chapter 10

chapter 10 - Objectives Chapter 10 PLANT ASSETS INTANGIBLE...

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1 Chapter 10 PLANT ASSETS, INTANGIBLE ASSETS, AND RELATED EXPENSES Professor Dominica Lee September 2005 2 ACY1111 D. Lee 2005-2006 Objectives: (1) Cost of a plant asset (2) Depreciation Methods: (a) Straight-line (b) Units-of production (c) Double-declining-balance (d) Sum-of-years’-digit (3) Disposal of plant assets (a) Retiring a plant asset (b) Selling a plant asset (c) Exchanging plant assets (4) Natural resources and depletion (5) Intangible assets and amortization 3 ACY1111 D. Lee 2005-2006 Plant Assets: Are long-lived assets that are tangible in nature and are used in the operation (not for resale) of the business. 4 ACY1111 D. Lee 2005-2006 Cost of a Plant Asset: Includes all costs necessary to (1) acquire the asset and (2) make it ready for its intended use. e.g. Land: cost includes purchase price, brokerage commission, legal fees, taxes. Machinery: cost includes purchase price, transportation charges, insurance during transit, installation. How about costs incurred from mishandling the assets? Refer to p.422-423 for more examples. 5 ACY1111 D. Lee 2005-2006 Capitalizing Interest: To capitalize a cost means to include the cost as a part of an asset’s cost, i.e. debit a capitalized cost to an asset account. Interest incurred during construction is capitalized. 6 ACY1111 D. Lee 2005-2006 Depreciation is the allocation of a plant asset’s cost to expense over the asset’s useful life . What accounting principle is depreciation based on? Common Misunderstandings: (1) Depreciation is not a process of valuation. Why? (2) Depreciation does not provide cash for replacing assets. Causes of depreciation include physical deterioration and obsolescence.
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2 7 ACY1111 D. Lee 2005-2006 Land is not a depreciable asset. How about parking lot, driveways, fences? These are called Land Improvements . Do they depreciate? 8 ACY1111 D. Lee 2005-2006 Determining Depreciation 3 factors: (1) cost (2) estimated useful life (3) estimated residual value (scrap value, salvage value): estimated value of the asset at the end of its useful life. Depreciation is to allocate the depreciable cost (= cost – residual value) over the asset’s useful life. 9 ACY1111 D. Lee 2005-2006 Methods of Depreciation (1) Straight-line method: Most widely used, simplest method. An equal amount of depreciation expense is charged each year. Depreciation per year = (cost – residual value) / useful life in years Book value (or carrying amount ) = cost – accumulated depreciation 10 ACY1111 D. Lee 2005-2006 Methods of Depreciation (cont’d) (2) Units-of-production (units-of-activity) method (UOP): This method best fits those assets that wear out because of physical use rather than obsolescence. Used when the productivity of an asset varies
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This note was uploaded on 11/26/2010 for the course BA ACY1111/2 taught by Professor C during the Spring '09 term at CUHK.

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chapter 10 - Objectives Chapter 10 PLANT ASSETS INTANGIBLE...

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