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Chapter 7 - Chapter 7 Plant Assets and Intangibles Types of...

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Chapter 7: Plant Assets and Intangibles Types of Assets: Plant Assets : aka fixed assets, long lived and tangible, ex. Land, buildings, equipment. Expense associated with them is called depreciation . Land is not expensed over time. Reported as Property, Plant and Equipment on b/s. Intangible assets: carry special rights, no physical form, ex. Patents, copyrights, trademarks and goodwill, accounting for them is similar to that of plant assets. *unless otherwise stated, use GAAP methods Measuring the Cost of a Plant Asset The cost of any asset is the sum of all the costs incurred to bring the asset to its intended use . It includes purchase price, plus taxes, commissions, and other amounts paid. These costs vary by asset. Land - cost includes purchase price (cash + any note payable), brokerage commission, survey fees, legal fees, back property tax that purchaser pays, expenditures for grading/clearing land, removing unwanted buildings. *cost of land does not include cost of fencing, paving, security or lighting, these are called land improvements and can be depreciated. Example= land for $300,000 on note payable + $24,000 for other (above) Land 324,000 Note Payable 300,000 Cash 24,000 Buildings, Machinery, and Equipment - cost of construction includes architectural fees, building permits, contractor’s charges, payments for material, labor and overhead. If constructed by company, includes interest on money borrowed to do so. Purchase a building (new/old)- cost includes price, brokerage commission, sales or other tax, expenditures to repair/renovate for intended purpose. Equipment- includes purchase price, transportation costs, insurance in transit, sales/other tax, purchase commission, installation, and expenditures to test it, special platforms. *after in use, insurance, maintenance and taxes recorded as expenses, not asset’s cost. Land Improvements and Leasehold Improvements- although land improvements are located on the land, they are subject to decay and cost is then depreciated, leasehold improvements (such as painting a truck that is leased), depreciated over term of lease. This is called amortization . Lump - Sum (or Basket)) Purchases of Asset- businesses often purchase several assets as a group for single lump amount. Total cost must be divided among the assets according to their relative sales/market values. This is called relative-sales-value method . Ex . Buy land and building for 2,800,000, lands market is 300,000 and building’s market is 2,700,000. This equals 3,000,000, making land 10 percent and building 90 percent. Determine cost of asset. Land 280,000 Building 2,520,000 Cash 2,800,000 * total assets do not change. Capital Expenditure vs. Immediate Expense -
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Capital Expenditures- increase asset’s capacity or extend its useful life, said to be capitalized, cost is added to asset account, not expensed immediately. (to capitalize or expense is major issue) ex. Major overhaul EXTRAORDINARY REPAIRS Immediate Expense - costs that do not extend asset’s capacity or useful life but merely restore or maintain asset to working order. Ex. Repair expense, repainting, replacing something, ORDINARY REPAIRS * Does the cost extend assets usefulness? If so, record an asset, if repairs or restores to normal conditions, record
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