Page 472 - Accounting Principles (A Business Perspective)

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Key terms
Amortization The term used to describe the systematic write-off of the cost of an intangible asset to
expense.
Capital lease A lease that transfers to the lessee virtually all of the rewards and risks that accompany
ownership of property.
Commercial substance The result if an exchange of nonmonetary assets causes future cash flows to differ
significantly.
Copyright An exclusive right granted by the federal government giving protection against the illegal
reproduction by others of the creator's written works, designs, and literary productions.
Depletion The exhaustion of a natural resource; an estimate of the cost of the resource that was removed
from its natural setting during the period.
Finite Useful Life Length of time an intangible asset is expected to contribute to the cash flows of the
entity.
Franchise A contract between two parties granting the franchisee (the purchaser of the franchise) certain
rights and privileges ranging from name identification to complete monopoly of service.
Goodwill An intangible value attached to a company resulting mainly from the company's management skill
or know-how and a favorable reputation with customers. Evidenced by the ability to generate an above-
average rate of income on each dollar invested in the business.
Intangible assets Items that have no physical characteristics but are of value because of the advantages or
exclusive privileges and rights they provide to a business.
Lease A contract to rent property. Grantor of the lease is the lessor; the party obtaining the rights to possess
and use property is the lessee.
Leasehold The rights granted under a lease.
Leasehold improvement Any physical alteration made by the lessee to the leased property in which
benefits are expected beyond the current accounting period.
Natural resources Resources supplied by nature, such as ore deposits, mineral deposits, oil reserves, gas
deposits, and timber stands supplied by nature.
Operating lease A lease that does not qualify as a capital lease.
Patent A right granted by the federal government giving the owner the exclusive right to manufacture, sell,
lease, or otherwise benefit from an invention for a limited period.
Research and development (R&D) costs Costs incurred in a planned search for new knowledge and in
translating such knowledge into a new product or process.
Total assets turnover Equal to Net sales/Average total assets. This ratio indicates the efficiency with
which a company uses its assets to generate sales.
Trademark A symbol, design, or logo used in conjunction with a particular product or company.
Trade name A brand name under which a product is sold or a company does business.
Wasting assets See Natural resources.
Self-test
True-false

Indicate whether each of the following statements is true or false.
When a plant asset is still being used after it has been fully depreciated, depreciation can be taken in excess of its
cost.
In an exchange of nonmonetary assets having commercial substance, the new asset is recorded at the fair market
value of the asset received or the fair market value of the asset given up plus cash paid, whichever is more clearly
evident.
In calculating depletion, the residual value of acquired land containing an ore deposit is included in total costs

subject to depletion.
All recorded intangible assets are subject to amortization.

Accounting Principles: A Business Perspective 473 A Global Text