Accounting 312- ch 10 - Accounting 312 Chapter 10-...

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Accounting 312 Chapter 10- Accounting for Property, Plant and Equipment -plant assets/fixed assets=PPE 1. they are acquired for use in operations and not for resale 2. they are long term in nature and usually depreciated 3. they possess physical substance (tangible) I. Acquisition and Valuation of Property, Plant and Equip A. Historical Cost 1. most co use historical cost as the basis for valuing PPE 2. it measures the cash price of obtaining the asset and brining it to the location and condition necessary for its intended use a. adds to the asset’s cost any related costs incurred after the asset’s acquisition, such as additions and replacements only if they provide future service potential 3. PPE should not be written up to reflect appraisal, market or current value which are above cost because: a. at the date of acquisition cost reflects fair value b. historical cost involves actual, not hypothetical transactions and so is the most reliable c. companies should not anticipate gains and losses but should recognize gains and losses only when asset is sold B. Cost Of Land 1. all expenditures made to acquire land and ready it fore use are considered part of land cost a. purchase price, closing costs (title to the land, attorney fee), costs incurred in getting land in condition for use, assumption of any mortgages, additional land improvements that have an indefinite life 2. removal of old buildings-clearing and filling-is a land cost because this activity is necessary to get land in condition for intended purpose 3. treat proceeds from getting land as reduction in price 4. special assessments for improvements charged to Land acct because are permanent (drainage systems, street lights etc) 5. if the major purpose of acquiring land is speculative, a co more appropriately classifies it as an investment and if real estate hold land for resale, its inventory C. Cost of Buildings 1. include costs of materials, labor and over head costs incurred during construction 2. include professional feeds and building permits 3. if a co purchases land with an old building on it, then the cost of demolition less its salvage value is a cost of getting land ready, not new building D. Cost of Equip 1. includes delivery equip, office equip, machinery, furniture etc 2. costs include purchase price, freight and handling charges, insurance, cost of special foundations, assembling fees, costs of trial runs E. Self Constructed Assets 1. allocate costs and expenses to arrive at the cost of self constructed asset 2. materials and direct labor used in construction are directly traceable 3. indirect costs of manufacturing creates problems: overhead or burden costs include heat, light, power, insurance etc a. to account for overhead, a co assigns a portion of all overhead to the construction process because these costs are attached to all precuts and assets manufactured or constructed b. if the allocated over head results in recording construction costs in excess of the costs that an outside independent producer would charge, the co should charge the excess OH as 1
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This note was uploaded on 01/23/2011 for the course ACCOUNTING acc312 taught by Professor Halwhite during the Fall '10 term at University of Michigan.

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Accounting 312- ch 10 - Accounting 312 Chapter 10-...

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