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Unformatted text preview: 8-1SolutionsCHAPTER 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.8.2Maintenance services provided for selling and administrative activitiesappear as expenses of the current period. Maintenance services provided formanufacturing activities accumulate in Work-in-Process and Finished GoodsInventory accounts. These costs become expenses in the period of sale.Expenditures from any of these activities that increase the service life orservice potential of assets beyond that originally expected increase theassets depreciable base. Such expenditures become expenses as the firmrecognizes depreciation during future years.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.8.4a.Over the life of the project, income is cash-in less cash-out. Capitalizingand then amortizing interest versus expensing it affects the timing butnot the total amount of income. Capitalizing interest defers expensefrom the construction period to the periods of use, increasing income inthe early years of construction and decreasing it in the periods of use,when depreciation charges are larger.b.The "catch-up" described in the preceding part is indefinitely delayed.Reported income in each year increases by the policy of capitalizinginterest. When the self-construction activity declines, then the reportedincome declines as a result of reduced capitalization of interest, but notbefore.Solutions8-28.5a.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....
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