Chapter 9 Notes
Plant assets (p. 448)
Tangible resources that have physical substance, are used in the operations of the business, and are not intended for sale to customers.
> Plant assets are critical to a company’s success because they determine the company’s capacity and therefore its ability to satisfy customers.
> It is important for a company to (1) keep assets in good operating condition, (2) replace worn-out or outdated assets, and (3) expand its productive assets as needed.
1. Describe how the cost principle applies to plant assets.
> The cost principle requires that companies record plant assets at cost. Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use
Revenue expenditures (p. 449)
Expenditures that are immediately charged against revenues as an expense.
Capital expenditures (p. 449)
Expenditures that increase the company’s investment in plant assets.
> Cost is measured by the cash paid in a cash transaction or by the cash equivalent price paid when companies use noncash assets in payment. The cash equivalent price is equal to the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable. Once cost is established, it becomes the basis of accounting for the plant asset over its useful life.
> Current fair value is not used to increase the recorded cost after acquisition.
Cash equivalent price (p. 449)
An amount equal to the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable.
> IFRS is flexible regarding asset valuation. Companies revalue to fair value when they believe this information is more relevant.
> The cost of land includes (1) the cash purchase price, (2) closing costs such as title and attorney’s fees, (3) real estate brokers’ commissions, and (4) accrued property taxes and other liens on the land assumed by the purchaser.
> Land improvements are structural additions made to land, such as driveways, parking lots, fences, landscaping, and underground sprinklers. The cost of land improvements includes all expenditures necessary to make the improvements ready for their intended use.
> Because of their limited useful life, companies expense (depreciate) the cost of land improvements over their useful lives.
> Buildings are facilities used in operations, such as stores, offices, factories, warehouses, and airplane hangars.
> When a building is purchased, such costs include the purchase price, closing costs (attorney’s fees, title insurance, etc.), and real estate broker’s commission. Costs to make the building ready for its intended use consist of expenditures for remodeling rooms and offices and replacing or repairing the roof, floors, electrical wiring, and plumbing. When a new building is constructed, its cost consists of the contract price plus payments made by the owner for architects’ fees, building permits, and excavation costs.
> The inclusion of interest costs in the cost of a constructed building is limited to interest costs incurred during the construction period. When construction has been completed, subsequent interest payments on funds borrowed to finance the construction are recorded as increases (debits) to Interest Expense.
> The cost of equipment consists of the cash purchase price, sales taxes, freight charges, and insurance during transit paid by the purchaser. It also includes expenditures required in assembling, installing, and testing the unit.
> Two criteria apply in determining the cost of equipment: (1) the frequency of the cost—one time or recurring, and (2) the benefit period—the life of the asset or one year.
Lessor (p. 452)
A party that has agreed contractually to let another party use its asset for a period at an agreed price.
Lessee (p. 452)
A party that has made contractual arrangements to use another...