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Unformatted text preview: 300 Financial Accounting: A Business Perspective 9e 11 PLANT ASSET DISPOSALS, NATURAL RESOURCES, AND INTANGIBLE ASSETS ANSWERS TO QUESTIONS 1. When depreciable plant assets are sold for cash, any gain or loss is measured by the difference between the cash received and the book value of the asset at the time of the sale. If the amount of cash received is greater than the book value, there is a gain; if the amount of cash received is less than the book value, there is a loss. If the amount of cash received is equal to the book value, there is neither a gain nor a loss. 2. It is not appropriate to continue recording depreciation on a fully depreciated asset. The purpose of depreciation accounting is to charge a plant assets cost to expense. Thus, total depreciation expense can never exceed the assets cost. The assets cost and accumulated depreciation should not be removed from the accounting records until the asset is sold, traded, or retired from service. 3. The cost basis of the delivery truck is measured by its fair market value (usually its cash price) or the fair value of the machine at the time of the exchange plus the $22,500 of cash paid, whichever is more clearly evident. 4. If the exchange has commercial substance, the new asset is recorded at the fair market value of the new asset or the fair market value of the asset given up plus any cash paid, whichever is more clearly evident. Any gain or loss would be recorded. If the exchange has no commercial substance, the cost basis of the new asset is measured by the book value of the old asset plus the amount of cash paid. No gain or loss would be recorded. 5. The exchange of nonmonetary assets not having commercial substance is not an event that should result in the recording of an immediate gain by acquiring the new asset. In effect, the gain on an exchange of those assets is realized later in the form of increased net income resulting from smaller depreciation charges on the newly acquired asset rather than realized upon the exchange. The new asset is recorded at an amount lower than its fair market value. 6. Removal costs are deducted from the salvage proceeds to determine the assets net salvage value. The removal costs should be tied to the old asset rather than to the new asset. 7. a . Depreciation, depletion, and amortization are all methods of allocating the cost of long-lived assets over the period of their useful lives. Depreciation is related to all plant assets except land, depletion is related to natural resources, and amortization is related to intangible assets. Listed below are some typical long-lived assets that would fit into these categories. Depreciable Natural Amortizable Plant Assets Resources Intangible Assets Buildings Coal Deposits Patents Machinery Oil Reserves Copyrights Office Equipment Uranium Deposits Franchises Delivery Equipment Timber Stands Goodwill b. Basically, tangible assets can be seen and touched and intangible assets cannot. The depreciable plant assets and natural resources listed above are tangible assets, and of course, the intangible assets listed are intangible. course, the intangible assets listed are intangible....
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