Chapter 8

Chapter 8 - Chapter 8 Property Plant and Equipment...

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Chapter 8: Property, Plant, and Equipment
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Long-term operating assets Property, Plant, and Equipment (Tangible assets) Natural resources (e.g. mineral resources) Intangible assets: Patents, copyrights, etc Specialized assets (e.g. Films)
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Long-term operating assets Measurement of cost Historical cost Post acquisition expenditures Record cost of using Allocation of cost Alternative allocation methods Depreciation expense Book value = Cost – Accumulated depreciation Disposal of assets Gain or loss on disposal
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Measurement of cost Acquisition costs Legal fees, shipping costs, installation costs Renovation expenditures Self-constructed assets Capitalized interest Payment other than cash Shares of stock Exchanges Basket Purchases Allocation to individual assets (Fair values) Post-acquisition costs Ordinary repairs and Maintenance Additions and improvements
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Problem 8-1: Lump-Sum Purchase of Assets and Subsequent Events Carter Development Company purchased, for cash, a large tract of land that was immediately platted and deeded into smaller sections: Section 1, retail development with highway frontage Section 2, Multifamily apartment development Section 3, single-family homes in the largest section Based on recent sales of similar property, the fair market values of the three sections are as follows: Section 1, $630,000 Section 2, $378,000 Section 3, $252,000 Required 1.What value is assigned to each section of land if the tract was purchased for (a) $1,260,000, (b) $1,560,000, or (c) $1,000,000? 2. How does the purchase of the tract affect the balance sheet? 3.Why would Carter be concerned with the value assigned to each section? Would Carter be more concerned with the values assigned if instead of purchasing three sections of land, it purchased land with buildings? Why or why not?
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1. Relative fair values: Section 1 $630,000 50% Section 2 378,000 30 Section 3 252,000 20 Total $1,260,000 100 % Section 1 2 3 50% 30% 20% (a) $1,260,000 $630,000 $378,000 $252,000 (b) 1,560,000 780,000 468,000 312,000 (c) 1,000,000 500,000 300,000 200,000
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2. The purchase of the land has no effect on total assets. Current assets (cash) declines and long-term assets (land) increases and therefore only the composition of assets on the balance sheet is changed.
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3. Carter would be concerned with the value assigned to each section if it intended to sell one or two sections and keep others. Carter would want the section it intended to sell to be assigned the highest value in order to defer a gain. The value assigned to buildings would be depreciated; therefore, Carter would want more value assigned to the buildings in order to depreciate them and take advantage of the tax shield.
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Problem 8-7: Cost of Assets and the Effect on Depreciation Early in its first year of business, Toner Company, a fitness and training center, purchased new workout equipment. The acquisition cost included the
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Chapter 8 - Chapter 8 Property Plant and Equipment...

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