ACCT Chapter 8 Condensed (Day 1).docx

Chapter 8 Condensed (Day 1) I. Property, Plant, and Equipment (PPE) II. Acquisition and maintenance of PPE III. Fixed asset turnover ratio IV. Depreciation and Depletion V. Asset Impairment VI. Disposal, Retirement and Trading of PPE VII. Intangible Assets VIII. Amortization I. Property, Plant, and Equipment (PPE) Plant assets are resources that: i. have physical substance, ii. are used in the operations of a business, and iii. are not intended for sale to customers. Plant assets are recorded at cost (cost principle). Cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use. Example: The Wiggles Company has five plant assets that cost a total of $200 million. The total current market value of the assets is $500 million. The assets will be reported as assets on the balance sheet at a. $200 million b. $500 million c. $700 million d. $300 million A. Land – The cost of land includes: i. cash purchase price, ii. closing costs such as title and attorney's fees, iii. real estate brokers’ commissions, and iv. all necessary costs incurred in making land ready for its intended use  Clearing, draining, filling and grading vacant land  Demolition and removal of old building v. Land is NOT depreciated 1 B. Land Improvements i. Eg. Paving, Fencing, Lighting ii. Land Improvements are depreciated Eg. Newton Hospital installs a new parking lot. The paving cost $30,000 and the lights to illuminate the new parking area cost $12,000. Which of the following statements is true with respect to these additions? a. $30,000 should be debited to the Land account. b. $12,000 should be debited to Land Improvements. c. $42,000 should be debited to the Land account. d. $42,000 should be debited to Land Improvements. C. Buildings i. When a building is purchased costs include all necessary expenditures relating to the purchase or construction of a building:  Purchase Price  Closing Costs  Attorney’s fees  Title Insurance  Real estate broker’s commissions ii. When a building is constructed costs include  Contract price plus payments made by the owner for architect’s fees  Building Permits  Excavation Costs  Capitalized Interest Expense (limited to the construction period) During time of construction, don’t expense interest, capitalize it D. Equipment – The cost of equipment consists of the: i. Cash purchase price ii. Sales Tax iii. Freight-In Charges iv. Insurance during transit v. Assembling, installing and testing the unit vi. One-time costs generally included (eg. Insurance during Transit)… recurring costs NOT included (eg. Yearly insurance). E. Natural Resources (eg. Timber tracts and silver mines) 2 Eg. Madrigal Corp had the following transactions:  Paid $20,500 for the basic truck to the dealer.  Paid $700 to have the company name and logo painted on the side of the truck.  Paid $200 annual license fee on the truck.  Paid $1,450 sales tax on the purchase of the truck.  Paid $500 for annual parking permit for the truck to park near the university.  Paid $800 for 6 months insurance on the truck.  Paid $2,500 for custom designed shelf unit permanently attached to the inside of the truck. Equipment: Truck II. Acquisition and maintenance of PPE A. Purchase PPE for Cash Eg. Southwest purchased an