SM_Chap009

Fundamentals of Financial Accounting with Annual Report

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Unformatted text preview: Chapter 09 - Reporting and Interpreting Long-Lived Tangible and Intangible Assets Chapter 9 Reporting and Interpreting Long-Lived Tangible and Intangible Assets ANSWERS TO QUESTIONS 1. Long-lived assets are any assets that will not be used up within the next year, which a business retains, not for sale, but for use in the course of normal operations. Long-lived assets include the following: (1) Tangible Assets: These are long-lived assets that have physical substance, which simply means that you can see, touch, or kick them. The most prominent examples of tangible assets are land, buildings, factories, machinery, and office equipment, which are typically grouped into a single line item on the balance sheet called property, plant, and equipment. (2) Intangible Assets: These long-lived assets have special rights, but no physical substance. Most intangible assets are evidenced only by legal documents. This category includes things like goodwill, brand names, trademarks, and licensing rights. 2. The general rule for tangible assets, under the cost principle, is that all reasonable and necessary costs of acquiring and preparing an asset for use should be recorded as a cost of the asset. 3. The act of recording costs as assets rather than as expenses is what accountants and analysts call capitalizing the costs. In the period a decision is made to capitalize costs, assets on the balance sheet will increase and expenses on the income statement will be lower than they would have been had the costs been expensed. In later periods, depreciation expense on the income statement will be greater (when the capitalized costs are expensed). 4. All reasonable and necessary costs to acquire and prepare an asset for use should be capitalized. One could argue that to locate new landfill sites, Waste Managements employees must be paid salaries and must travel to potential sites, and legal fees must be incurred to obtain the rights to use land as a garbage dump. Alternatively, one could argue that these costs should be expensed because, at the time they are incurred, Waste Management does not own the site and may never be able to gain permission to use potential sites for landfill purposes. 9-1 Chapter 09 - Reporting and Interpreting Long-Lived Tangible and Intangible Assets 5. Ordinary repairs and maintenance are expenditures for routine maintenance and upkeep of long-lived assets. These expenditures are recurring in nature, involve relatively small amounts at each occurrence, and do not directly lengthen the useful life of the asset. Because these expenditures occur frequently and maintain the productive capacity of the asset for a short period of time, they are recorded as expenses in the current period....
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SM_Chap009 - Chapter 09 - Reporting and Interpreting...

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