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Characteristics of Plant Assets

Characteristics of Plant Assets. Have physical substance (tangible) Used in the operations of the business Not intended for sale to customers Long-lived. Cost of Plant Assets. All expenditures to acquire the asset and make it ready for its intended use Land - unlimited life

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Characteristics of Plant Assets

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  1. Characteristics ofPlant Assets • Have physical substance (tangible) • Used in the operations of the business • Not intended for sale to customers • Long-lived

  2. Cost of Plant Assets • All expenditures to acquire the asset and make it ready for its intended use • Land - unlimited life • cost includes title, attorney, real estate fees, costs to clear land for intended use • Land Improvements • associated with land, but have limited life • parking lots; fencing; lighting

  3. Cost of Plant Assets • Buildings • Purchased building - Closing costs, real estate commissions, remodeling, repairs • Constructed building - Architects fees, excavation, construction costs, interest cost during construction period • Equipment • Cost includes freight, installation, assembly

  4. Acquiring Assets through Leases • Advantages of leasing • Easier to replace assets more frequently • Minimal down payment required • Tax advantages may exist • Accounting advantage • For many leases, debt represented by future lease payments is not reported as a liability in the balance sheet

  5. Depreciation of Plant Assets • Cost of asset is allocated over periods during which asset is used to generate revenues • Calculation requires • Cost of asset • Estimated useful life • Salvage value • Depreciation method

  6. Depreciation Methods • Straight-line • [Cost - Salvage] / Useful Life in Years = Depreciation / Year • Declining-balance • Higher depreciation in early years of asset life • Declining balance rate is a percentage of straight-line rate • DB rate x Book value of asset = Depreciation in current year

  7. Depreciation Methods • Units-of-Activity • Useful life of asset measured in terms of some measure of output or use • Miles driven on vehicle • Units produced by equipment • [Cost - Salvage Value] / Total units of activity = Depreciation Rate / Unit of Activity • Deprec Rate x Units of activity in current period = Depreciation for current period

  8. Change in Depreciation • Estimated useful life of asset is increased or decreased • Prior years’ depreciation is not adjusted • Remaining cost of asset is depreciated over remaining life (based on new estimate)

  9. Sale of Plant Assets • Book value of Asset = Cost - Accumulated Depreciation (Deprecation recorded to date) • Plant asset sold for more than book value • Gain on sale reported in income statement • Plant asset sold for less than book value • Loss on sale reported in income statement

  10. Ratios for Analyzing Plant Assets • Return on Assets • Net income / Average total assets • Asset Turnover • Net sales / Average total assets

  11. Intangible Assets • Long-lived assets that do not have physical substance • Legal rights: Patents, trademarks • Goodwill: Recorded when the cost of a business is more than the fair value acquired • Allocation of cost of intangible asset is called Amortization Expense • Normally straight-line method used • Goodwill is not amortized

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