Intermediate Accounting

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10 Investments in Noncurrent Operating Assets—Acquisition Overview Operating assets are not the assets that come out of daily operations (cash, accounts receivable, etc.). Rather, they are plant (fixed) assets and other assets required by businesses for the long haul. Without them, the day-to-day operations may not exist. Examples include property, plant, equipment, and intangible assets. What are these noncurrent operating assets and how do they get recorded on the books? That is what this chapter covers. The accounting for these transactions isn’t always as simple and straightforward as some other transactions like the recording of revenue or the receipt of cash. Sometimes these assets are acquired in basket purchases or as acquisitions of entire companies. Other times payment is deferred so (long-term) debt is affected. Some are not outright purchased but are leased in such a way that the company must account for the lease as though a purchase was made. Although many companies don’t self-construct their own assets, some do. When they do so and have interest expense, a portion, or all, of their interest expense is capitalized (turned into part of the building as an asset) rather than expensed. This calculation can be somewhat complicated, especially for companies with multiple debt sources. In terms of the financial statement appearance, there is a big difference between capitalizing a cost and expensing it. When capitalized, it shows up as an asset, which makes the balance sheet look healthier. When expensed, it shows up as a deduction from revenue, which reduces net income and makes the income statement look weaker. Hence, it is important that true expenses are not capitalized. Only costs incurred to create assets should be capitalized. The chapter covers a variety of potential costs and whether each should be expensed or capitalized. When solitary intangibles are acquired, the accounting is simple. But in many cases, multiple intangibles are acquired simultaneously, intangibles are acquired with parts of other companies, or they are acquired as part of the acquisition of an entire company. Under these instances, the treatment can become more complicated. Although intangibles are frequently created, they are not always, or even usually, recorded. Generally, intangibles need to be purchased to be reflected on a company’s books.
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10-2 Chapter 10 Learning Objectives Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that this section of the chapter is second nature to you before you attempt the homework, a quiz, or exam. This important piece of the chapter serves as your CliffsNotes or “cheat sheet” to the basic concepts and principles that must be mastered. If after reading this section of the chapter you still don’t feel comfortable with all of the
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This note was uploaded on 12/22/2010 for the course ACCOUNTING 564 taught by Professor Ahmadali. during the Fall '08 term at American Dubai.

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032459237X_174370 - 10 Investments in Noncurrent Operating...

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