ACCT 200 1nd Edition Lecture 12 Outline of Last Lecture II. Notes Receivable ContinuedIII. Statement Presentation of ReceivablesIV. Managing ReceivablesOutline of Current Lecture V. Plant AssetsVI. Determining the Cost for Plant AssetsVII. Accounting for Plan AssetsCurrent LectureChapter 9Reporting and Analyzing Long-Lived AssetsPlant AssetsPlant assets are resources that have- Physical- Used in operation- Not intended for sale- To provide future service- NOT land*Referred to as property, plant, and equipment; plant and equipment; and fixed assets*Plant assets are critical to a company’s successDetermining the Cost of Plant AssetsHistorical cost principle requires that companies record plan assets at cost- Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use- Cost- cash paid in a cash transaction or the cash equivalent price paidCash equivalent price is the- Fair value of the asset given up OR- Fair value of the asset received These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Whichever is more clearly determinableLand- All necessary costs incurred in making land ready for its intended use debit land account (balance sheet)- Cost typically includeo Purchase priceo Closing fees (title/ attorney)o Real estate commission or feeo Accrued property taxes and other liens on the land assumed by the purchaserCosts: 1 time NOT annualLand Improvements- Includes all expenditures necessary to make the improvements ready for their intended useo Examples: parking lot, fencing, landscaping, irrigationo Limited useful liveso Expense (depreciate) the cost of land improvements over their useful livesBuildings- Includes all costs related directly to purchase or construction- Purchase costs:o Purchaseo Closing feeo Attorneyo Titleso Real estate feeso Remodeling and replacing or repairing the roof, floors, electrical wiring, and plumbing- Construction costs:o Contract price plus payments for architects’ fees, building permits, and excavation costsEquipment- Include all costs incurred in acquiring the equipment and preparing it for use- Cost typically includeo Cash paid or note = purchase priceo Sales taxo Freight charges (in)o Insurance during transit paid by the purchaser 1 time fee Not for annual insuranceo Expenditures required in assembling, installing, and testing the unitTo buy or lease? (Rent)- A lease is a contractual agreement in which the owner of an asset (lessor) allows another party (lessee) to use the asset for a period of time at an agreed price- Some advantages of leasingo Reduced risk of obsolescence (outdated)o Little or no down paymento Shared tax advantages o Assets and liabilities not reported*Capital lease- lessees show the asset and liability on the balance sheetPractice ProblemThe following expenditures relating to plan assets were made by Watkens Company during the first 2 months of 2014.1. Paid $7,000 of accrued taxes at the time the plant site was acquired (land, debit)2. Paid $200 insurance to cover a possible accident loss on a new factory machinery while the machinery was in transit (equipment, debit)3. Paid $850 sales taxes on a new delivery truck (truck, debit)4. Paid $21,000 for parking lots and driveways on the new plant site (land improvements, debit)5. Paid $250 to have the company name and slogan painted on the new delivery truck (truck, debit)6. Paid $8,000 for installation of new factory machinery (equipment, debit)Accounting for Plant AssetsDeprecation- Process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic mannero Process of cost allocation, not asset valuationo Applies to land improvements, buildings, and equipment, NOT lando Depreciable, because the revenue-producing ability of asset will decline over the asset’s useful lifeFactors in computing deprecation- Cost: all expenditures necessary to acquire the asset and make it ready for intended use- Useful life: estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence- Salvage value: estimate of the asset’s value at the end of its useful lifeDeprecation methods- Management selects the method it believes best measures an asset’s contribution to revenue over its useful life- Examples include:o Straight line method (same expense every year)o Declining balance method (changes every year)o Units of activity methodComparison of deprecation methods- Each method is acceptable because each recognizes the decline in service potential of the asset in a rational and systematic mannerDeprecation and income taxes- IRS does not require taxpayer to use the same deprecation method on the tax return that is used in preparing financial statements- IRS requires the straight line method or a special accelerated deprecation method called the modified accelerated cost recovery system (MACRS)- MACRS is not acceptable under GAAPExpenditure during useful life- Ordinary repairs- expenditures to maintain the operating efficiency and productive life ofthe unito Debit to expense (repairs and maintenance)- Additions and improvements- costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asseto Debit