Chapter 7 - ACC210 - Spring 2011 Operating Assets Chapter 7...

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ACC210 - Spring 2011 “Operating Assets” Chapter 7 Christopher T. McKittrick CPA, MBA, CFE
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Chapter 7 Operating Assets – Objectives Describe the different types of operating assets Identify the costs of acquiring operating assets Classify asset expenditures as either capital expenditures or revenue expenditures Compute straight-line, units of production and double- declining balance depreciation expense for plant and equipment Describe the purpose of amortization expense for intangible assets Describe the reporting of the impairment of operating assets Calculate gain/loss on sale/disposition of plant and equipment Calculate and interpret ratios related to operating assets
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Understanding Operating Assets Long-lived assets used in normal operations Held or used until service potential exhausted Three categories: 1. Tangible assets (e.g. land, buildings, equipment) 2. Intangibles Legal and contractual rights without physical substance (e.g. patents, copyrights, trademarks, licenses, goodwill) 3. Natural resources Tangible assets (e.g. timberlands, coal, oil) 3
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(Plant Assets) Acquisition Costs Terminology Capital Expenditure Revenue Expenditure
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Measuring Cost of a Fixed Asset • Cost principle – Record fixed asset at historical cost • Cost – Any expenditure necessary to acquire the asset and to prepare asset for use – “Capitalize” expenditures included in cost of asset – Immediately “expense” expenditures not included in cost of asset 5
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6 HOW TO Measure and Record the Cost of a Fixed Asset
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Cost of Fixed Asset - Example • On Jan. 2, 2011, Drew Company acquired a new automatic milling machine from Dayton, Inc. • Drew paid $20,000 in cash and signed a one- year, 10% note for $80,000 • Following the purchase, Drew incurred (on account) $2,900 freight charges to deliver the machine. • After the machine arrived, Drew paid J.B. Contractors $5,300 for installation • Drew also used $800 of materials during installation and spent $1,500 of labor on trial runs 7 Information:
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Cost of Fixed Asset - Example 8 1. Determine the cost of the machine 2. Prepare the journal entry necessary to record the purchase of the machine Required:
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Cost of Fixed Asset - Example 9 Solution 1: Cash payment Debt to finance purchase $20,000 80,000 Cost of machine $110,500 Freight charges on account 2,900 Installation costs 5,300 Materials 800 Labor 1,500
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Cost of Fixed Asset - Example 10 Solution 2: Record purchase of Dayton milling mach. Date Account and Explanation Debit Credit Equipment 110,500 Cash 25,300 Jan. 2, 2011 Notes Payable 80,000 Accounts Payable 2,900 Inventory, Materials 800 Wages Payable 1,500
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Depreciation (“matching principle”) Calculation requires … Cost Useful Life Salvage (Residual) Value Depreciation Method
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Depreciation • Process of allocating, in a systematic and
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This note was uploaded on 03/10/2011 for the course ACC 210 taught by Professor Staff during the Spring '07 term at N.C. State.

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Chapter 7 - ACC210 - Spring 2011 Operating Assets Chapter 7...

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