CH10 Plant Assets, Natural Resources, Intangibles

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How Does a Business Measure the Cost of Property, Plant, and Equipment? - Property, plant, and equipment (PP&E) are long-lived, tangible assets used in the operations of a business. - Examples include land, buildings, equipment, furniture, and automobiles. Often, property, plant, and equipment are referred to as plant assets, operational assets , or fixed assets in financial statements. - Plant Assets : Long term (lasting several years) - This allocation of a plant asset's cost over its useful life is called depreciation and follows the matching principle. - The matching principle ensures that all expenses are matched against the revenues of the period. Because plant assets are used over several years, a business will record a portion of the cost of the asset as an expense in each of those years. - All plant assets except land are depreciated. We record no depreciation for land because it does not have a definitive or clearly estimable life, so it is difficult to allocate the cost of land. - Plant assets are used in the operations of the business - Plant assets are recorded at historical cost—the amount paid for the asset. - This follows the cost principle , which states that acquired assets (and services) should be recorded at their actual cost. The actual cost of a plant asset is its purchase price plus taxes, purchase commissions, and all other amounts paid to ready the asset for its intended use. Land & Land Improvements - The cost of land includes the following amounts paid by the purchaser: - Purchase price - Brokerage commission - Survey and legal fees - Delinquent property taxes - Taxes assessed to transfer the ownership (title) on the land - Cost of clearing the land and removing unwanted buildings - The cost of land does not include the following costs: - Fencing - Paving - Sprinkler systems - Lighting - Signs - These separate plant assets (fencing, paving, and so on) are called land improvements . Unlike land, land improvements are subject to depreciation. - Measuring the Cost of Land
- - The entry to record the purchase of the land on August 1, 2019, follows: - - Smart Touch Learning capitalized the cost of the land at $62,000. Capitalized means that an asset account was debited (increased) because the company acquired an asse - Smart Touch Learning then pays $20,000 for fences, paving, lighting, and signs on August 15, 2019. The following entry records the cost of these land improvements: Buildings - The cost of a building depends on whether the company is constructing the building itself or is buying an existing one. These costs include the following: - Machinery and Equipment - The cost of machinery and equipment includes the following: - Purchase price (less any discounts) - Transportation charges - Insurance while in transit - Sales tax and other taxesPurchase commission - Installation costs - Testing costs (prior to use of the asset) - After the asset is up and running, the company no longer capitalizes the cost of insurance, taxes, ordinary repairs, and maintenance to the Equipment account. From
that point on, insurance, taxes, repairs, and maintenance costs are recorded as expenses. Furniture and Fixtures - Furniture and fixtures include desks, chairs, file cabinets, display racks, shelving, and so forth. The cost of furniture and fixtures includes the basic cost of each asset (less any discounts), plus all other costs to ready the asset for its intended use. Lump-Sum Purchase - A company may pay a single price for several assets as a group - The company must identify the cost of each asset purchased. The total cost paid (100%) is divided among the assets according to their relative market values. This is called the relative-market-value method - Example: Suppose Smart Touch Learning paid a combined purchase price of $100,000 on August 1, 2019, for the land and building. An appraisal indicates that the land's market value is $30,000, and the building's market value is $90,000. It is clear that the company got a good deal, paying less than fair market value, which is $120,000 for the combined assets. But how will the accountant allocate the $100,000 paid for both assets? - First, calculate the ratio of each asset's market value to the total market value for both assets. The total appraised value is $120,000. - - The land makes up 25% of the total market value and the building 75%, as follows: - - For Smart Touch Learning, the land is assigned the cost of $25,000 and the building is assigned the cost of $75,000. The calculations follow: - - Suppose the company purchased the assets by signing a note payable. The entry to record the purchase of the land and building is as follows: - Capital & Revenue Expenditures
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