CH9LongTerm+Assets09F - Chapter 9 - 1 Chapter 9: Long-Term...

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Chapter 9 - 1 Chapter 9: Long-Term Assets I. Accounting Definition : DEPRECIATION Depreciation is the systematic allocation of the cost of an operational asset over its useful life. In accounting it does not mean wear and tear and obsolescence and yes, we ignore inflation. It represents "use" of asset we own; similar to rent expense for assets we don't own. It is not an accumulation of cash for replacement of the asset. Operational (Depreciable) Assets are also called fixed assets or Depreciate : Building, Equipment, Automobiles, Furniture, Land Improvements, Leasehold Improvements, etc. Never depreciate land (per IRS). Cost of land includes removal of any building on property. Land improvements = fences, landscaping, sewers, etc.-- they are depreciable. Leasehold improvements are changes you made to space that you rent. Often referred to as retro fitting the space. A. Why do we depreciate? Expense recognition concept (matching) - Expense of using the asset is recorded in the period of revenue due to accrual accounting (GAAP) B. Appreciation (increase in market value of the asset) — do not record! II. What is included in cost? A. Acquisition Cost = everything to get the asset ready to use except interest. Examples: installation fees, test runs, transportation, 1
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lawyers’ fees, real estate commissions, taxes, razing old building, etc. Remove any purchase discount offered as this is technically interest regardless of whether or not it is taken. Later, if they do not pay within discount period, call it interest expense. Other miscellaneous stuff: If building/equipment is damaged prior to the being put into use, then the repair is typically added to the purchase cost of the asset (as opposed to expensing it). If building/equipment is damaged after being put into use, then the repair is typically "repairs and maintenance expense". Insurance during shipping and installation cost of asset. Regular insurance for using asset insurance expense. Razing (demolition) of a building is added to the cost of Land. B. Basket or group purchases - allocate purchase cost of land, building and equipment based on their relative market value. Must separate types of assets since they have different useful lives that affect depreciation expense. Formula for basket purchases: Individual market value x total purchase = individual purchase Total market value cost cost to be recorded III. Adjusting journal entry must be done yearly but can be done monthly or quarterly also. If you own a lot of assets it is a large expense. Note this expense does not “USE” cash. We will discuss later in the handout. AJE: Dr:
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CH9LongTerm+Assets09F - Chapter 9 - 1 Chapter 9: Long-Term...

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