RCJ4Ch10 - LongLivedAssetsand Depreciation...

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Long-Lived Assets and  Depreciation Revsine/Collins/Johnson: Chapter 10
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RCJ ©Spring 2009 2 Learning objectives 1. What measurement base is used for long-lived assets. 2. What kinds of costs are capitalized and how joint costs are allocated among assets. 3. How GAAP measurement rules complicate trend analysis and comparisons across companies. 4. Why the carrying values of internally developed intangibles often differ from their real values. 5. What asset “impairment” means and how it is recorded. 6. How different depreciation methods work. 7. How analysts can adjust for different depreciation assumptions and improve comparisons across companies. 8. How long-lived asset accounting and depreciation practices differ internationally.
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RCJ ©Spring 2009 3 Long-lived operating assets An asset generates future economic benefits and is under the exclusive control of a single entity. This chapter concentrates on operating assets expected to yield their economic benefits (service potential) over a period longer than one year. Footnotes provide additional details (see exhibit 10.2)
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RCJ ©Spring 2009 4 Initial asset measurement rules The initial balance sheet carrying amount of a long- lived asset is governed by two rules: 1. All costs necessary to acquire the asset and make it ready to use are included in the asset account (meaning they are capitalized costs ). Other costs are “expensed” to income. $$ $$ $$ $$ Capitalized Expensed Price paid for land Cost of clearing land Monthly equipment rental Cost to repair damaged equipment $200 delivery and installation fee Equipment A Equipment B $100 $100 1. Joint costs incurred in acquiring more than one asset are apportioned among the acquired assets.
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RCJ ©Spring 2009 5 Initial asset measurement rules: Example Special GAAP rules apply Purchase price Preparation costs Joint cost Construction costs Joint cost
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RCJ ©Spring 2009 6 Review Question #1 ABC, Inc. purchases new equipment on 1/1/06. The firm Pays $890,000 to the vendor of the machine. Pays $51,000 to transport the equipment Pays $8,000 for insurance during transportation Estimates that maintenance will cost $4,000 in the first year, and will rise by about 20% annually for 10 years. What is the balance sheet effect on 1/1/06? Equipment Asset = $949,000
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RCJ ©Spring 2009 7 Initial Cost Measurement:           Self-Constructed Assets Direct costs of construction Financing costs (interest on funds borrowed to finance construction)
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RCJ ©Spring 2009 8 Determining  the acquisition cost (ex. 2) Seattle Manufacturing acquires a work-station on 1/1/01. The firm Pays a $30,000 down payment to the vendor. Signs a 3-year note payable for $170,000 at an annual interest rate of 10% Pays employees $4,000 to configure the work- station for daily operations and run appropriate tests.
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This note was uploaded on 05/21/2011 for the course ACCT 326 taught by Professor Joh during the Spring '11 term at San Diego State.

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RCJ4Ch10 - LongLivedAssetsand Depreciation...

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