Lecture Notes for Chapter 10 (ACCT 331)
Operational Assets: Acquisition and Disposition
Operating assets are long term revenue generating assets.
Types of Operational Assets
Fixed assets (land, building, machinery, and natural resources such as oil reserves,
mineral deposits etc.).
They are used in operations and not held for resale
They are long term and are subject to depreciation (except land)
They are tangible (have physical substance)
Intangible Assets: (goodwill, patents, copyrights, trademarks, franchises):
They represent exclusive rights that provide benefits to the owner
Intangible assets with finite useful lives (e.g., patents) are amortized;
intangible assets with indefinite useful lives (e.g., goodwill) are
They lack physical substance
The initial cost of an asset includes the purchase price and all
expenditures necessary to bring the asset to its desired condition and location for
use (e.g., freight costs, installation costs, sales taxes, title fees, etc.).
Suppose Central Machine Tools purchased an industrial lathe to be used in its
The purchase price was $62,000.
Central paid a freight
company $1,000 to transport the machine to its plant location plus $300 shipping
In addition, the machine had to be installed and mounted on a special
platform built specifically for the machine at a cost of $1,200.
After installation, several
trial runs were made to ensure proper operation.
The cost of these trials including
wasted materials was $600.
At what amount should Central capitalize the lathe?
Freight and handling
Insurance during shipping