Accounting for Fixed Assets
1)
When do we capitalize the assets and start taking depreciation?
When the assets been placed into service (used for production).
2)
What is the treatment for the costs while they are not ready to be placed into
service?
Costs will be held in a current asset account called “Construction-in-Progress.” When the
project is completed, the final cost will be reclassified to a fixed asset account.
3)
What is the cost used to place the fixed asset on the books?
Acquisition cost: land cost including sales tax (if applicable), freight, installation, construction
labor and materials. If land: removal costs, attorney, real estate broker fees, and abstract title
costs.
4)
List types of Fixed Assets:
Land (no depreciation)
Buildings
Machinery and Equipment (for manufacturing)
Furniture and Fixtures
Autos and Transportation Vehicles
Leasehold Improvements (removable items)
5)
Capital Leases (Leasing and Debt Covenants)
A lease is capital if any one of the following four tests is met:
1. The lease conveys ownership to the lessee at the end of the lease term.
2. The lessee has an option to purchase the asset at a bargain price at the end of the lease term.
3. The term of the lease is 75% or more of the economic life of the asset.
4. The present value of the rents, using the lessee's incremental borrowing rate, is 90% or more of
the fair market value of the asset.