Review Notes Ch 9

Review Notes Ch 9 - CHAPTER 9 Reporting and Analyzing...

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CHAPTER 9 Reporting and Analyzing Long-Lived Assets Study Objectives 1. Describe how the cost principle applies to plant assets. 2. Explain the concept of depreciation. 3. Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods. 4. Describe the procedure for revising periodic depreciation. 5. Explain how to account for the disposal of plant assets. 6. Describe methods for evaluating the use of plant assets. 7. Identify the basic issues related to reporting intangible assets. 8. Indicate how long-lived assets are reported in the financial statements. 9. (Appendix) Compute periodic depreciation using the declining-balance method and the units-of-activity method. 9-1
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Chapter Outline Study Objective 1 - Describe how the Cost Principle Applies to Plant Assets Plant assets are resources that have physical substance (a definite size and shape), are used in the operations of a business, and are not intended for sale to customers. It is important for companies to (1) keep assets in good operating condition, (2) replace worn-out or outdated assets, and (3) expand its productive assets as needed. The cost principle requires that plant assets be recorded at cost. Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use. If a cost is not included in a plant asset account, then it must be expensed immediately. Such costs are referred to as revenue expenditures . Costs that are not expensed immediately, but are instead included in a plant asset account are referred to as capital expenditures . Cost is measured by the cash paid in a cash transaction or by the cash equivalent price paid when noncash assets are used in payment. The cash equivalent price is equal to the fair market value of the asset given up or the fair market value of the asset received, whichever is more clearly determinable. Once cost is established, it becomes the basis of accounting for the plant asset over its useful life. Land – Land is often used as a building site for a manufacturing plant or office. The cost of land includes: (1) The cash purchase price (2) Closing costs such as title and attorney's fees (3) Real estate brokers’ commissions (4) Accrued property taxes and other liens on the land assumed by the purchaser All necessary costs incurred in making land ready for its intended use increase (debit) the Land account. Land improvements – Land improvements are structural additions made to land such as driveways, parking lots, fences, landscaping, and underground sprinklers. 9-2
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The cost of land improvements includes all expenditures necessary to make the improvements ready for their intended use. The cost of a new company parking lot includes the amount paid for paving,
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Review Notes Ch 9 - CHAPTER 9 Reporting and Analyzing...

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