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Week 5 Lecture - Week 5 Lecture Long-Term Assets and...

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Week 5 Lecture: Long-Term Assets and Liabilities Capital Expenditures | Depreciation | Disposal of Plant Assets | Current Liabilities | Bond Prices | Bonds Payable and Interest Expense | Bond Carrying Values | Tutorials This week’s TCO is about analyzing and reporting the value of non-current assets and related liabilities. The topics this week include determining the net value of long-term assets and the issues that affect them as well as both current and long-term liabilities. Capital Expenditures A capital expenditure is an expenditure that is recorded as an asset. We use the verb ‘capitalize’ to refer to the act of recording an appropriate expenditure in this way. The term ‘capital’ is also a name used for the equity of a sole proprietor (not incorporated) business. Hopefully, you will be able to remember that assets and capital (equity) are listed on the balance sheet, so a capital expenditure is treated as an asset and also listed on the balance sheet. Alternatively, some expenditures are referred to as revenue expenditures . These are expenditures that are recorded as expenses. This should be easy to remember since both revenues and expenses are listed on the income statement. This concept is applied to the costs related to long-term (also called fixed) assets. The balance sheet subheading for these assets is called Plant, Property, and Equipment and is often referred to as PP&E for short. The rule states that the cost of a fixed asset is the total cost of acquiring and making the fixed asset ready for its intended use. Generally, costs incurred before the asset is put into service (used by the business) are capitalized. Costs incurred to maintain, repair, or keep the asset in service after it is put in service are revenue expenditures and expensed. However, there are two criteria to consider when judging a particular cost incurred at the time of acquiring the asset: 1. The frequency of the cost – one time, or recurring, and 2. The benefit period associated with the cost – the life of the asset, or one year. A cost that is a one-time cost that applies to the life of the asset is capitalized; a cost that is recurring and/or applies to one year is expensed. Below are some examples to illustrate the concepts: Land Cash price of property $ 125,000 Cost to remove old warehouse 9,500 Receipts for sale of salvage materials (1,500) Clearing and grading 3,500 Attorney’s fee 750 Real estate broker’s commission 7,500 Cost of land $ 144,750 Delivery Truck Cash price $ 18,000 Sales taxes 1,080 Painting and lettering 1,200 Cost of delivery truck $ 20,280
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Factory Equipment Cash price of property $ 48,000 Sales taxes 2,500 Insurance during shipping 500 Installation and testing 1,400 Cost of factory equipment $ 52,400 Examples of costs that would be treated as expenses for these assets would be monthly lawn maintenance on the land, an annual license fee, liability insurance for the delivery truck, and regular maintenance costs like lubricants or repairs for the equipment after it has been placed in service.
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