Solution_Chpt08 - Acct 2301 fall 2009 Li Solution Chapter...

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Acct 2301 fall 2009 Li Solution Chapter 08 1 3. Long-lived assets are classified as follows: (1) Tangible long-lived assets—assets that are tangible (i.e., have physical substance) and long- lived (i.e., beyond one year); they are acquired for use in the operation of a business and are not intended for resale. They are comprised of three different kinds of assets: (a) Land—not subject to depreciation. (b) Plant and equipment—subject to depreciation. (c) Natural resources—mines, gravel pits, and timber tracts. Natural resources are subject to depletion. (2) Intangible long-lived assets—assets held by the business because of the special valuable rights that they confer; they have no physical substance. Examples are patents, copyrights, franchises, licenses, trademarks and goodwill. Intangible assets with definite lives are subject to amortization. 4. When a long-lived asset is acquired, it is recorded in the accounts in conformity with the cost principle. That is, the acquisition cost of a long-lived asset is the cash equivalent price paid for it plus all incidental costs expended to obtain it, to place it in the location in which it is to be used, and to prepare it for use. 5. In measuring and reporting long-lived assets, the matching principle is applied. As a long-lived asset is used, revenues are earned over a period of time. Over that same period of time, the long-lived asset tends to be used up or worn out. As a consequence, under the matching principle, the acquisition cost of the asset must be allocated to the periods in which it is used to earn revenue. In this way the cost of the asset is matched, as expense, with the revenues as they are earned from period to period through the use of the asset. 6. a. Capital expenditures—expenditures of resources (i.e., assets given up or debt incurred) for a service or asset that will help earn revenue for periods beyond the current accounting period. Capital expenditures should be debited to appropriate asset accounts and then allocated to those future periods in which revenues will be earned and against which the expenditures will be matched. Revenue expenditures—expenditures that help earn revenue only for the current period. Revenue expenditures are debited to appropriate expense accounts in the period in which incurred. b. Ordinary repairs—expenditures for the normal maintenance and upkeep of machinery and other tangible long-lived assets that are necessary to keep the assets in their usual operating conditions. Generally, ordinary repairs are recurring in nature, involve relatively small amounts at each occurrence and do not extend the useful estimated life of the asset. Ordinary repairs are debited to expense in the period in which incurred. Improvements—unusual, nonrecurring, major renovations that are necessary because of
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This note was uploaded on 02/10/2012 for the course ACCT 2301 taught by Professor Li during the Fall '09 term at University of Central Florida.

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Solution_Chpt08 - Acct 2301 fall 2009 Li Solution Chapter...

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