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COMMERCE 1AA3 Study Guide - Final Guide: Fgl Sports, Asset, Ddb Worldwide

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Aadil Merali Juma
Study Guide

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Chapter 7: Property, Plant, 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
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
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
The cost of any asset is the sum of all the costs incurred to bring the asset to its location and
intended use.
1. Land costs purchase price, commission, survey & legal fees, back property taxes, costs
for grading and clearing the land and removing unwanted buildings
2. Buildings
o Architectural fees, building permits, and contractors’ charges
o Materials, labor, and overhead
o Interest on funds borrowed
o Purchase price
o Broker’s commission
o Taxes paid
o Costs to repair and renovate
3. Equipment Purchase price (after discounts), Transportation, Insurance in transit , Sales
and other taxes, Purchase commission, Installation and testing.
Land improvements and leasehold improvements
Land improvements are improvements to land that will eventually deteriorate
o include fencing, paving, sprinkler systems, lighting, parking lots, and driveways
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Leasehold improvements are improvements to leased assets. The cost of leasehold
improvements should be depreciated over the term of the lease.
Lump-Sum (Basket) Purchases:
Several assets purchased in a group at one price
Total cost is allocated based on their market values
Capital vs. Revenue Expenditures
Capital Expenditures
Revenue Expenditures
Increase the productive life, operating
efficiency, or capacity of the asset
Maintain the productive capacity of the asset
Go on the Balance Sheet as Assets
Depreciation Accrual over time,
reduces Income and Tax Expense
Go on the Income Statement as Expenses
Expenses, Income, Income taxes
No 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,
Accumulated depreciation, a contra-asset account, is the portion of the asset’s cost that has
already been amortized (or expensed).
Assets final carrying value = residual value
When the Asset is fully depreciated, the asset and its depreciation account remain in the
ledger with no additional depreciation entries.
Entry to record Depreciation Expense:
Depreciation Expense XXX
Accumulated Depreciation XXX
o Straight-line
o Double-Diminishing-balance
o Units-of-activity
o Sum-of-years’-digits
o Cost
o Useful Life
o Salvage Value
o Depreciable (Amortizable) cost = Cost Salvage Value
o Carrying Value = Historical Cost Accumulated Depreciation
Asset Marketvalue
marketvalue Totalcost
Land $300,000 $3,000,000 10% $2,800,000 $280,000
Building $2,700,000 $3,000,000 90% $2,800,000 $2,520,000
$3,000,000 100% $2,800,000
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