Plant and Intangible Assets

CHAPTER 9 PLANT AND INTANGIBLE ASSETS

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

1. Coca-Cola’s trademark name was not purchased from another company, but rather was developed internally. Thus, the development costs probably were not material and were treated as revenue expenditures. Even if these costs had been capitalized, they would be amortized over a period of 40 years or less. Thus, any costs associated with this trademark now would be fully amortized, leaving a zero book value. 2. There are three basic “accountable events” in the life of a plant asset: (1) acquisition, (2) allocation of the acquisition cost to expense, and (3) disposal. The second event, allocation of the acquisition cost to expense, typically has the greatest effect upon net income. However, any gain or loss on disposal also affects net income. The allocation of acquisition cost to expense has no effect upon cash flows (other than income taxes). However, the acquisition of plant assets requires cash outlays, and disposals often result in cash receipts. 3. (d) Held for sale in the regular course of business and (e) not capable of rendering benefits to the business in the future. 4. (a) Freight charges, (b) sales taxes on the machine, and (d) wages of employees for time spent in installing and testing the machine before it was placed in service. 5. A capital expenditure is one that is material in amount and will benefit several accounting periods and is therefore charged to an asset account. A revenue expenditure is assumed to benefit only the current period (or is not material in amount) and is charged to an expense account so that it will be deducted from revenue of the current period in the determination of net income. 6. If a capital expenditure (acquisition of an asset) is erroneously treated as a revenue expenditure (an expense), expenses of the current year will be overstated and net income, therefore, will be understated. Since this error also results in the failure to record an...