Also called “plant assets” or “property, plant, and equipment”

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Presentation transcript:

Also called “plant assets” or “property, plant, and equipment” Example Exercise 1 Nature of fixed assets Also called “plant assets” or “property, plant, and equipment” Fixed assets have the following characteristics: They exist physically and, thus, are tangible assets They are owned and used by the company in its normal operations They are not offered for sale as part of normal operations Fixed assets are long-term or relatively permanent assets such as equipment, machinery, buildings, and land. [CLICK] Fixed assets are also called plant assets or property, plant, and equipment. [CLICK] They [CLICK] physically exist and, thus, are tangible assets. [CLICK] They are owned and used by the company in its normal operations. [CLICK] They are not offered for sale as part of normal operations.

Example Exercise 1 Classifying Costs A cost that has been incurred may be classified as a fixed asset, an investment, or an expense. To determine the proper classification of a cost and how it should be recorded, use the following steps. Step one, is the purchased item long-lived? If yes, the item is recorded as an asset on the balance sheet, either as a fixed asset or an investment then go to step two. If no, the item is classified and recorded as an expense. Step two, is the asset used in normal operations? If yes, the purchase is classified and recorded as a fixed asset. If no, the asset is classified and recorded as an investment.

Example Exercise 1 This exhibit shows typical costs of acquiring fixed assets. Note that Land Improvement differs from Land in that the items, such as trees, shrubs, and fences, have limited lives. Items considered to be Land have an indefinite life or impact land for an indefinite period. Paving the parking areas has a limited life because parking lots wear out and have to be routinely repaired. Paving a public street is considered land because the city will take over and keep the pavement repaired indefinitely.

Example Exercise 1 Capital and Revenue Expenditures After a fixed asset has been placed in service, costs may be incurred for ordinary maintenance and repairs. Costs may also be incurred for improving an asset or for extraordinary repairs that extend the asset’s useful life. Costs that only benefit the current period are called revenue expenditures. Costs that improve the asset or extend its useful life are capital expenditures.

Example Exercise 1 Ordinary Maintenance and Repairs Assume that $300 was paid for a tune-up of a delivery truck. Costs related to ordinary maintenance and repairs of a fixed asset are recorded as an expense of the current period. Such expenditures are revenue expenditures and recorded as increases to Repairs and Maintenance Expense. [CLICK] Assume that $300 was paid for a tune-up of a delivery truck. The entry would be recorded as [CLICK] a debit to Repairs and Maintenance Expense and a credit to Cash.

Example Exercise 1 Asset Improvements Assume that $5,500 was paid for a hydraulic lift for a delivery truck. After a fixed asset has been placed in service, costs may be incurred to improve the asset. [CLICK] Assume that $5,500 was paid for a hydraulic lift to allow for easier and quicker loading of cargo for a delivery truck. This improves the service value of the delivery truck. The entry would be recorded as [CLICK] a debit to Delivery Truck and a credit to Cash.

Example Exercise 1 Extraordinary Repairs Assume that $4,500 was paid to overhaul of the engine of a forklift. After a fixed asset has been placed in service, costs may be incurred to extend the asset’s useful life. [CLICK] Assume that $4,500 was paid to overhaul the engine of a forklift. This extends the asset’s useful life and is considered a capital expenditure. The entry would be recorded [CLICK] as a debit to Accumulated Depreciation─Forklift and a credit to Cash.

Example Exercise 1 1 Let’s look two items purchased by GTS Company for one of their delivery trucks. The first item is a hydraulic lift for $1,200. Since this expenditure improved the asset, it is recorded with a [CLICK] debit to Delivery Truck and a credit to Cash. The second item is a payment of $45 for an oil change. This is considered a routine expense and is recorded with a [CLICK] debit to Repairs and Maintenance Expense and a credit to Cash.

Example Exercise 1  For Practice: PE 1A, PE 1B 1 1A, 1B Refer to Practice Exercises PE 1A and PE 1B to practice on capital and revenue expenditures.  For Practice: PE 1A, PE 1B