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Unformatted text preview: Chapter 8 Notes Long-Lived Assets Resources that determine a companys productive capacity. They are listed as NONCURRENT assets on the Balance Sheet and can be classified as either tangible or intangible. 1. Tangible Assets have physical substance, and are classified as property, plant, and equipment or fixed assets on the B/S. The three kinds of tangible assets are: Land (NONDEPRECIABLE) Buildings, fixtures, and equipment (DEPRECIABLE) Natural Resources (DEPLETION) 2. Intangible Assets have no physical substance, and confer specific rights on their owner. Examples include: patents, copyrights, franchises, licenses, and trademarks. Certain intangibles such as patents are subject to amortization expense over their useful lives, which is similar to the straight-line depreciation method. Long-Lived Assets are recorded on the books using the historical cost principle approach. Any costs/expenditures associated with purchasing a long-lived asset AND preparing it for use are CAPITALIZED at the sum of the costs incurred and/or paid for in order to acquire the asset and prepare it for use. When constructing a long-lived asset, sometimes companies have to borrow large sums of money from banks (or by issuing bonds to investors) in order to finance the construction. When they borrow money, they have to pay interest on the amount they borrowed. During the construction phase of the asset, any interest expense incurred as a direct result of money borrowed to finance the project is CAPITALIZED (added) to the cost of the asset. Ordinary repairs and maintenance (revenue expenditures) v. Additions and improvements (capital expenditures) Ordinary repairs and maintenance (revenue expenditures) Expenditures that maintain the productive capacity of the asset during the current accounting period only. These are recorded as operating expenses of the company, and often encompass routine maintenance upkeep of assets. Scott Friend, 2007 Additions and Improvements (Capital Expenditures) Expenditures that increase the productive life, operating efficiency, or capacity of the asset. These capital expenditures are added to the asset accounts and are not recorded as expenses upfront. These occur infrequently, involve large amounts of money, and increase an assets economic usefulness in the future through either increased efficiency or longer life. Examples included additions, major overhauls, major replacements and improvements, etc. Capital expenditures are not expensed upfront. This makes sense because capital assets are often used for multiple years, and if we expense the entire amount in the current year, this would violate the matching principle....
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