CHAPTER 10

FIXED ASSETS AND INTANGIBLE ASSETS

EYE OPENERS
1. a. Tangible
b. Capable of repeated use in the
operations of the business
e. Long-lived
2. a. Property, plant, and equipment
b. Current assets (merchandise inventory)
3. Real estate acquired as speculation should
be listed in the balance sheet under the
caption Investments, below the Current
Assets section.
4. $298,500
5. Capital expenditures include the cost of
acquiring fixed assets and the cost of
improving an asset. These costs are
recorded by increasing (debiting) the fixed
asset account. Capital expenditures also
include the costs of extraordinary repairs,
which are recorded by decreasing (debiting)
the assets accumulated depreciation
account.
Revenue
expenditures
are
recorded as expenses and are costs that
benefit only the current period and are
incurred for normal maintenance and
repairs of fixed assets.
6. Capital expenditure
7. A capital lease is accounted for as if the
lessee has purchased the asset and the
asset is written off over its useful life. An
operating lease is accounted for as a
current-period expense (rent expense).
8. Ordinarily not; if the book values closely
approximate the market values of fixed
assets, it is coincidental.
9. a. No, it does not provide a special cash
fund for the replacement of assets.
Unlike most expenses, however,
depreciation expense does not require
an equivalent outlay of cash in the
period to which the expense is
allocated.
b. Depreciation is the cost of fixed assets
periodically charged to revenue over
their expected useful lives.
10. 12 years

11. a. No
b. No
12. a. An accelerated depreciation method is
most appropriate for situations in which
the decline in productivity or earning
power of the asset is proportionately
greater in the early years of use than in
later years, and the repairs tend to
increase with the age of the asset.
b. An accelerated depreciation method reduces income tax payable to the IRS in
the earlier periods of an assets life.
Thus, cash is freed up in the earlier
periods to be used for other business
purposes.
c. MACRS was enacted by the Tax
Reform Act of 1986 and provides for
depreciation for fixed assets acquired
after 1986.
13. No. Financial Accounting Standards No.
154, Accounting Changes and Error
Corrections, is quite specific about the
treatment of changes in depreciable assets
estimated service lives. Such changes
should be reflected in the amounts for
depreciation expense in the current and
future periods. The amounts recorded for
depreciation expense in the past are not
affected.
14. a. No, the accumulated depreciation for an
asset cannot exceed the cost of the
asset. To do so would create a negative
book value, which is meaningless.
b. The cost and accumulated depreciation
should be removed from the accounts
when the asset is no longer useful and
is removed from service. Presumably,
the asset will then be sold, traded in, or
discarded.
15. a. Over the shorter of its legal life or years
of usefulness.
b. Expense as incurred.
c. Goodwill should not be amortized, but
written down when impaired.

69

PRACTICE EXERCISES
PE 101A
May

27 Accumulated DepreciationDelivery Van.........

Cash..................................................................

950

27 Delivery Van..........................................................
Cash..................................................................

450

950
450

PE 101B
Oct.

9 Delivery Truck.......................................................
Cash..................................................................

1,150

9 Repairs and Maintenance Expense....................

Cash..................................................................

40

PE 102A
a. $410,000 ($485,000 $75,000)
b. 4% = (1/25)
c. $16,400 ($410,000 4%), or ($410,000/25 years)

PE 102B
a. $120,000 ($125,000 $5,000)
b. 12.5% = (1/8)
c. $15,000 ($120,000 12.5%), or ($120,000/8 years)

PE 103A
a. $99,000 ($134,000 $35,000)
b. $0.33 per mile ($99,000/300,000 miles)
c. $17,160 (52,000 miles $0.33)

1,150
40

PE 103B
a. $80,000 ($95,000 $15,000)
b. $2.00 per hour ($80,000/40,000 hours)
c. $10,200 (5,100 hours $2.00)

PE 104A
a. 5% = [(1/40) 2]
b. $32,500 ($650,000 5%)

PE 104B
a. 40% = [(1/5) 2]
b. $58,000 ($145,000 40%)

PE 105A
a. $12,000 [($250,000 $34,000)/18]
b. $130,000 [$250,000 ($12,000 10)]
c. $15,500 [($130,000 $6,000)/8]

PE 105B
a. $8,125 [($80,000 $15,000)/8]
b. $47,500 [$80,000 ($8,125 4)]
c. $7,500 [($47,500 $10,000)/5]

PE 106A
a. $81,000 = $324,000 [(1/8) 2)] = $324,000 25%
b. $17,750 gain, computed as follows:
Cost......................................................
Less: First-year depreciation............
Second-year depreciation.......
Book value at end of second year....

$324,000
(81,000)
(60,750) [($324,000 $81,000) 25%]
$182,250

Gain on sale ($200,000 $182,250) = $17,750

c.

Cash..................................................................................
Accumulated DepreciationEquipment.......................
Equipment...................................................................
Gain on Sale of Equipment.......................................

200,000
141,750
324,000
17,750

PE 106B
a. $9,500 [($160,000 $17,500)/15]
b. $13,000 loss {$90,000 [$160,000 ($9,500 6)]}
c.

Cash..................................................................................
Accumulated DepreciationEquipment.......................
Loss on Sale of Equipment............................................
Equipment...................................................................

90,000
57,000
13,000
160,000

PE 107A
a.

$0.60 per ton = $120,000,000/200,000,000 tons

b. $18,693,000 = (31,155,000 tons $0.60 per ton)

c.

Dec. 31

Depletion Expense........................................ 18,693,000

Accumulated Depletion...........................
18,693,000
Depletion of mineral deposit.

PE 107B
a.

$0.40 per ton = $50,000,000/125,000,000 tons

b. $16,954,000 = (42,385,000 tons $0.40 per ton)

c.

Dec. 31

Depletion Expense........................................ 16,954,000

Accumulated Depletion...........................
16,954,000
Depletion of mineral deposit.

PE 108A
a.

Dec. 31

b. Dec. 31

Loss from Impaired Goodwill.......................

Goodwill....................................................
Impaired goodwill.

500,000

Amortization ExpensePatents..................
Patents.......................................................
Amortized patent rights
[($388,000/8) 6/12].

24,250

500,000

24,250

PE 108B
a.

Dec. 31

b. Dec. 31

Loss from Impaired Goodwill.......................

Goodwill....................................................
Impaired goodwill.

875,000

Amortization ExpensePatents..................
Patents.......................................................
Amortized patent rights
[($425,000/17) 9/12].

18,750

875,000

18,750

EXERCISES
Ex. 101
a. New printing press: 1, 2, 3, 4, 6
b. Used printing press: 7, 8, 9, 11

Ex. 102
a. Yes. All expenditures incurred for the purpose of making the land suitable for
its intended use should be debited to the land account.
b. No. Land is not depreciated.

Ex. 103
Initial cost of land ($30,000 + $270,000).....................
Plus: Legal fees...........................................................
Delinquent taxes................................................
Demolition of building.......................................
Less: Salvage of materials..........................................
Cost of land...................................................................

Ex. 104
Capital expenditures: 1, 2, 4, 5, 6, 8, 10
Revenue expenditures: 3, 7, 9

Ex. 105
Capital expenditures: 2, 4, 6, 7, 8, 9
Revenue expenditures: 1, 3, 5, 10

$300,000
$ 1,425
12,000
18,500

31,925
$331,925
4,500
$327,425

Ex. 106
Feb. 16 Accumulated DepreciationDelivery Truck.....
Cash..................................................................

3,150

July

15 Delivery Truck.......................................................
Cash..................................................................

1,100

3 Repairs and Maintenance Expense....................

Cash..................................................................

72

Oct.

3,150
1,100
72

Ex. 107
a. No. The $3,175,000 represents the original cost of the equipment. Its
replacement cost, which may be more or less than $3,175,000, is not reported
in the financial statements.
b. No. The $2,683,000 is the accumulation of the past depreciation charges on
the equipment. The recognition of depreciation expense has no relationship
to the cash account or accumulation of cash funds.

Ex. 108
(a) 50% (1/2), (b) 12.5% (1/8), (c) 10% (1/10), (d) 5% (1/20), (e) 4% (1/25), (f) 2.5%
(1/40), (g) 2% (1/50)

Ex. 109
$3,350 [($93,750 $10,000)/25]

Ex. 1010
$145,000 $7,000
= $1.84 depreciation per hour
75,000 hours

150 hours at $1.84 = $276 depreciation for July

Ex. 1011
a. Depreciation per Rate per Mile:
Truck #1
Truck #2
Truck #3
Truck #4

($50,000 $6,500)/150,000 = $0.29

($72,900 $9,900)/300,000 = $0.21
($38,000 $3,000)/200,000 = $0.175
($90,000 $13,000)/200,000 = $0.385

Truck No.

Rate per Mile

Credit to
Accumulated
Depreciation

Miles Operated

1
29.0 cents
23,000
2
21.0
25,000
3
17.5
36,000
4
38.5
40,000
Total................................................................................................

$ 6,670
3,000*
6,300
15,400
$ 31,370

*Mileage depreciation of $5,250 (21 cents 25,000) is limited to $3,000, which

reduces the book value of the truck to $9,900, its residual value.
b. Depreciation ExpenseTrucks.....................................
Accumulated DepreciationTrucks........................
Truck depreciation.

31,370

Ex. 1012
First Year
a. 5% of $75,000 = $3,750
or
($75,000/20) = $3,750
b. 10% of $75,000 = $7,500

Second Year
5% of $75,000 = $3,750
or
($75,000/20) = $3,750
10% of ($75,000 $7,500) = $6,750

Ex. 1013
a. 12 1/2% of ($172,000 $20,000) = $19,000 or [($172,000 $20,000)/8]
b. Year 1: 25% of $172,000 = $43,000
Year 2: 25% of ($172,000 $43,000) = $32,250

31,370

Ex. 1014
a. Year 1: 3/12 [($85,000 $5,000)/10] = $2,000
Year 2: ($85,000 $5,000)/10 = $8,000
b. Year 1: 3/12 20% of $85,000 = $4,250
Year 2: 20% of ($85,000 $4,250) = $16,150

Ex. 1015
a. $17,500 [($1,050,000 $420,000)/36]
b. $700,000 [$1,050,000 ($17,500 20 yrs.)]
c. $20,000 [($700,000 $300,000)/20 yrs.]

Ex. 1016
a.

Mar. 30 Carpet..............................................................
Cash...........................................................

12,000

b. Dec. 31 Depreciation Expense...................................

Accumulated Depreciation......................
Carpet depreciation
[($12,000/15 years) 9/12].

600

12,000
600

Ex. 1017
a.

Cost of equipment......................................................................
Accumulated depreciation at December 31, 2010
(4 years at $38,500* per year)..............................................
Book value at December 31, 2010............................................
*($504,000 $42,000)/12 = $38,500

b. (1) Depreciation ExpenseEquipment........................

Accumulated DepreciationEquipment..........
Truck depreciation ($38,500 3/12 = $9,625).
(2) Cash...........................................................................
Accumulated DepreciationEquipment................
Loss on Sale of Equipment.....................................
Equipment............................................................
*($154,000 + $9,625 = $163,625)

$504,000
154,000
$350,000
9,625
9,625

315,000
163,625*
25,375
504,000

Ex. 1018
a. 2007 depreciation expense: $29,250 [($265,500 $31,500)/8]
2008 depreciation expense: $29,250
2009 depreciation expense: $29,250
b. $177,750 [$265,500 ($29,250 3)]
c.

Cash..................................................................................
Accumulated DepreciationEquipment.......................
Loss on Disposal of Fixed Assets.................................
Equipment...................................................................

168,500
87,750
9,250

d. Cash..................................................................................
Accumulated DepreciationEquipment.......................
Equipment...................................................................
Gain on Sale of Equipment.......................................

180,000
87,750

265,500

265,500
2,250

Ex. 1019
a. $16,200,000/90,000,000 tons = $0.18 depletion per ton
13,750,000 $0.18 = $2,475,000 depletion expense
b. Depletion Expense..........................................................
Accumulated Depletion.............................................
Depletion of mineral deposit.

2,475,000
2,475,000

Ex. 1020
a. ($750,000/15) + ($90,000/12) = $57,500 total patent expense
b. Amortization ExpensePatents....................................
Patents........................................................................
Amortized patent rights ($50,000 + $7,500).

57,500
57,500

Ex. 1021
a. Property, Plant, and Equipment (in millions):

Land and buildings.....................................................

Machinery, equipment, and internal-use software. .
Office furniture and equipment..................................
Other fixed assets related to leases.........................
Less accumulated depreciation................................
Book value...................................................................

Current
Year

Preceding
Year

$ 626
595
94
760
$2,075
794
$1,281

$ 361
470
81
569
$1,481
664
$ 817

A comparison of the book values of the current and preceding years indicates
that they increased. A comparison of the total cost and accumulated
depreciation reveals that Apple purchased $594 million ($2,075 $1,481) of
additional fixed assets, which was offset by the additional depreciation
expense of $130 million ($794 $664) taken during the current year.
b. The book value of fixed assets should normally increase during the year.
Although additional depreciation expense will reduce the book value, most
companies invest in new assets in an amount that is at least equal to the
depreciation expense. However, during periods of economic downturn,
companies purchase fewer fixed assets, and the book value of their fixed
assets may decline.

Ex. 1022
1. Fixed assets should be reported at cost and not replacement cost.
2. Land does not depreciate.
3. Patents and goodwill are intangible assets that should be listed in a separate
section following the Fixed Assets section. Patents should be reported at
their net book values (cost less amortization to date). Goodwill should not be
amortized, but should be only written down upon impairment.

Appendix 1 Ex. 1023

Sum of Years of Useful Life =

N(N + 1)
20(20 + 1)
=
= 210
2
2

First year: 20/210 $75,000 = $7,143

Second year: 19/210 $75,000 = $6,786

Appendix 1 Ex. 1024

Sum of Years of Useful Life =

N(N + 1)
8(8 + 1)
=
= 36
2
2

First year: 8/36 ($172,000 $20,000) = $33,778

Second year: 7/36 ($172,000 $20,000) = $29,556

Appendix 1 Ex. 1025

Sum of Years of Useful Life =

N(N + 1)
10(10 + 1)
=
= 55
2
2

First year: 3/12 10/55 ($85,000 $5,000) = $3,636

Second year:
[(9/12 10/55 ($85,000 $5,000)] + [(3/12 9/55 ($85,000 $5,000)] =
$10,909 + $3,273 = $14,182

Appendix 2 Ex. 1026

a.
Price (fair market value) of new equipment.......................................
Trade-in allowance of old equipment.................................................
Cash paid on the date of exchange....................................................
b.
Price (fair market value) of new equipment......................
Less assets given up in exchange:
Book value of old equipment......................................
Cash paid on the exchange.........................................
Gain on exchange of equipment........................................

$300,000
120,000
$180,000

$300,000
$115,500
180,000

295,500
$ 4,500

Appendix 2 Ex. 1027

a.
Price (fair market value) of new equipment.......................................
Trade-in allowance of old equipment.................................................
Cash paid on the date of exchange....................................................
b.
Price (fair market value) of new equipment........................
Less assets given up in exchange:
Book value of old equipment.........................................
Cash paid on the exchange...........................................
Loss on exchange of equipment..........................................

$300,000
120,000
$180,000

$300,000
$127,750
180,000

307,750
$ 7,750

Appendix 2 Ex. 1028

a.

Depreciation ExpenseEquipment..............................
Accumulated DepreciationEquipment.................
Equipment depreciation ($20,000 9/12).

15,000

b. Accumulated DepreciationEquipment.......................
Equipment........................................................................
Loss on Exchange of Fixed Assets...............................
Equipment...................................................................
Cash.............................................................................

235,000
462,000
5,000

15,000

336,000
366,000

Appendix 2 Ex. 1029

a.

Depreciation ExpenseTrucks.....................................
Accumulated DepreciationTrucks........................
Truck depreciation ($16,000 3/12).

4,000

b. Accumulated DepreciationTrucks.............................
Trucks...............................................................................
Trucks.........................................................................
Cash.............................................................................
Gain on Exchange of Fixed Assets..........................

68,000
150,000

4,000

96,000
120,000
2,000

Ex. 1030
Revenue

a. Fixed Asset Turnover Ratio = Average Book Value of Fixed Assets

Fixed Asset Turnover Ratio =

$93,469
($85,294 + $82,356)/2

Fixed Asset Turnover Ratio = 1.12

b. Verizon earns $1.12 revenue for every dollar of fixed assets. This is a low
fixed asset turnover ratio, reflecting the high fixed asset intensity in a
telecommunications company. The industry average fixed turnover ratio is
slightly lower at 1.10. Thus, Verizon is using its fixed assets slightly more
efficiently than the industry as a whole.

Ex. 1031
a.

Best Buy: 12.72 ($35,934/$2,825)

Circuit City Stores, Inc.: 14.13 ($12,430/$880)

b. Circuit Citys fixed asset turnover ratio of 14.13 is higher than Best Buys
fixed asset turnover ratio of 12.72. Thus, Circuit City is generating $1.41
($14.13 $12.72) more revenue for each dollar of fixed assets than is Best
Buy. On this basis, Circuit City is managing its fixed assets slightly more
efficiently than is Best Buy.

PROBLEMS
Prob. 101A
1.
Item
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
2.

Land
$ 4,000
400,000
2,500
31,750

Land
Improvements

Building

Other
Accounts

$ 36,000
10,000
(3,000)*
15,200
5,400
$(600,000)*
9,000
3,000
1,800
$ 12,000
14,500
33,000
(4,500)*
$469,450

$ 26,500

700,000
(450)*
$773,950

*Receipt
3. Since land used as a plant site does not lose its ability to provide services, it
is not depreciated. However, land improvements do lose their ability to
provide services as time passes and are therefore depreciated.

Prob. 102A

Year

Depreciation Expense
a. Straightb. Units-ofLine
Production
Method
Method

2009
2010
2011
2012
Total

$ 86,000
86,000
86,000
86,000
$344,000

$129,000
107,500
60,200
47,300
$344,000

c. DoubleDeclining-Balance
Method
$190,000
95,000
47,500
11,500*
$344,000

Calculations:
Straight-line method:
($380,000 $36,000)/4 = $86,000 each year
Units-of-production method:
($380,000 $36,000)/8,000 hours = $43 per hour
2009: 3,000 hours @ $43 = $129,000
2010: 2,500 hours @ $43 = $107,500
2011: 1,400 hours @ $43 = $60,200
2012: 1,100 hours @ $43 = $47,300
Double-declining-balance method:
2009: $380,000 50% = $190,000
2010: ($380,000 $190,000) 50% = $95,000
2011: ($380,000 $190,000 $95,000) 50% = $47,500
2012: ($380,000 $190,000 $95,000 $47,500 $36,000*) = $11,500
*Book value should not be reduced below the residual value of $36,000.

Prob. 103A
a.

Straight-line method:
2008: [($48,600 $3,000)/3] 1/2................................................
2009: ($48,600 $3,000)/3............................................................
2010: ($48,600 $3,000)/3............................................................
2011: [($48,600 $3,000)/3] 1/2................................................

$ 7,600
15,200
15,200
7,600

b. Units-of-production method:
2008: 1,800 hours @ $6.08*..........................................................
2009: 2,600 hours @ $6.08...........................................................
2010: 2,000 hours @ $6.08...........................................................
2011: 1,100 hours @ $6.08...........................................................

$10,944
15,808
12,160
6,688

*($48,600 $3,000)/7,500 hours = $6.08 per hour

c.

Double-declining-balance method:
2008: $48,600 2/3 1/2..............................................................
2009: ($48,600 $16,200) 2/3....................................................
2010: ($48,600 $16,200 $21,600) 2/3...................................
2011: ($48,600 $16,200 $21,600 $7,200 $3,000*)............
*Book value should not be reduced below $3,000, the residual value.

$16,200
21,600
7,200
600

Prob. 104A
1.

Year
a.

Accumulated
Depreciation,
End of Year

Book Value,
End of Year

$ 33,300
66,600
99,900
133,200

$110,700
77,400
44,100
10,800

$72,000 [$144,000 (1/4) 2]

$ 72,000
36,000 [$72,000 (1/4) 2]
108,000
18,000 [$36,000 (1/4) 2]
126,000
7,200 [$144,000 $126,000 $10,800] 133,200

$72,000
36,000
18,000
10,800

Depreciation
Expense

1
$33,300*
2
33,300
3
33,300
4
33,300
*[($144,000 $10,800)/4]
b.

2.

3.

1
2
3
4

Cash..................................................................................
Accumulated DepreciationEquipment.......................
Equipment...................................................................
Gain on Sale of Equipment.......................................
*($19,750 $18,000)

19,750
126,000

Cash..................................................................................
Accumulated DepreciationEquipment.......................
Loss on Sale of Equipment............................................
Equipment...................................................................
*($18,000 $14,900)

14,900
126,000
3,100*

144,000
1,750*

144,000

Prob. 105A
2008
Jan.
Feb.
Dec.

2009
Jan.
Mar.
Apr.

Dec.

7 Delivery Equipment........................................................
Cash...........................................................................

45,600

27 Truck Repair Expense...................................................

Cash...........................................................................

130

31 Depreciation ExpenseDelivery Equipment..............

Accumulated DepreciationDelivery Equipment
Delivery equipment depreciation
[$45,600 (1/8 2)].

11,400

8 Delivery Equipment........................................................
Cash...........................................................................

75,000

13 Truck Repair Expense...................................................

Cash...........................................................................

200

30 Depreciation ExpenseDelivery Equipment..............

Acc. DepreciationDelivery Equipment................
Delivery equipment depreciation
[$45,600 $11,400 (1/8 2) 4/12].

2,850

30 Acc. DepreciationDelivery Equipment.....................

Cash.................................................................................
Loss on Sale of Delivery Equipment............................
Delivery Equipment..................................................

14,250
30,000
1,350

31 Depreciation ExpenseDelivery Equipment..............

Acc. DepreciationDelivery Equipment................
Delivery equipment depreciation
[($75,000 (1/10 2)].

15,000

45,600
130
11,400

75,000
200
2,850

45,600
15,000

Prob. 105A
2010
July
Oct.

Dec.

Concluded

1 Delivery Equipment..............................................
Cash..................................................................

82,000

4 Depreciation ExpenseDelivery Equipment....

Acc. DepreciationDelivery Equipment......
Delivery equipment depreciation
[$75,000 $15,000 (1/10 2) 9/12].

9,000

4 Cash.......................................................................
Acc. DepreciationDelivery Equipment............
Delivery Equipment.........................................
Gain on Sale of Delivery Equipment.............

53,000
24,000

31 Depreciation ExpenseDelivery Equipment....

Acc. DepreciationDelivery Equipment......
Delivery equipment depreciation
[$82,000 (1/10 2) 6/12].

8,200

82,000
9,000

75,000
2,000
8,200

Prob. 106A
1.

2.

a.

Loss on impairment of goodwill, $20,000,000

b.

$675,000/10 years = $67,500; 1/2 of $67,500 = $33,750

c.

$1,665,000/9,000,000 board feet = $0.185 per board foot; 2,400,000 board

feet $0.185 per board foot = $444,000

a. Loss on Impairment of Goodwill.............................. 20,000,000

Goodwill................................................................
20,000,000
b. Amortization ExpensePatents..............................
Patents...................................................................
Patent amortization.

33,750

c. Depletion Expense.....................................................
Accumulated Depletion........................................
Depletion of timber rights.

444,000

33,750

444,000

Prob. 101B
1.
Item
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
2.

Land
$ 1,500
300,000
20,000
5,000
(3,600)*
15,800

Land
Improvements

Building

Other
Accounts

4,200

17,500
18,000
$(750,000)*
4,500
$15,000
9,000
1,100
1,500
(6,000)*

$356,200

$ 25,100

800,000
45,000
(350)*
$866,850

*Receipt
3. Since land used as a plant site does not lose its ability to provide services, it
is not depreciated. However, land improvements do lose their ability to
provide services as time passes and are therefore depreciated.

Prob. 102B
Depreciation Expense
a. Straightb. Units-ofLine
Production
Method
Method

Year
2008
2009
2010
Total

$ 21,000
21,000
21,000
$ 63,000

$ 30,240
22,680
10,080
$ 63,000

c. DoubleDeclining-Balance
Method
$ 45,000
15,000
3,000
$ 63,000

Calculations:
Straight-line method:
($67,500 $4,500)/3 = $21,000 each year
Units-of-production method:
($67,500 $4,500)/25,000 hours = $2.52 per hour
2008: 12,000 hours @ $2.52 = $30,240
2009: 9,000 hours @ $2.52 = $22,680
2010: 4,000 hours @ $2.52 = $10,080
Double-declining-balance method:
2008: $67,500 2/3 = $45,000
2009: ($67,500 $45,000) 2/3 = $15,000
2010: ($67,500 $45,000 $15,000 $4,500*) = $3,000
*Book value should not be reduced below the residual value of $4,500.

Prob. 103B
a.

Straight-line method:
2008:
[($15,660 $600)/3] 1/2..................................................
2009:
($15,660 $600)/3.............................................................
2010:
($15,660 $600)/3.............................................................
2011:
[($15,660 $600)/3] 1/2..................................................

$2,510
5,020
5,020
2,510

b. Units-of-production method:
2008:
3,750 hours @ $0.80*........................................................
2009:
7,500 hours @ $0.80.........................................................
2010:
5,000 hours @ $0.80.........................................................

$3,000
6,000
4,000

2011:

2,575 hours @ $0.80.........................................................

2,060

*($15,660 $600)/18,825 hours = $0.80 per hour

c.

Double-declining-balance method:
2008:
$15,660 2/3 1/2.............................................................
2009:
($15,660 $5,220) 2/3....................................................
2010:
($15,660 $5,220 $6,960) 2/3.....................................
2011:
($15,660 $5,220 $6,960 $2,320 $600*).................
*Book value should not be reduced below $600, the residual value.

$5,220
6,960
2,320
560

Prob. 104B
1.

Year
a.

Accumulated
Depreciation,
End of Year

Book Value,
End of Year

$ 24,000
48,000
72,000
96,000
120,000

$107,250
83,250
59,250
35,250
11,250

$52,500 [$131,250 (1/5) 2]

$ 52,500
31,500 [$78,750 (1/5) 2]
84,000
18,900 [$47,250 (1/5) 2]
102,900
11,340 [$28,350 (1/5) 2]
114,240
5,760 [$131,250 $114,240 $11,250] 120,000

$78,750
47,250
28,350
17,010
11,250

Depreciation
Expense

1
$24,000*
2
24,000
3
24,000
4
24,000
5
24,000
*[($131,250 $11,250)/5]
b.

2.

3.

1
2
3
4
5

Cash..................................................................................
Accumulated DepreciationEquipment.......................
Equipment...................................................................
Gain on Sale of Equipment.......................................
*($21,500 $17,010)

21,500
114,240

Cash..................................................................................
Accumulated DepreciationEquipment.......................
Loss on Sale of Equipment............................................
Equipment...................................................................
*($17,010 $12,500)

12,500
114,240
4,510*

131,250
4,490*

131,250

Prob. 105B
2008
Jan.
July
Dec.

2009
Jan.
Aug.

Oct.
Dec.

6 Delivery Equipment........................................................
Cash...........................................................................

24,000

19 Truck Repair Expense...................................................

Cash...........................................................................

500

31 Depreciation ExpenseDelivery Equipment..............

Accumulated DepreciationDelivery Equipment
Delivery equipment depreciation
[$24,000 (1/4 2)].

12,000

2 Delivery Equipment........................................................
Cash...........................................................................

69,000

1 Depreciation ExpenseDelivery Equipment..............

Accumulated DepreciationDelivery Equipment
Delivery equipment depreciation
[$24,000 $12,000 (1/4 2) 7/12].

3,500

1 Accumulated DepreciationDelivery Equipment......

Cash.................................................................................
Delivery Equipment..................................................
Gain on Sale of Delivery Equipment.......................

15,500
10,250

24 Truck Repair Expense...................................................

Cash...........................................................................

415

31 Depreciation ExpenseDelivery Equipment..............

Accumulated DepreciationDelivery Equipment
Delivery equipment depreciation
[$69,000 (1/5 2)].

27,600

24,000
500
12,000

69,000
3,500

24,000
1,750
415
27,600

Prob. 105B
2010
July
Oct.

Dec.

Concluded

1 Delivery Equipment........................................................
Cash...........................................................................

70,000

1 Depreciation ExpenseDelivery Equipment..............

Accumulated DepreciationDelivery Equipment
Delivery equipment depreciation
[$69,000 $27,600 (1/5 2) 9/12].

12,420

1 Cash.................................................................................
Accumulated DepreciationDelivery Equipment......
Loss on Sale of Delivery Equipment............................
Delivery Equipment..................................................

25,000
40,020
3,980

31 Depreciation ExpenseDelivery Equipment..............

Accumulated DepreciationDelivery Equipment
Delivery equipment depreciation
[$70,000 (1/8 2) 1/2].

8,750

70,000
12,420

69,000
8,750

Prob. 106B
1.

2.

a.

$1,170,000/4,500,000 board feet = $0.26 per board foot; 1,370,000 board

feet $0.26 per board foot = $356,200

b.

Loss on impairment of goodwill, $5,000,000

c.

$234,000/12 years = $19,500; 3/4 of $19,500 = $14,625

a. Depletion Expense.....................................................
Accumulated Depletion........................................
Depletion of timber rights.

356,200

b. Loss on Impairment of Goodwill..............................

Goodwill................................................................

5,000,000

356,200

c. Amortization ExpensePatents..............................
14,625*
Patents...................................................................
Patent amortization.
*($234,000/12 years) = $19,500; $19,500 3/4 = $14,625

5,000,000
14,625*

SPECIAL ACTIVITIES
Activity 101
It is considered unprofessional for employees to use company assets for
personal reasons, because such use reduces the useful life of the assets for
normal business purposes. Thus, it is unethical for Esteban Appleby to use
Summerfield Consulting Co.'s computers and laser printers to service his parttime accounting business, even on an after-hours basis. In addition, it is
improper for Estebans clients to call him during regular working hours. Such
calls may interrupt or interfere with Estebans ability to carry out his assigned
duties for Summerfield Consulting Co.

Activity 102
You should explain to Faye and Pat that it is acceptable to maintain two sets of
records for tax and financial reporting purposes. This can happen when a
company uses one method for financial statement purposes, such as straight-line
depreciation, and another method for tax purposes, such as MACRS
depreciation. This should not be surprising, since the methods for taxes and
financial statements are established by two different groups with different
objectives. That is, tax laws and related accounting methods are established by
Congress.
The
Internal Revenue Service then applies the laws and, in some cases, issues
interpretations of the law and congressional intent. The primary objective of the
tax laws is to generate revenue in an equitable manner for government use.
Generally accepted accounting principles, on the other hand, are established
primarily by the Financial Accounting Standards Board. The objective of
generally accepted accounting principles is the preparation and reporting of true
economic conditions and results of operations of business entities.
You might note, however, that companies are required in their tax returns to
reconcile differences in accounting methods. For example, income reported on
the companys financial statements must be reconciled with taxable income.
Finally, you might also indicate to Faye and Pat that even generally accepted
accounting principles allow for alternative methods of accounting for the same
transactions or economic events. For example, a company could use straight-line
depreciation for some assets and double-declining-balance depreciation for
other assets.

Activity 103
1.

a. Straight-line method:
2008: ($200,000/5) 1/2........................................................................
2009: ($200,000/5).................................................................................
2010: ($200,000/5).................................................................................
2011: ($200,000/5).................................................................................
2012: ($200,000/5).................................................................................
2013: ($200,000/5) 1/2........................................................................

$20,000
40,000
40,000
40,000
40,000
20,000

b. MACRS:
2008: ($200,000 20%).........................................................................
2009: ($200,000 32%).........................................................................
2010: ($200,000 19.2%)......................................................................
2011: ($200,000 11.5%)......................................................................
2012: ($200,000 11.5%)......................................................................
2013: ($200,000 5.8%)........................................................................

$40,000
64,000
38,400
23,000
23,000
11,600

Activity 103 Continued

2.
a. Straight-line method
Income before depreciation...........
Depreciation expense....................
Income before income tax.............
Income tax.......................................
Net income.......................................

Year
2008

2009

2010

2011

2012

2013

$500,000
20,000
$480,000
192,000
$288,000

$500,000
40,000
$460,000
184,000
$276,000

$500,000
40,000
$460,000
184,000
$276,000

$500,000
40,000
$460,000
184,000
$276,000

$500,000
40,000
$460,000
184,000
$276,000

$500,000
20,000
$480,000
192,000
$288,000

b. MACRS
Income before depreciation...........
Depreciation expense....................
Income before income tax.............
Income tax.......................................
Net income.......................................

Year
2008

2009

2010

2011

2012

2013

$500,000
40,000
$460,000
184,000
$276,000

$500,000
64,000
$436,000
174,400
$261,600

$500,000
38,400
$461,600
184,640
$276,960

$500,000
23,000
$477,000
190,800
$286,200

$500,000
23,000
$477,000
190,800
$286,200

$500,000
11,600
$488,400
195,360
$293,040

Activity 103 Concluded

3. For financial reporting purposes, Mike should select the method that
provides the net income figure that best represents the results of operations.
(Note to Instructors: The concept of matching revenues and expenses is
discussed in Chapter 3.) However, for income tax purposes, Mike should
consider selecting the method that will minimize taxes. Based on the
analyses in (2), both methods of depreciation will yield the same total amount
of taxes over the useful life of the equipment. MACRS results in fewer taxes
paid in the early years of useful life and more in the later years. For example,
in
2008
the
income tax expense using MACRS is $184,000, which is $8,000 ($192,000
$184,000) less than the income tax expense using the straight-line
depreciation of $192,000. Lonesome Dove Construction Co. can invest such
differences in the early years and earn income.
In some situations, it may be more beneficial for a taxpayer not to choose
MACRS. These situations usually occur when a taxpayer is expected to be
subject to a low tax rate in the early years of use of an asset and a higher tax
rate in the later years of the assets useful life. In this case, the taxpayer may
be better off to defer the larger deductions to offset the higher tax rate.

Activity 104
Note to Instructors: The purpose of this activity is to familiarize students with the
differences in cost and other factors in leasing and buying a business vehicle.

Activity 105
Note to Instructors: The purpose of this activity is to familiarize students with the
procedures involved in acquiring a patent, a copyright, and a trademark.

Activity 106
Revenue

a. Fixed Asset Turnover = Average Book Value of Fixed Assets

$348,650

Wal-Mart: $83,865 = 4.16

$30,379

Alcoa Inc.: $14,495 = 2.10

$24,966

Comcast Corporation: $20,009 = 1.25

b. The fixed asset turnover measures the amount of revenue earned per dollar
of fixed assets. Wal-Mart earns $4.16 of revenue for every dollar of fixed
assets, while Alcoa only earns $2.10 and Comcast Corporation only earns
$1.25 in revenue for every dollar of fixed assets. This says that Alcoa and
Comcast require more fixed assets to operate their businesses than does
Wal-Mart, for a given level of revenue volume. Does this mean that Wal-Mart is
a better company? Not necessarily. Revenue is not the same as earnings.
More likely, Wal-Mart has a smaller profit margin than do Alcoa and Comcast.
Although not required by the exercise, the income from operations before tax
as a percent of sales (operating margin) for the three companies is: Comcast,
14.3%, Alcoa, 9.9%, and Wal-Mart, 5.3%. Thus, the difference between the
fixed asset turnovers seems reasonable. Generally, companies with very low
fixed asset turnovers, such as aluminum making and cable communications,
must be compensated with higher operating margins.
Note to Instructors: You may wish to consider the impact of different fixed
asset turnover ratios across industries and the implications of these
differences. This is a conceptual question designed to have students think
about how competitive markets would likely reward the low fixed asset
turnover companies for embracing high fixed asset commitments.