Chapter 10 Notes

Chapter 10 Notes - CHAPTER 10 REVIEW 1. Chapter 10 presents...

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CHAPTER 10 REVIEW 1. Chapter 10 presents a discussion of the basic accounting problems associated with the incurrence of costs related to property, plant, and equipment; and the accounting methods used to retire or dispose of these costs. These assets, also referred to as fixed assets, are of a durable nature and include land, building structures, and equipment. Fixed assets are an important part of the operations of most business organizations. They provide the major means of support for the production and/or distribution of a company’s product or service. 2. (S.O. 1) Property, plant, and equipment possess certain characteristics that distinguish them from other assets owned by a business enterprise. These characteristics may be expressed as follows: (a) acquired for use in operations and not for resale, (b) long-term in nature and usually depreciated, and (c) possess physical substance. An asset must be used in the normal business operations to be classified as a fixed asset. These assets last for a number of years and their costs must be allocated to the periods which benefit from their use. Acquisition of Property, Plant, and Equipment 3. (S.O. 2) Property, plant and equipment are valued in the accounts at their historical cost. Historical cost is measured by the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use. Thus, charges associated with freight costs and installation are considered a part of the asset’s cost. The process of allocating the historical cost of property, plant, and equipment to the periods benefited by those assets is known as depreciation. The topic of depreciation is presented in Chapter 11. 4. With minor exceptions, use of a method other than historical cost in valuing property, plant, and equipment represents a departure from generally accepted accounting principles. This position is justified on the grounds that: (a) cost reflects fair value on the date of acquisition, (b) historical cost involves actual, not hypothetical transactions, and (c) gains and losses should not be anticipated but should be recognized when the asset is sold. 5. The assets normally classified on the balance sheet as property, plant, and equipment include land, buildings, and various kinds of machinery and equipment. The cost of each item includes the acquisition price plus those expenditures incurred in getting the asset ready for its intended use. In the case of land, cost typically includes (a) purchase price; (b) closing costs such as title, attorney, and recording fees; (c) cost of grading, filling, draining, and clearing the property; (d) assumption of any liens, mortgages, or encumbrances on the property; and (e) any additional land improvements that have an indefinite life. The cost of removing an old building from land purchased for the purpose of constructing a new building is properly charged to the land account. Also, when improvements that have a limited life (fences,
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This note was uploaded on 07/14/2011 for the course ACCT 23456 taught by Professor Cherie during the Spring '11 term at Portland State.

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Chapter 10 Notes - CHAPTER 10 REVIEW 1. Chapter 10 presents...

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