Term
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Definition
| Original cost less salvage value |
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Term
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Definition
Amount of time an asset can be used to produced goods
- Physical factors set outside limits |
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Term
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Definition
Original cost less accumulated depreciation
- Aka book value |
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Term
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Definition
The estimated amount that a company will recieve when it sells the asset or removes it from service
- Amount to which a company writes down or depreciates the asset during its useful life |
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Term
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Definition
| Activity, Straight line, decreasing - charge methods, group/composite |
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Term
| Activity based depreciation |
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Definition
- Dep is a function of use or productivity instead of the passage of time
- Life of asset considered in terms of hours of use or units produced, not years
- Depreciation rate = activity per period/total activity
- Apply rate to depreciable base |
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Term
| Limitation of activity based depreciation |
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Definition
| Inappropriate in situations in which depreciation is a function of time instead of activity |
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Term
| Straight Line depreciation |
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Definition
Depreciation is a function of time rather than charge
Widely used because of its simplicity
Depreciation base/Estimated service life is the charge applied every period |
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Term
| Objections to Straight line depreciation |
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Definition
Two assumptions that may not be correct:
- Economic usefullness is the same each year
- Repair expenses are essentially the same each period
Distorts rate of return analysis (income/assets) |
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Term
| Decreasing Charge methods |
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Definition
Provide higher depreciation cost in earlier years and lower charges in later periods
Charge more dep in earlier years because the asset is most productive in its earlier years
Sum of the year's digits
Declining balance |
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Term
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Definition
Decreasing depreciation charge based on a decreasing fraction of depreciable cost
Sum of years as the denominator, years of estimated life remaining as of beginning of the year as numerator |
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Term
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Definition
Rate is twice the straight line percentage (2 * 1/Life)
Apply rate to the book value of the asset at the beginning of each period
Depreciate it only to the amount of salvage value at the last period
- Do not deduct salvage value in computing depreciation base |
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Term
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Definition
Used when assets are similar in nature and have approximately the same useful lives
- Find an average and depreciate on that basis |
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Term
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Definition
Used when the assets are dissimilar and have different lives
- Find total depreciation per year, divide by total depreciable cost of assets to find depreciation rate
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Term
| Unit method advantages over group/composite methods |
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Definition
Simplifies the computation mathematically
Identifies gains and losses on disposal
Isolates depreciation on idle equipment
Represents the best estimate of the depreciation of each asset, not the result of averaging the cost over a longer period of time
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Term
| When is a change in depreciation estimate recorded? |
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Definition
| In the current and prospective periods; do not make any changes in previously reported periods |
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Term
| Changing depreciation estimate |
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Definition
Divide remaining book value less salvage value by the remaining estimated life
Do not make entry for the change, just change depreciation amount |
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Term
| Partial period depreciation |
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Definition
| Determine depreciation expense for the full year and prorate this expense between the periods involved |
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Term
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Definition
When the carrying amoung of an asset is not recoverable
A write off is recorded |
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Term
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Definition
Used to determine whether or not an impairment has occurred (may not be able to recover carrying amount of the asset)
1. Estimate future net cash flows expectedfrom the use of that asset and its eventual disposition
- if the sum of the expected future net cash flows is less than the carrying amount of the asset, it is considered impaired
- If it is greater, no impairment has occurred |
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Term
| Measurement of impairment loss |
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Definition
Loss is the amount by which the carrying value of the asset exceeds its fair value
- FV measured based on market value
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Term
| Recognizing loss on impairment |
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Definition
NOT reported as an extraordinary item
- Same costs that would flow through operations and would be reported as a loss in continuing operations
Disclose the assets impaired, events leading to impairment, amount of loss, and how it determined value |
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Term
| Restoring assets recognized for impairment |
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Definition
May not restore assets held for use - new cost basis puts the impaired asset on an equal basis with other assets that are unimpaired
Assets held for disposal - not depreciated during the periods held b/c it is inconsistent with the notion of assets to be disposed of and with the use of the lower of cost or NRV
- Held for disposal are like inventory and are held at lower of cost or NRV
Can write up or down an asset held for disposal in future periods as long as the carrying value afte rthe write up never exceeds the carrying amount of the asset before the impairment
- Report losses or gains related to these impaired assets as part of income from continuing operations
DR Loss on impairment, CR AD |
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Term
| What are intangible assets |
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Definition
Assets that lack physical existence - derive their value from the rights and priviliges granted to the company using them
- Not financial instruments |
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Term
| How are intangible assets accounted for |
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Definition
Long term because they typically provide benefits over a period of years
Recorded at cost in purchased from another party (plus expenditures to get it ready for intended use)
Costs incurred to create intangibles internally are generally expensed
- Capitalize only direct costs |
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Term
| Amortizing limited life intangibles |
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Definition
Amortize by systematic charges to expense over their useful life
Should reflect pattern in which they are consumed
If life changes: carrying amount should be amortized over the revised useful remaining life |
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Term
| Amortizing indefinite life intangibles |
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Definition
Not amortized, only tested for impairment at least annually
- Only use fair value test, not recovery test |
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Term
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Definition
Excess cost of the purchase over fair value of identifiable net assets (assets less liabilities) purchased
Future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately organized
Only way to recognize is to sell business |
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Term
| Recording Internally created goodwill |
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Definition
| Do not capitalize because the components of goodwill is simply too complex and associating any costs with future benefits |
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Term
| Recording purchased goodwill |
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Definition
| Compares fair value of the net tangible and identifiable intangible assets with the purchase price; difference is goodwill |
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Term
| Impairment of limited life intangibles |
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Definition
Loss recognized if carrying amount is not recoverable and its carrying amount exceeds its fair value
Perform the recoverability test then FV test
- Loss is carrying amount less fair value
Reduced carrying amount is the new cost basis
Do not restore previously recognized impairment losses |
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Term
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Definition
Adjust carrying value only when it is impaired
To determine impairment, compute FV of reporting unit to its carrying amount. If FV exceeds carryimg amount, it is not impaired
- If FV is less than the carrying amount, determine fair value of goodwill and compare it to recorded goodwill to measure impairment |
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Term
| Difficulties in accounting for R & D Expenditures |
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Definition
Identifying the costs associated with particular activities, projects or achievements
Determining the magnitude of the future benefits and length of time over which such benefits may bbe realized |
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Term
| How are R & D Expenditures recorded? |
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Definition
| All costs expensed when incurred |
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Term
| Software development costs |
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Definition
| Capitalize R & D Activities that develop or improve a product or process for use in SGA activities |
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Term
| Ways to amortize software development costs |
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Definition
Ratio of current revenues to current and anticipated revenues
- Current revenues/ (current + anticipated)
Straight line
Use whichever is greatest |
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Term
| Current maturities of long term debt |
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Definition
| Portion of current liabilities arising from maturation of long term debt within the period |
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Term
| When can you exclude long term debt maturing currently as current liabilities? |
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Definition
If they are to be:
1. Retired by asets accumulated for this purpose that properly have not been shown as current assets
2. Refinanced or retired from the proceeds of a new debt issue
3. Converted into capital stock
Use of current assets or the creation of other current liabilities does not occur in these situations. Therefore, classification as a current liability is inappropriate |
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Term
| Short term liabilities to be refinanced |
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Definition
Do not require use of working capital during the next year or operating cycle
Excluded from current liabilities if the following conditions are met:
- Must intend to refinance the obligation on a long term basis
- Must demonstrate an ability to consummate the refinancing
- Actually refinancing by issuing a long term obligation or equity securities after the date of the balance sheet but before it is issued
- Entering into a financing agreement that clearly permits the company to refinance the debt on a long term basis on terms that are readibly determinable
If refinancing occurs, the portion excluded may not exceed proceeds from new obligation or equity securities used to retire the short term obligation |
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Term
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Definition
DR Wages expense, CR Vacation wages payable or sick days payable when accrued
DR Payable, wages expense (if necessary), CR Cash when paid |
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Term
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Definition
| Consider bonus payments to employees as additional wages and include them as a current liability in the balance sheet |
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Term
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Definition
Claims or rights to receive assets or have a liabilty reduced whose existence is uncertain but which may become valid eventually
Do not record, following conservative policy. Disclose in notes only when a high proabbility exists for realizing them |
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Term
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Definition
| If it is probably that a liability has been incurred and the loss can be reasonably estimated |
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Term
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Definition
If reasonably estimable, recognize as a liability
Cash basis method - expense warranty costs as incurred |
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Term
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Definition
Interest rate written in the terms of the bond indenture
Used to find coupon payment |
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Term
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Definition
| Rate of interset actually earned by the bondholders |
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Term
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Definition
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Term
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Definition
| Bond that sells for less than face value because the market rate exceeds the stated rate |
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Term
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Definition
| Bond sells for more than face value because the effective yield is lower than the stated rate |
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Term
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Definition
| If market rate is greater than the stated rate, issued at a discount, premium if opposite |
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Term
| Amortizing discount or premium |
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Definition
DR Cash for amount recieved, discount, CR Bonds payable for face value (premium on bonds payable if issued at a premium)
- Amount of discount/premium is difference between cash recieved and face value |
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Term
| Recognizing interest on bonds |
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Definition
DR Bond interest expense, Bond premium if sold at premium, CR Cash (bond discount if issued at a discount)
Bond interest expense is total amount, cash paid is coupon rate |
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Term
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Definition
DR Cash, Unamortized bond issue costs
To amortize:
DR Bond issue expense, CR Unamortized bond issue costs |
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Term
| Extinguishment of bonds/debt |
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Definition
| DR Bonds payable, Loss on redemption of bonds, CR Discount on bonds payable, unamortized bond issue costs, cash |
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