9/23/2023 0 Comments Historical cost principleWhen purchased, the various normal and necessary expenditures made by the owner to ready the property for its intended use are capitalized to arrive at the cost to be reported. That is their purpose: to generate profits by helping to create the sale of goods and services. ![]() Instead, all expenditures are included within the cost of property and equipment if the amounts are normal and necessary to get the asset into condition and position to assist the company in earning revenues. Property and equipment is not bought for resale so this rule cannot be followed here without some modification. For property and equipment, how is historical cost defined?Īnswer: In the previous chapter, the cost of a company’s inventory was identified as the sum of all normal and necessary amounts paid to get the merchandise into condition and position to be sold. Initially, such assets are reported at cost. Wal-Mart also buys a new cash register to use at this outlet. What amounts are included in determining the cost of such assets? Assume, for example, that Wal-Mart purchases a parcel of land and then constructs one of its retail stores on the site. Question: The basis for reporting property and equipment is historical cost. Neither is used at the current time to help generate operating revenues. Conversely, land acquired as a future plant site and a building held for speculative purposes are both classified with investments (or, possibly, “other assets”) on the owner’s balance sheet rather than as property and equipment. Other examples include computers, furniture, fixtures, and equipment. It cannot be held for immediate resale, like inventory.Ī building used as a warehouse and machinery operated in the production of inventory both meet these characteristics. Furthermore, it must serve to generate revenues within the normal operating activities of the business. What requirements must be met for an asset to be classified as part of a business’s property and equipment?Īnswer: To be included within the property and equipment category, an asset must first have tangible physical substance and be expected to be used for longer than a single year. Proper classification is important for the clarity of the reported information. Question: Businesses hold numerous types of assets, such as receivables, inventory, cash, investments, and patents. Recognize that the straight-line method predominates in practice but any system that provides a rational approach can be used to create a pattern for depreciation. ![]()
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