Airplane travelers sometimes note that their cosmetics bottles and other containers have leaked during a flight. What might cause this?
April 4 - 8 th Expenditures after Acquisition Costs over the life of an asset occur for every company Costs include o Ordinary repairs and maintenance o Additions o Improvements Capitalized- added to an asset; make PPE more useful or productive; extend the life of the asset o Expenditure added to an asset account and are subject to depreciation o Large amounts of money o Major repairs, additions, remodeling of buildings, and other betterments Revenue- do not increase the future benefits of an asset; maintain the level of benefits the asset is already providing; these expenses are usually frequently and periodical; usually inexpensive o Expensed- reported in total on the income statement Therefore, NOT subject to depreciation o Reported in the same period the expenditure was made o Example- routine maintenance Revision of Depreciation Two steps are performed to revise depreciation expense 1. Obtain the book value of the asset at the date of the revision of deprecation 2. Compute depreciation expense using the revised amounts for book value, useful life, and/or residual value You do not go back and change previous years depreciation- just change the years that the addition affects Disposal of Fixed Assets Voluntary disposal- when the company decides that the asset is no longer useful, so they sell or retire it o If it is retired, the company receives no cash for the asset Involuntary disposal- when an asset is lost or destroyed- possibly through theft, acts of nature, or by accident Two journal entries needed for disposal of fixed assets o Record depreciation expense up to the date of disposal Debit- Depreciation Expense Credit- Accumulated Depreciation o Remove the asset's book value and record the gain or loss form disposal Debit- Cash and Accumulated Depreciation Credit- Machine (at book value) Also, debit if you incur an expense from selling (sell for less than it is worth) or credit a revenue from selling (sell for more than it is worth) Either-or situation: cannot have both an expense and revenue Intangible Assets These are assets that represent future economic benefit to a company They lack physical substance Examples- patents, copyrights, trademarks, leaseholds, organization costs, franchises and goodwill o Why buy a company's goodwill The company you buy is worth more than it appears on paper; buy out competitors Goodwill only gets recorded on the books of the purchasing company Economic benefits are usually in the form of legal rights and privileges Accounting for Intangible Assets Intangible assets are recorded at cost due to the historical cost principle The cost to develop an intangible asset is recorded as research and development expense Amortization - the cost of an intangible asset with a finite life is allocated to accounting periods over the life of the asset to reflect the decline in service potential o If something has a definite life, you amortize it over the shorter of the economic life or legal life o You do not amortize a trademark; but you do a patent Organizational costs- costs related to legal fees, stock insurance, accounting fees, and promotional fees Natural Resources Examples- coal deposits, oil reserves, and mineral deposits Natural resources are physically consumed as they are used by a company Nature can only replenish natural resources As a natural resource is removed from the earth, the cost of the natural resource is allocated to each unit of natural resource removed o This is known as depletion o You calculate depletion using expense per unit Depletion Depletion Rate = (Cost - Residual Value) / Recoverable Units o Very similar to the unit depreciation rate formula Depletion = Depletion Rate X Units Recovered Impairment of Property, Plant, and Equipment Impairment - permanent decline in the future benefit or service potential of an asset Factors- too little depreciation expense being recorded in previous years Always be conservative- if a fixed asset is impaired, a company should reduce the asset's book value to its fair value in the year the impairment occurs Formulas Book Value = cost - accumulated depreciation Depreciation Cost = cost - residual value Straight-line depreciation = (cost - residual value) / expected useful life Straight-line depreciation rate = 100% / expected useful life (in years) Double-Declining Balance rate = 2 X Straight-Line Rate o Straight-Line Rate = 100% / Estimated Life in Years Declining Balance Depreciation Expense = Declining Balance Rate X Book Value Depreciation Cost per Unit = (cost-residual value) / expected usage Units-of-Production Depreciation Expense = Depreciation Cost per Unit X Actual Usage Depletion Rate = (Cost - Residual Value) / Recoverable Units Depletion = Depletion Rate X Units Recovered