chapter 10 - 10 PROPERTY PLANT AND EQUIPMENT ANSWERS TO QUESTIONS 1 Inventory is purchased for resale while plant assets are purchased for use in the


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282 Financial Accounting: A Business Perspective 10e 10 PROPERTY, PLANT, AND EQUIPMENT ANSWERS TO QUESTIONS 1. Inventory is purchased for resale, while plant assets are purchased for use in the production or sale of other assets or services. 2. Items (b), (c), and (e) are properly classifiable as plant assets. Item (a) would be classified as a prepaid expense, and item (d) would be classified as inventory. 3. The cost of a plant asset includes the cash or cash equivalent value of all resources sacrificed to acquire the asset and place it in a condition and location for its intended use. The expenditures must also be necessary and reasonable to be included in asset cost. 4. Purchasing a plant asset resembles the prepayment of an expense because the purchase of a plant asset actually represents the advance payment or prepayment of expected services. As the plant asset is used, the accountant must allocate the cost of the services provided by the asset to the accounting periods that benefit. 5. Brown should allocate the purchase price to the land and building on the basis of the assets' relative market or appraisal values if the company decides to use the building in its operations. However, if the old building must be removed to build a new one, the entire purchase price should be debited to Land, including the cost of removing the old building less any proceeds from the sale of salvaged items. 6. A self-constructed asset's cost consists of the cost of materials and labor directly traceable to that asset. Also included are indirect costs such as the incremental cost of utilities, interest, and supplies used during the time of construction. 7. The general rule is to use the fair market value of the asset received or what was given up, whichever is more clearly evident. 8. Since most plant assets eventually become worthless, periodic depreciation must be recorded to spread their costs over those periods in which they render benefits or provide service. If no depreciation is recorded, the matching concept of accounting is violated. Since land is considered to have an unlimited life, no depreciation is taken on this asset. 9. Inadequacy is the inability of a plant asset to produce enough product to meet current demands. It often occurs when a company grows more rapidly than anticipated. Obsolescence is the decline in usefulness of an asset brought about by inventions and technological progress. 10. To compute periodic depreciation we need to know the (1) cost of the asset, (2) estimated salvage value, (3) estimated useful life, and (4) depreciation method. The calculation of depreciation is somewhat subjective. Since factors (2) and (3) are estimates, the final figure is an estimate. 11. Mindy undoubtedly is referring to the decline in the market value of her car. Her concept of depreciation differs from the accountant's concept. In accounting, depreciation is a cost allocation process, not a process that seeks to provide a market value for the asset being depreciated.
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