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Chapter 8
Accounting for Long-Term Assets
QUESTIONS
1. A plant asset is tangible; it is used in the production or sale of other assets or services;
3. Land is an asset with an unlimited life and, therefore, is not subject to depreciation.
Land improvements have limited lives and are subject to depreciation.
4. Often the lump-sum or basket purchase includes assets with different lives that must be
5. The Accumulated Depreciation—Machinery account is a contra asset account with a
credit balance that cannot be used to buy anything. The balance of the Accumulated
6. The Modified Accelerated Cost Recovery System is not generally acceptable for financial
7. The materiality constraint justifies charging low-cost plant asset purchases to expense
because such amounts are unlikely to impact the decisions of financial statement users.
8. Ordinary repairs are made to keep a plant asset in normal, good operating condition, and
9. A company might sell or exchange an asset when it reaches the end of its useful life, or
if it becomes inadequate or obsolete, or if the company has changed its business plans.
10. The process of allocating the cost of natural resources to expense over the periods
11. No, depletion expense should be calculated on the units that are extracted (similar to the
units-of-production basis) and sold.
12. An intangible asset: (1) has no physical existence; (2) derives value from the unique
13. Intangible assets are generally recorded at their cost and amortized over their predicted
useful life. (However, some costs are not included, such as the research and
14. A company has goodwill when its value exceeds the value of its individual assets and
liabilities. Goodwill appears in the balance sheet when one company acquires another
its net assets (assets less liabilities) excluding goodwill.
15. No; this type of goodwill would not be amortized. Instead, the FASB (SFAS 142) requires
that goodwill be annually tested for impairment. If the book value of goodwill does not
16. Total asset turnover is calculated by dividing net sales by average total assets.
17. The word “net” means that Apple is reporting its property and equipment after deducting
accumulated depreciation to date.
19. Samsung titles its plant assets “Property, plant and equipment.” The book value of its
Tangible fixed assets is ₩75,496,388 (KRW millions).
21. (a) The main difference between plant assets and current assets is that current assets
are consumed or converted into cash within a short period of time, while plant assets
have a useful life of more than one accounting period.
QUICK STUDIES
Quick Study 8-1 (10 minutes)
Quick Study 8-2 (10 minutes)
Expensed or Capitalized Asset Category (if any) .
1. Expensed —
2. Capitalized Equipment
3. Capitalized Equipment (reduce the cost of)
Quick Study 8-3 (10 minutes)
Straight-line:
Quick Study 8-4 (10 minutes)
($65,800 - $2,000) / 200 concerts = $ 319 depreciation per concert
Quick Study 8-5 (10 minutes)
$65,800 Cost
- 15,950 Accumulated depreciation (first year)
49,850 Book value at point of revision
Quick Study 8-6 (10 minutes)
Note: Double-declining-balance rate = (100% / 8 years) x 2 = 25%
First year:
$830,000 x 25% = $207,500
Second year:
Quick Study 8-7 (10 minutes)
Impairment Loss.............................................................. 1,250
Accumulated Depreciation—Equipment............... 1,250
To record impairment of equipment.
Quick Study 8-8 (10 minutes)
1. (a) Capital expenditure
2. (a) Equipment................................................................ 40,000
Cash................................................................... 40,000
To record an extraordinary repair.
(b)* Maintenance Expense............................................. 200
Cash................................................................... 200
To record ordinary maintenance of a truck.
Quick Study 8-9 (15 minutes)
Book value of old equipment = $76,800 - $40,800 = $36,000
1. Cash.................................................................................
................................................................................... 47,000
Accumulated depreciation............................................ 40,800
2. Cash.................................................................................
................................................................................... 36,000
3. Cash.................................................................................
................................................................................... 31,000
Accumulated depreciation............................................ 40,800
Quick Study 8-10 (10 minutes)
1. Ore Mine..........................................................................1,800,000
2.
Depletion per unit = = $1.60 per ton
Quick Study 8-11 (10 minutes)
a. Oil well NR
b. Trademark IA
Quick Study 8-12 (10 minutes)
1.
Jan. 4 Leasehold Improvements...............................................105,000
2.
Dec. 31 Amortization Expense–Leasehold Improvements.............13,125
Accumulated Amortization—Leasehold
$1,800,000 - $200,000
1,000,000 tons
Quick Study 8-13 (10 minutes)
Total asset turnover = = 0.80 times
($ thousands)
Quick Study 8-14A (10 minutes)
Book value of old machine = $42,400 - $18,400 = $24,000
1. Machinery (new)........................................................ 52,000
Accumulated Depreciation–Machinery (old)........... 18,400
Loss on Exchange of Assets*.................................. 2,000
2. Machinery (new)*....................................................... 46,000
Accumulated Depreciation–Machinery (old)........... 18,400
Quick Study 8-15 (10 minutes)
a. Accounting for plant assets involving cost determination,
depreciation, additional expenditures, and disposals of plant assets
is subject to broadly similar guidance for both U.S. GAAP and IFRS.
b. U.S. GAAP prohibits companies to record increases in the value of
plant assets subsequent to acquisition. However, IFRS permits
upward asset revaluations. If an impairment was previously recorded,
$14,800
($19,100 + $17,900) / 2
EXERCISES
Exercise 8-1 (15 minutes)
Invoice price of machine.........................................................$ 12,500
Less discount (.02 x $12,500)................................................. (250)
Net purchase price...................................................................12,250
Freight charges (transportation-in)........................................360
Exercise 8-2 (15 minutes)
Cost of land
Purchase price for land...........................................................$ 280,000
Purchase price for old building.............................................. 110,000
Cost of new building and land improvements
Cost of new building................................................................$1,452,200
Journal entry
Land................................................................................. 470,500
Land Improvements....................................................... 87,800
Exercise 8-3 (20 minutes)
Purchase price............................................................ $375,280
Closing costs............................................................... 20,100
Total cost of acquisition............................................. $395,380
Allocation of total cost
Appraised
Value
Percent
of Total
Applying %
to Cost
Apportioned
Cost
Land...............................$157,040 40% $395,380 x .40 $158,152
Land improvements....... 58,890 15 $395,380 x .15 59,307
Journal entry
Land.......................................................................... 158,152
Land Improvements................................................. 59,307
Exercise 8-4 (10 minutes)
Straight-line
($43,500 - $5,000) / 10 years = $3,850
Exercise 8-5 (10 minutes)
Units-of-production
