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Revising Periodic Depreciation
Course: ACCOUNTING ac 201, Spring 2011School: Montgomery
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Periodic Revising Depreciation Accounted for in the period of change and future periods in Estimate). (Change Not handled retrospectively. Not considered error.
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Periodic Revising Depreciation
Accounted for in the period of change and future periods in
Estimate).
(Change Not handled retrospectively.
Not considered error.
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Montgomery - ACCOUNTING - ac 201
Expenditure During Useful LifeOrdinary Repairs - expenditures to maintain the operating efficiency andproductive life of the unit. Debit - Repair (or Maintenance) Expense.
Montgomery - ACCOUNTING - ac 201
Expenditure During Useful LifeAdditions and Improvements - costs incurred to increase the operatingefficiency, productive capacity, or useful life of a plant asset. Debit - the plant asset affected.
Montgomery - ACCOUNTING - ac 201
ImpairmentsPermanent decline in the fair value of an asset.So as not to overstate the asset on the books, the company writesthe asset down to its new fair value during the year in which thedecline in value occurs.
Montgomery - ACCOUNTING - ac 201
Plant Asset DisposalsCompanies dispose of plant assets in three ways Retirement,Sale, or Exchange (appendix
Montgomery - ACCOUNTING - ac 201
Record depreciation up to the date of disposal.Eliminate asset by:(1) debiting Accumulated Depreciation, and(2) crediting the asset account.
Montgomery - ACCOUNTING - ac 201
Sale of Plant AssetsCompare the book value of the asset with the proceeds received from thesale. If proceeds exceed the book value, a gain on disposaloccurs. If proceeds are less than the book value, a loss ondisposal occurs
Montgomery - ACCOUNTING - ac 201
Illustration depreciation expenseIllustration: On July 1, 2012, Wright Company sells office furniture for$16,000 cash. The office furniture originally cost $60,000. As of January 1,2012, it had accumulated depreciation of $41,000. Depreciation for the
Montgomery - ACCOUNTING - ac 201
Retirement of Plant AssetsNo cash is received.Decrease (debit) Accumulated Depreciation for the fullamount of depreciation taken over the life of the asset.Decrease (credit) the asset account for the original cost ofthe asset.
Montgomery - ACCOUNTING - ac 201
Return on Asset RatioReturn on Asset Ratio indicates the amount of net incomegenerated by each dollar of assets.
Montgomery - ACCOUNTING - ac 201
Asset Turnover RatioAsset Turnover Ratio indicates how efficiently a company uses itsassets to generate sales.
Montgomery - ACCOUNTING - ac 201
Profit Margin Ratio RevisitedProfit Margin Ratio Revisited tells how effective a company is inturning its sales into incomethat is, how much income eachdollar of sales provides.
Montgomery - ACCOUNTING - ac 201
Intangible assetsIntangible assets are rights, privileges, and competitiveadvantages that result from ownership of long-lived assets that donot possess physical substance.
Montgomery - ACCOUNTING - ac 201
Common types of intangibles: Patents Copyrights Franchises or licenses Trademarks Trade names Goodwill
Montgomery - ACCOUNTING - ac 201
Limited-Life Intangibles: Amortize to expense. Credit asset account or accumulated amortization.
Montgomery - ACCOUNTING - ac 201
Indefinite-Life Intangibles: No foreseeable limit on time the asset is expected to providecash flows. No amortization.
Montgomery - ACCOUNTING - ac 201
Patents: Exclusive right to manufacture, sell, or otherwise control an inventionfor a period of 20 years from the date of the grant. Capitalize costs of purchasing a patent and amortize over its 20-yearlife or its useful life, whichever is shorter. E
Montgomery - ACCOUNTING - ac 201
Research and Development CostsExpenditures that may lead to patents, copyrights, new processes, and new products.
Montgomery - ACCOUNTING - ac 201
Important Research and Development CostsAll Research and Development Costs are expensed whenincurred
Montgomery - ACCOUNTING - ac 201
Copyrights: Give the owner the exclusive right to reproduce and sell an artistic or publishedwork. Granted for the life of the creator plus 70 years. Capitalize costs of acquiring and defending it. Amortized to expense over useful life.
Montgomery - ACCOUNTING - ac 201
Trademarks and Trade Names Word, phrase, jingle, or symbol that identifies a particularenterprise or product. Wheaties, Monopoly, Sunkist, Kleenex, Coca-Cola, BigMac, and Jeep. Legal protection for indefinite number of 20 year renewalperiods. Capit
Montgomery - ACCOUNTING - ac 201
Franchises and LicensesContractual arrangement between a franchisor and afranchisee.Toyota, Shell, Subway, and Marriott arefranchises.Franchise (or license) with a limited life should beamortized to expense over the life of the franchise.Franchise
Montgomery - ACCOUNTING - ac 201
GoodwillIncludes exceptional management, desirable location, goodcustomer relations, skilled employees, high-quality products, etc.Only recorded when an entire business is purchased.
Montgomery - ACCOUNTING - ac 201
GoodwillIt is recorded as the excess of purchase price over the FMV of theidentifiable net assets acquired.
Montgomery - ACCOUNTING - ac 201
The definition for plant assets for both IFRS and GAAP isessentially the same. Both international standards and GAAP follow the costprinciple when accounting for property, plant, andequipment at date of acquisition.
Montgomery - ACCOUNTING - ac 201
Under both IFRS and GAAP, interest costs incurred duringconstruction are capitalized. Recently, IFRS converged toGAAP requirements in this area. IFRS, like GAAP, capitalizes all direct costs in self-constructed assets such as raw materials and labor.
Montgomery - ACCOUNTING - ac 201
As in GAAP, under IFRS the costs associated withresearch and development are segregated into thetwo components.Costs in the research phase are always expensedunder both IFRS and GAAP.Under IFRS, however, costs in the developmentphase are capitalize
Montgomery - ACCOUNTING - ac 201
IFRS permits revaluation of intangible assets(except for goodwill).GAAP prohibits revaluation of intangible assets.
Montgomery - ACCOUNTING - ac 201
IFRS allows reversal of impairment losses when there hasbeen a change in economic conditions or in the expected useof the asset. Under GAAP, impairment losses cannot be reversed forassets to be held and used; the impairment loss results in anew cost
Montgomery - ACCOUNTING - ac 201
The accounting for exchanges of nonmonetary assets hasrecently converged between IFRS and GAAP. GAAP now requires that gains on exchanges ofnonmonetary assets be recognized if the exchange hascommercial substance. This is the same framework used in
Montgomery - ACCOUNTING - ac 201
Which of the following statements is correct?a) Both IFRS and GAAP permit revaluation of property, plant, andequipment and intangible assets (except for goodwill).b) IFRS permits revaluation of property, plant, and equipment and intangibleassets (exce
Montgomery - ACCOUNTING - ac 201
Research and development costs are:a) expensed under GAAP.b) expensed under IFRS.c) expensed under both GAAP and IFRS.d) None of the above.
Montgomery - ACCOUNTING - ac 201
Under IFRS, value-in-use is defined as:a) net realizable value.b) fair value.c) future cash flows discounted to present value.d) total future undiscounted cash flows.
Montgomery - ACCOUNTING - ac 201
Forms of business organization:Sole proprietorshipPartnershipCorporation
Montgomery - ACCOUNTING - ac 201
Users and Uses of Financial InformationInternal usersExternal usersEthics in financial reporting
Montgomery - ACCOUNTING - ac 201
Communicating with UsersIncome statementRetained earnings statementBalance sheetStatement of cash flowsInterrelationships of statementsOther elements of an annual report
Montgomery - ACCOUNTING - ac 201
Proprietorship Generally owned by one person Simple to establish Owner controlled Tax advantages
Montgomery - ACCOUNTING - ac 201
Partnership Simple to establish Shared control Broader skills and resources Tax advantages
Montgomery - ACCOUNTING - ac 201
Corporation Easier to transfer ownership Easier to raise funds No personal liability
Montgomery - ACCOUNTING - ac 201
Questions Asked by Internal UsersCan we afford to give our employees a pay raise?Human ResourcesWhat price for our product will maximize net income?MarketingWhich product line is most profitable?ManagementIs cash sufficient to pay dividends to the
Montgomery - ACCOUNTING - ac 201
Questions Asked by External UsersIs the company earning satisfactory income?InvestorsWill United Airlines be able to pay its debts as they come due?Creditors
Montgomery - ACCOUNTING - ac 201
Ethics In Financial ReportingUnited States regulators and lawmakers were very concerned thatthe economy would suffer if investors lost confidence in corporateaccounting because of unethical financial reporting.
Montgomery - ACCOUNTING - ac 201
Which of the following did not result from the Sarbanes-Oxley Act?a. Top management must now certify the accuracy of financialinformation.b. Penalties for fraudulent activity increased.c. Independence of auditors increased.d. Tax rates on corporation
Montgomery - ACCOUNTING - ac 201
All businesses are involved in three types of activity financing, investing, and operating
Montgomery - ACCOUNTING - ac 201
The accounting information systemThe accounting information system keeps track of the results of each ofthese business activities.
Montgomery - ACCOUNTING - ac 201
Two primary sources of outside funds are:1. Borrowing money2. Issuing shares of stock for cash
Montgomery - ACCOUNTING - ac 201
Borrowing money Amounts owed are called liabilities. Party to whom amounts are owed are creditors. Notes payable and bonds payable are different type ofliabilities.
Montgomery - ACCOUNTING - ac 201
Issuing shares of stock for cash.Payments to stockholders are called dividends
Montgomery - ACCOUNTING - ac 201
Investing ActivitiesPurchase of resources a company needs to operate. Computers, delivery trucks, furniture, buildings, etc. Resources owned by a business are called assets.
Montgomery - ACCOUNTING - ac 201
Operating ActivitiesOnce a business has the assets it needs, it can begin its operations. Revenues - Amounts earned from the sale of products (salesrevenue, service revenue, and interest revenue). Inventory - Goods available for sale to customers. Ac
Montgomery - ACCOUNTING - ac 201
ExpensesIt costs of assets consumed or services used.(cost of goods sold, selling, marketing, administrative, interest,and income taxes expense).
Montgomery - ACCOUNTING - ac 201
LiabilitiesIt is arising from expenses include accounts payable, interest payable, wagespayable, sales taxes payable, and income taxes payable
Montgomery - ACCOUNTING - ac 201
Net income when revenues exceed expenses. Net loss when expenses exceed revenues.
Montgomery - ACCOUNTING - ac 201
Companies prepare four financial statements from the summarizedaccounting data:1. balance sheet2. income statement3. retained earning4. cash flow
Montgomery - ACCOUNTING - ac 201
Net income will result during a time period when:a. assets exceed liabilities.b. assets exceed revenues.c. expenses exceed revenues.d. revenues exceed expenses.
Montgomery - ACCOUNTING - ac 201
Income Statement Reports revenues and expenses for a specific period of time. Net income revenues exceed expenses. Net loss expenses exceed revenues. Past net income provides information for predicting future netincome.
Montgomery - ACCOUNTING - ac 201
Important !Net income is needed to determine the ending balance inretained earnings