Chapter 9 - Financial Accounting Chapter 9 Notes Long Term...

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Chapter 9 Author: Anna Rovira Beavers Needles 2008 8/6/07 1 Financial Accounting Chapter 9 Notes Long Term Assets I. Criteria for Long Term Assets Asset must have a useful life of more than one year Are acquired for use in the operation of a business Are not intended for resale to customers Long tern assets are recorded in the balance sheet as: Property, plant and equipment Assets that are not used in the normal course of business should not be included in this category. Land held for speculative reasons should be recorded as long-term investments. Items held for resale to customers, it should be classified as inventory. II. Acquisition Cost of Property, Plant and Equipment Defining Expenditures: Expenditure Payment or obligation to make future payment for an asset, such as a truck. Expenditures are classified as: 1. Capital Expenditure Is an expenditure for the purchase or expansion of a long-term asset. 2. Revenue Expenditure Related to the repair, maintenance, and operation of a long-term asset. These expenditures do not add to the useful life of the asset but are necessary to use the asset as it was intended. These are recorded in the Income Statement. General Approach to Acquisition Cost The acquisition cost of property, plant, and equipment includes all expenditures reasonable and necessary to get the asset in place are ready for use. For example: Cost of installation of a machine and cost of testing the machines. Let’s look at acquisition cost of certain assets: 1. Land ( Not subject to depreciation) Cost of land Brokerage fees Legal fees Cost demolish an old building Cost to grade the lot Drainage work in the lot Sewage systems
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Chapter 9 Author: Anna Rovira Beavers Needles 2008 8/6/07 2 2. Building (Subject to depreciation) Purchase price Repairs to get the building in use Brokerage fees and other license fee not paid for in the land Lawyers’ fees Architects’ fees Insurance during construction Building permits 3. Equipment (Subject to depreciation) Purchase price Freight Transportation Insurance Excise taxed and tariffs Installation cost Testing In-Class Exercises SE-3 4. Group Purchases If the cost of land and building are included, the cost of each should be calculated separately because of depreciation conventions. Example: A company purchases a building and land for a lump-sum of
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This note was uploaded on 03/10/2011 for the course BUS 1B taught by Professor Kite during the Spring '11 term at Laney College.

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Chapter 9 - Financial Accounting Chapter 9 Notes Long Term...

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