pptchapter10

pptchapter10 - Acquisition and Disposition of Property...

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1 Bob Anderson, UCSB CHAPTER 10-1 10 CHAPTER Acquisition and Disposition of Property, Plant, and Equipment Bob Anderson, UCSB Chapter 10-2 4 Property, Plant, and Equipment (Fixed Asset or Plant Asset) Î Historical cost principle Î Includes any “normal” or “routine” expenditure to get an asset in place and functioning. Noncurrent Asset! Property, Plant and Equipment Bob Anderson, UCSB Chapter 10-3 FUNDAMENTALS: Whether you buy it, build it, plan to keep it and operate it or plan to sell it: ± Capitalize all costs necessary to make the asset ready for its intended use ± Anything you get back is a reduction ± Capitalize indirect costs if you can make the link to the asset ± Capitalize costs associated with owning it during the construction period= interest and property taxes ± Never on books for more than its recoverable value. ± Generally record at the fair value of what you give up. Remember that if payment occurs over time, fair value=present value! ± Subsequent costs only capitalized if they generate additional future benefit.- otherwise expense as repairs & maintenance. Bob Anderson, UCSB Chapter 10-4 Cost of Land: ± Again, usual and routine costs to get the land fit for use: ± Purchase price, closing, attorney’s fees. ± Cost to demolish existing structure, cleanup. ± Proceeds from salvage are an offset to the cost. ± Cost to grade land. ± Assumption of current mortgage, debts. ± Land improvements with an indefinite life. Land improvements with separate lives depreciated separately. Land itself is NOT depreciable ± Special public assessments (sidewalks, etc.) included. ± Land held for speculation is classified as an investment. Property, Plant and Equipment
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2 Bob Anderson, UCSB Chapter 10-5 Cost of Buildings: Î Outflows for cost of buildings or cost of construction. Î Same rule as before applies: anything to get an asset in place and functioning is part of the cost of the building. Cost of Equipment: Î Machinery, office equipment, furniture and fixtures. Î Historical cost = Purchase price + costs to put into service Property, Plant and Equipment Bob Anderson, UCSB Chapter 10-6 Property, Plant, and Equipment: Land $ xxx Land improvements xxx Building xxx Machinery xxx Equipment xxx Furniture xxx Construction in progress xxx Less: Accumulated depreciation (xxx) Total property, plant, and equipment $ xxx Balance Sheet Presentation Bob Anderson, UCSB Chapter 10-7 Martin Buber Co. purchased land as a factory site for $400,000. The process of tearing down two old buildings on the site and constructing the factory required 6 months. The company paid $42,000 to raze the old buildings and sold salvaged lumber and brick for $6,300. Legal fees of $1,850 were paid for title investigation and drawing the purchase contract. Payment to an engineering firm was made for a land survey, $2,200, and for drawing the factory plans, $68,000. The land survey had to be made before definitive plans could be drawn.
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pptchapter10 - Acquisition and Disposition of Property...

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