Historical Cost Model

Topics: Depreciation, Generally Accepted Accounting Principles, Investment Pages: 3 (827 words) Published: December 27, 2012
What is included in the cost basis of a long- lived asset? Explain for a least two types of such assets.

Add the original price of your investment and any transaction costs. For example, if you buy 100 shares of stock at $10 per share and pay a $20 broker’s commission, your purchase expense totals $1,020.

Disregard dividends or other income you receive as cash while you own the investment. Dividends or interest are classified (and taxed) by the Internal Revenue Service as ordinary income and do not increase or decrease your cost basis.

Add any additional money you invest (plus transaction costs) to your original purchase expenditure. Most often, such additional investment is in the form of reinvested dividends. Another example is money you spend for improvements to a real estate investment.

Add the transaction costs you pay when you liquidate the investment. If the original purchase expenditure for 100 shares of stock was $1,020, and you paid $30 in transaction fees to sell the shares, your total investment expenditure comes to $1,050. This is your cost basis.

What sources are reliably used to estimate as asset's useful life? Depreciation is the process of allocating the cost of long-lived plant assets other than land to expense over the asset's estimated useful life. For financial reporting purposes, companies may choose from several different depreciation methods. Before studying some of the methods that companies use to depreciate assets, make sure you understand the following definitions.

•Useful life is an estimate of the productive life of an asset. Although usually expressed in years, an asset's useful life may also be based on units of activity, such as items produced, hours used, or miles driven.

•Salvage value equals the value, if any, that a company expects to receive by selling or exchanging an asset at the end of its useful life.

•Depreciable cost equals an asset's total cost minus the asset's expected salvage value....
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