CHAPTER 10 Cost of land includes (1) cash purchase price (2) closing costs such as title and attorney's fees (3) real estate brokers commissions (4) accrued property taxes and other liens on land assumed by purchaser (everything D land account) Three factors that affect computation of depreciation: (1) cost: all expenditures necessary to acquire asset and make it ready for intended use (2) useful life: estimate of expected life based on need for repair, service life, and vulnerability to obsolescence (3) salvage value: estimate of asset's value at the end of its useful life Straight Line Method: depreciation is same for each year of asset's useful life; measured solely by passage of time; most common Depr Cost = Cost of Asset - Salvage Value Annual Depr Exp = Depr / Useful Life in Years Units of Activity Method: useful life is expressed in terms of total units of production or expected use from asset; best matches revenues with expenses Depr Cost per Unit = Depr Cost / Total Units of Activity Annual Depr Expense = Depr Cost per Unit x Units of Activity During Year Declining Balance Method: produces decreasing depreciation expense over asset's useful life; periodic depreciation is based on declining book value (cost - accumulated depr) Annual Depr Expense = Book Value at Beginning of Year x Declining Balance Rate Revenue Expenditures: expenses to maintain operating efficiency and productive life of unit; D repairs expense Capital Expenditures: additions and improvements made to increase company's investment in productive facilities; D plant asset affected Disposal by Retirement: plant asset is scrapped or discarded (eliminate book value of plant asset at date of sale: D accumulated depr, C asset) Gain on Disposal: debit difference if cash proceeds are greater than book value D cash, D accumulated depr, C asset, C gain on disposal Loss on Disposal: debit difference if cash proceeds are less than book value D cash, D accumulated depr, D loss on disposal, C asset Depletion: depreciation of natural resources; units-of-activity method is generally used Depletion = (Total Cost - Salvage Value) / Total Estimated Units Annual Depl Expense = Depl Cost per Unit x Number of Units Extracted and Sold D depletion expense, C accumulated depletion Intangible Assets: rights, privileges, and competitive advantages that result from ownership of long lived assets; may arise from govt grants, acquisitions of another business and private monopolistic arrangements Amortization: systematic write-off of an intangible asset; intangible assets are usually amortized on a straight line basis D amortization expense, C specific intangible asset Patents: exclusive right issued by Patent Office that enables recipient to manufacture, sell, or otherwise control invention for a period of 20 years from date of grant; cost should be amortized over its 20 year legal life or useful life, whichever is shorter Copyrights: grants from federal govt, giving owner exclusive right to reproduce and sell an artistic or published work; extend for life of creator plus 70 years Trademark: word, phrase, jingle, or symbol that identifies a particular enterprise or product; cost is purchase price and is not amortized because it is indefinite Franchise: contractual arrangement under which franchisor grants franchisee right to sell certain products, render specific services, or use certain trademarks, usually in restricted geographical area License/Permit: between govt body and business enterprise that permits enterprise to use public property in performing services Goodwill: value of all favorable attributes of a business (good management, good location, skilled employees); recorded as excess of cost over fair market value of net assets acquired Asset Turnover: analyzes productivity of company's assets Asset Turnover = Net Sales / Avg Total Assets acct Weygandt, Jerry J., Paul D. Kimmel, and Kieso E. Donald. Financial Accounting. 6th ed. Wiley, John & Sons, 2007. Print.
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