Textbook Notes (363,474)
Canada (158,377)
MGAB01H3 (126)
G.Quan Fun (21)
Chapter 9

Chapter 9 notes

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University of Toronto Scarborough
Financial Accounting
G.Quan Fun

Chapter 9 Reporting and Analyzing Long-Lived Assets Notes Property, Plant, and Equipment N long-lived resources that the company owns 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 N their benefits (which are for many years) arise from their use for the production and sale of goods or services to customers, for rental to others, or for administrative purposes N critical to a companys success because they determine the companys production capacity and ability to satisfy customers Determining the Cost of Property, Plant, and Equipment N cost principle requires that property, plant, and equipment be recognized (recorded) at cost, which includes the following: 1. the purchase price, less any discounts or rebates 2. the expenditures necessary to bring the asset to its required location and to make it ready for its intended use N these costs are capitalized (recorded as property, plant, and equipment), rather than expensed, if it is probable that the company will receive an economic benefit in the future from the asset N operating expenditures : expenditures that benefit current period; they are immediately matched against revenues as expense N capital expenditures : expenditures that benefit future periods; they are recorded as long-lived assets N PPE are often subdivided into four classes: land, land improvements, buildings, equipment Land N all costs related to the purchase of land, including such costs as survey and legal fees for closing deal, are added to Land account N if additional work is required to prepare land for its intended use, such as clearing, grading, and filling, these costs are also recorded as capital expenditures in Land account N if land has building on it that must be removed to make the site suitable for construction of a new building, all demolition and removal costs, less any proceeds from salvaged materials, are added to the Land account N when land has been purchased to construct a building, all costs that are incurred up to the time of excavation for new building are considered to be part of the costs that are necessary to prepare land for its intended use Land Improvements N land improvements are structural additions made to land, such as driveways, sidewalks, fences, and parking lots N land improvements, unlike land, decline in service potential over time and require maintenance and replacement N because of this, land improvements are recorded separately from land and are depreciated over their useful lives N when classifying costs, it is important to remember that one-time costs that are required for getting the land ready to use are always charged to Land account, not Land Improvements account Buildings N cost of building includes all costs that are directly related to its purchase or construction N when building is purchased, its cost includes purchase price, closing price, and all costs to make building ready for its intended use, which can include expenditures for remodelling rooms and offices, and for replacing or repairing the roof, floors, electrical wiring, and plumbing, which are all capitalized to the Building account N when new building is constructed, its cost consists of the contract price plus payments made for architect fees, building permits, and excavation costs; in addition, interest costs that are incurred specifically to finance a construction project (i.e., interest that could not be avoided) are also included in the cost of the asset N in these circumstances, interest costs are considered as necessary as materials and rules Equipment N equipment classification is broad one that can include delivery equipment, office equipment, machinery, vehicles, furniture and fixtures, and other similar assets N cost of equipment includes purchase price and all costs that are necessary to get equipment ready for its intended use, such as freight charges, insurance during transit paid by the purchaser, and expenditures that are required in assembling, installing, and testing equipment are all charged to Equipment account N because they are recurring expenditures that do not benefit future periods, annual costs such as licences and insurance are treated as operating expenditures when they are incurred Asset Retirement Costs N cost of PPE must include estimate of cost of any obligation to dismantle, remove, or restore long-lived asset when it is retired N costs such as these must be estimated (using present-value concepts) and added to asset account N other side of entry records liability for asset retirement obligation N these costs, and liability, are recorded in period when legal obligation is created, which can be at time asset is acquired, or later when asset is used To Buy or Lease? N in a lease, a party that owns an asset agrees to allow another party to use asset for agreed period of time at agreed price N lessor : a party that has agreed contractually to let another party use its asset N lessee : a party that has made contractual arrangements to pay for the use of another partys asset N here are some advantages of leasing an asset versus purchasing it: 1. Reduced risk of the negative impact of obsolescence. Obsolescence is the process by which an asset becomes out of date before it physically wears out. Frequently, lease terms allow party using the asset (lessee) to exchange the asset for a more modern or technologically capable asset if it becomes outdated. This is much easier than trying to sell an obsolete asset. www.notesolution.com
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