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Chapter 8

ACC 100 Chapter 8: Long-Lived Assets

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Ryerson University
ACC 100
Maurizio Di Maio

Chapter 8 LongLived Assets Equipment = a longlived, tangible asset LongLived Assets = divided into two groups on the Balance Sheet: Property, Plant Equipment Intangible Assets The cost of longlived assets includes all the costs incurred in purchasing and making the asset ready for use In order to determine whether a cost is necessary in making the asset ready for use, one must consider the following: Is this cost required to get the asset into use? Is this cost closely connected to the use of the asset? Is this cost necessary or just nice to have? When a business purchases something broken, the cost of fixing the asset is required to make it ready for use and is added to the cost of the asset; if the business purchases something in good condition and uses it upbreaks it over time, the cost to replacefix the asset would be an operating expense Materiality = the ability to change the decisions of stakeholders The cost of an asset is not recorded as an asset if it is immaterial; the concept of materiality trumps the definitions of the elements Ex: rather than recording a business license under Assets, it would be expensed under Business License Expense because it is immaterial to stakeholders Businesses measure the materiality of transactions in relation to the remainder of the business; anything less than 5 of the businesss total assets is immaterial Ex: a business with 1,000,000 in assets would not consider a 60 business license to be material Over time, longlived assets are used upexpensed The use of a longlived asset is recognized after gathering the following pieces of information: Cost = determined by reviewing all related costs and determining the purchase price plus all costs necessary to make the asset ready for use Ready for Use Date = the date that the asset is ready for use; when the business has the asset completely set up and it can start using it Estimated Useful Life = how long the business will keep and use the asset This value is not equivalent to the total life of the asset, but to the period of time the business ownsuses the asset Residual ValueSalvage Value = an estimate of how much money the business will get when it sells the asset at the end of its useful life As Estimated Useful Life increases, Residual Value decreases In order the calculate the Residual Value, the business must have a reliable Secondary Market Secondary Market = a place to sell used assets When there is no Secondary Market, the Residual Value is zero Depreciable Amount = Historical Cost Residual Value
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