Classification of the assets of Closser-Gomez Company will be classified according to the property, plant and equipment and finitive-lived intangible assets method, considering the cost of each asset. In this situation, the depreciation and appreciation of the properties is put into account.
There are four categories under this classification which include land, equipment, buildings and land improvements. In the context of Closser Gomez this will include the land they own for property development. It will also include the buildings owned by the company. The three warehouses in south Texas as well as the office complex in San Antonio are contained in this category. The equipment of the company, including the five bulldozers used to clear land and the company trucks are also in this category. Equipments will also include the computer hardware and any printing machines they have. The cost incurred when preparing the land for construction is also considered as land improvements
To determine the cost of the assets in this category, depreciation is considered. Notably, land is the only asset in this category that is not subjected to depreciation. On the contrary, the value or cost of land always appreciates over time.
The cost or value of a product when factoring in depreciation is calculated as shown below
Final Cost=Initial Cost (1-r)n
Where r represents the rate of depreciation and n depicts the time period over which the asset has served.
When calculating the cost of land, however, the formula changes a little to,
Final Cost=Initial Cost (1+r)n
Note that depreciation reduces the net income and therefore reducing the income tax. Appreciation on the other hand does the opposite. There are three ways an asset can undergo depreciation. First, straight line depreciation involves a constant rate of depreciation over the time period the asset serves. The amount of depreciation value therefore remains the same throughout. In unit activity method, the depreciation of an asset is determined by its productivity. This therefore means that if an asset’s productivity improves over the year, its depreciation rate reduces. However, if there is no improvement, the depreciation rate increases. In declining balance, there is use of a fixed percentage of the asset value that is used to calculate the depreciation.
These are assets that cannot be touched or felt physically. They are abstract. In Closser Gomez, the intangible asset they have is the patent rights they have on the blueprint designs for construction of their projects. This is a definite intangible asset since there is an agreement ion place for the expiry date of the legal rights. When determining the cost of this asset, amortization of the asset is factored in. This is because; the blueprint designs might lose some demand in the market and therefore reducing the value of the asset over time.
These are all the minerals and other valuable commodities extracted from the land pieces that Closser Gomez purchases to develop. These include iron ores, coal and timber. When evaluating the cost of these assets, depletion should be considered since they are mineral elements and valuable land commodities. Therefore in the event of depletion, the value or costs of these resources reduce.
Benefits of Allocating Asset Costs over their Useful life
Calculating asset cost over their useful life is very important in determining the utility of the asset. For a company to derive the most value of a product from it, the cost of purchase should be way higher than the value of [productivity (simple law of economics). Therefore, calculating the cost of the asset will help the company to make purchase decisions that will ensure they derive the most utility from a less pricey effort. The turnover and most likely the profits of the company will therefore be maximized.