Chapter 4 - Chapter 4 Acquisition and Use of Long-Term...

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5-1 1 Chapter 4 Acquisition and Use of Long-Term Operational Assets 2 Classification: Tangible vs. Intangible Tangible Physical Substance Intangible No Physical Substance Expected to Benefit Future Periods Actively Used in Operations
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5-2 3 Tangible: Property, Plant, Equipment Tangible Physical Substance Intangible No Physical Substance Expected to Benefit Future Periods Actively Used in Operations Land: Does NOT wear out Assets subject to depreciation Buildings and equipment Furniture and fixtures Natural resource assets subject to depletion Mineral deposits and timber Examples 4 Intangibles Tangible Physical Substance Intangible No Physical Substance Expected to Benefit Future Periods Actively Used in Operations Value represented by rights that produce benefits Patents Copyrights Trademarks Franchises Goodwill Subject to amortization Examples
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5-3 5 Purchase price Basket purchase Overview of Long-Lived Asset Accounting Acquisition Post-acquisition expenditures (Depreciation expense) Cost Allocation Gain or Loss on Disposal Use Disposal 6 Measuring and Recording Acquisition Cost Acquisition cost includes the purchase price and all expenditures needed to prepare the asset for its intended use. Acquisition cost does NOT include financing charges such as interest costs.
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5-4 7 Purchase price Architectural fees Cost of permits Excavation costs Construction costs Acquisition Cost Buildings 8 Purchase price Installation costs Modification to building necessary to install equipment Transportation costs Acquisition Cost Equipment
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5-5 9 Purchase price Real estate commissions Title insurance premiums Delinquent taxes Surveying fees Title search and transfer fees Land is not depreciable. Acquisition Cost Land 10 When land and building are purchased together, the land cost and the building cost are placed in separate accounts. The total cost of the purchase is separated on the basis of relative market values . Basket Purchase of Acquisitions
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5-6 11 Example: On March 1, Arco Co. purchased land and building for $200,000 cash. The appraised value (i.e., market value) of the building was $172,500, and the land was appraised at $57,500. How much of the $200,000 purchase price will be allocated to each account? Basket Purchase of Acquisitions 12 Fair Market Values: Building $ 172,500 Land $ 57,500 Total market value $ 230,000 Allocation of cost: Building 172,500/230,000 * $200,000 = Land 57,500/230,000 * $200,000 = Basket Purchase of Acquisitions
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5-7 13 Fair Market Values: Building $ 172,500 Land $ 57,500 Total market value $ 230,000 Allocation of cost: Building .75 * $200,000 = 150,000 Land .25 * $200,000 = 50,000 Basket Purchase of Acquisitions 14 Basket Purchase of Acquisitions How would the acquisition of the land and building be recorded in the journal?
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Chapter 4 - Chapter 4 Acquisition and Use of Long-Term...

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