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Accounting For And Presentation Of Property, Plant, Equipment, And Other Noncurrent Assets

Accounting for and Presentation of Property,  Plant, Equipment, and Other Noncurrent Assets

Non-Current Assets

Non-current assets include:

  • Land - ground upon which       the business buildings of an entity are located.
  • Buildings - Buildings which appear in the property,      plant, and equipment section of a Balance Sheet are quarters used to       carry on business. Buildings owned as investments are not included as       plant assets.
  • Equipment – machinery used in manufacturing       a product or performing a service for a customer.
  • Intangible Assets – assets such as patents,      leasehold, trademarks, goodwill.
  • Natural resources – mines, quarries, oil       reserves, gas deposits, and timber stands are examples of natural resources.      They represent inventories of raw materials that will be consumed or       exhausted through extraction or removal of their physical properties.

Key Terminology

Depreciation in accounting is the spreading of the cost of a non-current     asset over its estimated useful life to the entity.

Depreciation Expense refers to that portion of the cost of a long term     asset recorded as an expense in an accounting period.

Accumulated Depreciation is a “contra asset” account. The     balance in this account is the accumulated total of all of the depreciation     expense recognized to date on the related asset.

Capitalize / Expense

  1. Capitalize – to       capitalize an expenditure means to record the expenditure as an asset.      A non-current asset that has been capitalized will be depreciated.
  3. Expense – to expense an expenditure means       to record the expenditure as an expense. Expense items are not depreciated.

Net Book Value – the difference between an asset’s cost and     its accumulated depreciation.

Depreciation of Non-current Assets

Depreciation is a non cash flow and therefore the recognition of depreciation     expense does not affect cash.

Depreciation Expense Calculation Elements

  1. Asset Cost
  3. Estimated Salvage Value
  5. Estimated Useful Life to Entity

Alternative Calculation Methods for Depreciation

  1. Straight-Line        
    • Based on years of life Please use bullets when developing HTML
    • Based on units of products
    • Straight-Line Formulas:
    • Depreciation Expense = (Cost – Estimated Salvage Value)        / Estimated Useful life
    • Depreciation Expense Per Unit = (Cost – Estimated Salvage         Value) / Estimated total units
  1. Accelerated        
    • Sum-of the-Years-Digits
    • Declining-Balance

Depreciation Method Alternatives

Accelerated depreciation results in greater depreciation expense during     the early years of an asset’s life than straight-line depreciation.    Most entity’s use straight line depreciation for financial reporting     purposes.

Depreciation expense does not affect cash. However, because depreciation     is deductible for income tax purposes, most entities use an accelerated     method for calculating income tax depreciation.

The depreciation method selected for financial reporting will have an     effect on Return on Investment (ROI) and Return on Equity (ROE). To make     valid comparisons between companies, it is necessary to know whether or     not comparable depreciation calculation methods have been used.

If an expenditure has been inappropriately capitalized or expensed, both     assets and net income will be affected in the current year as well as     future years of the asset’s life.

Assets Acquired by Capital Lease

A long-term lease is frequently a way of financing the acquisition of     a non-current asset.

The effect of the accounting for a leased asset or a purchased asset     should be the same.

The cost of a leased asset is the present value of the lease obligations.

Depreciation expense is recorded based on the present value cost.

As annual lease payments are made, interest expense is recognized and     the lease obligation is reduced.

Intangible Assets and Natural Resources

The expenditure for these items is capitalized, and the expense is recognized     periodically over the useful life of the asset to the entity.

The accounting is essentially the same as that for depreciable assets.

Intangible Asset Terminology

  1. Amortization Expense
  3. Usually an accumulated amortization account is       not used.

Natural Resource Terminology

  1. Depletion Expense
  3. Accumulated Depletion

Present Value (PV) Analysis

Money has value over time

An amount to be received or paid in the future has value today (the present     value) that is less than the future value due to the interest that can     be earned between the present and the future.

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