. writing off assets
    • depreciation- refers to PPE assets
    • depletion- refers to wasting assets
    • amortization- refers to intangible assets
  29. in financial accounting depreciation is calculated either by
    • an accelerated method
    • or by straight line method
  30. accelerated depreciation is ofen used for income tax purposes  because it decreased the amount of taxable income in the early years
Card Set
Accounting 7
Accounting 7