1nd Edition ACCT 200 Lecture 12 Outline of Last Lecture II Notes Receivable Continued III Statement Presentation of Receivables IV Managing Receivables Outline of Current Lecture V Plant Assets VI Determining the Cost for Plant Assets VII Accounting for Plan Assets Current Lecture Chapter 9 Reporting and Analyzing Long Lived Assets Plant Assets Plant 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 success Determining the Cost of Plant Assets Historical 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 paid Cash 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 determinable Land All necessary costs incurred in making land ready for its intended use debit land account balance sheet Cost typically include o Purchase price o Closing fees title attorney o Real estate commission or fee o Accrued property taxes and other liens on the land assumed by the purchaser Costs 1 time NOT annual Land Improvements Includes all expenditures necessary to make the improvements ready for their intended use o Examples parking lot fencing landscaping irrigation o Limited useful lives o Expense depreciate the cost of land improvements over their useful lives Buildings Includes all costs related directly to purchase or construction Purchase costs o Purchase o Closing fee o Attorney o Titles o Real estate fees o 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 costs Equipment Include all costs incurred in acquiring the equipment and preparing it for use Cost typically include o Cash paid or note purchase price o Sales tax o Freight charges in o Insurance during transit paid by the purchaser 1 time fee Not for annual insurance o Expenditures required in assembling installing and testing the unit To 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 leasing o Reduced risk of obsolescence outdated o Little or no down payment o Shared tax advantages o Assets and liabilities not reported Capital lease lessees show the asset and liability on the balance sheet Practice Problem The 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 Assets Deprecation Process of allocating to expense the cost of a plant asset over its useful service life in a rational and systematic manner o Process of cost allocation not asset valuation o Applies to land improvements buildings and equipment NOT land o Depreciable because the revenue producing ability of asset will decline over the asset s useful life Factors 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 life Deprecation 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 method Comparison of deprecation methods Each method is acceptable because each recognizes the decline in service potential of the asset in a rational and systematic manner Deprecation 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 GAAP Expenditure during useful life Ordinary repairs expenditures to maintain the operating efficiency and productive life of the unit o Debit to expense repairs and maintenance Additions and improvements costs incurred to increase the operating efficiency productive capacity or useful life of a plant asset o Debit asset