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ACFM 321 Exam 4
| Term | Definition |
|---|---|
| Property, Plant, & Equipment | Tangible, long-lived assets used in operations of business, such as land, buildings, equipment, machinery, furniture, and vehicles, as well as natural resources, such as mineral mines, timber tracts, and oil wells |
| Intangible Assets | Operational assets that lack physical substance and often involve an exclusive right to a company to provide a product or service; examples: patents, copyrights, franchises, and goodwill |
| Equipment | Broad term that includes machinery, computers, and other office equipment, vehicles, furniture, and fixtures |
| Land | Real property used in operations (land held for speculative investment or future use is reported as investments or other assets) |
| Land Improvements | Enhancements to property such as, parking lots, driveways, private roads, fences, landscaping, and sprinkler systems |
| Buildings | Structures that include warehouses, plant facilities, and office buildings |
| Natural Resources | Productive assets that are physically consumed in operations such as timber, mineral deposits, and oil/gas reserves |
| Patents | Exclusive 20-year right to manufacture a product or use a process |
| Copyrights | Exclusive right to benefit from a creative work, for life of creator plus 70 years |
| Trademarks | Exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service, for a period of 10 years and is renewable |
| Franchises | Contractual agreement under which franchisor grants franchisee exclusive right to use franchisor's trademark or tradename and certain product rights |
| Software Development Costs | Costs incurred to develop or purchase computer software to be sold, leased, or otherwise marketed (or to develop computer software to be used internally) |
| Acquired Research & Development | Developed technologies or in-process R&D purchased in a business acquisition |
| Goodwill | Unique value of company as a whole over and above all identifiable assets |
| Expenses, Capitalized | Costs that benefit only current period are recorded as _______, but costs that also benefit future periods should be _________ |
| Cost of Equipment To Be Capitalized | Purchase price less any discounts received from seller, sales tax, transportation costs paid by buyer, installation and testing, legal fees to establish title, and any other costs of bringing asset to its condition and location for use |
| Cost of Land To Be Capitalized | Purchase price, closing costs (attorney, title, title search, and recording), real estate agent commissions, back taxes, liens, mortgages, or other obligations, expenditures (clearing, filling, draining, etc), less proceeds from sale of salvaged materials |
| Cost of Land Improvements To Be Capitalized | Cost of these assets are separately identified and capitalized; depreciate their cost over periods benefitted by their use |
| Cost of Buildings To Be Capitalized | Realtor commissions & legal fees in addition to purchase price & reconditioning costs (refurbishing, remodeling, or modifications to suit new owner) |
| Cost of Natural Resources To Be Capitalized | Initial valuation is purchase price plus any other costs necessary to bring asset to condition and location for use, acquisition costs, exploration costs, development costs, and restoration costs |
| Acquisition Costs | Amounts paid to acquire rights to explore for undiscovered natural resources or to extract proven natural resources |
| Exploration Costs | For natural resources, expenditures such as drilling a well, or excavating a mine, or any other costs of searching for natural resources |
| Development Costs | For natural resources, costs incurred after resources have been discovered but before production begins |
| Restoration Costs | Costs to restore land or other property to its original condition after extraction of natural resource ends |
| Asset Retirement Obligations | Obligations associated with retirement of a tangible, long-lived asset & amount of liability recorded becomes part of the capitalized cost of asset at time of acquisition |
| Accretion Expense | Increase in an asset retirement obligation that accrues as an operating expense |
| Debit Accretion Expense & Credit Asset Retirement Liability | Journal Entry to Record an Accretion Expense |
| Debit Asset Retirement Liability & Debit Loss or Credit Gain & Credit Cash | Journal Entry to Record Actual Costs vs Retirement Obligation |
| Purchase them or develop them internally | How do companies acquire intangible assets? |
| Costs of Purchasing Intangible Assets | Original cost plus all other costs, such as legal fees, necessary to get asset ready for use & it is amortized over its useful life unless it has an indefinite useful life |
| Costs of Developing Intangible Assets | Record internal development costs as an expense in income statement in period we incur those costs rather than as an intangible asset in balance sheet |
| Costs of Patents, Copyrights, & Trademarks | Initial valuation plus legal, filing, and attorney fees these are capitalized. If the company develops it on its own, it expenses those costs as it incurs them |
| Costs of Franchises | Initial franchise fee plus any legal costs, amortized over life of franchise agreement, periodic payments relate to services provided by franchisor on a continuing basis and are expensed as they are incurred |
| Costs of Goodwill | Fair value of consideration given to acquire company (acquisition price) minus fair value of acquired company's identifiable net assets. Company must expense all costs incurred in internal generation of good will. Do not amortize! |
| Lump-Sum Purchases | If it involves different assets, it is necessary to allocate lump-sum acquisition price among separate items & allocation is made in proportion to individual assets' relative fair values |
| Non-Cash Acquisitions | Asset acquired is recorded at its fair value |
| Deferred Payments (Notes Payable) | As long as note payable explicitly contains realistic interest rate, present value will equal face value of note & it should be equal to fair value of equipment purchased |
| Non-Interest Bearing Note | When interest rate is not specified or is unrealistic, determining cost of asset is less straightforward & in that case, look beyond form of transaction and record its substance |
| Fixed Asset Turnover | Effectiveness of managers to use fixed assets to generate sales |
| Net Sales / Avg Fixed Assets (At Book Value (Cost - Accumulated Depreciation/Depletion)) | What is the fixed asset turnover ratio? |
| Costs of Constructing Asset | GAAP states that _____ ___ __________ asset, including interest should be capitalized and those costs are then allocated as depreciation during later periods when assets are providing benefits |
| Interest is Capitalized | During construction period for assets built for company's own use & assets constructed as discrete projects for sale or lease |
| Interest Costs Expensed | Interest costs incurred during productive life of asset are _______ as incurred |
| Period of Capitalization | Starts with first expenditure and ends when asset is substantially complete and ready for use or when interest costs no longer are being incurred |
| Capitalized Amount | Amount capitalized is only that portion of interest cost incurred during construction period that could have been avoided if expenditures for asset had not been made |
| Specific Interest Method | For interest capitalization, rates from specific construction loans to the extent of specific borrowings are used before using average rate of other debt |
| Weighted-Average Interest Method | For interest capitalization, weighted-average rate on all interest-bearing debt, including all construction loans, is used to calculate amount of capitalized interest |
| Full-Cost Approach | All overhead costs are allocated both to production and to self-constructed assets based on relative amount of a chosen cost driver incurred; this is the generally accepted method used to determine cost of self-constructed asset |
| Expensed | FASB takes a conservative approach and requires R&D costs to be ___________ immediately |
| Understated & Overstated | This leads to assets being ____________ & expenses being ____________ in current period |
| Research | Planned search or critical investigation aimed at discovery of new knowledge with hope that such knowledge will be useful in developing a new product/service or a new process/technique or in bringing about a significant improvement to an existing product |
| Development | Translation of research findings or other knowledge into a plan or design for a new product/process or for a significant improvement to an existing product/process whether intended for sale/use |
| Costs Included In R&D | Salaries, wages, and other labor costs of personnel engaged in R&D activities, costs of materials consumed, equipment, facilities, and intangibles used, costs of services performed by others in connection, and a reasonable allocation of indirect costs |
| Single-Use | Expensed immediately even though the asset's useful life extends beyond current year |
| Alternative-Use | Cost is initially capitalized and depreciation over time is included as expense only in periods asset is used for R&D activities |
| Commercial Production | Point in time where company has no other plans to materially change product prior to beginning production for intended sales to customers |
| What types of costs related to R&D are capitalized? | Software development costs after point of technological feasibility, R&D performed by company for sale to others, and R&D purchased in a business acquisition |
| Technological Feasibility | Established when enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish product can be produced to meet design specifications including functions, features, and technical performance requirements |
| Expensed | Before technological feasibility software costs are ________ as incurred |
| Capitalized | After technological feasibility but before software release to customers, costs are _________ as an intangible asset |
| Expensed | After software release, costs are generally ___________ but not part of R&D |
| Why are R&D costs in general expensed in period incurred? | Entail high degree of uncertainty of future benefits & difficult to match with future benefits |
| Costs of cloud computing arrangements are treated as purchase of intangible assets if both: | Customer has contractual right to take possession of software without significant penalty & could run software on its own or with an unrelated vendor |
| When criteria are not met: | Arrangement is treated as service contract, and costs are expensed as incurred |
| When R&D is Performed For Others: | R&D costs are capitalized as inventory and carried forward into future years until project is completed |
| When R&D is Acquired in Business Acquisitions: | Must determine whether technological feasibility has been achieved |
| Developed Technology | Capitalize its fair value and amortize that amount over its useful life just like any other finite-life intangible asset |
| In-Process R&D | Capitalize its fair value & do not amortize |
| Start-Up Costs | Whenever company introduces new product/service, or commences business in a new territory or with a new customer, it incurs one-time costs that are expensed in period incurred |
| Organization Costs | Costs related to organizing a new entity, such as legal fees and state filing fees to incorporate |
| Depreciation | Cost allocation for plant & equipment over the periods they are used to produce revenues and it is not valuation |
| Depletion | Allocation of the cost of natural resources |
| Amortization | Cost allocation for intangibles |
| Service Life | Estimated use that company expects to receive from asset |
| Physical Life | Provides upper bound for service life of tangible, long-lived assets |
| Allocation Base | Cost of asset expected to be consumed during its service life, computed as asset's acquisition cost less its residual value |
| Residual/Salvage Value | Amount company expects to receive for asset (or leased property) at end of its service life (or lease term) less any anticipated disposal costs |
| Time-Based Methods | Allocates cost base according to passage of time |
| Activity-Based Methods | Allocates cost base using a measure of asset's input or output |
| Straight-Line Method | Allocates an equal amount of depreciable base to each year of asset's service life |
| (Cost - Estimated Residual Value) / Estimated Service Life | What is the formula for straight-line depreciation? |
| Debit Depreciation Expense & Credit Accumulated Depreciation | Journal Entry for Depreciation |
| Double-Declining Balance Method | 200% of straight-line rate is multiplied by beginning book value |
| Beginning of Year Book Value * (2 / Estimated Service Life) | What is the formula for double-declining balance depreciation? |
| Sum-Of-The-Year's-Digits Method | Systematic acceleration of depreciation by multiplying depreciable base by a fraction that declines each year |
| Units-Of-Production Method | Allocates an asset's cost to periods based on asset's production or activity |
| Actual Units Produced * ((Cost - Estimated Residual Value) / Estimated Units of Productivity) | What is the formula for units-of-production depreciation? |
| Half-Year Convention | Record one-half of a full year's depreciation in year of acquisition and another half year in year of disposal |
| Debit Cash, Debit Accumulated Depreciation, Credit Equipment, & Credit Gain on Sale of Equipment | Journal Entry for Gain on Sale of Equipment |
| Debit Cash, Debit Accumulated Depreciation, Debit Loss on Sale of Equipment, & Credit Equipment | Journal Entry for Loss on Sale of Equipment |
| For assets held for sale, all criteria must be met: | Mgmt commits to plan to sell asset, available for sale, active plan to locate a buyer, completed sale is probable and will occur within 1 year, offered for reasonable price relative to its current FV, & mgmt's actions indicate plan is unlikely to change |
| Assets Held For Sale are | Reported at lower of its current book value or its fair value less any cost to sell |
| Retirements | Asset account and accumulated depreciation account are removed from books and a loss equal to remaining book value of asset is recorded |
| Group Depreciation Method | Collection of depreciable assets that share similar service lives and other attributes |
| Composite Depreciation Method | Physically dissimilar assets are aggregated to gain convenience of group (collective) depreciation calculation |
| Debit Cash, Debit Accumulated Depreciation, & Credit Asset | Journal Entry for Group and Composite Depreciation with Gain & Loss included in Accumulated Depreciation |
| Depletion Base / Estimated Extractable Tons | What is the formula for depletion? |
| Debit Depletion & Credit Asset | Journal Entry for Depletion |
| Finite-Life Intangible Assets Subject to Amortization | Allocate capitalized cost less any estimated residual value of intangible asset to periods in which asset is expected to contribute to company's revenue-generating activities |
| Debit Amortization Expense & Credit Intangible Asset Name | Journal Entry to Record Amortization |
| Amortization of Software Development Costs | Capitalized software development costs are amortized based on whichever of following 2 methods produces a greater amount |
| Percentage of Revenue Method & Straight-Line Method | What are the 2 methods that are compared for the amortization of software development costs, and the greater of them is taken? |
| Goodwill | What is an example of an indefinite-life intangible asset not subject to amortization? |
| Accounted for prospectively, made typically at the beginning of the year, and disclosure note is needed | Changes in Estimate are: |
| Debit Depreciation Expense (Year) & Credit Accumulated Depreciation | Journal Entry for Changes in Estimate |
| Accounted for prospectively, company must be able to justify it, and disclosure note is needed | Change in Depreciation, Amortization, or Depletion Method are: |
| Error Correction | Computational errors in calculation of depreciation, depletion, or amortization and mistakes made in determining whether expenditures should be capitalized or expensed need an ________ _______________ |
| Treatment of Material Errors Occurring in Previous Year | Previous year's statements are retrospectively restated, account balances corrected with journal entry, disclosure note, and if retained earnings requires correction, correction is reported as prior period adjustment in statement of shareholders' equity |
| Impairment of Value | An implicit assumption in allocating cost of an asset over its useful life is that there has been no significant reduction in anticipated total benefits or service potential of asset |
| When To Test For Impairment for PPE & Finite-Life Intangible Assets | Only if events or changes in circumstances indicate that book value of asset or asset group may not be recoverable |
| Recoverability Test & Measurement | What are the two steps to determine whether impairment loss has occurred and for how much to record for PPE & finite-life intangible assets? |
| Recoverability Test | An impairment occurs when undiscounted sum of estimated future cash flows from an asset is less than asset's book value |
| Measurement | Impairment loss recorded for amount by which asset's fair value is less than its book value and it is the process of associating numerical values with the elements |
| Debit Loss on Impairment, Debit Accumulated Depreciation (reduce to 0), & Credit Asset (down to fair value) | Journal Entry for Loss on Impairment |
| When to Test For Impairment for Indefinite-Life Intangible Assets | Should be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that asset is impaired |
| Qualitative Assessment for Indefinite-Life Intangible Assets | Evaluate relevant events or circumstances to determine whether it is more likely than not (likelihood of more than 50%) that fair value of asset is less than its book value |
| Impairment loss is recognized for difference | For Qualitative Assessment if FV is less than BV... |
| How is goodwill impairment measured? | Evaluate relevant events or circumstances to determine whether it is more likely than not (likelihood of more than 50%) that fair value of asset is less than its book value. If reporting unit is less than BV, impairment loss is recognized |
| Reporting Unit | Operating segment of company or component of operating segment for which discrete financial info |
| Debit Loss on Impairment of Goodwill & Credit Goodwill | Journal Entry to Record Impairment Loss for Goodwill |
| Understated | If company underestimates future net cash flows, fair value is ______________ |
| What are the 2 effects of a company underestimating future net cash flows and fair value being understated? | Current year's income is unrealistically low due to impairment loss being overstated & future income is unrealistically high because depreciation, depletion, and amortization are based on understated asset values |
| Expensed | Expenditures for basic repairs and maintenance are _________ as incurred |
| Additions | Adding of new major component to an existing asset, these costs should be capitalized, and the capitalized cost is depreciated |
| Improvements | Replacement of major component of asset, capitalized by increasing book value of related asset, and the capitalized cost is depreciated |
| Substitution, Capitalization of New Cost, & Reduction of Accumulated Depreciation | What are the three methods to capitalize improvement costs? |
| Substitution | Deposition of old component & acquisition of new component |
| Capitalization of New Cost | Debit cost of improvement to related asset account, without removing original cost & accumulated depreciation of original component |
| Reduction of Accumulated Depreciation | Leave asset account unaltered but decrease its related accumulated depreciation |
| Rearrangements | Expenditures made to restructure an asset without addition, replacement, or improvement, and the costs are capitalized and then depreciated |
| Capitalized and Amortized | If an intangible right is successfully defended, litigation costs should be __________ & __________ over remaining useful life of related intangible |
| Expensed and Reduced | If defense of an intangible right is unsuccessful, intangible asset has no future value and litigation costs should be __________ immediately and book value should be __________ to realizable value |
| Expensed as Property Taxes | Should the current portion of property taxes be capitalized or expensed? |
| Other Identifiable Intangible Assets | Contractual rights, customer lists, non-compete agreements, trade secrets |
| How to Calculate Fair Value of Net Identifiable Assets (FVNIA) | FV of tangible assets + FV of identifiable intangible assets (whether or not previously recognized) + FV of goodwill - FV of new liabilities |
| Debit Fixed Asset & Credit Cash | Journal Entry for Additions |
| Debit Fixed Asset & Credit Cash | Journal Entry for Capitalization of New Cost (Improvements) |
| Debit Accumulated Depreciation, Debit Loss on Disposal, & Credit Old Asset Component | Journal Entry for Substitution Step 1 (Improvements) |
| Debit New Asset Component & Credit Cash | Journal Entry for Substitution Step 2 (Improvements) |
| Debit Accumulated Depreciation & Credit Cash | Journal Entry for Reduction of Accumulated Depreciation (Improvements) |
| Debit Fixed Asset & Credit Cash | Journal Entry for Rearrangements |
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MOWGaming04
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