CHAPTER 8 LLS

CHAPTER 8 LLS - CHAPTER 8 I. Property, Plant, and...

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CHAPTER 8 - Property, Plant, and Equipment; Natural Resources; and Intangibles I. LONG-TERM PRODUCTIVE ASSETS A. Classifying Long-term Assets 1. Tangible assets have physical substance. They are usually classified as property, plant, and equipment (fixed assets). They include: a. Land used in operations. b. Buildings, fixtures, and equipment used in operations. c. Natural resources used in operations. 2. Intangible assets have no physical substance. These assets give certain rights to the owner. They are supported by legal documents. a. Examples include patents, copyrights, franchises, licenses, and trademarks. II. MEASURING THE COST OF ACQUISITION AND MAINTENANCE OF PROPERTY, PLANT, AND EQUIPMENT. A. Measuring and Recording Acquisition Cost 1. Under the cost principle, all reasonable and necessary costs incurred to acquire and prepare an asset for use should be capitalized (added to the asset account) a. Acquisition costs : the net cash equivalent paid or to be paid for long-lived assets. Examples: 1. Costs to buy the asset include the invoice price, sales taxes, legal fees, and transportation costs. 2. Setup costs, including special wiring, platforms (such as a concrete foundations), and other installation costs. 3. Costs to place the asset in service (to ready it for use) include expenditures for testing, adjusting, renovating, and complying with safety requirements. b. Generally, financing charges associated with the asset are treated as interest expense (not capitalized). c. Land: 1. Include all costs associated with getting the land ready for its intended use Ex: Tearing down old buildings so new one can be built (subtract value of salvaged material); Filling in and leveling land in preparation for building 2. Various means of acquiring long-lived assets include: a. For cash: cash is paid at the time of acquisition. b. For debt: a note is negotiated with the seller or the bank to finance the purchase. c. For equity or noncash consideration : when stock or other noncash consideration is included as part of the purchase price. 1. The cash-equivalent cost is measured by the current market value of the stock or non-cash consideration. 2. If the value of what is given up is not determinable, the current market value of what is received should be used for measurement purposes. 1
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Lump-Sum Purchase When a group of assets are acquired for a lump-sum price, the purchase price must be allocated based on the relative fair market value of the assets acquired. EX: Land and a building are purchased for $100,000. An independent appraisal determines that the FMV of land would be $30,000 and the building would be $90,000 if bought separately. B. Repairs, Maintenance, and Additions 1. Most productive assets require expenditures during their useful lives for ordinary repairs and maintenance, major repairs, replacements, and additions.
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CHAPTER 8 LLS - CHAPTER 8 I. Property, Plant, and...

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