April 17, 2016

Long-Lived Assets and Depreciation - Review Notes

Measuring the Cost of a Plant Asset
The cost principle says to carry an asset at its historical cost—the amount paid for
the asset. The rule for measuring cost is as follows:
Measure the cost of a plant asset

Cost of an asset =
Sum of all the costs incurred to bring the asset
to its intended purpose, net of all discounts


Land and Land Improvements
The cost of land is not depreciated. It includes the following costs paid by the purchaser:
● Purchase price
● Brokerage commission
● Survey and legal fees
● Property taxes in arrears
● 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—called land improvements—are subject to
depreciation.


Measuring the Cost of Land
Purchase price of land ......................
Add related costs:
Property taxes in arrears...........
Transfer taxes...........................
Removal of building .................
Survey fee .................................
Total cost of land .............................

The 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.



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:

Constructing a Building
Architectural fees
Building permits
Contractor charges
Payments for material, labor, and overhead
Capitalized interest cost, if self-constructed


Purchasing an Existing Building

Purchase price
Costs to renovate the building to
ready the building for use, which
may include any of the charges listed
under “Constructing a Building”

Machinery and Equipment
The cost of machinery and equipment includes its
● purchase price (less any discounts),
● transportation charges,
● insurance while in transit,
● sales tax and other taxes,
● purchase commission,
● installation costs, and
● the cost of testing the asset before it is used.

After the asset is up and running, the company no longer debits 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. For
example, for a desk, this may include the costs to ship the desk to the business and
the cost paid to a laborer to assemble the desk.

Capital Expenditures
Accountants divide spending made on plant assets into two categories:
● Capital expenditures
● Expenses
Capital expenditures are debited to an asset account because they
● increase the asset’s capacity or efficiency, or
● extend the asset’s useful life.
Examples of capital expenditures include the purchase price plus all the other costs
to bring an asset to its intended use, as discussed in the preceding sections. Also, an
extraordinary repair is a capital expenditure because it extends the asset’s capacity or
useful life.

Depreciation

depreciation is the allocation of a plant asset’s cost
to expense over its useful life. Depreciation distributes the asset’s cost over the time
(life) the asset is used. Depreciation matches the expense against the revenue generated
from using the asset to measure net income.

Measuring Depreciation
Depreciation of a plant asset is based on three main factors:
1. Capitalized cost
2. Estimated useful life
3. Estimated residual value
Capitalized cost is a known cost and, as mentioned earlier in this chapter,
includes all items spent for the asset to perform its intended function. The other two
factors are estimates.

Depreciation Methods
There are many depreciation methods for plant assets, but three are used most
commonly:
● Straight-line
● Units-of-production
● Declining-balance

Accounting for Research and Development
Costs
Research and development (R&D) costs are the lifeblood of companies such as Procter & Gamble, General Electric, Intel, and Boeing. In general, companies do not
report R&D assets on their balance sheets because GAAP requires companies to expense R&D costs as they are incurred.


Presentation slides

http://wps.prenhall.com/wps/media/objects/1838/1883037/powerpoints/ch_08.ppt



HBS Alumni excel tool on Depreciation methods
http://www.alumni.hbs.edu/new_alumni/toolkit/tools/depreciationcalculator.xls

Updated  17 Apr 2016

8 Dec 2011

1 comment:

  1. WHEN THE INITIAL TEETHING TROUBLES ARE OVER,AN AMOUNT IS KEPT SEPARATE TO AVOID THE OBSOLESCENCE-ASHOK OF EQUIPMENT ETC. IN ORDER TO REPLACE THE PLANT,EQUIPMENT,HUMAN RESOURCES(THEY ALSO AGE WITH THE PASSAGE OF TIME

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