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Unformatted text preview: 10-1 CHAPTER 10 Plant Assets, Natural Resources, and Intangible Assets ANSWERS TO QUESTIONS 1. For plant assets, the cost principle means that cost consists of all expenditures necessary to ac- quire the asset and make it ready for its intended use. 2. Examples of land improvements include driveways, parking lots, fences, and sprinkler systems. 3. (a) When only the land is to be used, all demolition and removal costs of the building less any proceeds from salvaged materials are necessary expenditures to make the land ready for its intended use. (b) When both the land and building are to be used, necessary costs of the building include remodeling expenditures and the cost of replacing or repairing the roofs, floors, wiring, and plumbing. 4. You should explain to the president that depreciation is a process of allocating the cost of a plant asset to expense over its service (useful) life in a rational and systematic manner. Recognition of depreciation is not intended to result in the accumulation of cash for replacement of the asset. 5. (a) Salvage value, also called residual value, is the expected cash value of the asset at the end of its useful life. (b) Salvage value is used in determining depreciable cost in each of the methods except the declining-balance method. 6. (a) Useful life is expressed in years under the straight-line method and in units of activity under the units-of-activity method. (b) The pattern of periodic depreciation expense over useful life is constant under the straight- line method and variable under the units-of-activity method. 7. The effects of the three methods on annual depreciation expense are: Straight-line—constant amount; units of activity—varying amount; declining-balance—decreasing amounts. 8. A revision of depreciation is made in current and future years but not retroactively. The rationale is that continual restatement of prior periods would adversely affect the reader’s confidence in the financial statements. 9. Revenue expenditures are ordinary repairs made to maintain the operating efficiency and expected productive life of the asset. Capital expenditures are additions and improvements made to increase efficiency, productivity, or expected useful life of the asset. Revenue expenditures are recognized as expenses when incurred; capital expenditures are generally debited to the plant asset affected. 10. In a sale of plant assets, the book value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal occurs. If the proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal occurs. 10-2 11. The plant asset and related accumulated depreciation should continue to be reported on the bal- ance sheet without further depreciation or adjustment until the asset is retired. Reporting the asset and related accumulated depreciation on the balance sheet informs the reader of the financial state-...
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