CHAPTER
1. Distinguish a companys expenses from expenditures that it should capitalize 2. Measure the acquisition cost of tangible assets such as land, buildings, and equipment 3. Compute depreciation for buildings and equipment using various depreciation methods 4. Recalculate depreciation in response to a change in estimated useful life or residual value 5. Differentiate financial statement depreciation from income tax depreciation 6. Explain the effect of depreciation on cash flow
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Introduction to Financial Accounting, 10/e
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C = total acquisition cost December 31, 20X2 $41,000 R = estimated residual value $1,000 n = estimated useful life (in years or miles) 4 years 200,000 miles D = amount of depreciation Various
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Straight line rate of depreciation = year = 25% per year Double the straight line rate = 25% x 2 = 50% Book value at the begin. of the year = Acquisition cost less Accumulated Depreciation
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Sale for less than its book value (41,000 20,000 = 21,000)
Cash Accumulated Depreciation Loss Equipment 14,000 20,000 7,000 41,000
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Fair Market Value - Amount the asset could be exchanged between willing knowledgeable parties in an arms length transaction; usually determined by appraisers based on market-based evidence.
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Introduction to Financial Accounting, 10/e
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Impairment loss
Active market: Book value fair market value Inactive market: Book value net discounted cash flows associated with future benefits
Recoverable value the higher of fair market value minus the cost to sell and the value in use (present value of expected future cash flows).
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LO 11 - Intangible Assets
Intangible assets are not physical in nature; they are rights or claims to expected benefits that are often from contractual rights Accounting for intangible assets depends on whether the asset
was acquired externally or developed internally has a finite or infinite life
LO 11 - Intangible Assets
Patents - exclusive right granted by government to produce or sell a product, or use a process for up to 20 years. Copyrights exclusive rights to reproduce and sell a book, musical composition, film, or similar creative item for the life of the creator plus 70 years. Trademarks - distinctive identifications of a manufactured product or a service, taking the form of a name, sign, slogan, logo, or emblem Franchises/licenses - legal contracts that grant the buyer the right to sell a product or service in accordance with specified conditions Leasehold - right to use a fixed asset for a specified period of time beyond one year Leasehold improvements - lessee spends money to improve leased property; improvements become part of the leased property and are classified as fixed assets; amortized over the shorter of the lease term or the physical life of the improvement.
2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial Accounting, 10/e
US GAAP only allows externally acquired assets on the balance sheet, as the internally developed ones are difficult to value honestly and objectively (except for computer software) IFRS does not allow capitalization of the research costs, but requires capitalization of the development costs Assets with indefinite life are not amortized; they are evaluated periodically for impairment Assets with finite life are amortized similar to tangible assets Useful life shorter of economic useful life or legal life
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Introduction to Financial Accounting, 10/e
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LO 12 - Goodwill
Goodwill an intangible asset that cannot be separated from the firm
Can be recognized only when one company buys another Is the excess of the cost of the acquired company over the sum of the fair market value of its identifiable individual assets less the liabilities Goodwill is not amortized It is reviewed annually for impairment
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