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Accounting Review 9-12

Accounting Review 9-12 - Accounting Review Chapters 9-12...

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Accounting Review Chapters 9-12 Chapter 9- Valuing Long-Lived Assets In general, interest cost is always expense If borrow money to construct long term asset, need to expense it when construction is done. Basket Purchases Acquisition of a group of assets for a lump sum. Allocate cost with fair market values. o Land 700,000 + Other… = 1,800,000 o Bought in Basket for 1,500,000 o Land = (700,000 / 1,800,000) x 1,500,000 = 583,333 Improvement and Repairs If spend money to improve, add it to asset on balance sheet (to extend useful life) If spend money to repair, need to expense cost. Asset Exchange If exchange is for similar asset and it results in a gain o Firm records new asset at book value of old asset and additional cash paid o Show no gain Exchange Truck $11,000 and acc. Dep. 7500. Market Value new truck $17,500 and additional 11,500 cash paid. Journal Entries Truck (new) 15,000 Acc. Dep. (old) 7500 Truck (old) 11,000 Cash 11,500 If exchange is for similar asset and results in a loss o Firm immediately recognizes loss in JE’s. Same as above but 15,500 cash paid Truck (new) 17,500 Loss 1,500 Acc. Dep. (old) 7500 Truck (old) 11,000 Cash 15,500 Book Value = Acquisition Cost – Accumulated Depreciation Salvage Value = Estimated value of asset at end of its useful life Depreciable Cost = Acquisition Cost – Salvage Value
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Straight Line Depreciation Allocates expense evenly over life of the asset Depreciation Expense = (Asset Cost – Salvage Value) / Useful Life For financial reporting use SL because it’s consistent and has less effect on income. Double Declining Balance Method Takes more depreciation expense in the early years of the asset’s life o Take SL depreciation rate as % and double it Ignores Salvage Value Effect of Changes in Estimates A firm adjusts current year’s and future years’ depreciation to account for any changes in estimates, but does not restate prior years’ depreciation. Modified Accelerated Cost Recovery System Asset lives are shorter than economic lives. Depreciation Rate is greater than straight-line rates. No salvage value is assumed. Impairment Assets must be checked to see if the carrying value is higher than expected future cash flows generated from them. If book value is higher than expected future cash flows, impairment loss must be recognized to reduce asset to fair value.
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