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Chapter 9 Reporting and Interpreting Property

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James Moore

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CHAPTER 9 Reporting and Interpreting Property Plant and Equipment Natural Resources and IntangiblesAcquisition and Maintenance of Plant and Equipment LONGLIVED OR LONGterm OR CAPITAL ASSETS are tangible or intangible resources owned by a business and used in its operations to produce benefits over several years o Not normally sold to generate revenue o Can be tangible or intangibleTANGIBLE ASSETS have physical substance 1 Land reported on the statement of financial position as a separate item if it has a material value Land does not become obsolete never depreciated It may however be impaired Buildings fixtures and equipment reported as a separate item on the statement of financial position or in the notes2 Natural resources mineral deposits such as gold or iron ore oil wells reserves and timber tractsIntangible assets have no physical substance Intangibles and other nothingsname logo slogans computer software and landing rights intellectual property copyrights patents licences trademarks software franchises and subscription lists FIXED ASSET TURNOVER RATIO How effectively is management utilizing its property plant and equipment to generate revenuesMeasures the sales dollars generated by each dollar of fixed assets usedA high rate normally suggests effective managementCreditors and security analysts use this ratio to assess a companys effectiveness in generating sales from its longlived assetsA lower or declining rate may indicate that a company is expanding by acquiring additional productive assets in anticipation of higher sales in the future An increasing ratio could signal that a firm has cut back on capital expenditures because it anticipates a downturn in business Appropriate interpretation of the ratio requires an investigation of related activities Measuring and Recording Acquisition Cost We say that the costs are capitalized when they are recorded as assets instead of as expenses in the current period These costs including any sales taxes legal fees transportation costs and installation costs are added to the purchase price of the asset Special discounts and interest charges associated with the purchase should not be included in the cost of the asset Interest charges should be reported as interest expenseA company may acquire undeveloped land typically with the intent to build a new factory or office building When a company purchases land incidental costs such as title fees sales commissions title insurance delinquent taxes and surveying fees should be included in its cost Sometimes a company purchases an old building or used machinery for use in its business operations Renovation and repair costs incurred by the purchaser prior to the assets use should be included as a part of its costThe ACQUISITION COST is the net cash equivalent amount paid or to be paid for the assetwhen noncash assets are used up as payment the fair market value of the asset given or asset received whichever can be more clearly determined cash equivalent priceEX Cost of aircraftinvoice pricediscounttransportation chargespreparation costsVarious Acquisition Methods For CashFor Debt assume that WestJet signed a note payable for the aircraft and paid cash for the transportation and preparation costs For Equity or Other Noncash Consideration common shares or a right given to the sellerThe cashequivalent cost fair market value of the asset given or received is determined Assume that WestJet gave Boeing 5000000 of its common shares with a market value of 1350 per share the approximate stock price on the date of the transaction and paid the balance in cash including cash for the transportation and preparation costs
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