ch09 - 1 Chapter 9 Long-lived Assets and Cost Long-lived...

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2 Chapter 9: Chapter 9: Long-lived Assets and Cost Long-lived Assets and Cost Allocation Allocation
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3 Capitalize vs Expense Capitalize vs Expense Revenue Expenditures Merely maintain a given level of services Should be Expensed Capital Expenditures Provide future benefits (useful life > 1 year) Should be Capitalized Debit Expense Debit Asset
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4 Property, Plant, and Equipment
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5 1. Acquisition - What Costs to 1. Acquisition - What Costs to Capitalize? Capitalize? General Rule: Capitalize (add to an asset account) the costs to acquire the asset and to prepare it for its intended use. Dr. Asset (purchase price, sales tax, delivery, installation, etc) Cr. Cash, Notes Payable, etc
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Land Has indefinite life and therefore is not depreciated Historical Cost includes: Purchase price, Closing costs, Cost to get ready for intended use (Note: Sale of salvaged materials reduces cost) Land Improvements Have definite life and therefore are depreciated Fences, walls, parking lots, driveways Buildings Have definite life and therefore are depreciated Proportionate share of purchase price, or construction Purchase price (net of cash discounts), Freight & handling, Insurance while in transit, Installation
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Self Constructed Self Constructed Assets Assets What to Capitalize? What to Capitalize? Variable Overhead Apply Fixed Overhead Interest During Construction, if constructed for company’s own use by someone else and progress payments &/or deposit are required
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8 2. Depreciation (Cost 2. Depreciation (Cost Allocation) Allocation) Depreciation is a method of cost allocation . it is used to allocate the capitalized cost of PP&E over the years benefited (matching) Note: depreciation will decrease the carrying value of the asset, but it is not a valuation technique (i.e., book value is not market value)
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9 2. Depreciation (Cost 2. Depreciation (Cost Allocation) Allocation) Useful Life Salvage Value Depreciation methods (1) Activity (units-of-production) (2) Straight-line (3) Double-declining balance (4) 150 percent declining balance (5) Sum-of-the-years digits (6) MACRS (income tax depreciation)
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10 Class Example Class Example Given the following information regarding an automobile purchased by the company on January 2, 2007: Cost to acquire = $10,000 Estimated life = 4 years Estimated miles = 100,000 miles Salvage value = $2,000 Calculate depreciation expense for the first two years under each of the following methods.
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11 (1) Units-of-Production (Activity) (1) Units-of-Production (Activity) Assume that the car was driven 20,000 miles in the
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This note was uploaded on 09/06/2010 for the course BUSINESS ACG 6025 taught by Professor Karenlivingstone during the Fall '10 term at University of South Florida.

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ch09 - 1 Chapter 9 Long-lived Assets and Cost Long-lived...

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