Chapters 10, 12 and 21

Chapters 10, 12 and 21 - Chapters 10, 12 and 21 Chapter 10...

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Chapters 10, 12 and 21
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Chapter 10 Learning Objectives 1. Describe property, plant and equipment. 2. Identify the costs to include in initial valuation of property, plant, and equipment. (pgs.488-493) 3. Understand accounting issues related to acquiring and valuing plant assets. 4. Describe the accounting treatment for costs subsequent to acquisition.(pgs. 488-501) 5. Describe the accounting treatment for the disposal of property, plant, and equipment. (pgs. 506-514).
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Property, Plant and Equipment 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.
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Valuation of PPE 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.
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Cost of PPE 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 case of land, cost typically includes (a) purchase price; (b) closing costs such as title, attorney, and recording fees; (c) cost of grading, filling, draining, and clearing the property; (d) assumption of any liens, mortgages, or encumbrances on the property; and (e) any additional land improvements that have an indefinite life. The cost of removing an old building from land purchased for the purpose of constructing a new building is properly charged to the land account. Also, when improvements that have a limited life (fences, driveways, etc.) are made to the land they should be set up in a separate Land Improvements account so they can be depreciated over their estimated useful life.
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Building and Equipment Costs Building costs include materials, labor, and overhead costs incurred during construction. Also, any fees such as those incurred for building permits or the services of an attorney are included in acquisition cost. In general, all costs incurred from excavation of the site to completion of the building are considered part of the building costs. With respect to
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Chapters 10, 12 and 21 - Chapters 10, 12 and 21 Chapter 10...

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