Quiz 9: Plant and Intangible Assets
The cost of plant assets includes all expenditures reasonable, necessary and directly attributable for getting the assets to the place of use and into its working condition. The following table shows the cost of the equipment: Maintenance charges are a recurring expenditure hence it has not been capitalised as it will be treated as revenue expenses and charge to income statement.
a. Lengthening the period over which assets are depreciated for financial statement purposes will reduce the annual charges to depreciation expense. This will reduce expenses in the income statement and increase net income. But depreciation is only a computation-it is not "paid" in cash on an annual basis. Therefore, changing the estimated useful lives of plant assets will have no effect upon cash flows, nor does it affect the time period over which the assets are actually used by the company. b. Management is responsible for establishing the estimated useful lives of assets for purposes of calculating depreciation and preparing financial statements. Those lives must be consistent with the actual expected use of the assets. To arbitrarily lengthen the estimated lives of assets for purposes of improving the company's appearance in its financial statements is not appropriate. If the financial statements are subject to audit by a Certified Public Accountant (CPA), the useful lives over which assets are depreciated will be subject to evaluation as part of the audit process. Depreciating assets over longer lives than are supported by the underlying facts (i.e., the period over which the assets are actually being used) will be recognized by the CPA as an arbitrary step that is intended to make the company's financial situation look better, but which is not supported by the facts. In this instance, management will be faced with the dilemma of having to subsequently reverse its decision to depreciate over longer lives, or accept an unfavorable audit opinion on the fairness of the financial statements. c. The ethical issue confronting Gillespie is whether the change in estimated useful lives is reasonable, or whether it will cause the company's financial statements to be misleading. On one hand, the fact that the company is experiencing financial difficulties may well indicate that it will not replace assets as quickly as it did in more prosperous times. On the other hand, if Gillespie knows that these assets must be replaced after only 5 years, the use of a 10-year depreciation life would be misleading to users of the financial statements. In summary, Gillespie must assess the reasonableness of Bedell's instructions. If the change to a 10-year life would not result in the financial statements being misleading, then there is no problem in revising the estimated useful lives. If he believes that this change will result in misleading financial statements, he must refuse to participate in presenting such information Given that he is the controller of the company, he should resign if the CEO insists upon issuing financial statements that he believes to be misleading.
Coca-Cola's distinctive trademark is more valuable to the company than its bottling plants. But the company's bottling plants are listed in the balance sheet, and the famous trade mark is not listed, because the cost of developing a trademark or brand name often consist of advertising campaigns, which should be treated as expenses when incurred. If a trademark or brand name is purchased, however, the cost may be substantial. Such cost should be capitalized and amortized to expense over the time period the trademark or brand name is expected to be used. If the use of the trademark is discontinued or its contribution to earnings becomes doubtful, any unamortized cost should be written off immediately.