Chapter 8 - Cambridge Business Publishers, 2011 Solutions...

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Unformatted text preview: Cambridge Business Publishers, 2011 Solutions Manual, Chapter 8 8-1 Chapter 8 Reporting and Analyzing Long-Term Operating Assets Learning Objectives coverage by question Mini- exercises Exercises Problems Cases LO1 Describe and distinguish between tangible and intangible assets. 17 31 38, 39 LO2 Determine which costs to capitalize and report as assets and which costs to expense. 11,17 22 38, 39 LO3 Apply different depreciation methods to allocate the cost of assets over time. 12, 13, 16, 18 22, 23, 24, 25, 26, 27, 28 LO4 Determine the effects of asset sales and impairments on financial statements. 14, 15 22, 24, 26, 35 36, 38, 39 40 42 LO5 Describe the accounting and reporting for intangible assets. 17, 21 31, 34 37, 38 42 LO6 Analyze the effects of tangible and intangible assets on key performance measures. 20, 21 29, 30, 33 41 42 LO7 Explain the accounting for acquisition and depletion of natural resources. 19 32 Cambridge Business Publishers, 2011 Financial Accounting, 3 rd Edition 8-2 QUESTIONS Q8-1. Routine maintenance costs that are necessary to realize the full benefits of ownership of the asset should be expensed. However, betterment or improvement costs should be capitalized if the outlay enhances the usefulness of the asset or extends the assets useful life beyond original expectations. As would be the case with any cost, an immaterial amount should be expensed as incurred. Q8-2. Capitalizing interest costs as part of the cost of constructing an asset reduces interest expense, and increases net income during the construction period. In subsequent periods, the interest costs that were capitalized as part of the cost of the asset will increase the periodic depreciation expense and reduce net income. Q8-3. As any asset is used up, its cost is removed from the balance sheet and transferred into the income statement as an expense. Capitalization of costs onto the balance sheet and subsequent removal as expense is the essence of accrual accounting. If the cost of a depreciable asset is recognized in full upon purchase, profit would be inaccurately measured: it would be too low in the year of purchase when the asset is expensed and too high in later years as revenues earned by the asset are not matched with a corresponding cost. The proper matching of costs (expenses) and revenues is essential for the proper recognition of profit. Q8-4. The primary benefit of accelerated depreciation for tax reporting is that the higher depreciation deductions in early periods reduce taxable income and income taxes. Cash flow is, therefore, increased, and this additional cash can be invested to yield additional cash inflows (e.g., an "interest-free loan" that can be used to generate additional income). We would generally prefer to receive cash inflows sooner rather than later in order to maximize this investment potential....
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This note was uploaded on 08/16/2011 for the course ECON 300 taught by Professor Laren during the Spring '11 term at Missouri State University-Springfield.

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Chapter 8 - Cambridge Business Publishers, 2011 Solutions...

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