aka gross margin Gross profit percentage gross profit net sales revenue Gross Profit CHAPTER 7 Plant Assets aka property plant and equipment or fixed assets Long lived assets that are tangible Measuring the cost of a plant asset sum of all costs incurred to bring the asset to its intended use Land does not depreciate purchase price commissions survey and legal fees back property taxes paid grading and removing unwanted buildings Buildings architectural fees and contractors charges materials labor and overhead interest on funds borrowed purchased purchase price broker s commission taxes paid costs to repair and renovate Equipment purchase price transportation insurance in transit sales tax installation and testing add to cost of asset be on balance sheet depreciation expense over time Increase capacity or extended Land Improvements parking lots driveways signs fences sprinkler systems Leasehold Improvements improvements to lease property depreciated or amortized over lease term Lump Sum Basket Purchases several assets purchased in a group for lump sum amount total cost is allocated based on their market Relative sales value method Capital Expenditure useful life cost is added to an asset account balance sheet Immediate Expense immediately shows on income statement Repairs Expense Do not extend capacity or useful life maintain or restore working order cost is recorded as an expense income statement Book Value book value of a Plant Asset Cost Accumulated Depreciation Depreciation allocation of plant assets cost to expense over its useful life Land is NOT depreciated b c unlimited useful life Causes physical wear tear obsolescence Its not a valuation process or fund to replace assets Measuring Depreciation expressed in yrs units of output miles etc 3 Estimated Residual Value the expected cash value of an asset at the end of its useful life Scarp value salvage value Depreciation Methods 1 Straight Line Depreciable cost cost residual value useful life in years results in equal amount of depreciation each 1 Cost 2 Estimated Useful Life is the length of service expected from using the asset May be year Accumulated depreciation contra asset normal credit balance a running total of all depreciation taken increases book value cost accumulated depreciation decreases 2 Units of Production UOP Cost Residual value useful life in units depreciation per unit X activity for period units miles 3 Double Declining Balance accelerated depreciation method step 1 straight line rate 1 useful life in years Step 2 DDB rate 2 x straight line rate Step 3 Depreciation book value x DDB rate COMPARE straight line best for assets that generate revenue evenly best meets matching principle 88 of companies use it most popular Units of production best for assets that wear out because of use Double declining balance best for assets that generate revenue early in useful life aka nonmonetary exchange Old assets traded in for new assets Cost of plant asset received is equal cash received is greater than book value GAIN cash received is less than book value LOSS long lives income taxes affected by depreciation gains and losses incurred when sold future impact on Plant Asset Issues adoption of international standards Depreciation for Tax Purposes accelerated depreciation provides fastest tax deductions tax deductions decrease tax payments tax savings can be reinvested invested in business Partial Year Depreciation annual depreciation X months from date of purchase to end of year 12 Disposal of Plant Assets bring depreciation up to date to measure assets final book value ad record expense up to date of disposal Remove asset and related accumulated depreciation account from books Selling a Plant Asset Exchanging Plant Assets to the fair values of assets given up old asset and any cash paid Difference between fair vale of old asset and its book value is gain or loss Natural Resources such as oil and gas reserves coalmines or stands of timber are accounted for as long term assets when theyre purchased or developed Assets are physically used depletion Distinct from deprecation computed like UOP If al of extracted resource is sold amount depleted is recorded as an expense If portion of extracted resource is not immediately sold amount becomes inventory Intangible Assets No physical form useful b c of the special rights they carry Patents copyrights and franchises Two categories Finite lives amortization recorded straight line method intangible asset reduce directly Indefinite lives tested for loss in value impairment Accounting for Specific Intangibles 1 Patents granted by fed gov t give holder exclusive right to produce sell an invention lasts 20 years 2 Copyrights granted by fed gov t give holder exclusive rights to reproduce and sell a book musical composition film or other work of are extended 70 years after creator s life useful life is usually very short 3 Trademarks and Trade Names distinctive identification of a product or service also includes adv Slogans useful life may be set by contract or indefinite life indicated by or 4 Franchises and Licenses granted by private business or gov t give purchase right to sell a product or service with specified conditions include restaurant chains sports orgs have indefinite life 5 Goodwill only recorded when an entire company is purchased defined as the excess of the purchase price of the co over the market value of its net assets represents earning power of a co purchased not amortized if sales price the investment carrying amount short term investments are current assets They appear on the balance sheet immediately after cash aka marketable securities These are investments in marketable securities easily convertible to cash that CHAPTER 5 Short Term investments a company plans to hold for 1 year or less Easily convertible into cash next most liquid asset after cash Types of short term investments Available for sale securities Held to maturity securities and Purpose of owning Trading security is to hold it for a short time then sell it for more than its cost If market price of investment increases a gain results if market price of investment decreases a loss results Can be debt or equity securities of another company Earn interest or dividend revenue Realized Gains and Losses only reported when investment is sold Realized gain if sales price than the Investment carrying amount Realized Loss Reporting on Balance Sheet because short term investments are almost as liquid as cash