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48 - Land has an unlimited life and is the only plant asset...

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Lump-Sum Purchases Companies purchase several assets in a group for one price Cost is allocated to individual assets by on their market values Capital Expenditure vs. Immediate Expense Capital Expenditure Increase capacity or extend life Examples: Major overhaul Building additions Immediate Expense Maintain or restore to working order Examples: Minor repairs Painting NOTE: Most companies set a dollar amount to decide if an expenditure should be capitalized or expensed Measuring Depreciation on Plant Assets Plant assets wear out or grow obsolete over time The cost of a plant asset is allocated to an expense over its life Matches expense of using the asset to the revenues the asset helped produce
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Unformatted text preview: Land has an unlimited life and is the only plant asset not depreciation Depreciation Depreciation is NOT: • a process of valuation based on market value decline • a method of setting aside cash to replace assets How to Measure Depreciation • Three items needed Cost of the plant asset Estimated useful life • How long the company expects to use the asset Estimated residual value • Expected cash value of asset at the end of its life • Can be zero Depreciable Cost = Asset’s cost – Estimated residual value...
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