Reimersppt_ch08 - Chapter 8 Reporting and Interpreting...

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Chapter 8 Reporting and Interpreting Long- Term Operational Assets
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In Chapter 7 You learned: o How to account for cash and accounts receivable o Why it’s important to control cash o How a company accounts for bad debts
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In Chapter 8 You will learn: o To account for the purchase and use of: o Buildings o Manufacturing plants o Equipment o Natural resources o Intangible assets o How transactions related to long-term assets are presented on the financial statements.
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Acquiring Plant Assets Assets are required at Historical Cost o Cost includes all necessary costs to get the assets ready for their intended purpose o Their intended purpose is to help generate future revenues. o The expected future revenues must exceed the cost of the asset.
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Land              Acquisition Cost - Land Price Paid for Land Real Estate Commissions Attorneys’ fees Costs of preparing the land for use, such as clearing or draining Net Cost of tearing down existing Structures Cost of Land The Historical Cost Remains on the Balance Sheet. Land is not depreciated + + + + =
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Buildings - Plant              Acquisition Cost Price Paid for Buildings Costs to Update or remodel the facilities Any other costs to get the plant operational Cost of Building Depreciation allocates the cost against future revenues. + + =
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Equipment              Acquisition Cost Purchase Price Freight-In – Cost to have the Equipment Delivered Insurance in Transit Installation Costs, including test runs Cost of Equipment Will be depreciated over the estimated useful life of the equipment + + + =
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Building              Acquisition Cost Architects’ or contractors’ fees Construction Costs Cost of renovating or repairing building Cost of Building Buildings are depreciated, even if the firm expects the market value of the building to increase + + =
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Basket Purchase Allocation When two or more assets are acquired in a single transaction, It is referred to as a “basket purchase” The Relative appraised value of each asset is used to allocate the purchase price
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Basket Purchase Allocation Example: A company purchased a building and its land together for a price of $100,000. The Land appraised at $30,000. The Building appraised at $90,000. Appraised Values Land Building $30,000 $90,000 Total $120,000 $30,000 ÷ 120,000 = 25% $90,000 ÷ 120,000 = 75% 75% 25% Bldg Land
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Basket Purchase Allocation The % of Appraised Value is used to allocate the $100,000 purchase price The Land is valued at $25,000. The Building is valued at $75,000. Appraised % Land Building 25% 75% Total 100% 25% X $100,000 = $25,000 75% X $100,000 = $75,000 75% 25% Land Bldg $100,000 Cost
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Long-Term Assets Are recorded on the Balance Sheet at Cost Recording a Cost as an Asset is called Capitalizing the Cost
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As the Assets are used…. A portion of the cost is transferred to the Income Statement And Matched Against the Revenue the assets helped generate
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Long-Term Assets The general term to describe the process is called “Amortization” “Depreciation” is the specific term to describe the amortization of Property Plant and
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Reimersppt_ch08 - Chapter 8 Reporting and Interpreting...

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