ch 8 - Chapter 8-Property, Plant, and Equipment, Natural...

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(c) Mikhail Pevzner and George Mason University Chapter 8-Property, Plant, and Equipment, Natural Resources, and Intangibles
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(c) Mikhail Pevzner and George Mason University Classifying long-lived assets • Tangible long-lived assets (aka fixed assets ); – Land; – Buildings, fixtures, and equipment; – Natural resources (e.g. oil or natural gas deposits); • Intangible assets; – Patents/trademarks; – Capitalized software costs; – Purchased goodwill;
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(c) Mikhail Pevzner and George Mason University Cost (capitalization) principle • All costs incurred in placing an asset in operation must be included in the cost of that asset on the balance sheet.
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(c) Mikhail Pevzner and George Mason University Your Textbook Example • Delta purchased 73 aircraft for $73 million. Boeing offered Delta $4 million discount which Delta took. Delta also paid $200K in plane delivery expenses and additional $800K to prepare planes for flying. What is the cost of planes recorded on the Delta books?
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(c) Mikhail Pevzner and George Mason University Delta example (continued) Capitalized cost=$73 million-$4 million+$200,000+$800,000=$70 million. Journal entry (assuming cash purchase): Cash $70 million
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(c) Mikhail Pevzner and George Mason University Delta example (continued) Alternatively, if Delta only pays $1 million in cash, and takes out a note for the rest, the entry is: Cash $ 1million Note Payable $ 69 million
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(c) Mikhail Pevzner and George Mason University Delta example (continued) If Delta gives 6 million shares of its $1.5 par value stock trading @$7 to Boeing, and pays the rest in cash, the entry is as follows: Common Stock $9 million Additional Paid in Capital $33 million Cash $28 million
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(c) Mikhail Pevzner and George Mason University Construction: capitalized interest • Just as all other costs, costs of financing construction projects must be capitalized as part of costs of constructed assets. • Examples: Interest on loans taken out to finance plant construction, ship-building, or inventory purchases.
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(c) Mikhail Pevzner and George Mason University Construction: capitalized interest (continued) • Suppose it costs Boeing $50 million to build a 737. However, Boeing also has to take out a $50 million loan to build this plane, and it incurs $1 million in interest expense payable next year. What is the amount capitalized?
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(c) Mikhail Pevzner and George Mason University Interest capitalization (continued) Capitalized amount of $51 million. The journal entry is: Loan Payable $50 million Interest Payable $ 1 million
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(c) Mikhail Pevzner and George Mason University Improvements vs. repair and maintenance • In general, costs incurred to maintain an asset in its current state which do not result in substantial improvement in asset value are expensed. – Example: periodic building maintenance;
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This note was uploaded on 02/05/2011 for the course ACCT 301 taught by Professor Hasan during the Fall '09 term at George Mason.

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ch 8 - Chapter 8-Property, Plant, and Equipment, Natural...

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