Nt1310 Unit 10
CHAPTER 10
Acquisition and Disposition of Property, Plant, and Equipment
ANSWERS TO QUESTIONS
1. The major characteristics of plant assets are (1) that they are acquired for use in operations and not for resale, (2) that they are long-term in nature and usually subject to depreciation, and (3) that they have physical substance.
2. The company should report the asset at its historical cost of $420,000, not its current value. The main reasons for this position are (1) at the date of acquisition, cost reflects fair value; (2) historical cost involves actual, not hypothetical transactions, and as a result is extremely reliable; and (3) gains and losses should not be anticipated but should be recognized when the asset is sold.
3. (a) The …show more content…
If the discount is taken, it should be considered a reduction in the asset cost. Different viewpoints exist, however, if the discount is not taken. One approach is that the discount must be considered a reduction in the cost of the asset. The rationale for this approach is that the terms of these discounts are so attractive that failure to take the discount must be considered a loss because management is inefficient. The other view is that failure to take the discount should not be considered a loss, because the terms may be unfavorable or the company might not be prudent to take the discount. Presently both methods are employed in practice. The former approach is conceptually …show more content…
The authors believe it is difficult to justify an Allowance for Repairs account under any circumstances, except possibly for interim statements. It is difficult to justify the “Allowance for Repairs” as a liability under any conditions because no past transaction has occurred which will result in future payments to satisfy an existing obligation. Furthermore, as a liability we might ask the question—whom do you owe? Placement in the stockholders’ equity section is also illogical because no addition to the stockholders’ investment has taken place. The only reasonable method of presentation appears to be as a contra account to the asset involved. Even this approach is highly questionable.
23. This approach is not correct since at the very minimum the investor should be aware that certain assets are used in the business which are not reflected in the main body of the financial statements. Either the company should keep these assets on the balance sheet or they should be recorded at salvage value and the resulting gain recognized. In either case, there should be a clear indication that these assets are fully depreciated, but are still being used in the business.
24. Gains or losses on plant asset retirements should be shown in the income statement along with other items that arise from customary business activities.
SOLUTIONS TO BRIEF
Acquisition and Disposition of Property, Plant, and Equipment
ANSWERS TO QUESTIONS
1. The major characteristics of plant assets are (1) that they are acquired for use in operations and not for resale, (2) that they are long-term in nature and usually subject to depreciation, and (3) that they have physical substance.
2. The company should report the asset at its historical cost of $420,000, not its current value. The main reasons for this position are (1) at the date of acquisition, cost reflects fair value; (2) historical cost involves actual, not hypothetical transactions, and as a result is extremely reliable; and (3) gains and losses should not be anticipated but should be recognized when the asset is sold.
3. (a) The …show more content…
If the discount is taken, it should be considered a reduction in the asset cost. Different viewpoints exist, however, if the discount is not taken. One approach is that the discount must be considered a reduction in the cost of the asset. The rationale for this approach is that the terms of these discounts are so attractive that failure to take the discount must be considered a loss because management is inefficient. The other view is that failure to take the discount should not be considered a loss, because the terms may be unfavorable or the company might not be prudent to take the discount. Presently both methods are employed in practice. The former approach is conceptually …show more content…
The authors believe it is difficult to justify an Allowance for Repairs account under any circumstances, except possibly for interim statements. It is difficult to justify the “Allowance for Repairs” as a liability under any conditions because no past transaction has occurred which will result in future payments to satisfy an existing obligation. Furthermore, as a liability we might ask the question—whom do you owe? Placement in the stockholders’ equity section is also illogical because no addition to the stockholders’ investment has taken place. The only reasonable method of presentation appears to be as a contra account to the asset involved. Even this approach is highly questionable.
23. This approach is not correct since at the very minimum the investor should be aware that certain assets are used in the business which are not reflected in the main body of the financial statements. Either the company should keep these assets on the balance sheet or they should be recorded at salvage value and the resulting gain recognized. In either case, there should be a clear indication that these assets are fully depreciated, but are still being used in the business.
24. Gains or losses on plant asset retirements should be shown in the income statement along with other items that arise from customary business activities.
SOLUTIONS TO BRIEF