{g,0}8.0{s} Part 8 Noncurrent Assets and Depreciation {s}
{b}Learning Objectives
In this part you will learn:
1. How plant assets are recorded.
2. The meaning of depreciation.
3. The straight-line and accelerated methods of depreciation.
4. How depreciation is recorded.
5. The meaning of depletion and how it is recorded.
6. How intangible assets are recorded.
7. Differences between income tax principles and accounting principles.
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8.1
Earlier, you learned that {u}current{n} assets were cash or items likely
to be converted to cash within one {1,5,2} [what time period?]. Evidently
{b}noncurrent assets{n} are assets that are expected to be of use to the entity
for longer than one {2,5,2}.
*1
YEAR - OK - Correct.
- HINT - The period of time is one YEAR.
*2
YEAR - OK - Right.
- HINT - The period of time is one YEAR.
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8.2
Tangible assets are assets that can be seen or touched. Intangible
assets are assets that have no physical substance (other than pieces of paper)
but give the entity valuable rights. Which of the following do you think are
tangible assets? [Answer (Y) Yes, or (N) No, for each item.]
{b} Current assets Noncurrent assets
1. Accounts receivable {1,3} 5. Land {5,3}
2. Notes receivable {2,3} 6. Goodwill {6,3}
3. Inventory {3,3} 7. Buildings {7,3}
4. Prepaid rent {4,3} 8. Investment in {s}
another entity {8,3}
*1
NO - OK - Correct.
N - OK - Correct.
YES - QUIT - No.
Y - QUIT - No.
*2
NO - OK - Correct.
N - OK - Correct.
YES - QUIT - {a,21,1}No, although a note receivable is evidenced by a paper that can be seen, the {a,22,1}asset is the sum of money that is promised. This is an intangible asset.
Y - QUIT - {a,21,1}No, although a note receivable is evidenced by a paper that can be seen, the {a,22,1}asset is the sum of money that is promised. This is an intangible asset.
*3
- POST - {a,21,1}{c, ,79}{a,22,1}{c, ,79}
YES - OK - Correct.
Y - OK - Correct.
NO - QUIT - Inventory IS a tangible asset.
N - QUIT - Inventory IS a tangible asset.
*4
NO - OK - Correct.
N - OK - Correct.
YES - QUIT - No.
Y - QUIT - No.
*5
YES - OK - Correct.
Y - OK - Correct.
NO - QUIT - No, Land is a tangible asset.
N - QUIT - No, Land is a tangible asset.
*6
NO - OK - Correct.
N - OK - Correct.
YES - QUIT - No.
Y - QUIT - No.
*7
YES - OK - Correct.
Y - OK - Correct.
NO - QUIT - No, buildings are tangible.
N - QUIT - No, buildings are tangible.
*8
NO - OK - Correct.
N - OK - Correct.
YES - QUIT - No.
Y - QUIT - No.
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8.3
On the balance sheet, {u}tangible noncurrent assets{n} are often labelled
{b}fixed assets{n}, or {b}property, plant, and equipment{n}. Equipment is a {1,10}
(A) current (B) noncurrent
and {2,10} asset.
(C) tangible (D) intangible
*1
- POST - {b}{a,6,29}{r}
NONCURRENT - OK - Correct.
B - OK - Correct.
CURRENT - QUIT - No, it is expected to be around longer than ONE YEAR.
A - QUIT - No, it is expected to be around longer than ONE YEAR.
*2
- POST - {b}{a,10,13}tangible
TANGIBLE - OK - Correct.
C - OK - Correct.
INTANGIBLE - QUIT - No, equipment can be touched.
D - QUIT - No, equipment can be touched.
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8.4
For brevity, we shall use the word {b}plant{n} for all tangible current assets
except land. Thus buildings, equipment, and furniture are items of {1,5,2}.
These assets are expected to be useful for longer than one year.
*1
PLANT - OK - Right.
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8.5 Acquisition of Noncurrent Assets
When a noncurrent asset is acquired, it is recorded in the accounts
at its {1,4,2} [what value?] in accordance with the fundamental accounting
concept known as the {2,4,2} concept.
*1
COST - OK - Correct.
- HINT - It is recorded at its cost.
*2
COST - OK - Yes.
- HINT - It is recorded at its cost according to the cost concept.
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8.6
The cost of an asset includes all costs of acquiring and installing it
so as to make the asset ready for its intended use. {s}
{d}
Smith Corporation paid $10,000 for a piece of land. It also paid $500 as a
brokerage fee, $600 for legal fees, and $1,000 to tear down the existing
structures in order to make the land ready for its intended use. The land
should be recorded in the accounts at an amount of ${1,-6}.
*1
12,100 - OK - Correct.
12100 - OK - Correct.
- HINT - No, the total cost adds up to $12,100.
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8.7
In the case of machinery, transportation and installation costs are
usually included. {s}
{d}
Plymouth Bank purchased a minicomputer for $20,000. The entity also paid
$200 in freight charges and $400 in installation charges. This equipment
should be recorded in the accounts at its cost, ${1,-6}.
*1
20,600 - OK - Right.
20600 - OK - Right.
20,000 - NO - No, freight and installation are included costs.
20000 - NO - No, freight and installation are included costs.
- HINT - Including freight and installation, the cost is $20,600.
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8.8
If an entity constructs a machine or a building with its own personnel,
all costs incurred in construction are included in the asset amount. {s}
{d}
Green Company built a new building for its own use. It spent $10,000 in mate-
rials, $30,000 in salaries to persons engaged in the building's construction,
and $20,000 in overhead costs related to the building. This building should
be recorded in the accounts at its cost, ${1,-6}.
*1
60,000 - OK - Correct.
60000 - OK - Correct.
- HINT - The total cost is $10,000 + $30,000 + $20,000.
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8.9 Capital Leases
Most assets are {u}owned{n} by the entity. When an entity leases a
building, a machine, or other tangible item, the item is owned by someone
else (the {b}lessor{n}); the entity {1,8} own it. Therefore most leased
(A) does (B) does not
items {2,7} assets of the entity that leases them (the {b}lessee{n}).
(C) are (D) are not
*1
- POST - {b}{a,8,26}{r}
DOES NOT - OK - Right.
B - OK - Right.
DOES - QUIT - No, leasing is not owning.
A - QUIT - No, leasing is not owning.
*2
- POST - {b}{a,12,26}{r}
ARE NOT - OK - Correct.
D - OK - Correct.
ARE - QUIT - No, assets of an entity are usually things that it OWNS.
C - QUIT - No, assets of an entity are usually things that it OWNS.
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8.10
If an entity leases an item for a long period of time, it has as
much control over the use of that item as if it owned it. A lease for a long
time -- almost the whole life of the asset -- is called a {b}capital lease{n}.
Because the entity controls the item for almost its whole life, a C{1,7,2}
L{2,5,2} is recorded as an asset.
*1
APITAL - OK - Right.
CAPITAL - OK - Right.
*2
EASE - OK - Yes.
LEASE - OK - Yes.
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8.11
The amount recorded for a capital lease is the amount the entity would
have paid if it had purchased the item rather than leased it. If the entity
leased a machine for 10 years, agreeing to pay $1,000 per year, and if the
purchase price of this machine was $6,000, this capital lease would be
recorded as an asset at an amount of ${1,-6}.
(A) 6,000 (B) 10,000
*1
- POST - {b}{a,12,13}6,000
6,000 - OK - Right.
6000 - OK - Right.
A - OK - Right.
10,000 - QUIT - No, the PURCHASE PRICE ($6,000) is the recorded asset amount.
10000 - QUIT - No, the PURCHASE PRICE ($6,000) is the recorded asset amount.
B - QUIT - No, the PURCHASE PRICE ($6,000) is the recorded asset amount.
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8.12
Even though the entity does not own the item, a capital lease is
treated like other plant assets. A capital lease is an exception to the
general rule that assets are property or property rights that are
{1,5,2} by the entity.
*1
OWNED - OK - Correct.
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8.13 Depreciation
Except in rare cases, land retains its usefulness indefinitely. Land
therefore continues to be reported on the balance sheet at its acquisition
cost, in accordance with the {1,13,2} concept.
(A) cost (B) going concern {s}
{d}
If Hanover Hospital purchased a piece of land in 1960 at a cost of $100,000,
it would have been reported at ${2,-7 } on the Decembe
