Chapter 9.docx

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Department
Financial Accounting
Course
MGAB02H3
Professor
G.Quan Fun
Semester
Winter

Description
MGTB06 Chapter 9: Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles Long-lived assets: are tangible or intangible resources owned by a business and used in its operations to produce benefits over several years Fixed Asset Turnover = Net Sales / Average Net Fixed Assets Measuring and Recording Acquisition Cost  Cost must be recorded at their acquisition cost according to cost principle  Special discounts and interest charges should not be included in the cost  Sales taxes, legal fees, transportation costs, and installation costs are added to the purchase price of the asset Acquisition Cost: the net cash equivalent amount paid or to be paid for the asset Capitalized Interest: represents interest on borrowed funds directly attributable to construction until the asset is ready for is intended use Basket Purchase: an acquisition of two or more assets in a single transaction for a single lump sum Ordinary Repairs and Maintenance: expenditures for normal operating upkeep of long-lived assets Revenue expenditures: maintain the productive capacity of the asset during the current accounting period only and are recorded as expenses Extraordinary Repairs: infrequent expenditures that increase the asset’s economic usefulness in the future Betterments: cost incurred to enhance the productive or service potential for a long-lived asset Capital Expenditure: increase the productive life, operating efficiency, or capacity of the asset and recorded as increases in asset accounts, not as expenses Depreciation: the process of allocating the acquisition cost of property, plant, and equipment over their useful lives by using a systematic and rational method Depletion: the allocation of the acquisition cost of natural resources Amortization: allocation of the acquisition cost of intangible assets Depreciation is a process of cost allocation, not a process of determining an asset’s current market value or worth. When an asset is depreciated, the amount remaining on the statement of financial position does not represent its current market value. Carrying Amount: the acquisition cost of an asset less accumulated and any write downs in asset value MGTB06 Remaining life: (Carrying Amount/ Acquisition Cost)x Estimated Useful life Estimated Useful Life: the expected service life of an asset to the present owner Estimated useful life represents management’s estimate of the asset’s useful economic life to the company rather than of its total economy life to all potential users. The determination of estimated useful life of a long-lived asset must conform to the continuity assumption. Residual Value: the estimated amount to be recovered, less disposal costs, at the end of the estimated useful life of an asset Depreciation Method: 1. Straight-line(Expense: equal amounts each year) The method that allocates the cost of an asset in equal periodic amounts over its useful life  Depreciation expense is a constant amount for each year  Accumulated depreciation increases by an equal amount each year  Carrying amount decreases by the same amount each year until it equals the estimated residual value (Cost – Residual Value) x 1/ Useful Life = Depreciation Expense 2. Units-of-Production(Expense: carrying amounts based on production level) A method to allocated the cost of an asset over its useful life based on the relation of its periodic output to its total estimated output  Depreciation expense is a variable expense because it varies directly with production or use (Cost – Residual Value)/ Estimated Total Production x Actual Production = Depreciation Expense 3. Declining Balance(Expense: declining amounts over time) The method that allocates that cost of an asset over its useful life based on a multiple of the straight-line rate (often two times)  Declining-balance depreciation is based on multiplying the asset’s carrying amount by a fixed rate that exceeds the straight line rate. The rate if often double of the straight line rate is called the double declining balance rate.  Accumulated depreciat
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