MGT 6201 ACCOUNTING FINAL ACTUAL ANSWERS
AND QUESTIONS SET A+
✔✔Available for Sale - ✔✔Debt without the intention of holding to maturity or for a short
period to get a gain
✔✔Property Plant and Equipment - ✔✔• Actively used in operations
• Long-term periods of service utility
i. Non-current on financial statements
• Have physical substance
• These assets often makeup the largest asset amounts
• PPE include natural resources (e.g., timber track, coal mine, oil, and gas wells)
✔✔Reporting PPE on Balance Sheet - ✔✔• Reported at Historical Cost less
Accumulated Depreciation (known as the book value or carrying value)
• If impairment of value, write down to reflect lower fair market value (writing up assets
is typically not allowed under GAAP)
i. Impaired means value went down
✔✔Which expenditures should we include in "Historical Cost" - ✔✔• All costs necessary
to (1) acquire the asset and (2) make it ready for use.
• Historical Cost would include: purchase price, and other related costs such as sales
tax, transportation costs, installation, testing, legal fees to establish title, recording fees,
and any other costs to get the asset ready for use.
• Costs included in the asset account are called "capitalized costs"
✔✔Capitalization versus Expense - ✔✔Key issue is whether resources spent on long-
lived assets are capitalized [create an asset on BS] (placed on the balance sheet) or
expensed (immediately reducing net income)
✔✔Depreciation - ✔✔The Financial Accounting Standards Board (FASB) defines
depreciation as "a system of accounting which aims to distribute the cost or other basic
value of tangible capital assets, less salvage (if any), over the estimate life of the unit
(which may be a group of assets), in a systematic and rational manner. It is a process of
, allocation, not of valuation." Essentially spreading the cost of the asset over the usable
life of the asset
✔✔Depreciation requires the following estimates: - ✔✔• Useful life - period of time over
which the asset is expected to generate cash inflows
• Salvage value - Expected disposal amount for the asset at the end of its useful life
• Depreciation rate - an estimate of how the asset will be used up over its useful life.
✔✔Depreciation Methods - ✔✔• Straight-line method: Under the straight-line method,
depreciation expense is recognized evenly over the estimated useful life of the asset.
• Accelerated Methods (Double-declining-balance)
• Activity-based methods (Units-of-Production)
✔✔Impairment of Value: - ✔✔• PPE should be written down if there has been a
significant and permanent impairment of value.
• For most long-term assets an impairment test is done whenever there is a triggering
event.
• Triggering event - certain events or changes in circumstances that raise the possibility
that certain long-lived assets may be impaired
✔✔Intangible Assets - ✔✔• Have no physical substance
• Not financial instruments
• Convey certain legal and economic rights
• Uncertainty associated with future economic benefits
✔✔Identifiable vs. Unidentifiable Assets - ✔✔• Identifiable: patents, copyrights,
trademarks, franchises, licenses
• Unidentifiable: goodwill (goodwill recognized only with purchase of another business)
✔✔How intangibles are aquired - ✔✔• Acquired externally: can capitalize purchase cost
and other related costs
• Developed internally: only direct costs (like legal fees) are capitalized- all other related
costs are expensed as incurred
✔✔Current Liabilities - ✔✔Probable future sacrifices of economic benefits arising from
present obligations to other entities resulting from past transactions or events.
✔✔Specifics of current liabilities - ✔✔• Obligations payable within one year or one
operating cycle, whichever is longer.
• Expected to be satisfied with current assets or by the creation of other current
liabilities.
• Examples: Accounts payable, Cash dividends payable, Accrued expenses, Unearned
revenues, Taxes payable, Short-term notes payable
• Current liabilities are considered more risky than noncurrent liabilities
• Usually reported at their maturity amounts
AND QUESTIONS SET A+
✔✔Available for Sale - ✔✔Debt without the intention of holding to maturity or for a short
period to get a gain
✔✔Property Plant and Equipment - ✔✔• Actively used in operations
• Long-term periods of service utility
i. Non-current on financial statements
• Have physical substance
• These assets often makeup the largest asset amounts
• PPE include natural resources (e.g., timber track, coal mine, oil, and gas wells)
✔✔Reporting PPE on Balance Sheet - ✔✔• Reported at Historical Cost less
Accumulated Depreciation (known as the book value or carrying value)
• If impairment of value, write down to reflect lower fair market value (writing up assets
is typically not allowed under GAAP)
i. Impaired means value went down
✔✔Which expenditures should we include in "Historical Cost" - ✔✔• All costs necessary
to (1) acquire the asset and (2) make it ready for use.
• Historical Cost would include: purchase price, and other related costs such as sales
tax, transportation costs, installation, testing, legal fees to establish title, recording fees,
and any other costs to get the asset ready for use.
• Costs included in the asset account are called "capitalized costs"
✔✔Capitalization versus Expense - ✔✔Key issue is whether resources spent on long-
lived assets are capitalized [create an asset on BS] (placed on the balance sheet) or
expensed (immediately reducing net income)
✔✔Depreciation - ✔✔The Financial Accounting Standards Board (FASB) defines
depreciation as "a system of accounting which aims to distribute the cost or other basic
value of tangible capital assets, less salvage (if any), over the estimate life of the unit
(which may be a group of assets), in a systematic and rational manner. It is a process of
, allocation, not of valuation." Essentially spreading the cost of the asset over the usable
life of the asset
✔✔Depreciation requires the following estimates: - ✔✔• Useful life - period of time over
which the asset is expected to generate cash inflows
• Salvage value - Expected disposal amount for the asset at the end of its useful life
• Depreciation rate - an estimate of how the asset will be used up over its useful life.
✔✔Depreciation Methods - ✔✔• Straight-line method: Under the straight-line method,
depreciation expense is recognized evenly over the estimated useful life of the asset.
• Accelerated Methods (Double-declining-balance)
• Activity-based methods (Units-of-Production)
✔✔Impairment of Value: - ✔✔• PPE should be written down if there has been a
significant and permanent impairment of value.
• For most long-term assets an impairment test is done whenever there is a triggering
event.
• Triggering event - certain events or changes in circumstances that raise the possibility
that certain long-lived assets may be impaired
✔✔Intangible Assets - ✔✔• Have no physical substance
• Not financial instruments
• Convey certain legal and economic rights
• Uncertainty associated with future economic benefits
✔✔Identifiable vs. Unidentifiable Assets - ✔✔• Identifiable: patents, copyrights,
trademarks, franchises, licenses
• Unidentifiable: goodwill (goodwill recognized only with purchase of another business)
✔✔How intangibles are aquired - ✔✔• Acquired externally: can capitalize purchase cost
and other related costs
• Developed internally: only direct costs (like legal fees) are capitalized- all other related
costs are expensed as incurred
✔✔Current Liabilities - ✔✔Probable future sacrifices of economic benefits arising from
present obligations to other entities resulting from past transactions or events.
✔✔Specifics of current liabilities - ✔✔• Obligations payable within one year or one
operating cycle, whichever is longer.
• Expected to be satisfied with current assets or by the creation of other current
liabilities.
• Examples: Accounts payable, Cash dividends payable, Accrued expenses, Unearned
revenues, Taxes payable, Short-term notes payable
• Current liabilities are considered more risky than noncurrent liabilities
• Usually reported at their maturity amounts
