Chap 6 Outline

# Example cost 40000 useful life 5 years salvage 4000

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Example: Cost \$40,000. Useful life 5 years. Salvage \$4,000 Case 1: After 2 years, it was determined that there 5 more years remaining of usage and same salvage Case 2: After 2 years, it was determined that the salvage was \$0 at end of useful life Expenditures that happen after the asset is initially purchased What does a company do if they need to repair or improve existing equipment? 2 choices: Costs that are expensed Costs that are capitalized (added to the cost of the asset) Costs that are expensed: Routine maintenance costs and minor repairs that keep an operation asset running are 6-3

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Chapter 06 - Accounting for Long-Term Operational Assets expensed. Example: oil change on delivery truck Costs that are capitalized. Substantial amounts of money spent to improve or EXTEND the life of the asset (This is not done often) If you extend the life of the asset, you can re-evaluate the cost & depreciation and revise it. Natural Resources Timber, copper, oil and gas reserves are examples of natural resources. These can be used up and so the cost of these resources, as they are used, are expensed. This expense is called depletion. Example: A business owns 10,000 acres of truffula trees. The trees were valued at \$100,000. So if 2,000 acres of the trees were cut down (and the lorax let it happen) then 20% of the cost of the trees would be expensed in that year. (The land would have a separate value from the trees!) 20% * 100,000 = 20,000 is depleted Asset Equity Trees Retained earnings - 20,000 - 20,000 depletion Tree – natural resource = 100,000 – 20,000 = \$80,000 value Intangible assets Read pages 216-218 about the different types.
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