ACCT 2110 CH 7 Operating Assets

This allocation is called

*depreciation for property, plant, and equipment assets, amortization for intangible assets, and depletion for natural resources *

Operating asset is recorded at its cost

*including the cost of acquiring the asset and the cost of preparing the asset for use (historical cost principle)*

The most common depreciation methods are:

*straight-line*. *declining balance*. *units-of-production*.

As the service potential of an operating asset declines

*the cost of the asset is allocated as an expense* among the accounting periods in which the asset is used and benefits are received (the matching principle)

Information Required for Measuring Depreciation

1) *cost of the fixed asset*: is any expenditure necessary to acquire the asset and to prepare the asset for use. 2) *useful life (or expected life) of the fixed asset*: is the period of time over which the company anticipates deriving benefit from the use of the asset. 3)*residual value (salvage value) of the fixed asset*: is the amount of cash or trade-in consideration that the company expects to receive when an asset is retired from service.

Operating assets are divided into three categories:

1) Property, plant, and equipment: fixed assets or plant assets such as building, machines, equipment, and automobiles. 2) Intangible assets: Do not have physical substance. They include patents, copyrights, trademarks, licenses, franchises, and goodwill. 3) Natural resources: Naturally occurring materials. They include timberlands and deposits such as coal, oil, and gravel.

Cost minus Residual Value

= Depreciable Cost

Book Value =

Cost-Accumulated Depreciation

Capitalized

Expenditures that are included as part of the cost of the asset are said to be...

Expensed immediately

Expenditures that are not included as part of the cost of the asset are...

Building cost includes:

Purchase price. Closing costs. Architectural fees. Cost of building permits. Excavation costs. Remodeling fees.

Land cost includes:

Purchase price. Real estate commissions. Delinquent property taxes. Closing costs (attorney, title and survey fees). Clearing and grading costs. Demolition of unwanted buildings, minus andy salvage.

Equipment cost includes:

Purchase price. Sales taxes. Transportation costs. Insurance during transportation. Installation costs. Cost of trial runs.

Land Improvement cost includes:

Purchases price. Sales taxes. Installation cost.

Depreciation expense

The amount of depreciation recorded each period and is reported on the *income statement*

Operating assets

The long-lived assets that are used by the company in the normal course of operations. Represent future economic benefits, or service potential, that will be used in the normal course of operations.

*Straight-line* depreciation method allocates

an *equal amount of an asset's cost to depreciation expense for each year* of the asset's useful life

The service potential of a fixed asset is

assumed to decline with each period of use, but the pattern of decline is not the same for all assets. As a result, various depreciation methods exist.

The cost of a fixed asset is an

expenditure necessary to acquire the asset and to prepare the asset for use

Accumulated depreciation

represents the *total amount of depreciation expense* that has been recorded for an asset since the asset was acquired, is reported on the *balance sheet as a contra-asset*

Operating assets are not

sold to customers. They are used by a company in the normal course of operations to generate revenue

Depreciation methods are

standardized calculations required to determine periodic depreciation expense.

The matching principle provides

the conceptual basis for measuring and recognizing depreciation

Depreciation is

the process of *allocating*, in a systematic and rational manner, *the cost of a tangible fixed asset* (other than land) *to expense over the asset's useful life*

Property, plant and equipment are

the tangible operating assets and include: *Land:* The site of a manufacturing facility or office building used in operations (not subject to depreciation because it has an unlimited life and service potential) *Land Improvements:* Structural additions or improvements to land (such as driveways, parking lots, fences, landscaping, lighting) *Buildings:* Structures used in operations (factory, office, warehouse) *Equipment:* Assets used in operations (machinery, furniture, automobiles)