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Chapter 8

ACCT 1201 Chapter Notes - Chapter 8: Macrs, Book Value, Internal Revenue Code

Course Code
ACCT 1201
Ganesh Krishnamoorthy

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Accounting Chapter 8 03/09/2014
Acquisition And Maintenance of Plant and Equipment
Long Lived Assets are the resources that determine a company’s
productive capacity
oListed as noncurrent assets on the balance sheet
oCan be either tangible or intangible
Characteristics Include
oLong-Lived Tangible Assets
Land used in operations
Buildings, Fixtures, and equipment used in
Natural Resources used in operations.
oLong Lived Intangible Assets
Patents copyrights, franchises, licenses, and trademarks
Measuring and Recording Acquisition Cost
Under the cost principles,
oAll reasonable and necessary expenditures made in acquiring
and preparing an asset for use should be recorded as the cost
of the asset.
Expenditures are capitalized when they are recorded
as part of the cost of an asset instead of as expenses in
the current period
Fixed Asset Turnover = Net Sales (or Operating Revenues) /
Average Net Fixed Assets
Measures the sales dollars generated by each dollar of fixed assets
Higher ratio indicates better asset management.
When purchasing land, building, and equipment as a group (basket
purchase) the total cost is allocated to each asset in proportion to the assets
market value relative to the total market value of the assets as a whole.
When a company decides to construct an asset for use instead of buying it
the cost of the asset includes all the necessary costs associated
with construction
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oThese costs include a portion of interest incurred during the
construction period called capitalized interest.
Repairs, Maintenance, and Improvements.
Ordinary repairs and maintenance are expenditures that
maintain the productive capacity of the asset during the current
accounting period only.
oRecurring in nature, involve relatively smalls amounts at each
oDo not increase productive life, operating efficiency or
capacity of the asset
oThese cash outlays are recorded as expenses in the current
Improvements are expenditures that increase the productive life,
operating efficiency or capacity of the assets.
oThese Capital expenditures are added to the appropriate
asset accounts (they are capitalized)
oOccur infrequently, involve large amounts of money, and
increase an asset’s economic usefulness either through
increased efficiency or longer life.
Capitalizing expenses will increase assets and net income in the
current year lowering future years income by the amount of the annual
On the other hand
For tax purposes, expensing the amount in the current period will lower
taxes immediately
Use, Impairment, and Disposal of Plant and Equipment
Depreciation Concepts.
oExcluding land, a long lived asset with limited useful life,
represents the prepaid cost of a bundle of future services or
oThe expense matching principle requires that a portion of an
asset’s cost be allocated as an expense in the same period
that revenues are generated by its use.
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