Class Notes (1,100,000)
CA (650,000)
McMaster (50,000)
COMMERCE (2,000)
Lecture 1

COMMERCE 1AA3 Lecture Notes - Lecture 1: Historical Cost, 6 Years, Matching Principle


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Aadil Merali Juma
Lecture
1

This preview shows pages 1-3. to view the full 9 pages of the document.
Chapter 6: Property, Plant and Equipment, and Intangible Assets
Long-Lived Assets
Assets that are actively used in operations to generate future benefits beyond one year
Can be classified into tangible and intangible assets
Tangible Assets
Resources that have physical substance (a definite size and shape), are used in the
operations of a business, and are not intended for sale to customers.
Also called property, plant, and equipment; fixed assets; capital assets; and operational
assets.
Include land, amortizable assets (building, equipment, etc.), and natural resources
(mineral deposits and timber)
Except for land, all tangible assets are subject to depreciation or depletion (natural
resources)
Intangible Assets
Intangible assets involve rights, privileges, and competitive advantages that result from
ownership of long-lived assets that do not possess physical substance.
Include patents, copyrights, trademarks, franchises, and goodwill.
Some intangibles are subject to amortization.
Measurement
Tangible assets are measured at their acquisition cost (historical cost)
Cost includes the cash equivalent purchase price plus all reasonable and necessary
expenditures made to acquire and prepare the asset for its intended use.
Land
Purchase price
Commissions
Survey & legal fees
Back property taxes paid
Grading and removing unwanted buildings
Example: A business signs a $300,000 note payable to purchase land for a new production
facility. It pays $10,000 in real estate commission, $8,000 in back property tax, $5,000 for
removal of an old building, a $1,000 survey fee, and $260,000 to pave the parking lot. What is
the cost of the land?
Purchase price of land $300,000
Add related costs:
Real estate commission $10,000
Back property tax 8,000
Removal of buildings 5,000

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Survey fees 1,000 24,000
Total cost of land $324,000
Buildings
Constructed
o Architectural fees, building permits, and contractors’ charges
o Materials, labor, and overhead
o Interest on funds borrowed
Purchased
o Purchase price
o Broker’s commission
o Taxes paid
o Costs to repair and renovate
Equipment
Purchase price (after discounts)
Transportation
Insurance in transit
Sales and other taxes
Purchase commission
Installation and testing
Land Improvement
Parking lots
Driveways
Signs
Fences
Sprinkler systems
Leasehold improvements
Improvements to lease property
Depreciated or amortized over lease term
Acquisition for Noncash Consideration: Record at the current market value of the
consideration given, or the current market value of the asset acquired, whichever is more
clearly evident.
Other Long-Lived Assets
Constructed Assets
Leased Assets
Asset Retirement Obligations

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Lump-Sum (Basket Purchases)
Several assets purchased in a group at one price
Total cost is allocated based on their market values
Subsequent Costs
Two types of expenditures
o Capital expenditures: increase the productive life, operating efficiency, or
capacity of the asset
o Revenue expenditures: maintain the productive capacity of the asset
Capital Expenditures
Increase capacity to extend useful life
Cost is added to an asset account
Expenses
Do not extend capacity or useful life
Maintain or restore working order
Cost is recorded as an expense
DISTINCTION BETWEEN THE TWO REQUIRES JUDGEMENT.
Learning Objective: Calculate and record depreciation on property, plant, and equipment.
Depreciation
Allocating to expense the cost of an asset over its useful life in a rational and systematic
manner, in accordance with the matching principle
Process of cost allocation, not asset valuation
Not a cash fund
Depreciation Methods
Straight- line
Double- Diminishing balance
Sum-of-years’-digits
Units-of-activity
You're Reading a Preview

Unlock to view full version