Chapter 8-Solutions to Exercises and Problems

Chapter 8-Solutions to Exercises and Problems - Chapter 8...

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Chapter 8 Reporting and Analyzing Long-Term Assets QUESTIONS 1. A plant asset is tangible; it is used in the production or sale of other assets or services; and it has a useful life longer than one accounting period. 2. The cost of a plant asset includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use. 3. Land is an asset with an unlimited life and, therefore, is not subject to depreciation. Land improvements have limited lives and are subject to depreciation. 4. Often the lump-sum or basket purchase includes assets with different lives that must be depreciated separately. Sometimes the purchase may include land, which is never depreciated. 5. The Accumulated Depreciation—Machinery account is a contra asset account with a credit balance that cannot be used to buy anything. The balance of the Accumulated Depreciation—Machinery account reflects that portion of the machinery's original cost that has been charged to depreciation expense. It also gives some indication of the asset’s age and how soon it will need to be replaced. Any funds available for buying machinery are shown on the balance sheet as liquid assets with debit balances. 6. The Modified Accelerated Cost Recovery System is not generally acceptable for financial accounting purposes because it allocates depreciation over an arbitrary period that is usually much shorter than the predicted useful life of the asset. 7. The materiality principle justifies charging low-cost plant asset purchases to expense because such amounts are unlikely to impact the decisions of financial statement users. 8. Ordinary repairs are made to keep a plant asset in normal, good operating condition, and should be charged to expense of the current period. Extraordinary repairs are made to extend the life of a plant asset beyond the original estimated life; they are recorded as capital expenditures (and added to the asset account). 9. A company might sell or exchange an asset when it reaches the end of its useful life, or if it becomes inadequate or obsolete, or if the company has changed its business plans. An asset also can be damaged or destroyed by fire or some other accident that would require its disposal. 10. The process of allocating the cost of natural resources to expense over the periods when they are consumed is called depletion. The method to compute depletion is similar to units-of-production depreciation.
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11. No, depletion expense should be calculated on the units that are extracted (similar to the units-of-production basis) and sold. 12. An intangible asset: (1) has no physical existence; (2) derives value from the unique legal and contractual rights held by its owner; and (3) is used in the company’s operations.
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