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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 Classification

Micro-Technologies Inc., a computer manufacturer, has the following items on its balance sheet-office furniture delivery truck, patent, computer assembly machine, building, memory chips.

Required:

Indicate the proper balance sheet classification of each item and the cost allocation process used (depreciation, amortization, depletion).

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 and the process of allocating cost according to the usage of natural resource during a specific period is called as 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 expense over the useful life of the asset.

Amortization:

Amortization is 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.

Determine 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 id followed:

Office furniture is a fixed asset which comes under the property, plant and equipment section of balance sheet and since it is a fixed asset they are depreciated.

Delivery truck is a fixed asset which comes under the property, plant and equipment section of balance sheet and since it is a fixed asset they are depreciated.

Patent is an intangible asset which comes under the Intangible assets section of balance sheet and since it is an intangible asset they are amortized...

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