Page 437 - Accounting Principles (A Business Perspective)

10. Property, plant, and equipment

e. USD 3,100.
The result of recording a capital expenditure as a revenue expenditure is an:
a. Overstatement of current year's expense.

b. Understatement of current year's expense.
c. Understatement of subsequent year's net income.
d. Overstatement of current year's net income.
e. None of the above.
Now turn to “Answers to self-test” at the end of the chapter to check your answers.

Questions
➢ What is the main distinction between inventory and a plant asset?
➢ Which of the following items are properly classifiable as plant assets on the balance sheet?

➢ Advertising that will appear in the future to inform the public about new energy-saving programs
at a manufacturing plant.

➢ A truck acquired by a manufacturing company to be used to deliver the company's products to
wholesalers.
➢ An automobile acquired by an insurance company to be used by one of its salespersons.
➢ Adding machines acquired by an office supply company to be sold to customers.
➢ The cost of constructing and paving a driveway that has an estimated useful life of 10 years.

➢ In general terms, what does the cost of a plant asset include?
➢ In what way does the purchase of a plant asset resemble the prepayment of an expense?
➢ Brown Company purchased an old farm with a vacant building as a factory site for USD 1,040,000.
Brown decided to use the building in its operations. How should Brown allocate the purchase price
between the land and the building? How should this purchase be handled if the building is to be torn
down?
➢ Describe how a company may determine the cost of a self-constructed asset.
➢ In any exchange of noncash assets, the accountant's task is to find the most appropriate valuation for
the asset received. What is the general rule for determining the most appropriate valuation in such a
situation?

➢ Why should periodic depreciation be recorded on all plant assets except land?
➢ Define the terms inadequacy and obsolescence as used in accounting for depreciable plant assets.
➢ What four factors must be known to compute depreciation on a plant asset? How objective is the
calculation of depreciation?
➢ A friend, Mindy Jacobs, tells you her car depreciated USD 5,000 last year. Explain whether her
concept of depreciation is the same as the accountant's concept.

➢ What does the term accelerated depreciation mean? Give an example showing how depreciation is
accelerated.
➢ Provide a theoretical reason to support using an accelerated depreciation method.

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