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ORIE 3150 class notes September 28 2010

ORIE 3150 class notes September 28 2010 - 1 2 3 1 2 3

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ORIE 3150 Depreciation Methods September 28, 2010 A. Long term assets have the following characteristics: 1. Useful life of more than one year. 2. Acquired for operation of the business. 3. Are not intended for resale to customers. B. Tangible assets have physical substance. 1. Land 2. Plant, buildings, and equipment (a.k.a., plant assets) 3. Natural resources -timber, ore, oil, gas, and coal. C. Intangible assets have no physical substance. Ex.: patents, copyright, goodwill. D. Most long term assets are used up. They lose value over time. We must recognize this lost value each period as an expense. We allocate expense to each period over the useful life of the asset. E. The period allocation of expenses for plant, buildings, and equipment is depreciation. Can we depreciate land? No. We can put land improvements in a separate account (called Land Improvements) and depreciate them, though. Typical land improvements are fences, parking lots, driveways, and signs. F. The period allocation of the benefits of natural resources is called depletion. Usually on a per ton mined basis (for ore), on a stumpage or per-tree basis (for pulp wood), on a board-feet basis (for timber), on a per barrel basis (for oil), or on a per million cubic feet basis (for natural gas). G. The period allocation of intangible assets is called amortization. H. The unexpired part of the cost of an asset is called its book value or carrying value. Ex. For plant assets, Book value = cost – accumulated depreciation. Or, simply use the combination T accounts! So, for long term assets, the historical cost is kept in one T-account, and the accumulated depreciation (another contra-asset account) is kept in a separate T-account. The combination of the two T-accounts is the book value.
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I. The interest on a loan used to purchase an asset is expensed. This interest is not included as part of the cost of the asset.
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ORIE 3150 class notes September 28 2010 - 1 2 3 1 2 3

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