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Accounting for Fixed Assets Second Edition Raymond H. Peterson John Wiley & Sons, Inc. Copyright © 2002 by John Wiley and Sons, Inc., New York. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4744. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012, (212) 850-6011, fax (212) 850-6008, E-Mail: PERMREQ @ WILEY.COM. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. This title is also available in print as ISBN 0-471-09210-X. Some content that appears in the print version of this book may not be available in this electronic edition. For more information about Wiley products, visit our web site at www.Wiley.com To a number of people who influenced my life and prepared me for the job of creating this book: First, my mother, who not only taught me to read, but allowed me to experience the enjoyment of reading. She opened up for me the vast knowledge available in libraries. Dr. Wade Moorehouse, retired Professor of Accounting and former Chairman of the Department of Business and Economics at California State University, Hayward, who many years ago, when I was an undergraduate student in his accounting course, stimulated my excitement about the accounting function. Blessed with classes of fewer than six students in a new university, we spent many class hours discussing the theory of accounting. These discussions had a large impact on my career direction. Earl Malone, a District Accounting Manager, who early in my career forced me to develop my own thoughts and not just rely on past practice. He also forced me to aquire the skill of dictation, which made the creation of this book a possibility. Dodie Peterson, world’s best secretary, who converted my ramblings into a manuscript. Contents About the Author Preface Chapter Chapter xv xvii 1 2 What Is Accounting for Fixed Assets? 1 Introduction Consumption of Benefits Characteristics of Assets Need to Change 1 3 4 9 What Is an Asset? 11 Introduction Historical Cost Matching Principle Fixed Assets Property Plant Equipment Defining Assets Government Accounting User Fees Not-for-Profit Accounting 11 12 13 14 16 17 18 20 22 24 24 vii viii Chapter Chapter Chapter Contents 3 4 5 Classifications of Asset Transactions 27 Introduction Classification Systems Accounting Policy Decisions Coding of Transactions Property Record Coding System 27 28 31 33 34 Determining Base Unit 39 Introduction Definition of Base Unit Purpose of a Base Unit Establishing Base Units Decision Rules Difficulties in Establishment Land Buildings Equipment Criteria for Establishing Base Units Examples Spare Parts 39 39 40 44 47 48 49 49 52 52 54 54 Control of Property, Plant, and Equipment 55 Introduction Asset Accountant Asset Custodian Inventories Property Record System Identification of Assets Farm Owner Applied Numbers 55 56 57 58 58 59 59 Contents Chapter Chapter 6 7 ix Identification of Specific Asset Items to Be Tagged Bar Coded Tags Security 60 61 64 65 Asset Policies Manual 67 Introduction Purpose Creating the Manual Partial Sample Manual Use of the Manual Property, Plant, and Equipment Custodian’s Responsibilities Responsibilities of Asset Accountant Procedures for Purchase of Physical Assets Approval Limits Minimum Capitalization Level Items Always Charged to Expense Account Transaction Reports Data Definitions 67 67 69 69 72 Establishing Value 83 Introduction Historical Cost Other Values Uses of Values Insurance Collateral for a Loan Purchase or Sale of a Complete Business First Creation of Property Record 83 84 84 85 86 86 87 87 72 73 75 75 75 76 76 77 x Chapter Chapter Contents 8 9 Valuation Techniques Management Information Periodic Assessment of Value 88 89 90 Allocation of Costs to Accounting Periods 93 Introduction Costs of Using up Assets Depreciation Estimated Life Cost Basis Allocation Methods Accelerated Depreciation Other Depreciation Concerns Tax versus Book Depreciation Balance Sheet Disclosure Not-for-Profit Organizations 93 94 95 95 96 97 98 99 100 101 101 Regulated Utilities 105 Introduction Differences in GAAP Telecommunications Accounting Basic Property Record Telecommunications Plant in Service Chart of Accounts Railroads Property Accounts Cost of Construction Units of Property List of Units of Property Accounting for Engineering Costs 105 106 106 107 109 110 111 111 114 114 115 Contents Chapter Chapter 10 11 xi Common and Contract Motor Carriers of Passengers Carrier Operating Property Depreciation Minor Items Uniform System of Accounts—Tangible Accounts Account Definitions 117 117 117 119 119 119 Government Accounting 123 Introduction Measurement Focus Fund Accounting Funding for Government Assets Accounting Standard Setting Measuring Service Efforts and Accomplishments Current Government GAAP Property Records Infrastructure Assets Measurement of Utilization Establishing Property Record Establishing Property Record Units Infrastructure Property Units Planning Accounting Policies Software Selection Off-the-Shelf Software 123 124 125 126 126 127 128 128 129 130 131 131 131 132 133 134 Not-for-Profit Accounting 135 Introduction Accounting Definition of Not-for-Profit Organizations 135 136 xii Chapter Chapter Contents 12 13 Accounting Problems of Not-for-Profit Organizations Formal Accounting Standards Need for Change in Not-for-Profit Accounting Accounting for Property, Plant, and Equipment Creating Property Records Property Record System Documentation 138 139 140 141 143 145 147 Creation and Verification of Property Records 149 Introduction Purpose of Property Record New Concept Requirements for a Physical Asset Database Property Record Units Coding Systems Property Record Codes for Motor Vehicles Other Codes Required Property Record ID Number Maintenance of the Property Record Database Responsibilities of Asset Manager Updating Records Recording Maintenance Costs Verification of Physical Existence Military Commander Approach Foreign Corrupt Practices Act Fully Depreciated Assets Reports from the Property Record System 149 150 151 152 155 155 156 156 157 158 158 159 160 161 161 163 164 165 Computer Programs 167 Introduction Asset Database Software 167 167 One-Write Systems Existing Database Programs Software Selection Off-the-Shelf Property Record Database Packages Review Copies of Software Evaluation of Software Packages Program Review Checklist for Program Review Database Fields 168 169 169 170 170 171 172 175 176 Bibliography 179 Index 185 xiii