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Unformatted text preview: Chapter 8 Long lived assets: tangible and intangible resources owned by a business and used in its operations over several year Characteristics of long-lived assets 1. Tangible Assets: (or fixed assets) have physical substance Property, plant, and equipment or fixed assets a. Land used in operations b. Buildings, fixtures, and equipment used in operation c. Natural Resources used in operations 2. Intangible Assets: have special rights but not physical substance a. Examples are patents, copyrights, franchises, licenses, and trademarks Fixed asset Turnover= net sales (or operating revenues)/average net fixed assets Average net fixed assets: [beginning + ending fixed asset balance(net of accumulated depreciation)]/2 Fixed asset turnover ratio measures the sales dollars generated by each dollar of fixed assets used high rate normally suggests effective management Measuring and Recording Acquisition Cost Cost principle: all reasonable and necessary expenditure made in acquiring and preparing an asset for use should be recorded as the cost of the asset Capitalized: when they are recorded as part of the cost of an asset instead of as expenses in the current period Examples: sales tax, legal fees, transportation costs, and installation costs are added to the purchase Acquisition costs: the net cash equivalent amount paid or to be paid for the asset For Cash Flight equipment (+A)..70,000,000 Cash (-A)70,000,000 Assets Cash-70,000,000 Flight equipment +70,000,000 For Debt Flight Equipment (+A)70,000,000 Cash(-A) 1,000,000 Note Payable (+L) ...6,000,000 For Equity Flight Equipment (+A)..70,000,000 Common Stock (+SE) ($1 par value x 9,000,000 shares)..9,000,000 Additional paid in capital (+SE) ($4 market value x 9,000,000shares) 36,000,000 Cash (-A) 25,000,000 Sometimes a company may construct an asset for its own use instead of buying it and the costs of creating it like construction, labor, materials and interest are included in capital interest Capital Interest: represents interest expenditures included in the cost of a self constructed asset Capitalized interest recorded by debiting the asset and crediting cash when the interest is paid Ex....
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