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CH08 - PP&E - “FINANCIAL ACCOUNTING” by Robert...

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“FINANCIAL ACCOUNTING” by: Robert Libby, Patricia A. Libby, and Daniel G. Short (5th Ed.) Chapter 8 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles Long-term operational assets can be separated into 2 categories: 1) - property, plant, and equipment and natural resources - examples: machinery, computers, land, buildings, office furniture, and oil wells 2) - long-term assets with no physical properties - examples include patents, copyrights, trademarks, goodwill - some companies include these assets in “other” assets These assets have the following 3 characteristics: 1) useful life of more than 1 year (unlike supplies) 2) used in the operation of the business (unlike long-term investments) 3) not intended for resale (unlike inventory) ACQUISITION COST OF PROPERTY, PLANT, AND EQUIPMENT Expenditures for Property, Plant and Equipment are classified into 2 categories: 1) Defined: expenditures that provide benefits for one or more accounting periods beyond the current period. a) with respect to the acquisition of PP&E assets, these costs are recorded in asset accounts at their cost , which includes all costs necessary to acquire the asset and prepare it for its intended use. Includes: - purchase price - taxes - transportation / delivery - installation - any other necessary cost incurred to prepare the asset for its intended use (e.g., machinery testing) - exception: unexpected damage or loss incurred while getting the asset ready for its intended use is recorded as a loss on the income statement. 1
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b) after acquisition of these assets, the following costs also should be capitalized: - extraordinary repairs: repairs which extend an asset’s useful life or increase the asset’s productivity or operating efficiency (e.g., an engine overhaul) - additions: an extension to or enlargement of existing assets (e.g., a new wing added on to a building). - Note: the capitalized cost affects the amount of depreciation to be charged over the remaining life of the asset by increasing the asset’s book value, and perhaps by changing the remaining useful life and residual value of the asset.
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