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Spiceland Chapter 7_Solutions

Spiceland Chapter 7_Solutions - Chapter 07 Long-Term Assets...

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Chapter 07 - Long-Term Assets It will overstate net income on the income statement and overstate assets and retained earnings on the balance sheet. If University Hero initially records an expense incorrectly as an asset, expenses are understated or too small . Since expenses are subtracted from revenues in arriving at net income, understating expenses will overstate net income reported on the income statement. Similarly, recording an expense as an asset will overstate assets on the balance sheet. Retained earnings on the balance sheet will also be overstated due to the overstatement of net income. Costs Little King might incur to make the land ready for its intended use include the purchase price plus closing costs such as fees for the attorney, real estate agent commissions, title, title search, and recording. We also include the cost of removing the old building as an additional cost in making the land ready for its intended use. If we receive any cash from selling salvaged materials from the old building, we reduce the cost of land by that amount. If the property is subject to back taxes or other obligations, we include these amounts as well. In fact, any additional expenditure such as clearing, filling, and draining the land, to prepare the land for its intended use, becomes part of the land’s capitalized cost. We don’t depreciate land because its service life never ends. Land improvements are additional amounts spent to improve the land such as a parking lot, paving, temporary landscaping, lighting systems, fences, sprinkler systems, and 7-1 Chapter 7 – Homework Solutions Long-Term Assets QUESTIO NS Question 7-1 WorldCom recorded assets on the balance sheet that should have been recorded as expenses on the income statement. When WorldCom uses the telecommunication lines of another company, it pays a fee. This fee is part of normal operating costs, and should be recorded as an expense of the current period to properly match the expense with the revenues it helped to generate. Instead, WorldCom recorded these operating expenses as long-term assets on the balance sheet. Question 7-2 The two major categories for long-term assets are (1) property, plant, and equipment and (2) intangible assets. Property, plant, and equipment include land, land improvements, buildings, equipment, and natural resources. Intangible assets include patents, trademarks, copyrights, franchises, and goodwill. The two categories differ by their physical substance. Property, plant, and equipment consist of items that you can actually see, while intangible assets lack physical substance. The existence of intangible assets is often based on a legal contract. Question 7-3 We initially record a long-term asset at its cost plus all expenditures necessary to get the asset ready for use. Thus, the initial cost of a long-term asset might be more than just its purchase price; it also will include any additional amounts the firm paid to bring the asset to its desired condition and location for use.
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