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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Balance Sheet Presentation

Listed below are items that may appear on a classified balance sheet.

1. Land

2. Amounts due from customers

3. Office building

4. Truck

5. Goods held for resale

6. Amounts owed to suppliers

7. Patent

8. Timberland

9. Land held as investment

10. Goodwill

Required:

Indicate whether each item is included as an asset on a classified balance sheet. If the item is an operating asset, indicate whether the item is property, plant, and equipment; an intangible asset; or a natural resource as well as the cost allocation process used (depreciation, amortization, or depletion). If the item is not an operating asset, indicate the proper balance sheet classification.

To determine

Concept Introduction:

Depletion:

When natural resources such as coal, iron ore, oil reserves and mineral, etc. are extracted from the earth, the company records the cost of extraction to the particular unit of the natural resource that is being extracted. The process of allocating cost according to the usage of natural resources during a specific period is called depletion.

Depreciation:

Fixed assets play a major in the contribution of revenue to the company and they are significant for the efficient and continuous operation of the day to the day business. Depreciation is the process in which the cost of the fixed assets other than land is allocated to an expense over the useful life of the asset.

Amortization:

Amortization is the same as depreciation, but it is used for intangible assets like patents, franchise, goodwill, trademark, etc. The cost of the intangible assets is allocated to expense over the useful life of the asset and this process is called amortization.

Balance Sheet:

It is a statement of the financial position of the company which specifies the assets, liabilities and equity at a specified date.

The balance sheet classification and cost allocation process for each item.

Explanation

Now, let us provide reasons for the classification of items under specific section and the type of cost allocation process that is followed:

  1. Land is a fixed asset that comes under the property, plant and equipment section of the balance sheet and since the land has unlimited service value, it is not depreciated.
  2. Amounts due from customers is accounts receivable which comes under the current assets section of the balance sheet and since it is revenue, there is no cost allocation involved.
  3. The office building is a fixed asset that comes under the property, plant and equipment section of the balance sheet and since it is a fixed asset, it is depreciated.
  4. Truck is a fixed asset that comes under the property, plant and equipment section of the balance sheet and since it is a fixed asset, it is depreciated.
  5. Goods held for resale is inventory which comes under the current assets section of the balance sheet and since it is not an operating asset there is no cost allocation involved...

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