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• To record loss on exchange of dissimilar plant assets.
• In some instances, companies buy only the right to extract the natural resource from someone else’s land.
• When the ratio is low relative to industry standards or the company’s ratio in previous years, it could indicate an over-investment in assets, a slow year in sales, or both.
• Determine the periodic depletion cost of a natural resource and calculate depreciation of plant assets located on extractive industry property.
• In addition to providing benefits, a franchise usually places certain restrictions on the franchisee.

Such a lawsuit establishes the validity of the patent and thereby increases its service potential. In addition, the firm debits the cost of any competing patents purchased to ensure the revenue-generating capability of its own patent to the Patents account. To record loss on exchange of dissimilar plant assets. Working capital refers to the amount of available capital that a company can readily use for day-to-day operations calculated as the current assets minus the current liabilities.

To record the sale of machinery at a price less than book value. To record sale of equipment at a price equal to book value. To record sale of equipment at a price greater than book value. Marketable securities include assets such as stocks, Treasuries, commercial paper, exchange traded funds , and other money market instruments.

Note the underlying accounting principle of matching the expenses with the revenues earned in that same accounting period. Remember, when the book value and the market value of the old asset are different, companies always recognize a gain or a loss on an exchange of nonmonetary assets having commercial substance. As discussed earlier, they do not recognize a gain or loss on an exchange of nonmonetary assets not having commercial substance. Fixed assets include property, plant, and equipment because theyare tangible, meaning that they are physical in nature; we may touch them. For example, an auto manufacturer’s production facility would be labeled a noncurrent asset. Another important current asset for any business is inventories.

Current Assets vs. Noncurrent Assets Example

Depreciation does not measure the decline in the asset’s market value each period, nor does it measure the asset’s physical deterioration. Since depreciation reflects the cost of using a plant asset, depreciation charges are only recorded when the asset is actually in services. Depreciation is cost allocation, not asset valuation. Depreciable assets located on extractive industry property should be depreciated over the shorter of the physical life of the asset or life of the natural resource. The periodic depreciation charges usually are computed using the units-of-production method. A leasehold improvement is any physical alteration made by the lessee to the leased property in which benefits are expected beyond the current accounting period.

Useful life, also called service life, might not be as long as the asset’s total productive life. The total amount of depreciation to be charged off over an asset’s benefit period equals the asset’s cost minus its salvage value. Salvage value, also called residual value or scrap value, is an estimate of the asset’s value at the end of it’s benefit period.

Financing activities are defined as the acquiring and disposing of resources for the purpose of selling products and services. Merchandise inventory can be described as products that a company owns and intends to sell. An intangible asset is one that has a physical existence?

Noncurrent Assets

A franchise is a contract between two parties granting the franchisee certain rights and privileges ranging from name identification to complete monopoly of service. In many instances, both parties are private businesses. For example, an individual who wishes to open a hamburger restaurant may purchase a McDonald’s franchise; the two parties involved are the individual business owner and McDonald’s Corporation. This franchise would allow the business owner to use the McDonald’s name and golden arch, and would provide the owner with advertising and many other benefits. The legal life of a franchise may be limited by contract. The finite useful life for a copyright extends to the life of the creator plus 50 years.

The records a company keeps for a financial accounting purpose are usually separate from the records it keeps for tax accounting purposes. This is so because financial accounting aims to report useful information on financial performance and position, whereas tax accounting reflects government objectives in raising revenues. Differences between these 2 systems are normal and expected. Depreciation is a common example of how record differ. Length of time it is productively used in a company’s operations.

COMPANY

If sales price is greater than book value, the company shows a gain. If sales price is less than book value, the company shows a loss. If sales price equals book value, no gain or loss results. In accounting, goodwill is an intangible value attached to a company resulting mainly from the company’s management skill or know-how and a favorable reputation with customers. A company’s value may be greater than the total of the fair market value of its tangible and identifiable intangible assets.

It is important for a company to maintain a certain level of inventory to run its business, but neither high nor low levels of inventory are desirable. Other current assets can include deferred income taxes and prepaid revenue. The net balance sheet amount is the asset book value, or simply book value, and is computed as the asset’s total cost less its accumulated depreciation.

Analyzing and using the financial results – Total assets turnover

Recognized intangible assets deemed to have indefinite useful lives are not to be amortized. Amortization will however begin when it is determined that the useful life is no longer indefinite. The method of amortization would follow the same rules as intangible assets with finite useful lives.

Current assets are generally reported on the balance sheet at their current or market price. Revenue Expenditures, also called income statement expenditures, are additional cost of plant asset that do not materially increase the asset’s life or productive capabilities. They are recorded as expenses and deducted from revenues in the current period’s income statement.

A company accountant’s role in measuring intangibles

Plant assets have useful lives extending over more than one accounting period. https://cryptolisting.org/ Quick assets do not include inventory and prepaid expenses. Some intangible assets are not required to be amortized.

Capital leases A capital lease transfers to the lessee virtually all rewards and risks that accompany ownership of property. The property owner is the grantor of the lease and is the lessor. The person or company obtaining rights to possess and use the property is the lessee. The accounting for a lease depends on whether it is a capital lease or an operating lease.

Many business entities will eventually have to dispose of a plant asset. When this happens, the company will either have a loss or show a gain depending on the difference between the asset’s sale price and its book value. In the preceding example, annual depreciation expense is less if it is based on the truck’s USD 53,000 cost basis than if it is based on the truck’s USD 55,000 cash price. Note that accounting for all the long-term assets discussed in these chapters is basically the same.

The amount of any goodwill impairment loss is to be recognized in the income statement as a separate line before the subtotal income from continuing operations . The goodwill account would be reduced by the same amount. In some instances, companies buy only the right to extract the natural resource from someone else’s land. When the land plant assets refer to nonphysical assets that are used in the operations of a business. is not purchased, its residual value is irrelevant and should be ignored. If there is an obligation to restore the land to a usable condition, the firm adds these estimated restoration costs to the costs to develop the site. Investors and analysts often compare book value per share with the market price per share for a corporation.

Instead it differentiates between exchanges that have commercial substance and those that do not have commercial substance. An exchange has commercial substance if, as a result of the exchange, future cash flows are expected to change significantly. For instance, if a company exchanges a building for land , the timing and the future cash flows are likely to be different than if the exchange had not occurred.