Retl-261-lecture-chapter-10a

Studocu is not sponsored or endorsed by any college or university RETL 261 Lecture Chapter 10A Functional Accounting I (University of South Carolina) Studocu is not sponsored or endorsed by any college or university RETL 261 Lecture Chapter 10A Functional Accounting I (University of South Carolina) Downloaded by ?? ? ([email protected]) lOMoARcPSD|29408391

RETL 261 Chapter 10 Lecture Williams PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLES I. Plant Assets A. Tangible assets that are used in the operations of a company and have a useful life of more than one accounting period B. Recorded at cost when purchased C. Cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use D. Land purchased as a building site 1. cost includes purchase price, commissions, title insurance, legal fees, accrued property taxes, surveying, clearing, landscaping, local government assessments, and cost of removal of existing structures 2. Do not depreciate E. Land Improvements 1. Costs that increase the usefulness of the land 2. Includes parking lots, driveways, fences, and lighting systems 3. Depreciated in a separate account F. Buildings 1. If purchased , cost includes purchase price, brokerage fees, taxes, title fees, attorney costs, all expenses to get it ready for use and necessary repairs 2. If constructed , cost includes materials and labor plus a reasonable amount of indirect overhead cost, design fees, building permits, and insurance during construction G. Machinery and Equipment 1. cost includes all normal and necessary expenditures to purchase them and prepare them for their intended use (purchase price, taxes, transportation, insurance, installation, assembling, and testing) H. Lump-Sum Asset Purchase ( Basket Purchase ) 1. Individual asset cost is determined by allocating the cost of the purchase based on the different assets relative market values II. Depreciation A. The process of allocating to expense the cost of a plant asset to the accounting periods benefiting from its use B. Factors in computing depreciation 1. Cost 2. Salvage value at the end of its useful life 3. Useful life of productivity C. Journal Entry 1. Dr. Depreciation Expense Cr. Accumulated Depreciation D. Methods 1. Straight-Line Method a. charges the same amount to expense for each period of the asset's useful life b. Cost - Salvage Value / Useful Life 2. Units-of-Production Method a. charges a varying amount to expense for each period of an asset's useful life depending on its usage in a period based on a rate of total usage expected b. Cost - Salvage Value / Total Units = Rate per unit x Units in this period 3. Declining-Balance Method a. an accelerated depreciation method that charges larger depreciation during the early years of an asset's life and smaller expenses in the later years (twice the straight-line rate) b. Do not use salvage value in this formula c. ( 1 / Life x 2 ) = Depreciation rate x Beginning book value 4. For Tax Reporting (from the U.S. federal income tax law) a. MACRS - required for tax reporting, but not acceptable for financial reporting E. Partial Year Depreciation 1. when an asset is purchased or disposed of at a time other than the beginning or end of an accounting period, depreciation is recorded for the part of the year the asset was in use F. Revising Depreciation Rates 1. Spread the remaining cost to be depreciated over the revised useful life remaining 2. Book value - Revised Salvage / Remaining life Downloaded by ?? ? ([email protected]) lOMoARcPSD|29408391

RETL 261 Chapter 10 Lecture Williams G. Reporting Depreciation on Assets 1. Cost and accumulated depreciation must be shown on B/S and in the notes 2. Must disclose the methods used III. Additional Expenditures A. Expenditures made after the assets initial purchase B. Categories 1. Revenue Expenditures a. recorded as expenses as ordinary repairs expense on I/S b. Low cost plant assets that are immaterial are expensed 2. Capital Expenditures a. additional costs of plant assets that do provide material benefits beyond the current period by increasing or improving the asset's service b. Betterments, Additions, and Extraordinary Repairs are debited to the asset account IV. Disposals of Plant Assets A. In general, follow four steps: 1. record depreciation up to the date of disposal 2. remove the disposed asset and related accumulated depreciation 3. record any cash received or paid 4. record any gain or loss B. Discarding a Plant Asset 1. If fully depreciated, no loss or gain C. Selling Plant Assets 1. follow four-step procedure under IV. A.above 2. Compare value received to book value to determine gain or loss D. Exchanging Plant Assets (Appendix 10A) 1. follow general procedure above 2. Commercial Substance - when the company's future cash flows change as a result of the transaction 3. Exchange with Commercial Substance a. recognize losses and gains as difference in what was given up and what was received 4. Exchange without Commercial Substance a. do not recognize gains or losses in a separate account V. Natural Resources A. Assets that are physically consumed when used B. Include timber, mineral deposits, oil and gas fields C. Recorded at the cost which includes all expenditures necessary to acquire the resources and prepare it for its intended use D. Depletion is the process of allocating the cost of natural resources to periods when they are consumed on a units-of-production basis E. Assets (machinery) used to extract the resources are normally depreciated in direct proportion with the depletion of the resource 1 . Depletion (Units-of-Production Method)  a. charges a varying amount to expense for each period of an asset's useful life depending on its usage in a period based on a rate of total usage expected Cost - Salvage Value = = Rate x Units in Total Units per this unit period Does not change each year Changes each year Same formula we used before Downloaded by ?? ? ([email protected]) lOMoARcPSD|29408391