WEEK 5 Flashcards
(63 cards)
Plant assets
resources with 3 characteristics
1. physical substance
2. used in operations of a business
3. not intended for sale to customers
synonym plant assets
property, plant, equipment
What costs are included in the cost of land?
Cash purchase price
Closing costs (title, attorney’s fees)
Real estate broker’s commission
Accrued property taxes & liens assumed
How are costs to prepare land for use recorded?
All necessary costs to make the land ready are debited to the Land account.
What are examples of land improvements?
Driveways, parking lots, fences, landscaping, underground sprinklers.
How are land improvements accounted for over time?
They are depreciated over their useful lives since they eventually need replacement.
What types of structures are considered buildings in accounting?
Stores, offices, factories, warehouses, airplane hangars.
What costs are included when purchasing or constructing a building?
Purchase price
Closing costs
Real estate broker’s commission
Costs to make the building ready for use
How is interest on construction loans treated in accounting?
Capitalized (added to the cost of the building) during construction
Expensed as interest expense after construction is complete
What costs are included in the cost of equipment?
Cash purchase price
Sales taxes
Freight charges
Insurance during transit
Assembly, installation, testing costs
When does insurance become part of equipment cost?
When it is paid during transit as part of getting the asset ready for use.
we make a difference between ordinary repairs and additions and improvements
ordinary repairs: Expenditures to maintain the operating efficiency and productive life of an asset
additions and improvements: Costs that increase operating efficiency, productive capacity, or useful life of a plant asset.
How frequent and costly are ordinary repairs?
They occur frequently and usually involve small amounts.
How are ordinary repairs recorded in the books?
Debited to Maintenance and Repairs Expense
Treated as Revenue Expenditures
revenue expenditures
belongs to ordinary repairs
is money spent for the daily running and upkeep of a business
What are additions and improvements?
Costs that increase operating efficiency, productive capacity, or useful life of a plant asset.
How often do additions and improvements occur?
They occur infrequently and usually involve larger costs.
How are additions and improvements recorded?
Debited to the Plant Asset account affected
Treated as Capital Expenditures
What is the key difference between revenue and capital expenditures?
Revenue Expenditures MAINTAIN the asset’s current condition.
Capital Expenditures IMPROVE or extend the asset’s value or life.
What is depreciation in accounting?
It’s the process of allocating the cost of a plant asset to expense over its useful life in a rational and systematic way.
Is depreciation the same as ASSET VALUATION?
No. It’s cost allocation, not a way to measure market or fair value.
Which plant assets are depreciated?
Land improvements
Buildings
Equipment
Why doesn’t land get depreciated?
Because land generally does not lose value or usefulness over time.
What are the three key factors in computing depreciation?
Cost – The total price paid for the asset
Useful Life – How long the asset is expected to be used
Salvage Value – Estimated value at the end of its useful life
