Financial Accounting: Tools for Business Decision Making, 4th Edition

1. Financial Accounting:Tools for Business Decision Making, 4th Edition Kimmel ∙ Weygandt ∙ Kieso CHAPTER 9 Prepared by Ellen L. Sweatt Georgia Perimeter College and Barbara Muller Arizona State University West

2. Chapter 9 REPORTING AND ANALYZING LONG-LIVED ASSETS

3. Chapter 9Reporting and Analyzing Long-Lived Assets After studying this chapter, you should be able to: • Describe how the cost principle applies to plant assets. • Explain the concept of depreciation. • Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods. • Describe the procedure for revising periodic depreciation.

4. Chapter 9Reporting and Analyzing Long-Lived Assets • Explain how to account for the disposal of plant assets. • Describe methods for evaluating the use of plant assets. • Identify the basic issues related to reporting intangible assets. • Indicate how long-lived assets are reported on the balance sheet.

5. 11 Cost of Plant Assets 1 • Plant assets are resources that • have physical substance • are used in the operations of a business • are not intended for sale to customers • deliver service potential over their useful lives (except land) • Plant assets are recorded at cost • cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use

6. Types of Expenditures • Revenue Expenditure - immediately charged against revenue as an expense • Capital Expenditure - capitalized as an asset, not immediately expensed

7. Plant Assets Cost is measured by • the cash paid in a cash transaction, or • the cash equivalent price paid when noncash assets are used in payment. The cash equivalent price is equal to • the fair market value of the asset given up, or • the fair market value of the asset received, whichever is more clearly determinable.

8. Plant AssetsLand Cost of land includes • Cash price, closing costs, brokers’ commissions, accrued property taxes, etc. • Can also include costs to raze a building, drain and fill the land • Proceeds from sale of salvaged materials are deducted from the cost

9. Cost ofLand Improvements • All expenditures necessary to make the improvements ready for their intended use • Drive ways • Parking lots • Fences • Underground sprinklers

10. Buildings • All necessary expenditures relating to the purchase or construction of a building. • When a building is purchased such costs include the • purchase price • closing costs (attorney's fees title insurance) • real estate broker's commissions

11. Buildings • If a building is purchased, but needs to be readied for its intended use, cost includes • expenditures for remodeling rooms or offices • replacing or repairing • roof • floors • electrical wiring • plumbing

12. Buildings • When a building is constructed, its cost consists of • the contract price • architect's fees • building permits • excavation cost • interest costs during construction

13. Equipment • Cost of equipment includes • purchase price • sales tax • freight charges and insurance during transit paid by the purchaser • expenditures required in assembling • installing and testing the unit

14. Equipment • Two criteria apply in determining the cost of equipment • the frequency of cost - one time or recurring • the benefit period - the life of the asset or 1 year

15. Leasing Versus Purchasing an Asset • Advantages of leasing include • Reduced risk of obsolescence • Little or no down payment • Shared tax advantages • Assets and liabilities may not be recorded

16. Review Question Which of the following is/are properly classified as plant assets (property, plant, and equipment)? • Inventory • Machinery • Office supplies • I and II only. • II and III only. • II only. • III only.

17. Review Question Which of the following is/are properly classified as plant assets (property, plant, and equipment)? • Inventory • Machinery • Office supplies • I and II only. • II and III only. • II only. • III only.

18. Review Question Real estate fees incurred to purchase a building are treated on the financial statements as an? • Expense in the period incurred. • Expense in the period the fees are paid. • Extraordinary expense, reported net of tax. • Asset.

19. Review Question Real estate fees incurred to purchase a building are treated on the financial statements as an? • Expense in the period incurred. • Expense in the period the fees are paid. • Extraordinary expense, reported net of tax. • Asset.

20. 11 2 Depreciation • The process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner. • Depreciation is not a process of asset valuation.

21. Depreciation • Three classes of plant assets are depreciated • Land improvements • Buildings • Equipment • Land is NOT depreciated

22. A decline in revenue- producing ability may also occur because of obsolescence. Depreciable Assets The revenue-producing ability of an asset declines during its useful life because of wear and tear.

23. Land Does not depreciate since its usefulness and revenue producing ability generally remain intact, or increase.