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Chapter 8 - Chapter 8 Reporting and Interpreting Property...

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Chapter 8: Reporting and Interpreting Property, Plant, Equipment; Natural Resources; and Intangibles ACQUISITION AND MAINTENANCE OF PLANT AND EQUIPMENT Classifying Long-lived Assets Long-lived assets : tangible and intangible resources owned by a business and used in operations over several years o Tangible assets : fixed assets that have physical substance; can be touched; also known as property, plan, and equipment; ex: land, buildings, fixtures, natural resources o Intangible assets : special rights but not physical substance; ex: patents, copyrights, licenses Measuring and Recording Acquisition Cost Cost principle where expenditures are capitalized when recorded as cost of asset instead of expense Add sales taxes, extra costs, etc. to purchase price of asset Subtract special discounts from purchase Ex: when purchase land, all extra fees (legal fees, taxes, insurance) and costs (renovation, repair) included in cost Acquisition cost : net cash equivalent amount paid or to be paid for the asset Can purchase with cash, debt, equity, or construction Capitalized interest : represents interest expenditures included in cost of self-constructed asset Repairs, Maintenance, and Additions Because maintenance costs are NOT necessary for readying the asset for use, they are NOT included in acquisition cost Ordinary repairs and maintenance : expenditures for normal operating upkeep of long- lived assets; recorded as expenses o Also known as revenue expenditures : maintain productive capacity of asset during current period only; recorded as expenses o Ex: changing oil in aircraft Additions and improvement : infrequent expenditures that increase asset’s economic usefulness in future o Also known as capital expenditures : increase productive life, operating efficiency, capacity of asset; recorded as increases in asset accounts, NOT expenses o Ex: complete replacement of engine in aircraft USE, IMPAIRMENT, AND DISPOSAL OF PLANT AND EQUIPMENT Depreciation Concepts Matching principle : portion of asset’s cost be
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