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Chapter 8 Lecture - CHAPTER 8 CLASS NOTES LONG-LIVED ASSETS...

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CHAPTER 8 CLASS NOTES LONG-LIVED ASSETS AND DEPRECIATION When monies obtained to finance the overall business are used to purchase assets that are not used up in the current operating cycle, it is an investing activity. The company is usually buying non current assets such as property and equipment, investment securities, and intangible assets.. Investment securities were covered in Chapter 11. In this chapter, we discuss the other two categories which fall under the operating assets umbrella. The amount invested in these operating assets are usually larger purchases in terms of dollars than those in the daily operations of the business and the purchases are more infrequent. Both categories discussed will appear separately on the balance sheet and all, with a few exceptions, are subject to a systematic allocation of their cost to operations during their useful lives. There are some terms that one must learn with respect to these categories of assets. The first term is book value that is simply the cost of the asset less its contra account of accumulated depreciation (or amortization--- a term that will be explained later in these notes). Book value and cost are the same at the time of purchase because no depreciation has taken place. The book value decreases each year as we record the systematic depreciation expense as part of the earnings process of the accounting period, until there is no more to depreciate. An important term is useful life that is the number of years an asset is expected to remain in use and this is the period over which a company records depreciation. Another term is salvage value and is the amount that the company believes it will be able to receive in cash when it sells the asset at the end of its useful life for scrap or other purpose. It is an amount we estimate today even though the asset will not be sold for many years. A company can determine that there is no salvage value, but if they determine a number, it is usually small in relation to the original cost of the asset. Salvage value is important because a company can only depreciate an asset to its salvage value and not lower . The original cost of the asset less salvage value is the amount that can be depreciated and is called depreciable cost . The last term to know is capitalized and it means when we add a cost to the asset, we say we are capitalizing the cost. We capitalize all costs at the time of purchase. The first category is called Property, Plant and Equipment(PPE) , although companies do vary the names for this category depending upon their particular circumstances. There are three attributes associated with PPE and they are: 1. The useful life of this asset exceeds one year in length. 2. The asset is tangible in that it has physical substance 3. The asset is acquired for use in the business not for resale like a security
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-2- PPE is recorded at cost. Cost is more than just the purchase price as it includes all expenditures necessary to bring the asset to the condition and location required for its intended use. Therefore, the costs will include the cost of the asset (purchase price),
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