CHAPTER 10 REVIEW - CHAPTER 10 REVIEW 1 Chapter 10 presents...

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CHAPTER 10 REVIEW 1. Chapter   10   presents   a   discussion   of   the   basic   accounting   problems  associated   with   the  incurrence   of   costs   related   to   property,   plant,   and  equipment; and the accounting methods used to retire or dispose of these  costs. These assets, also referred to as fixed assets, are of a durable nature  and include land, building structures, and equipment. Fixed assets are an  important part of the operations of most business organizations. They provide  the major  means   of   support   for   the   production   and/or   distribution   of   a  company’s product or service. 2. (S.O. 1) Property, plant, and equipment   possess certain characteristics  that distinguish them from other assets owned by a business enterprise.  These characteristics may be expressed as follows: (a) acquired for use in  operations   and   not   for   resale,   (b)   long-term   in   nature   and   usually  depreciated, and (c) possess physical substance. An asset must be used in  the normal business operations to be classified as a fixed asset. These  assets last for a number of years and their costs must be allocated to the  periods which benefit from their use. Acquisition of Property, Plant, and Equipment 3. (S.O. 2) Property, plant and equipment are valued in the accounts at their  historical cost.  Historical cost is measured by the cash or cash equivalent  price of obtaining the asset and bringing it to the location and condition  necessary for its intended use. Thus, charges associated with freight costs  and installation are considered a part of the asset’s cost. The process of  allocating the historical cost of property, plant, and equipment to the periods  benefited   by   those   assets   is   known   as   depreciation.   The   topic   of  depreciation is presented in Chapter 11. 4. With minor exceptions, use of a method other than historical cost in valuing  property,  plant,   and   equipment   represents   a   departure   from   generally  accepted accounting principles. This position is justified on the grounds that:  (a) cost reflects fair value on the date of acquisition, (b) historical cost  involves actual, not hypothetical transactions,  and (c) gains and losses  should not be anticipated but should be recognized when the asset is sold. 5. The assets normally classified on the balance sheet as property, plant, and  equipment include land,  buildings, and  various kinds of machinery and  equipment. The cost of each item includes the acquisition price plus those  expenditures incurred in getting the asset ready for its intended use. In the 
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This note was uploaded on 09/30/2008 for the course ACCY 206 taught by Professor Madlinger during the Spring '08 term at Northern Illinois University.

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CHAPTER 10 REVIEW - CHAPTER 10 REVIEW 1 Chapter 10 presents...

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