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CACC 100 CH09 - CACC 100 CH09 PROPERTY PLANT AND EQUIPMENT...

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CACC 100 CH09 PROPERTY, PLANT AND EQUIPMENT 4 categories: 1. Land 2. Land improvements Ex: driveways, parking lots, fences, and underground sprinkler system 3. Buildings 4. Equipment DETERMINING THE COST OF PROPERTY, PLANT AND EQUIPMENT Use Cost Principle – record everything at cost Cost = [purchase cost of (property/plant/equipment)] + [cost required to make it ready for its intended use] Cost required to make it ready for its intended use: Ex: freight cost, testing, and installation costs 2 types 1. Capital Expenditures Costs that benefit future periods These cost are capitalized – recorded as property/plant/equipment rather than expense (Included in long-lived-asset account) 2. Operating Expenditures Costs which benefit only current period and are recorded as expense Ex: maintenance cost, annual property taxes THE COST OF LAND Cost of Land = (purchase price) + (closing costs) + (cost incurred to prepare the land for its intended use) Example Brochu Corporation: 1. Acquires real estate at a cost of $100, 000 2. Torn down an onsite old warehouse at a net cost of $6,000 3. Closing Costs – Legal Fee: 1000 Cost of Land = 100, 000 + 6000 + 1000 = 107, 000 Journalizing Debit – Land: 107, 000 Credit – Cash: 107, 000 THE COST OF LAND IMPROVEMENTS Land improvements decline in service potential over time, and require maintenance and replacement to keep their value Hence 1. Land are not amortized 2. Land improvements - are amortized over their useful lives
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CACC 100 CH09 - recorded separately from lands THE COST OF BUILDINGS All cost of building are charged to the buildings account Cost of building that is purchased = (purchase price) + (closing cost) + (cost to make building ready for its intended use) Cost of building that is constructed = (contract price) + (payment for architecture fees) + (building permits) + (excavation costs) + (interest cost incurred during construction period) THE COST OF EQUIPMENTS (Equipments: Delivery Equipment, Office Equipment, Machinery, Vehicles, Furniture/Fixtures and other similar assets) Cost 2 criteria when determining the cost of equipment: 1. the frequency of the cost – 1-time/recurring 2. the benefit period – the (life of the asset)/(less than 1-year) Capital expenditure 1. purchase price 2. freight charges 3. insurance during transit paid by the purchaser 4. expenditures required in assembling, installing, and testing the equipment Operating expenditure 1. licenses 2. insurance Example Lenard Ltd: 1. purchases a used delivery truck = $32,000 2. Painting/Lettering cost ….. = $500 3. Motor vehicle License ….. = $80 4. 1-year accident insurance policy = $1600 Cost of delivery truck (capital expenditure) = (purchase price) + (Painting/Lettering cost) = 32,000 + 500 = $32, 500 Operating expenditure = {vehicle license, cost of insurance policy} Journalizing THE COST OF ASSET RETIREMENT - Cost for retirement of long-lived assets - Cost of property/plant/equipment will often include amounts for retirements of assets - Ex: cost of decommission ADVANTAGES OF LEASING AN ASSET VERSUS PURCHASING IT (PAGE 405 – 406)
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CACC 100 CH09 1. Reduced risk of obsolescence – Lease terms allow the party with obsolete asset to exchange for a
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