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ACCT 2010 May 20

# ACCT 2010 May 20 - CHAPTER 8 Operating Assets Property...

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5/20/08 CHAPTER 8 - Operating Assets: Property, Plant, and Equipment Acquisition Cost of Property, Plant, and Equipment Acquisition Cost: The amount that includes all of the cost normally necessary to acquire an asset and prepare it for its intended use. (also known as historical cost ) Items included in acquisition cost would generally include the following: Purchase price Taxes paid at time of purchase Transportation charges Installation costs It is important to measure separately the acquisition cost of the land and of the building. Capitalization of interest: Interest on constructed assets is added to the asset account. Interest can be included as part of the cost of an asset if the company: Constructs the asset over time Borrows money to finance construction Depreciation of Property, Plant, and Equipment Depreciation: The allocation of the original cost of an asset to the periods benefited by its use. Three Methods of Depreciation: 1. Straight-Line Method 2. Units of Production Method 3. Double Declining Balance 1. Straight-Line Method: Allocates the cost of the asset evenly over its useful life. Depreciation = Cost – Residual Value Useful life Book Value = Cost – Accumulated Depreciation 1

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5/20/08 2. Units of Production Method: Depreciation is determined as a function of the number of units the asset produces. Depreciation per Unit = Cost – Residual Value # of units 3. Accelerated Depreciation: A higher amount of depreciation is recorded in the early years and a lower amount in the later years. (Straight-line rate x 2) DDB Rate = 100% x 2 Useful Life Example: On January 1, ExerCo purchases a machine for \$20,000. The life of the machine is estimated at 5 years after which it is expected to be sold for \$2,000. DDB Rate = (100%/Useful Life) × 2 = (100%/5 Years) × 2 = 40% 2007 Depreciation = Beginning Book Value × Rate = \$20,000 × 40% = \$8,000 Book Value at Book Value at Year Rate Beginning of Year Depreciation End of Year 2007 40% \$20,000 \$8,000 \$12,000 2008 Depreciation = Beginning Book Value × Rate = \$12,000 × 40% = \$4,800 Book Value at Book Value at Year Rate Beginning of Year Depreciation End of Year 2007 40% \$20,000 \$8,000 \$12,000 2008 40 12,000 4,800 7,200 2
5/20/08 Reasons for Choosing the Straight-Line Method: Simplicity

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