ACCOUNTING101.docVIP

ACCOUNTING 101 CHAPTER 8: LONG-TERM ASSETS Plant assets Plant assets, also known as fixed assets or property, plant and equipment, have three defining characteristics. They are Tangible Used in business operations, and Have useful lives greater than one year. In Chapter 8, we will study the lifecycle of a plant asset. The lifecycle of a plant asset can be summarized as follows: The purchase of a plant asset and determining its cost The allocation of the plant asset’s cost to the periods benefitted (depreciation) Accounting for repairs and improvements to the plant asset Accounting for the disposal of the plant asset. Determining the cost of a plant asset Plant assets are recorded at cost. This is consistent with the cost principle. Costs include not only the purchase price, but all costs necessary to get the plant asset ready for its intended use. The following summarizes many of the expenditures that are capitalized (added to the purchase price of the plant asset) to determine the cost of the plant asset. Plant asset Capitalized costs Land Purchase price; real estate commissions; title fees; legal fees; accrued property taxes paid by the buyer. Costs paid for surveying, grading, and removing existing structures are also capitalized. Land improvements Costs for parking lot surfaces, driveways, fencing, plants and shrubs, and lighting systems. Buildings Purchase price; brokerage fees, taxes, title fees, attorney fees, and necessary renovations. Design or architectural fees are also capitalized. Machinery and Equipment Purchase price, taxes, freight, and installation and testing the equipment. Lump-Sum Purchase In a lump sum purchase, various assets are purchased for a single price. Costs are allocated to each asset based on relative market values. Any costs paid to repair assets damaged during installation are recorded as expense. Depreciation Methods The factors that determine depreciation are cost, salvage value and useful life. The three most widely us