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Chapter 8
Reporting and Analyzing Long-Term Assets
36
Accounting
Undergraduate 2
11/16/2008

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Term
Plant Assets
Definition
tangible assets used in a company’s operations that have a useful life of more than one accounting period.
Term
Plant Assets
Definition

o   Make up the single largest class of assets they own

o   Are used in operations

o   Have useful lives extending over more than one accounting period

Term
Land Improvements
Definition
have limited useful lives and can be used up
Term
When a company constructs a building or any plant asset for its own use, its costs include
Definition
material s and labor plus a reasonable amount of indirect overhead cost.
Term
Depreciation doesn't measure
Definition
§the decline in the asset’s market value each period or the asset’s physical deterioration
Term
Useful Life
Definition
   The length of time it is productively used in a company’s operations; also called service life
Term
Inadequacy
Definition
refers to the insufficient capacity of a company’s plant assets to meet its growing productive demands
Term
Obsolescence
Definition
refers to a plant asset that is no longer useful in producing goods or services with a competitive advantage because of new inventions and improvements
Term
Straight-Line Method Equation
Definition

Cost—Salvage Value

Useful life in periods
Term
Straight-Line Method
Definition
§  Charges the same amount of expense to each period of the asset’s useful life
Term
Units of Production Method
Definition
§  Charges a varying amount to expense for each period of an asset’s useful life depending on its usage
Term

Units of Prodcution Method

Two- step process

Definition
o   First get the depreciation per unito   Then get the depreciation expense
Term
Units of Production Method Equation
Definition
§  Depreciation per unit= cost – salvage value     Total units of production§  Depreciation expense= Depreciation per unit X Units produced in period
Term

Double- Declining Balance Method

Three step process

Definition
o   Compute the assets straight-line depreciation rateo   Double the straight-line rateo   Compute depreciation expense by multiplying this rate by the asset’s beginning-of-period book value
Term
Double Declining Balance Method Equation
Definition
§  Step 1: Straight-line rate= 100%                                            Useful life

§  Step 2: Double-declining-balance rate= 2 * Straight-line rate

§  Step 3: Depreciation expense= Double- declining-balance rate X Beginning- period book value

Term
The book value of the asset when using straight-line is always
Definition
greater than the book value of the double-declining method.
Term
With each method the depreciation expense is
Definition

§  the same over the assets useful life.

Term
Modified Accelerated Cost Recovery System (MACRS)
Definition
allows straight-line depreciation for some assets, but it requires accelerated depreciation for most kinds of assets
Term
§  Many companies use __________depreciation in computing taxable income
Definition
accelerated
Term

Partial-Year Depreciation (equation)

Definition
§  When an asset is purchased at a time other than the beginning or end of an accounting period, depreciation is recorded for part of a year§  Straight- line rate X  (month/12)
Term
§  Accumulated Depreciation is a _______ account with a normal ______balance
Definition

contra asset; credit

Term
Plant assets are reported on a balance sheet at their
Definition

§  book value, NOT MARKET VALUE

Term

§  The cost and accumulated depreciation of plant assets are reported on

Definition
the balance sheet
Term

§  Revenue Expenditures

Definition

additional costs of plant assets that don’t  increase the asset’s life or productive capabilities

o   Recorded as expenses and deducted from revenues in the current period’s income statement
Term

§  Capital Expenditures

Definition
 additional costs of plant assets that provide benefits extending beyond the current period
Term

Capital Expenditures:   Are _________to asset accounts and reported on the __________

Definition

debitied, balance sheet

Term
Revenue Expenditures includes
Definition
Ordinary repairs
Term
Capital Expenditures includes
Definition
Betterments and Extraordinary Repairs
Term

§  Disposals of plant assets can be

Definition
 discarded, sold, or exchanged
Term
Depletion
Definition
o   Depletion: the process of allocating the cost of a natural resource to the period when it is consumed
Term
o    Natural resources are reported on the balance sheet at
Definition
cost less accumulated depletion
Term
Depeletion Expense Equation
Definition
o   Depletion per unit= Cost – Salvage Value

                     Total units of capacity

                                Depletion expense= Depletion per unit   X   # of units sold per period
Term
Is land depreciable
Definition
NO; land improvements are depreciable
Term

Salvage value is not used in which method?

Definition
double-declining method
Term
Bond
Definition

 its issuer’s written promise to pay an amount identified as the par value of the bond with interest

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