Solutions Chapter 9 - ANSWERS TO QUESTIONS 1. For plant...

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ANSWERS TO QUESTIONS 1. For plant assets, the cost principle states that plant assets are recorded at cost, which consists of all expenditures necessary to acquire the asset and make it ready for its intended use. 2. In a cash transaction, cost is equal to the cash paid. In a non-cash transaction, cost is equal to the cash equivalent price paid, which is the fair market value of the asset given up or the fair market value of the asset received, whichever is more clearly determinable. 3. The primary advantages of leasing are (1) reduced risk of obsolescence, (2) little or no down payment, (3) shared tax advantages, and (4) reduced recorded assets and liabilities. 4. When only the land is to be used, all demolition and removal costs of the building less any proceeds from salvaged materials are necessary expenditures to make the land ready for its intended use. Any costs for clearing, draining, filling, and grading are also part of the cost of the land. When both the land and building are to be used, necessary costs of the building include remodeling expenditures and the cost of replacing or repairing the roofs, floors, wiring, and plumbing. 5. The potential benefits of leasing are (1) reduced risk of obsolescence (an obvious concern to Stellar), (2) little or no required down payment, (3) shared tax advantages, (4) assets and liabilities are not reported on the balance sheet. 6. You should explain to the president that depreciation is a process of allocating the cost of a plant asset to expense over its service (useful) life in a rational and systematic manner. Recognition of depreciation is not intended to result in the accumulation of cash for replacement of the asset. 7. (a) Salvage value is the expected cash value of the asset at the end of its useful life. (b) Salvage value is used in determining depreciable cost in the straight-line method by subtracting it from the plant asset’s cost. 8. (a) Useful life is expressed in years under the straight-line method and in units of activity under the units-of-activity method. (b) The pattern of periodic depreciation expense over an asset’s useful life is constant under the straight-line method and variable under the units-of-activity method. 9. The effects of the three methods on annual depreciation expense are: Straight-line— constant amount; units-of-activity—varying amount; declining-balance—decreasing amounts. 10. A revision of depreciation is made in current and future years but not retroactively. The rationale is that continual restatement of prior periods would adversely affect the reader’s confidence in the financial statements. 11. Revenue expenditures are ordinary repairs made to maintain the operating efficiency and expected productive life of the asset. Capital expenditures are additions and improvements
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made to increase efficiency, productive capacity, or expected useful life of the asset. Revenue expenditures are recognized as expenses when incurred; capital expenditures are
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This note was uploaded on 03/01/2010 for the course ACCT 2301 taught by Professor White during the Spring '08 term at Central Texas College.

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Solutions Chapter 9 - ANSWERS TO QUESTIONS 1. For plant...

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