Page 474 - Accounting Principles (A Business Perspective)

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depreciation on this asset? Explain. When should the asset's cost and accumulated depreciation be
removed from the accounting records?

➢ A machine and USD 22,500 cash were exchanged for a delivery truck. The exchange has commercial
substance. How should the cost basis of the delivery truck be measured?
➢ A plant asset was exchanged for a new asset of a similar type. How is the cost of the new asset
determined?
➢ When nonmonetary assets not having commercial substance are exchanged, a resulting gain is not
recognized. Discuss why this is so.

➢ What is the proper accounting treatment for the costs of removing or dismantling a company's old
plant assets?
➢ Distinguish between depreciation, depletion, and amortization. Name two assets that are subject
to depreciation, to depletion, and to amortization.
➢ Distinguish between tangible and intangible assets, and classify the assets named in part (a)
accordingly.
➢ A building with an estimated physical life of 40 years was constructed at the site of a coal mine. The
coal mine is expected to be completely exhausted within 20 years. Over what length of time should
the building be depreciated, assuming the building will be abandoned after all the coal has been
extracted?

➢ What are the characteristics of intangible assets? Give an example of an asset that has no physical
existence but is not classified as an intangible asset.
➢ What reasons justify the immediate expensing of most research and development costs?
➢ Over what length of time should intangible assets be amortized?
➢ Should costs incurred on internally generated intangible assets be capitalized in asset accounts?

➢ Describe the typical accounting for a patent.
➢ During 2010, Hardy Company incurred USD 123,000 of research and development costs in its
laboratory to develop a patent that was granted on 2010 December 29. Legal fees (outside counsel)
and other costs associated with registration of the patent totaled USD 22,800. What amount should
be recorded as a patent on 2010 December 29?
➢ What is a capital lease? What features may characterize a capital lease?
➢ What is the difference between a leasehold (under an operating lease contract) and a leasehold
improvement? Is there any difference in the accounting procedures applicable to each?

➢ Walt Company leased a tract of land for 40 years at an agreed annual rental fee of USD 18,000. The
effective date of the lease was 2009 July 1. During the last six months of 2009, Walt constructed a

building on the land at a cost of USD 450,000. The building was placed in operation on 2010
January 2, at which time it was estimated to have a physical life of 50 years. Over what period should
the building be depreciated? Why?
➢ You note that a certain store seems to have a steady stream of regular customers, a favorable
location, courteous employees, high-quality merchandise, and a reputation for fairness in dealing
with customers, employees, and suppliers. Does it follow automatically that this business should
have goodwill recorded as an asset? Explain.

Accounting Principles: A Business Perspective 475 A Global Text