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Unformatted text preview: 8-1Odd-numbered SolutionsCHAPTER 8LONG-LIVED TANGIBLE AND INTANGIBLE ASSETS:THE SOURCE OF OPERATING CAPACITYQuestions, Short Exercises, Exercises, Problems, and Cases: Answers and Solutions8.1See the text or the glossary at the end of the book.8.3Generally accepted accounting principles use acquisition costs in thevaluation of most assets. Accounting gives no recognition to the fact thatsome firms can acquire a particular asset for a lower price than other firmscan acquire it. Part of the explanation relates to measuring the relevantcost savings. There is seldom a single, unique alternative price. Additionally,accounting views firms as generating income from using assets inoperations, not from simply purchasing them.The income effect of both recording procedures is a net expense of$250,000, the cash outflow to self-construct the warehouse. The generallyaccepted procedure recognizes $250,000 as depreciation expense over thelife of the warehouse. The unacceptable procedure recognizes revenue of$50,000 upon completion of the warehouse and depreciation expense of$300,000 over the life of the warehouse.8.5a.If the life of an asset is shorter than the accounting period (or thatportion of the period remaining after the purchase of the asset),depreciation, as an accounting measurement problem, disappears. Thedifficulties increase as it becomes necessary to spread the cost of anasset over a number of periods of time. If the accounting period wereten years, fewer items would have to be spread, or "depreciated." If noasset lasted more than a year or two, accountants could make evenannual depreciation calculations with considerable accuracy.b.Depreciation accounting allocates the cost of long-lived assets to theperiods of use in an orderly, reasonable manner. Recognizingdepreciation does not "provide funds" for the firm. Selling the firm'sproducts to customers provides funds.8.7Depreciation for years prior to the change in estimate is larger or smallerthan it would have been if the firm had originally used the revised estimate.Depreciation for the current and future years is also smaller or larger than itwould be if the firm corrected for the original misestimate retroactively.Thus, depreciation in no year of the assets’ service life will show theappropriate depreciation for the actual depreciable life of assets.Odd-numbered Solutions8-28.9The relevant question to apply generally accepted accounting principles iswhether the expenditure maintained the originally expected useful life orextended that useful life. Firms should expense, as maintenance or repairs,expenditures that maintain the originally expected five-year life. In thiscase, the expenditure both maintains and extends the useful life. A portionof the expenditure should appear as an expense immediately (perhaps two-thirds) and a portion (perhaps one-third) should increase the depreciablebase for the asset....
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- Fall '07
- Depreciation, .........