Chapter 9 Plant Assets, Natural Resources, and Intangibles

How is gain or loss determined when disposing of plant assets? What situation constitutes a gain? What situation consitutes a loss?

Gain or loss is determined by comparing the cash received and the market value of any other assets received with the book value of the plant asset disposed of. A gain occurs when the cash received and the market value of any other assets received is greater than the book value of the disposed plant asset. A loss occurs when the cash received and the market value of any other assets received is less than the book value of the disposed plant asset.

What is a natural resrouces? What is the process by which businesses spread the allocation of a natural resource's cost over its usage?

Natural resources are assets that come from the earth that are extracted or cut down. Examples include iron ore, oil, natural gas, diamonds, coal, and timber. Depletion is the process by which businesses spread the allocation of a natural resource's cost over its usage.

What is the process by which businesses spread the allocation of an intangible asset's cost over its useful life?

Amortization is the process by which businesses spread the allocation of an intangible asset's cost over its useful life.

What does it mean if an exchange of plant assets has commercial substance? are gain and losses recorded on the books because of the exchange?

An exchange has commercial substance if the future cash flows change as a result of the transaction. In other words, if in the future cash flows (receipts of revenue or payment of expenses) of the business will change because of the exchange. Exchanges that have commercial substance require any gain or loss on the transaction to be recognized. The old asset will be removed from the books and the new asset will be recorded at its market value. Exchanges that lack commercial substance ignore any gain or loss on the transaction, except in a few limited situations. The new asset is recorded at the old asset's book value plus cash paid minus cash received instead of at market value.

How is discarding of a plant asset diffferent from selling a plant asset?

Discarding of plant assets involves disposing of the asset for no cash. Selling an asset involves receiving cash in exchange for the asset.

What is goodwill? Is goodwill amortized? What happens if the value of goodwill has decreases at the end of the year?

Goodwill is the excess of the cost of an acquired company over the sum of the market values of its net assets (assets minus liabilities). Goodwill is the value paid above the net worth of the company's assets and liabilities. Goodwill is not amortized. Instead, the acquiring company measures the fair value of its goodwill each year. If the goodwill has increased in value, there is nothing to record. But if goodwill's value has decreased, then the company records an impairment loss and writes the goodwill down.

What is an intangible asset? Provide some examples?

Intangible assets are assets that have no physical form. Instead, these assets convey special rights from patents, copyrights, trademarks, and other creative works.

What financial statement is plant assets reported on, and how?

Plant assets are reported at book value on the balance sheet. Companies may choose to report plant assets as a single amount, with a note to the financial statements that provides detailed information, or companies may provide detailed information on the face of the statement. The cost of the asset and the related accumulated depreciation should be disclosed

What does the asset turnover ratio measure, and how is it calculated?

The asset turnover ratio measures how efficiently a business uses its average total assets to generate sales. Net sales / Average total assets.

If a business changes the estimated useful life or estimated residual value of a plant asset, what must the business do in regard to depreciation expense?

When a company makes an accounting change, generally accepted accounting principles require the business to recalculate the depreciation for the asset in the year of change and in future periods. It does not require that businesses restate prior years' financial statements for this change in estimate. For a change in either estimated asset life or residual value, the asset's remaining depreciable book value is spread over the asset's remaining life.