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Chapter 9 - Long-lived assets. This chapter explain the difference between capitalizing costs and expensing costs, and compare how these two accounting treatments affect net income across time. | 1 Chapter 9: Long-Lived Assets 2 2 Long – Lived Assets Land Has indefinite life and therefore is not depreciated Historical Cost includes: Purchase price, Closing costs, Cost to get ready for intended use (Note: Sale of salvaged materials reduces cost) Land Improvements Have definite life and therefore are depreciated Fences, walls, parking lots, driveways 3 Long – Lived Assets Buildings Have definite life and therefore are depreciated Proportionate share of purchase price, or construction cost, Closing Cost, Architect & Attorney fees Machinery, Equipment, Furniture & Fixtures Purchase price (net of cash discounts), Freight & handling, Insurance while in transit, Installation Intangible assets Rights, privileges, and benefits of possession No physical existence Includes cost and the cost to defend them Amortized over useful life (if indefinite life, no amortization) 4 The Relative Size of Long-Lived Assets 5 Figure 9-1 Property, plant, and equipment plus Intangible as a percentage of total assets Capitalize vs. Expense Revenue Expenditures Merely maintain a given level of services Should be Expensed Capital Expenditures Provide future benefits (useful life > 1 year) Matching principle Should be Capitalized 6 Debit Expense Debit Asset 6 Financial Statement Effects 7 Figure 9-2 (Partial) The effects of depreciation period on the financial statements: Rudman Manufacturing 8 Overview of Accounting for Property, Plant, and Equipment Figure 9-4 Accounting for long-lived assets 8 Acquisition: What Costs to Capitalize? General Rule: Capitalize (add to an asset account) the costs to acquire the asset and bring it to its serviceable or usable condition and location. Dr. Asset (purchase price, sales tax, delivery, installation, etc) Cr. Cash, Notes Payable, etc 9 9 Construction of Long - Lived Assets What to Capitalize? Direct Materials Labor Overhead Interest During Construction 10 Postacquisition Expenditures: Betterments or Maintenance? Maintain current level of . | 1 Chapter 9: Long-Lived Assets 2 2 Long – Lived Assets Land Has indefinite life and therefore is not depreciated Historical Cost includes: Purchase price, Closing costs, Cost to get ready for intended use (Note: Sale of salvaged materials reduces cost) Land Improvements Have definite life and therefore are depreciated Fences, walls, parking lots, driveways 3 Long – Lived Assets Buildings Have definite life and therefore are depreciated Proportionate share of purchase price, or construction cost, Closing Cost, Architect & Attorney fees Machinery, Equipment, Furniture & Fixtures Purchase price (net of cash discounts), Freight & handling, Insurance while in transit, Installation Intangible assets Rights, privileges, and benefits of possession No physical existence Includes cost and the cost to defend them Amortized over useful life (if indefinite life, no amortization) 4 The Relative Size of Long-Lived Assets 5 Figure 9-1 Property, plant, and equipment plus Intangible as a percentage of
