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CHAPTER 10 - CHAPTER 10 Fatburger Inc Do you remember...

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CHAPTER 10 Fatburger Inc. Do you remember purchasing your first car? You probably didn't buy your first car like you would buy a CD. Purchasing a new or used car is expensive. In addition, you would drive (use) the car for the next 3–5 years or longer. As a result, you might spend hours or weeks considering different makes and models, safety ratings, warranties, and operating costs before deciding on the final purchase. Like buying her first car, Lovie Yancey spent a lot of time before deciding to open her first restaurant. In 1952, she created the biggest, juiciest hamburger that anyone had ever seen. She called it a Fatburger. The restaurant initially started as a 24-hour operation to cater to the schedules of professional musicians. As a fan of popular music and its performers, Yancey played rhythm and blues, jazz, and blues recordings for her customers. Fatburger's popularity with entertainers was illustrated when its name was used in a 1992 rap by Ice Cube. "Two in the mornin' got the Fatburger," Cube said, in "It Was a Good Day," a track on his Predator album. The demand for this incredible burger was such that, in 1980, Ms. Yancey decided to offer Fatburger franchise opportunities. In 1990, with the goal of expanding Fatburger throughout the world, Fatburger Inc. purchased the business from Ms. Yancey. Today, Fatburger has grown to a multi- restaurant chain with owners and investors such as talk show host Montel Williams, Cincinnati Bengals' tackle Willie Anderson, comedian David Spade, and musicians Cher, Janet Jackson, and Pharrell. So, how much would it cost you to open a Fatburger restaurant? The total investment begins at over $750,000 per restaurant. Thus, in starting a Fatburger restaurant, you would be making a significant investment that would affect your life for years to come. In this chapter, we discuss the accounting for investments in fixed assets such as those used to open a Fatburger restaurant. We also explain how to determine the portion of the fixed asset that becomes an expense over time. Finally, we discuss the accounting for the disposal of fixed assets and accounting for intangible assets such as patents and copyrights. http://www.fatburger.com 10-1 Nature of Fixed Assets Fixed assets are long-term or relatively permanent assets such as equipment, machinery, buildings, and land. Other descriptive titles for fixed assets are plant assets or property, plant, and equipment . Fixed assets have the following characteristics: 1. They exist physically and, thus, are tangible assets. 2. They are owned and used by the company in its normal operations. 3. They are not offered for sale as part of normal operations.
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Exhibit 1. Fixed Assets as a Percent of Total Assets—Selected Companies 10-1a Classifying Costs A cost that has been incurred may be classified as a fixed asset, an investment, or an expense. Exhibit 2 shows how to determine the proper classification of a cost and, thus, how it should be recorded. As shown in Exhibit 2, classifying a cost involves the following steps: Step 1. Is the purchased item (cost) long-lived?
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