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Chap10 Class Notes 2010

Chap10 Class Notes 2010 - Chapter 10 Plant Assets Natural...

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Victor Leung ACCT2111 Chapter 10 1 Chapter 10 Plant Assets, Natural Resources, and Intangible Assets I. Nature of Plant Assets 1. Plant assets are tangible resources that have physical substances 2. Used in the operations of a business 3. Not intended for sale to customers. 4. Also called property, plant, and equipment ; plant and equipment ; or fixed assets. 5. Plant assets are recorded at cost in accordance with the cost principle . Cost consists all expenditures necessary to acquire the asset and to make it ready for the intended use . Expenditures that are unnecessary should be recorded as expenses or losses. In a cash transaction, cost is measured by the cash paid. When non-cash assets are used in payment, cost is measured by the fair market value of the asset given up or the fair market value of the asset received, whichever is more clearly determined. II. Cost of Plant Assets 1. The cost of land consists of: the cash purchase price, closing costs such as title and attorneys’ fee real estate broker’s commission mortgage on the land assumed by the purchaser demolition and removal cost of old building on land. 2. Land improvements are structural additions made to land, the cost includes: the cost of a new parking lot, fencing and lighting on the land driveways 3. The cost of buildings includes all costs related to the purchase or construction of a building: purchase price, closing costs, and broker’s commission remodelling or repairing the building for its intended use construction cost includes contract price, architects’ fees, build ing permits, excavation costs, payments for material, labour, and overhead cost of interest on money borrowed to finance the construction 4. The cost of machinery and equipment includes: the cash price, freight charges, and insurance during transit sales taxes cost in assembling, installing, and testing the equipment. repairs and reconditioning before it is operated for used assets Note: Recurring costs such as licenses and insurance are expensed as incurred. (Illustration 10-3, page 428; Illustration 10-4, page 429)
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Victor Leung ACCT2111 Chapter 10 2 III. Accounting for Depreciation (page 430) 1. Depreciation is the process of allocating the cost of a plant asset to expense over its useful life in a rational and systematic manner: (a) to provide for the proper matching of expenses with revenues, (b) to recognise the decline usefulness due to physical causes ( such as actual wear and tear) or functional causes (such as inadequacy and obsolescence). (c) Depreciation does not result in the cash out-flows or the accumulation of cash. 2. Three methods of depreciation (page 432) Each is acceptable under generally accepted accounting principle , management can select one method for different kinds of asset, but has to applied consistently .
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Chap10 Class Notes 2010 - Chapter 10 Plant Assets Natural...

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