Warren SM_Ch.10_final

Warren SM_Ch.10_final - CHAPTER 10 FIXED ASSETS AND...

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581 CHAPTER 10 FIXED ASSETS AND INTANGIBLE ASSETS EYE OPENERS 1. a. Tangible b. Capable of repeated use in the opera- tions of the business e. Long-lived 2. a. Property, plant, and equipment b. Current assets (merchandise inventory) 3. Real estate acquired as speculation should be listed in the balance sheet under the cap- tion “Investments,” below the Current Assets section. 4. $298,500 5. Capital expenditures include the cost of ac- quiring fixed assets and the cost of improv- ing an asset. These costs are recorded by increasing (debiting) the fixed asset account. Capital expenditures also include the costs of extraordinary repairs, which are recorded by decreasing (debiting) the asset’s accumu- lated depreciation account. Revenue ex- penditures are recorded as expenses and are costs that benefit only the current period and are incurred for normal maintenance and repairs of fixed assets. 6. Capital expenditure 7. A capital lease is accounted for as if the les- see has purchased the asset and the asset is written off over its useful life. An operating lease is accounted for as a current-period expense (rent expense). 8. Ordinarily not; if the book values closely ap- proximate the market values of fixed assets, it is coincidental. 9. a. No, it does not provide a special cash fund for the replacement of assets. Un- like most expenses, however, deprecia- tion expense does not require an equivalent outlay of cash in the period to which the expense is allocated. b. Depreciation is the cost of fixed assets periodically charged to revenue over their expected useful lives. 10. 12 years 11. a. No b. No 12. a. An accelerated depreciation method is most appropriate for situations in which the decline in productivity or earning power of the asset is proportionately greater in the early years of use than in later years, and the repairs tend to in- crease with the age of the asset. b. An accelerated depreciation method re- duces income tax payable to the IRS in the earlier periods of an asset’s life. Thus, cash is freed up in the earlier periods to be used for other business purposes. c. MACRS was enacted by the Tax Reform Act of 1986 and provides for deprecia- tion for fixed assets acquired after 1986. 13. No. Financial Accounting Standards No. 154 , “Accounting Changes and Error Correc- tions,” is quite specific about the treatment of changes in depreciable assets’ estimated service lives. Such changes should be re- flected in the amounts for depreciation ex- pense in the current and future periods. The amounts recorded for depreciation expense in the past are not affected. 14. a. No, the accumulated depreciation for an asset cannot exceed the cost of the as- set. To do so would create a negative book value, which is meaningless. b.
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Warren SM_Ch.10_final - CHAPTER 10 FIXED ASSETS AND...

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