121_07SG - Chapter 7Accounting for Plant Assets, Intangible...

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Chapter 7 174 Chapter 7—Accounting for Plant Assets, Intangible Assets, and Related Expenses CHAPTER OVERVIEW In Chapter 4, you were introduced to the principles of internal control. In Chapters 5 and 6, you saw how companies maintain control over three very important current assets: short-term investment, receivables, and inventories. In this chapter, we continue the discussion of internal control with specific application to non-current assets, also called long-lived assets. Long-lived assets include things such as equipment, buildings, natural resources, and intangible assets. The learning objectives for the chapter are to 1. Determine the cost of a plant asset. 2. Account for depreciation. 3. Select the best depreciation method for income tax purposes. 4. Analyze the effect of a plant asset disposal. 5. Account for natural resource assets and depletion. 6. Account for intangible assets and amortization. 7. Report plant asset transactions on the statement of cash flows. CHAPTER REVIEW Objective 1 - Determine the cost of a plant asset. Business assets are classified as current or long-lived (long-term) assets. Current assets are considered to be useful for one year or less. Long-lived assets are expected to be useful longer than a year. Plant assets are long-lived assets such as land and equipment. Plant assets are tangible; that is, they have physical form. The cost of a plant asset is the purchase price plus any other amount paid to acquire it and make it ready for use. The cost of land includes the purchase price, brokerage commission, survey fees, legal fees, transfer taxes, back property taxes, costs to grade or clear the land, and costs to demolish or remove any unwanted buildings or other structures. The cost of an existing building includes the purchase price, brokerage commission, taxes, and any expenditure to repair or renovate the building to make it ready for use. The cost of machinery and equipment includes the purchase price less any discounts, plus transportation charges, transportation insurance, commissions, and installation costs. Improvements to land are not part of the cost of land because the usefulness of the improvement decreases over time. Such improvements include roads, paving, fencing, driveways, parking lots, and lawn sprinkler systems. Improvements to land should be recorded in a separate asset account. The cost of improvements to leased assets are called leasehold improvements . Construction in progress refers to assets a company has begun building but not yet finished. Capital leases refer to plant assets a company does not own which are being leased over an extended period of time.
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Accounting for Plant Assets, Intangible Assets, and Related Expenses 175 Interest costs incurred during the time a plant asset is being constructed are considered a necessary cost to “acquire” the asset and are therefore capitalized (i.e., debited to the asset account.) The amount of interest capitalized is the lesser of the interest cost based on average accumulated construction expenditure or the
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This note was uploaded on 10/24/2010 for the course ACCOUNTING 31609 taught by Professor R.ambrose during the Fall '09 term at San Mateo Colleges.

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121_07SG - Chapter 7Accounting for Plant Assets, Intangible...

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