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CHAPTER 10 FIXED ASSETS AND INTANGIBLE ASSETS CLASS DISCUSSION QUESTIONS 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 caption "Investments," below the Current Assets section. 4. $375,000 5. Ordinarily not; if the book values closely approximate the market values of fixed as- sets, it is coincidental. 6. a. No, it does not provide a special cash fund for the replacement of assets. Un- like most expenses, however, depreci- ation 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. 7. 12 years 8. a. No b. No 9. 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 peri- ods to be used for other business pur- poses. c. MACRS was enacted by the Tax Re- form Act of 1986 and provides for de- preciation for fixed assets acquired after 1986. 10. No. Accounting Principles Board Opinion No. 20, Accounting Changes , is quite spe- cific about the treatment of changes in de- preciable assets’ estimated service lives. Such changes should be reflected in the amounts for de- preciation expense in the current and future periods. The amounts recorded for depreci- ation expense in the past are not affected. 11. Capital expenditures are recorded as as- sets and include the cost of acquiring fixed assets, adding a component, or replacing a component of fixed assets. Revenue ex- penditures are recorded as expenses and are costs that benefit only the current peri- od and are incurred for normal mainten- ance and repairs of fixed assets. 12. Capital expenditure (component replace- ment) 13. a. No, the accumulated depreciation for an asset cannot exceed the cost of the asset. To do so would create a negat- ive book value, which is meaningless. b. The cost and accumulated depreciation should be removed from the accounts when the asset is no longer useful and is removed from service. Presumably, the asset will then be sold, traded in, or discarded. 14. a. All purchases of fixed assets should be approved by an appropriate level of management. In addition, competitive bids should be solicited to ensure that the company is acquiring the assets at the lowest possible price.
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