Chapter 10
Plant Assets, Natural Resources, and Intangibles
QUESTIONS
1. A plant asset is tangible; it is used in the production or sale of other assets or services; and it has a useful life longer than one accounting period.
2. The cost of a plant asset includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.
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 depreciated separately. Sometimes the purchase may include land, which is never depreciated.
5.
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Financial statement users can use total asset turnover to evaluate the efficiency of a company in using its assets to generate sales.
17. Best Buy lists Land and buildings; Leasehold improvements; Fixtures and equipment; Property under capital lease. The book value of these assets is $2,938,000,000.
18. Circuit City calls its plant assets “Property and equipment, net of accumulated depreciation.” The book value of the property and equipment is $921,027,000.
19. The word “net” means that RadioShack is presenting its property, plant, and equipment after deducting accumulated depreciation to date.
20. Apple’s long-term assets discussed in this chapter are: Property, plant, and equipment, net; Goodwill; Acquired intangible assets, net.
QUICK STUDIES
Quick Study 10-1 (10 minutes)
Recorded cost = $350,000 + $10,000 + $4,000 + $21,000 = $385,000
Note: The $4,200 repair charge is an expense because it is not a normal and reasonable expenditure necessary to get the asset in place and ready for its intended use.
Quick Study 10-2 (10 minutes)
1. 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.
2. The main difference between plant assets and inventory is that inventory is held for resale and plant assets are not.
3. The main
According to AASB 116 Property, plant and equipment held beyond the normal operating cycle of entity are deemed to be non-current assets. Here’s the extract from the report.
Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, peripherals, and service and support contracts. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the .customer once it has been shipped and title and risk of loss have been transferred. For most of the Company's product sales, these criteria are met at the time the product is shipped. For online sales to individuals, the Company defers revenue until the customer receives the product because the Company legally retains a portion of the risk of loss on these sales during transit. The Company recognizes revenue from the sale of hardware products (e.g., Macs, iPhones, Wads, iPods and peripherals), software bundled with hardware that is essential to the functionality of the hardware, and third-party digital content sold on the
Fixed assets are assets that will be held or used over a period longer than one year. Companies typically have land, equipment, and buildings as their fixed assets. The account is usually called property, plant, and equipment or PP&E.
Assets are things that a company owns that have value. This typically means they can either be sold or used by the company to make products or provide services that can be sold. Assets include physical property, such as plants, trucks, equipment and inventory. It also includes things that can’t be touched but nevertheless exist and have value, such as
| In Year 1, depreciation is $5,000 plus 15% of the asset’s outlayFrom Year 2, depreciation is either * 30% of the asset’s book value; or * if the asset’s book value is less than $6,500, depreciation is the asset’s book value (i.e. asset is depreciated to zero once book value < $6,500)
There is no need to make a journal entry for the 2,500 spent on disposing of capital assets because it was correctly recorded as a Repairs and Maintenance expense.
The characteristics that excludes long-term assets subject to depreciation accounting, or goods which, when put into use. Even if a depreciable asset is retired from regular use and held for sale it does not mean that the item should be classified as inventory.
Assets are to be recorded and valued based of the type of asset there are.
The current assets are those which are readily convertible into cash and cash equivalents due to their highly liquid nature and also form part of working capital of the company’s operations. However, the long term assets in contrast are not liquid because since they have a useful life of more than a year and hence their full value cannot be easily realized within
Depreciation is the reduction in the value of certain fixed assets. It is a periodic reduction of fixed assets, usually done every year. Fixed assets are assets that add value to the company. Examples of fixed assets that can be depreciated are vehicles, buildings, machinery, equipment and fixture and fittings. The only fixed asset that is not depreciated is land, because it is not worn-out overtime, unless natural resources are being exploited. When a company buys a new fixed asset it doesn’t account for the full cost of it as one single large expense, instead the expense is spread over the life time of the asset. This is done by depreciating the asset. For example a company purchases a CNC router for €50,000 and will be used for five year. If they pay the full amount in the
Return on net assets = Net Income in Statement of Operations / Net Assets in the Balance Sheet
3. Depreciation: The moment a product is sold it is considered as used product and price of the product is less. There are some exceptions to this rule as land; gold etc. usually appreciates over time. For other products customers are actually buying products that will depreciate over time.
ii. For 2006, General Mills’ had a proportion of 17.44% for short-term assets, and a proportion of 82.56% for long-term assets. So, land, building and equipment, goodwill and intangible assets make up the majority of total assets. In other words, General Mill’s major assets are long-term assets, which is explained by the nature of business that General Mill Inc. does.
One of these is with regards to goodwill and intangible assets with identifiable useful lives.
Assets can be hard goods such as computers and equipment, but can also be information and intellectual property.