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Unformatted text preview: 1 CHAPTER 10 Investments in Property, Plant, and Equipment and in Intangible Assets Two major categories of long-term operating assets: property, plant, and equipment and intangible assets. 1. Property, plant, and equipment. Long-lived, tangible assets acquired for use in a business. Includes land, buildings, machinery, equipment, cars, trucks and furniture. 2. Intangible assets. Long-lived assets used in a business that have no physical substance. Common intangible assets are patents, licenses, franchises, and goodwill Factors important in deciding whether to acquire a long-term operating asset: 1. Long-term operating assets help companies generate future cash flows. 2. Capital budgeting is the process whereby decisions are made about acquiring long- term operating assets. 3. Capital budgeting involves comparing the cost of the asset to the value of the expected cash inflows, after adjusting for the time value of money. The value of a long-term operating asset can disappear instantly if events lower the expectations about the future cash flows the asset can generate. FIXED ASSETS (PROPERTY, PLANT & EQUIPMENT) Recording the acquisition of property, plant, and equipment Property, plant, and equipment may be acquired by purchase or lease 1. When purchased: They are recorded at cost. Includes all expenditures associated with acquiring them and getting them ready for their intended use (e.g. installation costs, legal fees, commissions) 2. When leased: The lease agreement must be classified as either an operating lease or as a capital lease. An operating lease results in a short-term use of the asset without recording the asset on the books of the user, the lessee. Instead, the lessee only records the rental expense each period. If the lease is for a longer term and meets the conditions of a capital lease, the lessee is treated as if it purchased the asset & took a loan from the lessor to pay for the purchase. The lessee records the leased property as an asset and related liability as if the property had been purchased and financed with long-term debt. Instead of recording rental expense, lessee records interest expense & reduction of liability with each payment, and will record depreciation expense at year-end. 2 Depreciation Expense Depreciation is the process of allocating the cost of plant and equipment to expense in the periods that are benefited from the use of the asset. The two most common and simple methods are straight-line and units-of-production....
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- Fall '08