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10-1 1 0 PROPERTY, PLANT, AND EQUIPMENT: ACQUISITION AND DISPOSAL CHAPTER OBJECTIVES After careful study of this chapter, students will be able to: 1. Identify the characteristics of property, plant, and equipment. 2. Record the acquisition of property, plant, and equipment. 3. Determine the cost of assets acquired by the exchange of other assets. 4. Compute the cost of a self-constructed asset, including interest capitalization. 5. Record costs after acquisition. 6. Record the disposal of property, plant, and equipment. 7. Understand the disclosures of property, plant, and equipment. 8. Explain the accounting for oil and gas properties (Appendix).
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10-2 SYNOPSIS Characteristics of Property, Plant, and Equipment 1. Assets categorized by a company as property, plant, and equipment must (a) be held for use in the business and not for investment, (b) have an expected life of more than one year, and (c) be tangible in nature. Sometimes these assets are referred to as plant assets, fixed assets, or operational assets. 2. A company records assets included in its property, plant, and equipment category initially at their acquisition cost (historical cost). The company then allocates the cost of the assets, other than land, as an expense to the periods in which it consumes the assets and receives the benefits in order to comply with the matching principle. This process is called depreciation . The major types of assets classified as property, plant, and equipment are land, buildings, equipment, machinery, furniture and fixtures, leasehold improvements, and natural resources (also called wasting assets). Acquisition of Property, Plant, and Equipment 3. The cost of a company's property, plant, and equipment is the cash outlay or its equivalent that is necessary to acquire the asset and put it in operating condition. This cost includes the contract price (less any available discounts), freight, assembly, installation, and testing costs. Costs incurred to obtain the benefits of the asset are capitalized when they are recorded as an asset. 4. The recorded value of land includes (a) the contract price, (b) the costs of closing the transaction and obtaining title (such as commissions, options, legal fees, title search, insurance, and past due taxes), (c) the costs of surveys, and (d) the costs of preparing the land for its particular use (such as the cost of removing an old building) if such improvements have an indefinite life. The costs of land improvements that have a limited life (such as sidewalks) are separately capitalized and depreciated if the company is responsible for maintaining them. If the local government has the responsibility for maintaining such improvements, then the costs are added to the cost of the land. Because land has an unlimited economic life and its residual value is unlikely to be less than its acquisition cost it generally is not depreciated. 5.
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This note was uploaded on 10/12/2011 for the course AC300 01 taught by Professor Smith during the Spring '11 term at Kaplan University.

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