acct 327 test 3 notes

acct 327 test 3 notes - Chapter 10 Notes Capitalize: turn...

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Chapter 10 Notes Capitalize: turn into asset instead of expense. Plant, property and equipment o Long term in nature and usually depreciated o Presented on the balance sheet and posses physical substance o Use in operations of business and not for resale Land: non depreciable o Capitalize Purchase price Closing costs Costs incurred to ready land for intended use Unpaid taxes to date of purchase Additional improvements Permanent improvements are capitalized into land account o Non depreciable, ex. Trees, drainage, dirt Temporary improvements go into a separate account called land improvements. o Depreciable ex. Flowers, sidewalks, parking lots o Land held for speculative is classified as an investment. o Land for resale is classified as inventory. Buildings o Purchase: capitalize Purchase price Closing costs Renovation costs (for intended use) Unpaid taxes
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o Construct: capitalize Building fees Materials Labor Overhead Full cost approach: used if company is operating at full capacity and constructing building will reduce production. Capitalize overhead as same rate of production. Incremental approach: not operating at full capacity and construction will not change production. Only capitalize extra overhead resulting from building. Lower of internal and external costs Interest: amount capitalized equals the portion of incurred interest charges that could have been avoided by either not borrowing additional funds for the asset or by using the amounts spent on the asset to retire existing debt. Interest in specific borrowing Avoidable interest (non specific borrowing): amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset. o Weighted average accumulated expenditures; a company weighs the construction expenditures by the amount of time that it can incur interest costs on the expenditures. Cash Discounts: net method represents cash purchase price. Deferred payment plans: o If FMV of asset being purchased or FMV of the debt are known then use that as capitalized amount and plug the interest. o If not known then calculate the PV of all future payments. Lump sum purchases: company allocates the total cost among the various assets on the basis of their relative fair value market values (appraisal) Issuance of stock: FMV of asset= price of stock x number of shares Land xx
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common stock xx APIC xx Expenditures after acquisition o Capital vs. revenue Capital: expected to benefit future periods by Increase quantity Increase quality on service/product Increase useful life Revenue: normal reoccurring expenditures, designed to maintain fixed asset through current period. o
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acct 327 test 3 notes - Chapter 10 Notes Capitalize: turn...

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