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Operating Assets Defined

Operating Assets Defined

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Published by mnadeem_248131
depreciation accounting
depreciation accounting

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Published by: mnadeem_248131 on Oct 07, 2012
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Operating Assets Defined
Operating assets
are long-lived assets that are used in normal business operations.They are not held for resale to customers. Investments in operating assets are essentialto the success of most businesses. There are three major categories of operatingassets: property, plant, and equipment, sometimes referred to as plant assets or fixedassets; natural resources; and intangible assets.
Property, plant, andequipment
includes land; land improvements, such as driveways, parking lots, fences,and similar items that require periodic repair and replacement; buildings; equipment;vehicles; and furniture.
Natural resources
, such as timber, fossil fuels, and mineraldeposits, are created by natural processes that may take thousands or even millions of years to complete. Companies use up natural resources by cutting or extracting them,so natural resources are sometimes called
wasting assets. Intangible assets
, whichlack physical substance, may nevertheless provide substantial value to a company.Patents, copyrights, and trademarks are examples of intangible assets.According to the matching principle, the costs of operating assets other than land mustbe matched with the revenues they help to generate over their useful lives. Allocatingthese costs to expense is called depreciation for plant assets, depletion for naturalresources, and amortization for intangible assets. The cost of land is never depreciatedbecause land is considered to have an unlimited useful life.Natural resources are usually listed within the property, plant, and equipment categoryon the balance sheet. Intangible assets are placed in a separate category.
Digby Pitts Strip Mining Partial Balance Sheet December 31, 20X4
 ASSETSCurrent AssetsCash $ 16,000Accounts Receivable 84,000Inventory 89,000Supplies 3,000
 
Prepaid Insurance8,000
 
Total Current Assets300,000
 
Property, Plant, andEquipmentLand$ 300,000
 
Buildings and Equipment$ 500,000
 
Less: AccumulatedDepreciation(200,000)
 
300,000Coal Deposits 5,000,000 300,000Less: AccumulatedDepletion(2,000,000)
 
3,000,000
 
3,600,000Intangible AssetsLeaseholds 100,000Goodwill 400,000Less: AccumulatedAmortization(100,000)
 
400,000
 
Total Assets$4,300,000
 
The Cost of Property, Plant, Equipment
 
The cost of property, plant, and equipment includes the purchase price of the asset andall expenditures necessary to prepare the asset for its intended use.
Land
. Land purchases often involve real estate commissions, legal fees, bank fees, titlesearch fees, and similar expenses. To be prepared for use, land may need to be clearedof trees, drained and filled, graded to remove small hills and depressions, andlandscaped. In addition, old buildings may need to be demolished before the companycan use the land. Such demolition expenses are considered part of the land's cost. Forexample, if a company purchases land for $100,000, pays an additional $3,000 inclosing costs, and pays $22,000 to have an old warehouse on the land demolished,then the company records the cost of the land at $125,000.
Land improvements
. The cost of land improvements includes all expendituresassociated with making the improvements ready for use. For example, when onebusiness contracts with another business to put a parking lot on a piece of land, thecost of the parking lot is simply the agreed-upon price. A company that builds its ownparking lot would determine the lot's cost by combining the cost of materials and wagespaid to employees for building the lot.
Buildings
. The cost of buildings includes the purchase price and all closing costsassociated with the acquisition of the buildings, including payments by the purchaserfor back taxes owed. Remodeling an acquired building and making repairs necessary forit to be used are also considered part of the cost. If a building is constructed for thecompany over an extended period, interest payments to finance the structure areincluded in the cost of the asset only while construction takes place. After constructionis complete and the building is ready for productive use, interest payments areclassified as interest expense.
Equipment, vehicles, and furniture
. The cost of equipment, vehicles, and furnitureincludes the purchase price, sales taxes, transportation fees, insurance paid to coverthe item during shipment, assembly, installation, and all other costs associated withmaking the item ready for use. These costs do not include such things as motor vehiclelicensing and insurance, however, even if they are paid when a vehicle purchase occurs.Expenses of this type are normal, recurring operational expenses that do not addlasting value to the vehicle.
Depreciation of Operating Assets
Depreciation
is the process of allocating the cost of long-lived plant assets other thanland to expense over the asset's estimated useful life. For financial reporting purposes,companies may choose from several different depreciation methods. Before studyingsome of the methods that companies use to depreciate assets, make sure youunderstand the following definitions.

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