Book 1 - Chapter 2

LG 2-6.

Item	Property	Service
a. The aircraft of a commercial airline company
b. A medical examination by your doctor
c. The medical equipment in the doctor’s office
d. The gasoline in your car
e. The cash in a savings account
f. The classroom lecture from your accounting instructor
g. The rental of a computer to a business that does not own one
h. A six-month fire insurance policy paid in advance
Note: Anything prepaid is property, even prepayment of a service as in this case. A prepayment is owned by whomever made the prepayment, and the benefit is the right to receive future fire insurance coverage. We will talk more about prepaid items in later sections of this volume and in Volume 2.

2-7.

a.	Because the machine has a market value and can be sold for $250, it is still an asset—the $250 represents potential future benefits that can be received.
b.	Because the machine is still functional and is able to provide operational benefits, it is still an asset to the business that is using it—despite the fact that no one would buy it. The historical cost of the item will be the dollar amount used to keep the item in the accounting records.
c.	No, it is not an asset. The equipment no longer provides any kind of benefits—either future sales price or operational cash flow. When property loses all future benefits to a business, the item is no longer an asset, even if it has some kind of functionality.
d.	Yes, an item can be an asset even though it is acquired at no cost—for example, a donation of land by a local city to attract a new business. However, the item must have some measurable value or it cannot be recorded, even if it otherwise would qualify as an asset. In the case of an asset acquired at no cost, the usual method is to use its appraised value. The best approach would be to use one or more certified appraisers. Another example: A business locates an old machine that no one wants and obtains it without cost. The machine is in some particular way useful to the operations of the business, so it provides some future benefits. The business would record the machine at its appraised value.
	Summary: In addition to being owned as the result of a past event, an item must provide some kind of future benefits to qualify as an asset. As well, for the asset to be recorded it must also be able to be valued at some measurable amount—either at historical cost, appraised value, or some other reliable valuation.
	Comment: Valuation issues are among the most tricky and difficult issues in accounting. How to determine the “best” valuation is the subject of frequent debate and controversy among professional accountants and academics. We return to the subject of valuation again in other learning goals.

Learning Goal 2, continued

SOLUTIONS

Learning Goal 2: Define and Identify Assets

Home

Home || Book Publications || Professor’s Office || Student Info & Resources || Useful Links

Worthy & James Publishing is a provider of basic accounting books covering fundamental accounting principles, business accounting, and business math. Topics in financial accounting and business accounting covered include the balance sheet, the income statement, financial ratios, and bank reconciliation.