LibbyFinancialaccountingsolutionmanual_chapter_8_entire_version_..docxVIP

Chapter 8Reporting and InterpretingProperty,?Plant,?and?Equipment;Natural Resources; and IntangiblesANSWERS TO QUESTIONS1.Long-lived assets are noncurrent assets, which a business retains beyond one year, not for sale, but for use in the course of normal operations. Long-lived assets include land in use, plant and equipment, natural resources, and certain intangibles such as a patent used in operating the business. Long-lived assets are acquired because of the future use that is expected of them. Thus, they may be thought of as a bundle of future services to be used over a period of time to earn revenue. As those services are used, as in the case of a machine, the cost of the asset is allocated as a periodic expense (i.e., matched with revenue).2. The fixed asset turnover ratio = Net sales [(Beginning net fixed asset balance + Ending net fixed asset balance) 2]This ratio measures how efficiently a company utilizes its investment in property, plant, and equipment over time. The ratio can also be compared to the ratio for the company’s competitors.3.Long-lived assets are classified as follows:(1)Tangible long-lived assets—assets that are tangible (i.e., have physical substance) and long-lived (i.e., beyond one year); they are acquired for use in the operation of a business and are not intended for resale. They are comprised of three different kinds of assets:(a)Land—not subject to depreciation.(b)Plant and equipment—subject to depreciation.(c)Natural resources—mines, gravel pits, and timber tracts. Natural resources are subject to depletion.(2)Intangible long-lived assets—assets held by the business because of the special valuable rights that they confer; they have no physical substance. Examples are patents, copyrights, franchises, licenses, trademarks and goodwill. Intangible assets with definite lives are subject to amortization.4.When a long-lived asset is acquired, it is recorded in the accounts in conformity with the cost principle. That is, the acquisition