Chapter 9 Plant Assets, Natural Resources, and Intangibles

Question 1

How does a business measure the cost of a plant asset?

Answer 1

Plant assets are long-lived, tangible assets used in the operation of a business. Plant assets are recorded at historical cost- the amount paid for the asset. This includes the purchase price plus taxes, purchase commissions, and all other amounts paid to ready the asset for its intended use. A lump-sum purchase involves paying a single price for multiple assets. the cost of each purchased must be identified on the relative-ma often incurred market-value method

Question 2

what are the 2 additional types of expenditures that are often incurred on plant assets

Answer 2

capital expenditures - debited to an asset account because it increases the asset’s capacity or efficiency or extends the asset’s useful life.
Revenue expenditures - debited to repairs and maintenance expense because they are incurred to maintain the asset in working order

Question 3

What is depreciation and how is it computed?

Answer 3

depreciation is the allocation of a plant asset’s cost to expense over its useful life
Modified accelerated cost recovery system (MACRS) is used for tax purposes
Occasionally a business may change its estimated residual value or estimated useful life of a depreciable asset. this change requires depreciation to be recalculated in the year of change and moving forward
Plant assets are reported on the balance sheet at book value (cost - accumulated depreciation)

Question 4

What are the 3 methods of depreciation?

Answer 4

3 methods: straight-line method - allocates an equal amount of depreciation to each year; Units of production method - allocates a varying amount of depreciation each year based on an asset’s usage; double declining balance method - an accelerated depreciation method that computes annual depreciation by multiplying the depreciable asset’s book value by a constant percent that is two times the straight line rate

Question 5

How are the disposals of plant assets recorded?

Answer 5

4 steps to recording disposals: 1. bring the depreciation up to date; 2 remove the old, disposed-of asset and associated accumulated depreciation from the books; 3 record the value of any cash received (or paid) for the asset; 4 determine the amount of any gain or loss. (market value of assets received compared to the book value of the asset disposed of)

Question 6

How are natural resources accounted for?

Answer 6

Natural resources are assets that come from the earth and are consumed
depletion is the process by which businesses spread the allocation of a natural resource’s cost over its usage
Depletion expense is computed by the units of production formula

Question 7

How are intangible assets accounted for?

Answer 7

Intangible assets are assets that have no physical form and are valuable because of special rights they carry
Amortization is the process by which businesses spread the allocation of an intangible asset’s cost over its useful life
Amortization expense is computed by the straight-line formula

Question 8

How do we use the asset turnover ratio to evaluate business performance?

Answer 8

The asset turnover ratio measures the amount of net sales generated for each average dollar of total assets invested
Net sales / Average total assets

Question 9

How are exchanges of plant assets accounted for?

Answer 9

Exchanges that have commercial substance require the recording of any gain or loss on the transaction
Exchanges that lack commercial substance ignore any gain or loss on the transaction except in a few limited cases

Question 10

define accelerated depreciation method

Answer 10

a depreciation method that expenses more of the asset’s cost near the start of its useful life and less at the end of its useful life

Question 11

define amortization

Answer 11

the process by which businesses spread the allocation of intangible asset’s cost over its useful life

Question 12

define asset turnover ratio

Answer 12

measures how efficiently a business uses its average total assets to generate sales. Net sales / Average total assets

Question 13

Define book value

Answer 13

a depreciable asset’s cost minus accumulated depreciation

Question 14

define capital expenditure

Answer 14

an expenditure that increases the capacity or efficiency of a plant asset or extends its useful life. Capital expenditures are debited to an asset account

Question 15

define capitalize

Answer 15

recording the acquisition of land, building, or other assets by debiting (increasing) an asset account

Question 16

Commercial substance

Answer 16

a characteristic of a transaction that causes a change in future cash flows

Question 17

define copyright

Answer 17

exclusive right to reproduce and sell a book, musical composition, film, other work of art, or intellectual property

Question 18

define cost principle

Answer 18

a principle that states that acquired assets and services should be recorded at their actual cost

Question 19

define depletion

Answer 19

the process by which businesses spread the allocation of a natural resource’s cost over its usage

Question 20

define double declining balance method

Answer 20

an accelerated depreciation method that computes annual depreciation by multiplying the depreciable asset’s decreasing book value by a constant percent that is two times the straight-line depreciation rate

Question 21

define depreciable cost

Answer 21

the cost of a plant asset minus its estimated residual value

Question 22

define depreciation

Answer 22

the process by which businesses spread the allocation of a plant asset’s cost over its useful life

Question 23

define extraordinary repair

Answer 23

repair work that generates a capital expenditure because it extends the asset’s life past the normal expected life

Question 24

define franchise

Answer 24

privilege granted by a business to sell a product or service under specified conditions

Question 25

define goodwill

Answer 25

excess of the cost of an acquired company over the sum of the market values of its net assets (assets minus liabilities)

Question 26

define impairment

Answer 26

a permanent decline in asset value

Question 27

define intangible asset

Answer 27

an asset with no physical form that is valuable because of the special right it carries

Question 28

define land improvement

Answer 28

a depreciable improvement to land, such as fencing, sprinklers, paving, signs, and lighting

Question 29

define license

Answer 29

privilege granted by a government to use public property in performing services

Question 30

define MACRS

Answer 30

Modified accelerated cost recovery system, a depreciation method that is used for tax purposes

Question 31

define natural resource

Answer 31

an asset that comes from the earth and is consumed

Question 32

define obsolete

Answer 32

an asset is considered obsolete when a new asset can perform the job more efficiently than the old

Question 33

define patent

Answer 33

an intangible asset that is a federal government grant conveying an exclusive 20-year right to produce and sell a process, product, or formula

Question 34

define plant asset

Answer 34

long-lived, tangible asset, such as land, buildings, and equipment, used in the operation of a business

Question 35

define relative market value

Answer 35

a method of allocating the total cost (100%) of multiple assets purchased at one time. Total cost is divided among the assets according to their relative market values

Question 36

define residual value

Answer 36

the expected value of a depreciable asset at the end of its useful life

Question 37

define revenue expenditure

Answer 37

an expenditure that does not increase the capacity or efficiency of an asset or extend its useful life. Revenue expenditures are debited to an expense account

Question 38

define straight line method

Answer 38

a depreciation method that allocates an equal amount of depreciation each year (Cost - residual value) / Useful Life

Question 39

Define Trademark

Answer 39

an asset that represents distinctive identification of a product or service

Question 40

define units of production method

Answer 40

a depreciation method that allocates a varying amount of depreciation each year based on an assets usage

Question 41

define useful life

Answer 41

length of the service period expected from an asset, may be expressed in time, such as months or years, or usage, such as units produced, hours used (for machinery), or miles driven (for a truck)