Chapter_9 - Chapter 9 Long Term Assets Fixed Assets are...

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Chapter 9 Long Term Assets Fixed Assets are tangible. Tangible assets have a physical form. All necessary costs of acquiring fixed assets should be included in their cost. Buy or Lease There are several advantages of leasing. 1. Reduced risk of obsolescence. 2. Little or no down payment. (Sorry, not on your auto lease) 3. Shared tax advantages; the lessor owns the equipment and takes the depreciation expense. A new company with no need of depreciation expense may receive a lower lease payment. 4. Assets and liabilities do not appear on the balance sheet. This is on operating leases, and is helpful in regard to not showing liabilities. There was so much abuse of this that under certain conditions a lease is considered a capital lease and the leased item must be treated as an asset and future lease payments as a liability. Depreciation Depreciation is the cost of wearing out a fixed asset. Depreciation spreads the cost of the fixed asset over the life of the fixed asset. Typically, depreciation is allowed by the month. If you use the asset half the month or more, you can take that month’s depreciation. Depreciation does not have anything to do with cash or monthly payments. To calculate depreciation I need the cost of the item, an estimated life and an estimated residual value . Cost minus residual value is the depreciable cost . For the examples the cost of the equipment is $50,000. Residual value is $10,000. The life is expressed as 8 years OR 20,000 units. Straight Line Depreciation
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Chapter_9 - Chapter 9 Long Term Assets Fixed Assets are...

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