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Chapter 10

Plant Assets, Natural Resources and
Intangibles
QUESTIONS
1.

The cost of a plant asset includes all normal, reasonable, and necessary costs of getting the
asset in place and ready for its intended use.

2.

A plant asset is tangible; it is used in the production or sale of other assets or services; and
it has a useful life longer than one accounting period.

3.

Land held for future expansion is classified as a long-term investment. It is not a plant asset
because it is not being used in the production or sale of other assets or services.

4.

Land is an asset with an unlimited life and, therefore, is not subject to depreciation. Land
improvements have limited lives and are subject to depreciation.

5.

The Modified Accelerated Cost Recovery System is not generally acceptable for financial
accounting purposes because it allocates depreciation over an arbitrary period that is
usually much shorter than the predicted useful life of the asset.

6.

The Accumulated Depreciation—Machinery account is a contra asset account with a credit
balance that cannot be used to buy anything. The balance of the Accumulated Depreciation
—Machinery account reflects that portion of the machinery's original cost that has been
charged to depreciation expense. It also gives some indication of the asset’s age and how
soon it will need to be replaced. Any funds available for buying machinery are shown on the
balance sheet as liquid assets with debit balances.

7.

The materiality principle justifies charging low-cost plant asset purchases to expense
because such amounts are unlikely to impact the decisions of financial statement users.

8.

Ordinary repairs are made to keep a plant asset in normal, good operating condition, and
should be charged to expense of the current period. Extraordinary repairs are made to
extend the life of a plant asset beyond the original estimated life; they are recorded as capital
expenditures (and added to the asset account).

9.

A company might sell or exchange an asset when it reaches the end of its useful life, or if it
becomes inadequate or obsolete, or if the company has changed its business plans. An
asset also can be damaged or destroyed by fire or some other accident that would require its
disposal.

10. The process of allocating the cost of natural resources to expense over the periods when
they are consumed is called depletion. The method to compute depletion is similar to unitsof-production depreciation.
11.

An intangible asset: (1) has no physical existence; (2) derives value from the unique legal
and contractual rights held by its owner; and (3) is used in the company’s operations.

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12. No, depletion expense should be calculated on the units that are extracted (similar to the
units-of-production basis) and sold.
13. Intangible assets are generally recorded at their cost and amortized over their predicted
useful life. (However, some costs are not included, such as the research and development
costs leading up to a patent.) The costs of intangible assets are generally allocated to
amortization expense using the straight-line method over their useful lives. If the useful life
of an intangible asset is indefinite, then it is not amortized—instead, it is annually tested for
impairment.
14. A company has goodwill when its income return rate is greater than the income return rate
normally earned in its industry. (Alternatively, goodwill is when the value of a company
exceeds the value of its individual net assets [assets less liabilities].) Goodwill appears in
the balance sheet when one company acquires another company or separate segment and
pays a price that exceeds the combined values of all its net assets (assets less liabilities)
excluding goodwill.
15.

No; this type of goodwill would not be amortized. Instead, the FASB (SFAS 142) requires that
goodwill be annually tested for impairment. If the book value of goodwill does not exceed its
fair (market) value, goodwill is not impaired. However, if the book value of goodwill exceeds
its fair value, an impairment loss is recorded equal to that excess. (Details of this two-step
test are in advanced courses.)

16. The statement of cash flows is potentially impacted in three ways when accounting for longterm assets. If there are (1) additions or (2) disposals of long-term assets, these transactions
(assuming they involve cash) are reported in the investing activities section of the statement
of cash flows. Also, if the indirect method is used to prepare the statement of cash flows—
see Chapter 16—then depreciation, depletion, and amortization of long-term assets are
reported in the operating section of the statement of cash flows as adjustments to net
income. (3) Cash payments for capital and revenue expenditures can also impact the
statement of cash flows.
17. Total asset turnover is calculated by dividing net sales by average total assets. Financial
statement users can use total asset turnover to evaluate the efficiency of a company in using
its assets to generate sales.
18. Krispy Kreme titles its plant assets "Property and equipment, net." The book value of its
property and equipment as of February 2, 2003, is $202,558,000 and as of February 3, 2002, is
$112,577,000.
19. Tastykake’s plant assets are categorized as “Property, plant and equipment” and are reported
at their gross values separately under “Land”, “Buildings and improvements,” and
“Machinery and equipment.” The accumulated depreciation amount is deducted from the
gross value of the long-term assets. The net value (book value) of the property, plant, and
equipment on its 2002 balance sheet is $58,391,222.
20. The December 31, 2002, long-term assets of Harley-Davidson, Inc., are reported in its Note 2
as follows:
Under property, plant and equipment, at cost (in thousands):
Land and land improvements....................... $ 20,674
Buildings and improvements........................
273,959
Machinery and equipment............................. 1,448,312
Construction-in-progress.............................
263,311
Total property and equipment...................... 2,006,256
Less accumulated depreciation...................
973,660
Property and equipment, net........................ $1,032,596

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Fundamental Accounting Principles, 17th Edition

QUICK STUDIES
Quick Study 10-1 (10 minutes)
Recorded cost = $180,000 + $18,000 + $3,000 + $12,600 = $213,600
Note: The $2,250 repair charge is an expense because it is not a normal and reasonable
expenditure necessary to get the asset in place and ready for its intended use.

Quick Study 10-2 (10 minutes)
1. The main difference between plant assets and current assets is that
current assets are consumed or converted into cash within a short
period of time while plant assets have a useful life of more than one
accounting period.
2. The main difference between plant assets and inventory is that
inventory is held for resale and plant assets are not.
3. The main difference between plant assets and long-term investments is
that plant assets are used in the primary operation of the business and
investments are not.
Quick Study 10-3 (10 minutes)
1. Straight-line:
($55,900 - $1,900) / 4 years = $13,500 depreciation per year
2. Units-of-production:
($55,900 - $1,900) / 120 concerts =

$

450 depreciation per concert
x 40 concerts in 2005
$18,000 depreciation in 2005

Quick Study 10-4 (10 minutes)
$55,900 Cost
- 13,500 Accumulated depreciation (first year)
42,400 Book value at point of revision
- 1,900 Salvage value
40,500 Remaining depreciable cost
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÷ 2 Years of life remaining
$20,250 Depreciation per year for years 2 and 3

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Fundamental Accounting Principles, 17th Edition

Quick Study 10-5 (10 minutes)
Note: Double-declining-balance rate = (100% / 8 years) x 2 = 25%

First year:
$930,000 x 25%

= $232,500

Second year:
($930,000 - $232,500) x 25%

= $174,375

Third year:
($930,000 - $232,500 - $174,375) x 25%

= $130,781* (rounded)

* Total accumulated depreciation of $537,656 ($232,500 + $174,375 + $130,781)
does not exceed the depreciable cost of $780,000 ($930,000 - $150,000).

Quick Study 10-6 (10 minutes)
1. (a)
(b)
(c)
(d)

Capital expenditure
Revenue expenditure
Revenue expenditure
Capital expenditure

2. (a)

Building.................................................................... 250,000
Cash...................................................................

250,000

To record addition of a new wing.

(d) Equipment................................................................ 50,000
Cash...................................................................

50,000

To record an extraordinary repair.

Quick Study 10-7 (10 minutes)
1.

Machinery...................................................................
Accumulated Depreciation–Machinery...................
Loss on Exchange of Assets....................................
Machinery..........................................................
Cash...................................................................

48,000
20,400
2,000
38,400
32,000

To record similar asset exchange.

2.

Machinery...................................................................
Accumulated Depreciation–Machinery...................
Machinery..........................................................

Solutions Manual, Chapter 10

42,000
20,400
38,400

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..... Inc.................... 24.. 2005 56 Fundamental Accounting Principles.Cash.......... ©McGraw-Hill Companies............ 17th Edition .......................000 To record similar asset exchange.

................. 2005 57 ........557 ($14....000 Accumulated Depletion—Ore Mine.000 To record depletion of ore mine (90..* * Amortization = $95... 243................... 1.......... Ore Mine..Quick Study 10-8 (10 minutes) 1............000 Cash.....$150............. 2....... 243........875 Accumulated Amortization—Leasehold Improvements.......................000 Cash.810) / 2 = 0.. 1....11........ Inc...80 times ©McGraw-Hill Companies...500... 11....................................................875 per year............... Quick Study 10-9 (10 minutes) Intangible Assets: b) Trademark c) Leasehold f) Copyright g) Franchise Natural Resources: a) Oil well Note: d) Gold mine h) Timberland Building is reported under plant assets..875 To record amortization of leasehold over the remaining life of the lease.........000 To record leasehold improvements..........500....................... Quick Study 10-10 (10 minutes) 1.........70 per ton Depletion Expense—Ore Mine............000 / 8-year-lease-term = $11.... 31 Amortization Expense–Leasehold Improvements...... Dec. Quick Study 10-11 (10 minutes) Total asset turnover = Solutions Manual.000 ..............968 + $18........000 x $2......... 4 Leasehold Improvements...70)....500........ 2.......... Jan...... Chapter 10 $13..........000 500.....95................................. Depletion per unit = $1.....000 tons = $2.000 To record cost of ore mine................. 95.........

($ millions) Interpretation: The company’s turnover of 0.. 2005 58 Fundamental Accounting Principles. Inc.0.80 times is markedly lower than its competitors’ turnover of 2. 17th Edition . ©McGraw-Hill Companies. This company must perform better if it is to be successful in the long run.

....................... Assembly........................ 34......................... 85....000 Demolition costs for old building...................500 Land Improvements............................500 (230) 11....... Solutions Manual.500 Total construction costs...............................$ 430............... $ 225....................270 260 795 375 30 12......... 85................ 1............... 2005 59 ..870.................................. Net purchase price.. 120.............000 Purchase price for old building.500 Cash..... $ Less discount (....................500 Landscaping..................354....... Materials used in adjusting..................500 To record costs of plant assets......................000 Journal entry Land.....440.........................................730 Exercise 10-2 (15 minutes) Cost of land Purchase price for land....... Total cost to be recorded.....500 Building......02 x $11....EXERCISES Exercise 10-1 (15 minutes) Invoice price of machine............................................... 1.........500)...........................$1...............................................................................................500 Cost of new building and land improvements Cost of new building...................... Mounting and power connections.000 Total cost of land.500 Cost of land improvements............................... Freight charges (transportation-in). 430............................. Inc...................$1......$ 11... Chapter 10 ©McGraw-Hill Companies... 51.354........

. Double-declining-balance depreciation Depreciation rate: 100% / 4 years = 25% x 2 = 50% Beginning-Year Depreciatio Annual Year Book Value n Depreciation Rate 2004..000 --©McGraw-Hill Companies......750* 2007.. 29..... 162....................500 2005.... $ 29..........................................14 $387....................... 36.....299 Building.... $117...........42 $387........440 Building...........250 $117.250 19..000 .000 Percent of Total Applying % to Cost Apportioned Cost 42% 14 44 100% $387.............. Closing costs....... $368.................................320 Land improvements........................ 55.........................750 50 6..... 29....... $166......... Inc..... 170.......000) / 4 years = $29.........250 per year Year Annual Depreciation Year-End Book Value 2004...........850 x .......250 88....850 x .....897 54........................240 Totals.........................000 Fundamental Accounting Principles..250 30.....000 30. 30........... 2005 60 Year-End Book Value $73...........850 x . 17th Edition ......500 36.....................Exercise 10-3 (20 minutes) Purchase price.....654 $387............299 170.750 2005.000 Total.850 Journal entry Land.....000 50% $ 73....750 2006.654 Cash.....850 To record costs of lump-sum purchase....................500 50 36....750 30...850 Allocation of total cost Appraised Value Land.$30........250 59....... 73...... 174... 387.........897 Land Improvements..500 2006....... Straight-line depreciation: ($147......000 2... $147. Exercise 10-4 (20 minutes) 1......250 2007...............................44 $162.......600 $387... 29...... Total cost of acquisition. $396..... 54.....

.000 * Do not depreciate more than $6.. $117.750 in the third year since the salvage value is not subject to depreciation.Total... 2005 61 . Inc... Chapter 10 ©McGraw-Hill Companies.. Solutions Manual.

...........000 2....000) / 5 years = $45..000 x 40% x 9/12).$75.....630 2.......000 x 40% x 3/12...000 $ 70....... Double-declining-balance depreciation for 2004 Rate = (100% / 5 years) x 2 = 40% 2004 depreciation ($250...................... Total 2005 depreciation. Inc... 17th Edition .......000).. Straight-line ($42......300 ........750 2. $ 75.....750 .$8.....750) $12.Exercise 10-5 (15 minutes) 1.500 3...............000 ..300 ...000 ...000 units in second year: Depreciation = 35.000 ©McGraw-Hill Companies. Book value at end of second year.......000) / 363..............................000 ........000 $ 25.......10 = $3...... 2005 ($250...300 x 20% = $8...$6........ Straight-line depreciation for 2005 ($250.............460 = $33... Double-declining-balance Double-declining-balance rate = (100% / 10 years) x 2 = 20% per year First year’s depreciation = $42........ $21............ Units-of-production Depreciation per unit = ($42...000) / 10 years = $3........ $175.000 Book value at January 1.........$25..$25..250) / 4 years] x 2 years........ 2005 62 (9.768 Exercise 10-6 (15 minutes) 1..... $ 75..........840 Second year’s depreciation = $33...000 Fundamental Accounting Principles... $12..300 . Less two years' accumulated depreciation [($21..... Original cost of machine................000 x 40% x 9/12)...000 ..$6....460 Book value at beginning of second year = $42.000) x 40% x 9/12. 2005 depreciation $250...................000 units = $0....000 45.000 Alternate calculation 2004 depreciation ($250..000 x $0...000 Exercise 10-7 (15 minutes) 1.......000 Depreciation for 2005 ($175. ($250....10 per unit For 35......$2.........$75............840 x 20% = $6...000 x 40%).......... $ 70......... Book value at end of second year...

........200 / 3 years = $3.......... (1........ Chapter 10 ©McGraw-Hill Companies................. Inc.....400 Solutions Manual..800) $10...... Remaining depreciable cost......Less revised salvage value...............200 Revised annual depreciation = $10... 2005 63 .

.........172 0 0 $182..120 56.... Year 3. Year 2.... Year 5..172** 182...500 85. $182....500 salvage value.500 85.Exercise 10-8 (30 minutes) 1......448 150.080 56.......700 $ (8.......500 Depreciation Expense* $ 36..... Year 4...540 36..700 Year 4. $235. Totals..... 84.... Income before Depreciation Depreciation Expense* Net Income $ 85..500 $427...960 48..800 Supporting calculations for depreciation expense *Note: (100% / 5 years) x 2 = 40% depreciation rate Annual Accumulated Beginning Depreciation Depreciation at Book (40% of the End of the Value Book Value) Year Year 1... Year 2......500 85..672 52.. 141.500 85....080 Year 2.500 85.200 Cost Less Accumulated Depreciation) $141....120 84.... ©McGraw-Hill Companies.....700 Year 5..869.960 48..... Totals.200 $ 94...800 *($235...500 52.448 32..500 52....960 $244.....500 **Must not use $33...500 $ 94... instead take only enough depreciation in Year 3 to reduce book value to the $52.... Straight-line depreciation Income before Depreciation Year 1.....500 0 182.....540 $182.700 Net Income $ 48. Double-declining-balance depreciation Year 1.328 85....... 2005 64 Fundamental Accounting Principles... Year 5....500 85.200 .500 85.052 53..540 36.. 17th Edition ..... 52............080 $ 94...500 0 182.960 48.580) 29...540 2.$52. Inc.500) / 5 years = $36.........500 $427.500 85.. 52..... Year 4..700 Ending Book Value ($235.....528 Year 3. Year 3....672 32..........700 Total..540 36.... $ 85.....540 36.....500 $244.500 85...960 48..

................... 2005 65 ....................000 21.................................. $628. Annual depreciation = $561...................... 4......5 Journal entry Depreciation Expense....... Inc......... Revised book value of building............................... 2.............................. Repairs Expense..............................................000 To record betterment............. 5.................................. New estimate of useful life (20 .....................000 / 20 years = $28.050 per year Age of the building = Accumulated depreciation / Annual depreciation = $420...................................287..........5 To record depreciation.................................750 $207..200 Less accumulated depreciation.. Solutions Manual... 3.. Cash... Chapter 10 ©McGraw-Hill Companies...5 Accumulated Depreciation–Building................. Equipment....750 / $28. 21................ 67.450 Revised book value of building (part 3)....................... Cash..........200 67.... Revised annual depreciation..................................................... Cash........................................................ 3.............. 17... Cash.... 67............ 13..............950 To record extraordinary repairs................ Equipment.. $207... 17.........................200 To record extraordinary repairs..250 To record ordinary repairs...............287....287.. Entry to record the extraordinary repairs Building..........15 + 7)..................................050 = 15 years 2..................450 12 years $17......................... $561.Exercise 10-9 (25 minutes) 1.....................................200 420..250 5......... Cost of building Before repairs............000 Add cost of repairs... Exercise 10-10 (15 minutes) 1...............................................................950 13..

...........................000+$82..000 To record asset exchange......000 82......................... Sold for $16.......000).......500 To record similar asset exchange......500 Accumulated Depreciation–Tractor. 2.............250 Loss on Sale of Machinery..................................500 Loss on Exchange of Machinery......................... 2005 66 42..................500).....625 Machinery................500.................500 ...... Loss on the exchange Book value ........................$52..............625 = $19... *[$58.......... *($28....875 Accumulated Depreciation--Machinery..............500 2........000) 3.125 Accumulated Depreciation--Machinery...........500 Tractor (old)........000) Exercise 10-12 (25 minutes) Note: Book value of Machine equals $42...................000 + $28. $20..................................... but no gain is recognized on similar asset exchange ($625 gain is ‘buried’ in the cost of the new machinery) Jan............... Cash..................625 Machinery............ 4.............500 3......................$22.000 trade-in allowance is less than book value (yielding a loss) Jan.......... 2 Machinery*............. 22.... Book value of the old tractor ($95................... 2 Machinery......... answers can be taken from the following journal entry: Tractor (new)*......................000 .......($20..... Cash**........... 14...............................$20. 17th Edition .................... 57............Trade-in allowance ($42.$28...000 trade-in allowance exceeds book value.....375 1. Debit to new Tractor account Cash paid + Trade-in allowance ($82............. 42...... 22........................000 Alternatively.......... ©McGraw-Hill Companies................$ 42..................... 42......... 58.......... 3..... $15...........................000-$19....... 16......$ 14......000).........................375 Accumulated Depreciation--Machinery....................000 ..000 38...............Exercise 10-11 (15 minutes) 1..500 ................ 110..............$110..... 52. 2 Cash...................... Inc.......................................................250 cash Jan.........375)] **($58.....000 To record cash sale of machine..................................................... 95...625 Machinery..000 Loss on Exchange of Assets.................000 Fundamental Accounting Principles...... 22........................

.....Cash*............ 2005 67 ...................500 To record similar asset exchange. Inc.... *($58. Chapter 10 ©McGraw-Hill Companies....000) Solutions Manual........ 43..........................500-$15..

..........000 cash July 1 Cash...................... 6......... ©McGraw-Hill Companies.......425................... $53..... 156...... Sold for $35... 3... 92... 1.... 18..........625 Gain on Sale of Machinery....633...... 31 Depreciation Expense—Machinery ..250 Depreciation for 6 months in 2008 = $13........................625 Machinery....Exercise 10-13 (25 minutes) 2008 July 1 Depreciation Expense...........250).......875 92... Inc... 2005 68 Fundamental Accounting Principles. 31 Depletion Expense—Mineral Deposit..........59................................ 6............................................000 Accumulated Depreciation—Machinery.......................12 = $18.............000 tons = $0...........55 per ton.............* *Total accumulated depreciation at date of disposal: Four years 2004-2007 (4 x $13... Exercise 10-14 (10 minutes) Dec.........744 Accumulated Depreciation—Machinery........750 To record disposal of machinery........744 To record depreciation [$171.59....000 Partial year 2008 (6/12 x $13.............. Machinery. Dec.......625 6.750 / 7 years = $13......125 Accumulated Depreciation—Machinery.....30..310 Accumulated Depletion—Mineral Deposit...625 Total accumulated depreciation....................250 x 6/12 = $6.....744]...... Destroyed by fire with $30.....................* *Annual depreciation = $92...........000 Loss from Fire........310]........000 tons= $2.......12 per ton.250).........425................ 398... 18.........................000 cash insurance settlement July 1 Cash...750 To record disposal of machinery from fire........ Accumulated Depreciation--Machinery......200 tons x $0....35.... $59........310 To record depletion [$3.55 = $398...... 398............................750/1................. 156.....625 1...200 tons x $2..625 To record one-half year depreciation.........................625 2......000/1. 17th Edition ..............

....700 To record purchase of copyright................... Moreover..725 To record amortization of copyright [$236....000 for depreciation and amortization 3.......... 19..992.. Dec.Exercise 10-15 (10 minutes) Jan..000 used in investing activities Exercise 10-18 (15 minutes) Total asset turnover for 2004 = $4........ Expected (typical) future net income......25 (4.........000 $ 41.....250 Note: These estimates of goodwill assume that Corey Alt’s departure does not impact the business’s goodwill...000 2......... 236.......96 Total asset turnover for 2005 = $7........ Chapter 10 ©McGraw-Hill Companies...000 + $1...725 Accumulated Amortization—Copyright..000 x 10% 43....017... Exercise 10-17 (15 minutes) 1..778...... $323. 2005 69 ... 1 Copyright........700....... Solutions Manual.... Exercise 10-16A (15 minutes) Net assets (excluding goodwill). $1.....700 / 12 years]....... Expected net income above-normal......866... Joy turned its assets over 1.......000 ($1..21 – 2................ Value of goodwill = $41.. Value of goodwill = $41...300 1..000)/2 = 2...000 for capital expenditures 2... 31 Amortization Expense—Copyright..96) more times in 2005 than in 2004...............21 Analysis comments..862........ Normal rate of return in this industry....542..........882............. Inc........ Together.......... Joy has improved its efficiency in using assets relative to its competitors who average 3......... 236.........000 + $1.. This increase indicates that Joy became more efficient in using its assets............... $437.....700...............300 x 10 = $413.0...............................300 / 8% = $516...................000)/2 = 4...............586......... 19.... $175.........000 ($1........ Based on these calculations...............700 85...700 Cash.... Normal net income on net assets.

2005 70 Fundamental Accounting Principles.. Inc. 17th Edition .these results based on total asset turnover indicate that Joy has markedly improved its performance and is currently superior to its competitors. ©McGraw-Hill Companies.

..... [Note: From a present value perspective.................................... Land improvements......................... Land.000 ................375 Cash...490 Part 3 Year 2005 double-declining-balance depreciation on land improvements (100% / 5 years) x 2 = 40% rate $39........ Inc....................... 2005 Jan.......... 2005 71 ......... it defers or postpones taxes to the later years of an asset’s useful life.... Instead..................000 Percent of Total 48% 34 5 13 100% Apportioned Cost $378...................... The result is to reduce taxable income more in earlier years but less in later years.....PROBLEM SET A Problem 10-1A (50 minutes) Part 1 Building........... Vehicles.750 Land Improvements....000 289................................................. Total...375 Vehicles................. 102........ 1 Appraised Value $408... Chapter 10 ©McGraw-Hill Companies.........500 $850....000 42...750 Part 4 Accelerated depreciation does not lower the total amount of taxes paid over the asset's life.. 378.........................500 110.....$25.000 267...................................375 102..... 39.............000 Land............... there is a tax Solutions Manual..............650) / 15 years] = $23............375 $787......... 267... This is because accelerated methods charge a higher portion of asset costs against revenue in earlier years and a lower portion in later years............................375 x 40% = $ 15....500 To record asset purchases....... Part 2 Year 2005 straight-line depreciation on building [($378.......500 Building.......................... 787.750 39........

2005 72 Fundamental Accounting Principles.] ©McGraw-Hill Companies. The company gets to use the tax deferred amounts for investment purposes until they are due. Inc.. 17th Edition .savings from use of accelerated depreciation.

.000 Demolition.. 422........792.........381... 158............019...........000 $158......... 31 Depreciation Expense—Land Improv.......156 To record depreciation.........915......... Chapter 10 ©McGraw-Hill Companies..........019..............$80.........381........ 2005 73 .300 Land Improvements 1...000 _________ $2..... 65........ 65............ Part 3 2005 Dec..................000 Land Improvements 1.......000 _______ $392.... 2......000 **Multiply the percentages in column 3 by the $2... _________ Totals............ $2.....000 Land................. 616.....$390.... New improvements.............. $2.........800...................156 Accumulated Depreciation—Building 3..... 26. 28... Part 2 2005 Jan............... 31 Depreciation Expense—Building 2......000 purchase price.............Problem 10-2A (45 minutes) Part 1 Building 2 Land Improvements 1 Building 3 Land Improvements 2 Land Purchase price*. [($2.... 1 Land.. $1.800 To record costs of plant assets.........000 $392..............100)/25] 31 Depreciation Expense—Land Improv.........600 Building 2....... 2..... 28. 1........... 2........................... 1...................................000 $2.....000/14 = $28.100 Totals..000 *Allocation of purchase price Appraised Value Percent of Total Apportioned Cost** 64% 22 14 100% $1...000 $2...............000 Cash......865.200 New building.. 167...........000 To record depreciation [$392...000 616..... 5...000]....000 .....000 392........800 _______ $616..... 26....000)/20] 31 Depreciation Expense—Building 3..792...........000 $158........019.... 641............000 Building 3...........................600 Land grading............ 408.....566............. 392.................000 .............. $1................ Inc............019........ Depreciation—Land Improv....800 Building 2......000 $616.......... [($616...........900 Solutions Manual............800.....800 To record depreciation.............. 7..........000 Accum.800 Accumulated Depreciation—Building 2................000 Land Improvements 2.

. 2. ©McGraw-Hill Companies. 17th Edition ... Inc. 7........Accum.... 2005 74 Fundamental Accounting Principles. Depreciation—Land Improv......000/20].900 To record depreciation [$158..

......................140 To record loader costs ($255................. 37...........................660 Revised cost of equipment................... *2005 depreciation after January 1st extraordinary repair Total cost ($276.................212 Revised remaining useful life (Original 4 years ..............850 Remaining cost to be depreciated.440 +$15...................................... 920 Cash................. 4....................273....... 920 To record ordinary repair on loader.........238 To record depreciation... 31 Depreciation Expense—Equipment....................... * 2004 depreciation after January 3rd betterment Total original cost..............3.......................................740 + $1.............................800 Less revised salvage ($34...............300 Less accumulated depreciation ........ + 2yrs............. 273..... 17 Repairs Expense—Equipment..950 Annual depreciation ($240...................500)..................140 Plus cost of betterment....................... 37................4....850 Cost to be depreciated....................042 To record depreciation......... 240..................... Chapter 10 ©McGraw-Hill Companies..............)..500 Cash....... 35........ Solutions Manual.......................140 Cash..................110)............................................ 60....212 / 5 yrs) (rounded)................. $ 37......... 60...................238* Accumulated Depreciation—Equipment......1yr.........................................................0 yrs................................950 / 4 years) (rounded)............................. 60.......................... 2005 75 ..... 3 Equipment...................... Inc......800 + $4............................................. 276........ 221...500 To record extraordinary repair on loader........... 35...660 Cash..........042* Accumulated Depreciation—Equipment..........200 +$2...............238 Book value....................................... Feb...238* 2005 Jan..... 3... Jan...062 Less salvage............. $185.............................. 1 Equipment.. $273.......660 To record betterment of loader... Dec................................................... 3........................................................... 5... 31 Depreciation Expense—Equipment.......... $281........................................................................................................ 1 Equipment ... Dec......500)................042 Revised annual depreciation ($185............................................. $ 60.........................................Problem 10-3A (50 minutes) 2004 Jan......................................

..... 6..20............................00 yrs.................................. $ 1................580 .....................558 *** Book value of truck at 12/31/2006 Total cost..................564 Revised useful life................ 4......................... 3......... Less one year used in 2004.............000)/5]........................ Dec.521 2006...521* Accumulated Depreciation—Trucks.200 Accumulated Depreciation—Trucks............ 4...............500 Remaining cost to be depreciated................................................... 3................... (12... 31 Cash..................00 yrs......415 + $1.... 4............... 1 Trucks..............................................558** Loss on Disposal of Trucks.............................................................521 To record depreciation.............................................580 Less accumulated depreciation (from 2004)............................................................ $ 3.......................................200 cash received ... 31 Depreciation Expense—Trucks............... $ 13................... 2005 76 Fundamental Accounting Principles............... Total depreciation for 2005 ($13. 3...................521 Total........................... Inc........................064 Less revised salvage value......................................................................022 Loss ($6.. 3............580 Cash................... 20............................... 1................. 2005 Dec........521 To record annual depreciation................521 2006 Dec.......00 yrs........................... 31 Depreciation Expense—Trucks.....558) Book value ...................... 4............. 3............... 4............165)...521 Accumulated Depreciation—Trucks.....................022 book value).580 Less accumulated depreciation..................580 To record sale of truck........4... Revised remaining useful life................ * 2005 depreciation Total cost....564/3)(rounded).......... 4......................................Problem 10-4A (40 minutes) 2004 Jan...................... $ 4........................................................... 20....$3..................................... 17th Edition ........................................ $12...........822 ©McGraw-Hill Companies............................... $ 8..............................516 Book value................................. ** Accumulated depreciation on truck at 12/31/2006 2004..............................516 To record depreciation [($20........................ 31 Depreciation Expense—Trucks........................................................ $20.............................................516 Accumulated Depreciation—Trucks..................580 To record cost of truck ($19..............................................822*** Trucks...............12....... $ 20.................................. 1........................................... Dec..........516 2005............................................ 17.........$8...........................

Problem 10-5A (45 minutes) Part 1 Cost of machine.250* $190.000 157........000 Take only enough depreciation in Year 4 to reduce book value to the asset’s $20..000 52......000 a Straight.........560 48.....250 Annual Depreciation (50% of Book Value) $105.....000 Less estimated salvage value...........600 118...............400 119...500 26.......640 $190.. 47..40 Depreciation $ 48.......... 20.250 20. 2..40 0....640* $190...........000/4 years = $47..500 183.........40 per unit Year 1. $ 47........000 52..000 *Take only enough depreciation in Year 4 to reduce book value to the asset’s $20.line: Cost per year = $190.......000 units = $0...200 Unit Cost $0..... 2005 77 ..............000 salvage value. 3....000 Accumulated Depreciation at the End of the Year $105.... 4.....750 190.. $210.. $190.000 Units-of-Productionb $ 48..000 52......960 47.........500 3. 2.......560 48......40 0.250 $190.................250 6.... Solutions Manual...500 2.. Beginning Book Value $210.500 Totals ..840 44..... Total..............40 0.....000 105.. 3.............400 122..... * Units 121........000 Cost Less Accumulated Depreciation) $105....000 Total depreciable cost.....250 6. 47.................... 4..... $190.. 47.......000/475........ Total.000 salvage value.....000 52..........960 47.....500 26.........840 44.....500 26..000 Double-DecliningBalancec $105. c Double-declining-balance: (100%/4) x 2 = 50% depreciation rate Year 1......000 Year Straight-Linea 1........000 Ending Book Value ($210...500 per year b Units-of-production: Cost per unit = $190............. Chapter 10 ©McGraw-Hill Companies.500 26...........500 4....... Inc....

...................... 167..............................000 To record machinery purchase........................... Jan....... 3................... 26..600)/6].............150 To record depreciation [($171.................................500 ....................................................................................................................750) Book value... Jan............ (130...............000 ©McGraw-Hill Companies.................000 cash from insurance company Dec......750 (i) Sold for $13..... Cash.......... 26.. 1.. 130..... 24.......... 3 Machinery....................... 27.....080 To record machinery costs........................................... 26........................... First year Dec..........750 Machinery....................750 Machinery.500 Accumulated depreciation........ 171............250 Accumulated Depreciation—Machinery...... b... 2005 78 Fundamental Accounting Principles................. Jan......................................250 (iii) Destroyed in fire and collected $24..... 26..........500 4................. 13.....000 cash Dec. 31 Depreciation Expense—Machinery.........150 To record year’s depreciation.... 3 Machinery.. Inc...................................................................150 Accumulated Depreciation—Machinery. 130....................... 45..$130................. 31 Cash.................................$14..... Accumulated depreciation at the date of disposal Five years' depreciation (5 x $26..............................150)............ Cash...........$171...150 Accumulated Depreciation—Machinery........000 Cash.............................. 17th Edition .......................................080 1..........500 (ii) Sold for $45..................... c..........420 To record machinery costs.750 Book value at the date of disposal Original total cost...............$ 40.................................................................000 Accumulated Depreciation—Machinery. 31 Cash................................... Fifth year Dec......... 167......................500 cash Dec.. 171..500 Loss on Sale of Machinery.......................................Problem 10-5A (Concluded) Part 2 a... Gain on Sale of Machinery.. 31 Depreciation Expense—Machinery.... 31 Cash............................. 2 Machinery......420 3........................................

.................... Inc..........................750 Loss from Fire..................................... Chapter 10 171............. 2005 79 ......... 16........ Solutions Manual...........500 ©McGraw-Hill Companies. 130...........Accumulated Depreciation—Machinery........750 Machinery...........

.............................000 Prepaid Rent................ (d) Dec........ 129.......000 x 6/12).................................................. (b) July 1 Prepaid Rent.... (e) Dec........................ 2005 80 Fundamental Accounting Principles......................................................... 35....9...............................000 To record prepaid annual lease rental...............840 Cash..........492 Accumulated Amortization—Leasehold Improvements......................................... 129...............................................840/10 years remaining on lease x 6/12)..... 31 Amortization Expense—Leasehold Improvements.. ©McGraw-Hill Companies................................ 17th Edition .......... Inc...........................492 To record leasehold improvement amortization ($129...............000 To record payment for sublease..............000/10 x 6/12).......000 Cash....... (f) Dec..... 31 Rent Expense............. 31 Rent Expense..................... 6..........250 Accumulated Amortization—Leasehold.... 185.........000 Cash.... 185.................. 35..Problem 10-6A (40 minutes) Part 1 2005 (a) June 25 Leasehold............. (c) July 5 Leasehold Improvements.......................................................................................000 To record one-half year lease rental ($70........ 70.....840 To record costs of leasehold improvements.250 To record leasehold amortization ($185.................. 9............ 70.........6.

.... Depreciation—Machinery........ 31 Depreciation Expense—Machinery...000/ 7.....................836.....000 tons = $0.. Chapter 10 ©McGraw-Hill Companies...................... 31 Depletion Expense—Mineral Deposit...... Also...... depletion.000 To record depreciation [$390........ 390..... amortization is typically computed using the straight-line method......000 tons = $0.... (c) Dec...........800.....000]............... (b) July 25 Machinery. 248. 2005 81 ...836..000 tons x $0.................. (d) Dec.. Depletion—Mineral Deposit...000 To record purchase of mineral deposit..... Solutions Manual....62 = $248............000]. and depreciation applies to plant assets.......000 tons x $0....................05 = $20.. 4........000/ 7. Analysis Component: Similarities—Amortization. and depreciation are similar in that they are all methods of allocating costs of long-term assets to the periods that benefit from their use........... 20....62 per ton............... 400...000 Accum............. 248........... 400....000 Accum........ 4....Problem 10-6A (Concluded) Part 2 (a) July 23 Mineral Deposit.......000 To record depletion [$4....................... whereas the units-ofproduction method is usually used in depletion................000 To record costs of machinery...800..........836......000 Cash........ 20... Inc........ depletion applies to natural resources...... 390................. Differences—They are different in that they apply to different types of long-term assets: amortization applies to intangible assets with (definite) useful lives..000 Cash.........05 per ton.........

........... However......................... (Details of this test are in advanced courses....760 Part 2 Potential Buyer’s proposal Goodwill ($20............. $100........... goodwill is not impaired.............) ©McGraw-Hill Companies..........930 Normal return in the industry....................... an impairment loss is recorded equal to that excess........ $ 20. 2005 82 Fundamental Accounting Principles......... if the book value of goodwill exceeds its fair value............................... If the book value of goodwill does not exceed its fair value.................................................................... $534................. 17th Edition ..............930 Cost of goodwill acquired by buyer (from part 1).......................... $104..... Inc...................... 79.......................000 Normal net income (from above)...................070 Part 3 Net assets without goodwill (equals equity)......................................................814 Rent Center’s proposal Goodwill ($20...................... the FASB (SFAS 142) requires that goodwill be annually tested for impairment. Goodwill is recorded as an asset and it is not amortized............................................ $395.................814 / 15%)....................................................225 / $534...........690 Part 4 Net income divided by buyer’s Investment ($100....................... 18.............. $395.. $138.... $ 79.......760 Purchase price (buyer’s investment)........................................... x 20% Normal net income..........186 Expected net income for this company.........................186 Above-normal net income....814 x 5)..7% Goodwill is measured as the excess of the cost of an acquired entity over the value of the acquired net assets..690)................Problem 10-7AA (30 minutes) Part 1 Equity....... 138.................... Instead..........................................

.............................. 2005 Jan.........860 Part 4 Accelerated depreciation does not increase the total amount of taxes paid over the asset’s life............. Trucks. it defers or postpones taxes to the later years of an asset’s useful life.....................................300 x 20% = $41........................ 2005 83 ....500 Land......640 226.......................................840 $1.........000 Buildings..................... Land improvements..........100 209.................000 Percent of Total 45% 31 13 11 100% Apportioned Cost $ 724.....] Solutions Manual....500 499......100 Cash..300 177................500 .......................... Inc...........................000 To record asset purchases...............000 Part 3 Year 2005 double-declining-balance depreciation on land improvements (100% / 10 years) x 2 = 20% rate $209.......610..... 1 Appraised Value $ 784.800 540......... 209. there is a tax savings from use of accelerated depreciation. [Note: From a present value perspective.... The company gets to use the tax deferred amounts for investment purposes until they are due.....720 191.............. Instead.................................. 177..... Land..........500) / 12 years] = $52................ 724........................$100...... 499......610........... Total..PROBLEM SET B Problem 10-1B (50 minutes) Part 1 Building. 1..........100 $1................. This is because accelerated methods charge a higher portion of asset costs against revenue in earlier years and a lower portion in later years. The result is to reduce taxable income more in earlier years and less in later years.......100 Land Improvements. Part 2 Year 2005 straight-line depreciation on building [($724.. Chapter 10 ©McGraw-Hill Companies.744....300 Trucks....

.250 $101....500 Demolition.....000)/15]............. 2005 84 Fundamental Accounting Principles.........000 _______ $121... .... ........................... 53..............585 Building B.......................................... 3................025 To record depreciation [($1...........................................................................................................500 Allocation of Appraised purchase price Value Land...............000 $1....................500 Land Improvements C........53.....500 459...250 Cash................000 ......... $ 769...................500 New building.......................................................$90..................096............025 Accumulated Depreciation—Building C......... 172........ 31 Depreciation Expense--Land Improvements B..............000 $121........................................770 Land Improvements B............................. 31 Depreciation Expense—Building B.... ©McGraw-Hill Companies................... 1 Land.... New improvements........... 125. 101...... ...000 Part 2 2005 Jan. .......356.......250 Apportioned Cost $ 769........ 24... Part 3 2005 Dec....... 1................ ............................. ________ Totals.....000 Land Improvements B................ Accumulated Depreciation—Building B.......... 117....... Inc............356...................... 24......250 ... $ 792......20. 17th Edition .$1............000 Land grading......Problem 10-2B (45 minutes) Part 1 Land Purchase price*.............000 Building B............. $1......500)/20].........750 To record cost of plant assets.......................350...............000 .....356........059.... 1..............500 $1.............................$295.................356..000 Building B Building C Land Improvements B $459......................................... 121...000 121..............145 Totals................... 472.......500 Percent of Total 57% 34 9 100% Land Improvements C $101............................................... 459...........000 _______ _________ $459.................600 ..059....................................................500 $1....................600 To record depreciation [($459..390...........000 Building C............ 31 Depreciation Expense—Building C.

250 To record depreciation [$121....125 ..............Accum......................................500/6]... Accum.... 2005 85 ..250/10]............. 20......... 31 Depreciation Expense--Land Improvements C.................. 10..... Inc........... Chapter 10 ©McGraw-Hill Companies..................................................... Depreciation--Land Improvements C....... Solutions Manual.10.. Depreciation--Land Improvements B..........125 To record depreciation [$101...... .............

........................970 To record extraordinary repair on van..... Inc................... 1.............900 Cash.........850 Annual depreciation ($24................................450 + $1............ 3.......................... 1............................Problem 10-3B (50 minutes) 2004 Jan..............642* Accum..................................................450 Less salvage......................... 3.......970 To record depreciation.....................970 Book value................900 To record costs of van ($24.......................... $24. 3 Equipment..970 2005 Jan.......................................... Cash... Dec...................................................................................642 To record depreciation.. May 10 Repairs Expense—Equipment........................450 Less revised salvage ($3......... Depreciation—Equipment................... Jan............. 3................................... $ 3................................................................................. Revised annual depreciation ($21............................. 1....26............................................... 4.................................... 3.............1yr.........600 Cost to be depreciated.....................970)......970* Accumulated Depreciation—Equipment........................................................ 25.........850 / 6 yrs) (rounded).. 6......................)................... + 2yrs.................950).............. 1 Equipment.... 17th Edition .. 31 Depreciation Expense—Equipment... $ 4... 1............850 / 5 years)............550 Cash........... 1 Equipment.............420 Less accumulated depreciation..................550 To record betterment of van..................................................... 4... *2005 depreciation after 1/1 extraordinary repair Total cost ($28.......................................................... 31 Depreciation Expense—Equipment........ 26................. 4............................970 Cash................................. 2005 86 Fundamental Accounting Principles..................600 Remaining cost to be depreciated......... $26......................400 + $200))..........................0 yrs........ 600 600 To record ordinary repair on van................. $30.............850 Revised remaining useful life (Original 5 years . 1.................642 ©McGraw-Hill Companies.900 Plus cost of betterment.................. * 2004 depreciation after January 3rd betterment Total original cost............................... 28.........550 Revised cost of equipment. $21........................................ Dec....950 + $1...........................

...........800)/6].... $113..200 2005............000-9. 27..............583 2006 Dec......................200 To record depreciation [($113.............. Total depreciation for 2005 ($82....................583 To record depreciation.............. 113.......................... 13......750/ 3 yrs) [rounded]..... Less 1 year in 2004........................................400)....... 27..... $ 82....800 Less revised salvage value................................................................... Dec.................................................................................................................................................................... 17...... Revised remaining useful life.......................................... $ 72....................... 15.........583 To record depreciation......... Chapter 10 ©McGraw-Hill Companies........................................................000 To record sale of machine........................... 1...... 1 Machinery. 2005 87 .............................. 27...... 27............. 31 Cash..................000 Solutions Manual.............. 113................ ** Accumulated depreciation on machine at 12/31/2006: 2004...... 25.............366** Loss on Disposal of Machinery.................. 4.. 95.....366 *** Book value of machine at 12/31/2006: Total cost......................................000 Less accumulated depreciation (from 2004).......... 3..............200 Accumulated Depreciation—Machinery...583 2006...583* Accum..........050 Remaining cost to be depreciated.....0 yrs............. * 2005 depreciation: Total cost.................................240 Accumulated Depreciation—Machinery............... Inc.........200 Book value............................................................394*** Machinery............................... 72. Dec............................................... 2005 Dec.............................. 17..... $113.......583 Total.......... 31 Depreciation Expense—Machinery..............000 Cash.. 17..................750 Revised useful life.......000 To record costs of machinery ($106........ 27................................................................ $ 27.. 31 Depreciation Expense—Machinery..........................................0 yrs...0 yrs.................... 113........... 27..... 31 Depreciation Expense—Machinery.. Depreciation—Machinery... $ 17.................................................583 Accumulated Depreciation—Machinery.......600 +$6.....................................Problem 10-4B (40 minutes) 2004 Jan........................

....................634 Loss ($25............. 2005 88 Fundamental Accounting Principles............. 17th Edition .394 ©McGraw-Hill Companies...Less accumulated depreciation.................634 book value)........ $ 40... Inc...366) Book value .....................240 cash received ....$40... (72............ $ 15..

. Straight-Line a Units-of-Production $ 56..000/5 years = $56...435 Total........800 per year b Units-of-production: Cost per unit = $284.000 Take only enough depreciation in Year 5 to reduce book value to the asset’s $28... 2005 89 . c Double-declining-balance (amounts rounded to the nearest dollar): (100%/5) x 2 = 40% depreciation rate Beginning Year Book Value 1.... 5. $312..000 Accumulated Depreciation at the End of the Year $124....... 67...800 56.....200 3..150 50..000 units = $0.......800 74.........600 56.000/1...... 3...400 227.... Totals..000 $124.......000 232... 4........... 4.........800 56..000 Cost less Accumulated Depreciation) $187....25 0...750 58.. 112....608 271... * Units 245. $312.....880 44.....000 Less estimated salvage value....565 284...........150 50............435 $284......... 3.........800 56.... $284...... 40..000 ©McGraw-Hill Companies.......000 Ending Book Value ($312..435 28.. Inc...928 26.800 56.......880 44......750 58......400 57.800 74.............392 40.....25 per unit Year 1.000 2. 2...............Problem 10-5B (45 minutes) Part 1 Cost of machine.... Total.... 5..400 57.......... 28.........200 Unit Cost $0.. 2.320 67......928 26................25 0.....25 0.957 12.............435** $284...000 Year 1..136.....000 a Straight................100* $284.......100 $284.......600 56....................200 112......600 211... 187.............. Chapter 10 Annual Depreciation (40% of Book Value) $124. Solutions Manual........800 199.000 Total depreciable cost.........25 0..320 4.......392 5..000 salvage value..600 230........957 12...000 b Double-DecliningBalancec $ 61..800 $284....680 244......line: Cost per year = $284..25 Depreciation $ 61.....

©McGraw-Hill Companies. Inc. 17th Edition ..** Take only enough depreciation in Year 5 to reduce book value to the asset’s $28. 2005 90 Fundamental Accounting Principles.000 salvage value.

. 103.................... 20.... 31 Cash..................... Jan..170 Accumulated Depreciation—Machinery.................... 4.........................170 Accumulated Depreciation—Machinery........020) Total............................................................................................170 (i) Sold for $30.................................. 31 Cash....................000 To record machinery costs..................170 Accumulated Depreciation—Machinery..........000 cash from insurance Dec.390 To record machinery costs...................... b.................. 138.................190 Accumulated depreciation.......... 31 Depreciation Expense—Machinery............000)/7 = $17... 17...........020 Book value at the date of disposal Original total cost................390 3.......190-$18.............................Problem 10-5B (Concluded) Part 2 a................ Chapter 10 ©McGraw-Hill Companies............................................................ Sixth year Dec.... 2 Machinery...(103............830 (iii) Destroyed in fire and collected $20.......................5................................................................................ 31 Cash...... 17......170].......170 To record depreciation [($138..........800 4............................................................000 Cash.... 2 Machinery.............................................000 Accumulated Depreciation—Machinery... Cash..170 To record the sixth year’s depreciation.. First year Dec.................. 130.........................................000 Solutions Manual.. 30.... 2005 91 ............ Jan............. Accumulated depreciation at the date of disposal First six years' depreciation (6 x $17....................$103............... Inc.... Jan..... Cash.... 138...........17.......190 Gain on Sale of Machinery...............................$ 35.................. 14....................... 130.......000 cash Dec........................................ 31 Depreciation Expense—Machinery........020 Machinery. 1 Machinery.....17.........................................000 Loss on Sale of Machinery.020 Machinery.....000 cash Dec........... 3.......800 To record machinery costs.170)......................................................... 103............................$138.. c...........190 (ii) Sold for $50.............. 50......

..........020 Machinery..Loss from Fire. 17th Edition ................................170 Accumulated Depreciation—Machinery........... 138.......................190 ©McGraw-Hill Companies................. 103........ Inc............................... 15............. 2005 92 Fundamental Accounting Principles......

....................... 26...........................000 To record costs of leasehold improvements.. (d) Dec....... (c) Jan........ 31 Rent Expense........ Solutions Manual...................................400 Cash....................600 26.... 1 Leasehold.....000 Cash......................................................................... To record leasehold improvement amortization ($18................................. 3 Leasehold Improvements...... Chapter 10 ©McGraw-Hill Companies......................................... Inc.000/5)......................................6.........................000 Accumulated Amortization—Leasehold. (b) Jan........... 1 Prepaid Rent................. 2005 93 .. 26..000 To record payment for sublease.....................400 To record annual lease rental. 18.............................................600 Accumulated Amortization—Leasehold Improvements........ 30..........000/5 years remaining on lease)...............000 Cash...... 3......... 31 Rent Expense.......................... (e) Dec..400 To record prepaid annual lease rental..3........ 6.. 18................................000 To record leasehold amortization ($30.. (f) Dec............... 26.................................Problem 10-6B (40 minutes) Part 1 2007 (a) Jan........ 31 Amortization Expense—Leasehold Improvements.......................400 Prepaid Rent................ 30............................

. Differences—They are different in that they apply to different types of long-term assets: amortization applies to intangible assets (with definite useful lives).....89 per ton... 31 Depreciation Expense—Machinery.080 Accum. 17th Edition ...... 14..................................000 tons = $0................. 14..................280 To record depletion [$4.000..080 To record depreciation [$200......450..... Depletion—Mineral Deposit..........000 To record costs of machinery... and depreciation are similar in that they are all methods of allocating costs of long-term assets to the periods that benefit from their use... 21 Machinery.......... and depreciation applies to plant assets.280 Accum.........450.000 Cash......... 19 Mineral Deposit..........000 tons x $0. Dec... 313. 352.........000/ 5..................080]..............000..... Also.89 = $313...............000/ 5.................... Analysis Component: Similarities—Amortization.............. 4.... 4....450..... 313.04 = $14. 2005 94 Fundamental Accounting Principles. depletion...... 352...04 per ton... Depreciation—Machinery......Problem 10-6B (Concluded) Part 2 Feb............ Mar..... 31 Depletion Expense—Mineral Deposit... amortization is typically computed using the straight-line method.... Dec................ 200....................... 200...............280]. ©McGraw-Hill Companies. whereas the units-ofproduction method is usually used in depletion.......... depletion applies to natural resources.......000 tons = $0.000 To record purchase of mineral deposit.............000 Cash............000 tons x $0..... Inc......

.............175 / $831.. $230........................................ $213..................... 24......... Chapter 10 ©McGraw-Hill Companies........ Inc...........400 Purchase price (buyer’s investment).......... $667.......440 Pack’s proposal Goodwill ($16............................440 / 10%).........560 Above-normal net income............................................ $667............... If the book value of goodwill does not exceed its fair value..... However................. 2005 95 .......................................................................... if the book value of goodwill exceeds its fair value.........000 Normal net income.................775)..........................520 Part 3 Net assets without goodwill...... $831.................. Instead............................. an impairment loss is recorded equal to that excess..........400 Part 2 Buyer’s proposal Goodwill ($16.......... 164................. $ 16...............560 Expected net income for this company.......................................... the FASB (SFAS 142) requires that goodwill be annually tested for impairment.......................................................................................375 Cost of goodwill acquired by buyer (from part 1)...........375 Normal return in the industry (given).................. Goodwill is recorded as an asset and it is not amortized...........1% Goodwill is measured as the excess of the cost of an acquired entity over the value of the acquired net assets...................) Solutions Manual............ x 32% Normal net income (rounded)............. $164........... $131................................... 213............. (Details of this test are in advanced courses................ goodwill is not impaired.775 Part 4 Net income divided by buyer’s investment ($200.............440 x 8)................Problem 10-7BA (30 minutes) Part 1 Equity.....

. 2004 Computer Equipment... Success Systems is in its first year of operations.... However.... 2004 Office Equipment.750 December 31.... For the three months ended March 31......Serial Problem Serial Problem... Inc.... 17th Edition ......000 December 31.. 2005 $20..................$5..39 x 4 quarters).......000 2........... Annualizing these three months results in the following amounts for depreciation expense: Depreciation Expense—Office Equipment ($400 x 4).000 Accumulated Depreciation–Office Equipment.5). $8. 2005 96 Fundamental Accounting Principles... $7.............000 $6......000 Accumulated Depreciation– Computer Equipment. $20...$1....... ©McGraw-Hill Companies..........250 x 4)...... and its turnover will improve if it can generate increased sales throughout the year while maintaining a similar asset level..... 2005 $8........ 400 Office Equipment (book value).250 Computer Equipment (book value)........... Note: Total asset turnover = Net sales / Average total assets The 3-month total asset turnover for Success Systems at March 31..... 2005..........000 2....250 for the computer equipment..39 times An estimate of its annual total asset turnover is 1................ December 31..248)/2] = 0..... $18..... This value for the total asset turnover is lower than usual for companies competing in this industry (2........250 $13. 1.600 December 31.....56 (0... depreciation expense was $400 for office equipment and $1.000 6..............909 + $93. 2005 $43..... Success Systems (45 minutes) 1.750 3..853 / [($129..600 Depreciation Expense—Computer Equipment ($1.....

as a result.484 = 71.1% As of 02/03/02: $112. Inc.495 (all $s in thousands). intangible assets that are identified with an indefinite life are no longer amortized. For the fiscal year ended February 3. Solution depends on the financial statement data obtained.$156. Solutions Manual.286 ($252.48 times 2/03/02: $394. Instead. The percent of original cost remaining to be depreciated is computed by taking the ratio of the book value of property. 2005 97 .376 + $171.770 = 80.577 / $156. plant and equipment. are not subject to amortization provisions. Its "Summary of Significant Accounting Policies" (Note 2) reports that intangible assets and goodwill have been evaluated as having indefinite lives and. In comparison. is an increase of $96. the change in total property.85 times 5.354 ($255. 2003.196 is used for the purchase of property. According to Note 5. according to the statement of cash flows.Reporting in Action – BTN 10-1 1. an annual impairment test is applied to goodwill. Total asset turnover for year ended ($ thousands): 2/02/03: $491.9% 2. and $701 is received from the disposal of property. (Instructor note: SFAS 142 has changed the accounting for goodwill —it is no longer amortized.493)/2 = 1.487 + $255. plant.558 / $252.549 ($410. Another possible explanation is that Krispy Kreme disposed of some of its plant assets at a loss during the year. plant and equipment.484). 2002.770 . This gives a net cash outflow of $82. and equipment to their original cost reported in Krispy Kreme’s Note 5 ($ thousands): As of 02/02/03: $202. $83. 4. Moreover. Chapter 10 ©McGraw-Hill Companies. it acquired certain plant assets for a promise (note agreement) to pay later. 2001. the Company recorded an expense of $100. The company believes that no impairment of intangible assets exists as of February 2.376)/2 = 1. One possible explanation for the difference in these amounts is that Krispy Kreme acquired plant assets for something other than cash—for example.) 3.000 to amortize intangible assets related to an acquisition completed prior to June 30.. but are subject to an impairment test. 2003. plant and equipment before accumulated depreciation for the year ended February 3.

Inc.46 in net sales for the prior year.376 + $171.46 times 2. ©McGraw-Hill Companies.137 + $112. Total asset turnover for Krispy Kreme ($ thousands) Current Year: $491.493)/2] = 1.487 + $255.137)/2] = 1.245 / [($116.Comparative Analysis — BTN 10-2 Note: Total asset turnover = Net sales / Average total assets 1. we see that Krispy Kreme employs its assets more efficiently than does Tastykake.48 times One Year Prior: $394.39 times One Year Prior: $166. 17th Edition .85 in net sales for the prior year. both companies have experienced a decline in asset efficiency for the current year. Each dollar of Tastykake’s assets produces $1.549 / [($410.. Consequently.376)/2] = 1.85 times Total asset turnover for Tastykake ($ thousands) Current Year: $162.192)/2] = 1.354 / [($255. However. Each dollar of Krispy Kreme’s assets produces $1.39 in net sales for the current year and $1.560 + $116.263 / [($116. 2005 98 Fundamental Accounting Principles.48 in net sales for the current year and $1.

less depreciation is (initially) accrued for the assets employed. since she appears to be using this method only with respect to current year additions. Choi is getting a onetime deferral of some partial months of depreciation. She is still employing a systematic and rational method of allocating costs if she consistently chooses the first day of the following month.. The facts of the situation seem to suggest an ethical violation rather than a legitimate depreciation decision rule.Ethics Challenge — BTN 10-3 1. By always assuming the first day of the following month as the date of purchase. This means depreciation expense will be less than if assets were considered employed on the first of the month closest to the date of purchase. the asset must be assigned a useful life. Therefore. Solutions Manual. for assets purchased on the 1st through 15th days of the month. For example. the first day of the month is assumed to be the purchase date. Many instructors find it useful to report the results from the teams to the class for purposes of classroom discussion and analysis. Inc. For assets purchased on the 16th through month-end. 2005 99 . it appears that she is using accounting rules to reduce depreciation expense this year. By selecting the first day of the following month. 3. a salvage value. net income will be higher for this current year. With reduced depreciation charges. When assets are placed in use on a day other than the first day of the month an assumption is often made that the assets are placed in use on the first day of the month nearest to the date of the purchase. 2. Communicating in Practice — BTN 10-4 The solution to this activity will vary based on the industry and the companies chosen for analysis. her practice is not in keeping with general business practices as described above. Also. Specifically. and a method of depreciation. this practice will result in a higher profit margin for her company for this year. Chapter 10 ©McGraw-Hill Companies. the first day of the next month is assumed to be the purchase date. When managers acquire new assets a number of decisions relative to depreciation must be made. However.

70 per mile.000 miles x $.000 miles in the last year.300 * Depreciation is based on the estimated capacity of 60.000 miles. Adaptec’s statement of operations (income statement) for 2002 shows patent settlement revenue of $9.600 2006 $10.500 $22.Taking It to the Net — BTN 10-5 1. Annual depreciation for each year of the asset’s useful life: Year 2004 Straight-line Double-Declining-Balance Units-of-Production ($44.70 = $12. Teamwork in Action — BTN 10-6 1.70 = $14.000 x 50%= $11.700 2007 $10. The company maintains a patent award program that encourages its engineers to document patentable inventions so that Adaptec can continue to apply for patents both in the U. and in foreign countries. This will record depreciation to the estimated salvage value.000 2005 $10.500 9.500 21. 3.400 = $22.3 million.500 declining-balance rate.000)/60. The company. 17th Edition .000)/4 (100%/4) x 2 = 50% is ($44. 2005 100 Fundamental Accounting Principles. purchases technology licenses from other companies rather than develop all needed patents internally.000 miles x $. depreciation can only be taken for the remaining 9.70 = $ 8. manage. Adaptec is a technology company that specializes in data storage solutions. ©McGraw-Hill Companies. Adaptec’s products include software and hardware products that are designed to move.000 18. at times.S.500 $5.000 x 50% = $5.000 miles = $10.000 x 50% 12. The negative revenues could be due to an appeal of the original 2000 court decision with Adaptec having to return part of the 2000 settlement fee.000 miles x $. Inc.000-2. 2.000-$2.70 = $ 6. This likely relates to monies recovered from other parties who have been ruled (by judges or juries) to have infringed on Adaptec’s patents..500 (depreciate to salvage) = $3. negative revenues are shown for patent settlement fees. BV x rate = $44. and protect critical data and digital content. Even though the van is driven 10.000 miles of estimated capacity.500 $11. = $.000* miles x $. In 2001.

.... The declining-balance method reduces net income the largest in 2004 (first year of use) and by a lesser amount in each subsequent year..... 23....................... Inc....... Each expert’s presentation of the comparison of methods will be slightly different.000 Units of Production $35... Chapter 10 ©McGraw-Hill Companies.000 Double-DecliningBalance $22...... Solutions Manual.......500 2... xxxx* xxxx* *Amount varies by method and year (see part 1).. Less: Accumulated Depreciation XXXX* $44................000 11...... The impact of the units-of-production method varies year to year according to the amount of estimated capacity consumed (miles driven)... Experts should explain the amounts shown. $33......000 – (amount varies by method—see part 1 for annual amounts) Year Straight-line 2004.. But each should show: Plant Assets: Transport Van.............. 2..000 For reporting purposes.......000 5..Teamwork in Action (Continued) 2...000 .....Accumulated depreciation = $44......600 23. 2006.500 2005...300 2.... The experts should make the following points: The straight-line method reduces net income by the same amount each year...... 3.... each expert will have different results......000 XXXX* * Amounts vary by the method and the year selected for illustration. Depreciation is recorded in an adjusting entry at the end of each period. 2005 101 . Book value at the end of each year = Cost . 12.000 8.. 4..... The entry is: Depreciation Expense.......500 2007..... Accumulated Depreciation. ..

if a company pays $1 billion for another company that has tangible assets. goodwill is measured as the excess of the cost of an acquired entity over the value of the acquired net assets. In accounting terms. This generated goodwill that must be tested for impairment (and likely written off against earnings). Instead. goodwill represents the purchase price of a company that exceeds the value of the identifiable net assets. ©McGraw-Hill Companies. if the book value of goodwill exceeds its fair value. Therefore. If the book value of goodwill does not exceed its fair value.. However. 2005 102 Fundamental Accounting Principles. (Details of this test are in advanced courses. such as plant and equipment. therefore. 17th Edition . Many of the 1990’s mega-mergers have not lived up to expectations and. It is a good idea to become familiar with the accounting for goodwill because goodwill write-downs are widely anticipated by numerous companies in the coming years. goodwill was required to be amortized deducting a portion of it from net income every year for up to 40 years. goodwill is not impaired. valued at $600 million. the acquirers often overpaid. The FASB has recently adopted a new standard in accounting for goodwill—these are reflected in SFAS 141 and 142. 3. 2.) 4. an impairment loss is recorded equal to that excess. Formerly.Business Week Activity — BTN 10-7 1. then the amount of goodwill is calculated to be $400 million. as before. goodwill is recorded as an asset and it is not amortized. Specifically. Inc. However. SFAS 142 requires that goodwill be annually tested for impairment. in contrast to the prior standard.

This is computed as net sales of $3.000 + $500. we need to focus on any potential customer concern and the impact on other dimensions of analysis that such a proposal can bring about.67 vis-à-vis the current total asset turnover of 3. However.000.500. It is usually interesting for the class to exchange their discoveries via class discussion.000 + $2.67 times per year or.000 ($3. Solutions Manual.500. This means the company would now turn its assets over 3.* *We must remember that total asset turnover is only one dimension of a complete analysis of this proposal. and not losing or alienating current and/or future customers due to the expanded operations. 2005 103 .67.500.67 of net sales per year. each $1 of assets produces $3. stated differently.000. Chapter 10 ©McGraw-Hill Companies.000). its asset turnover would increase to 3. the total asset turnover is 3. copyrights.* This means the company turns its assets over 3 times per year or.000 divided by its average total assets of $1. Hitting the Road — BTN 10-9 No formal solution exists for this activity. Assuming all of our estimates are reasonable. Part 2 Cordova’s proposal would yield an improved total asset turnover of 3. each $1 of assets would now produce $3.000. and trademarks. This is particularly the case with respect to patents. we need to recognize that this proposal depends on our confidence in both maintaining current sales. This is computed by taking its net sales of $5.000. Inc.000 ($1. stated differently. * Total asset turnover = Net sales Average total assets (b) Under this proposal.00 of net sales per year. For example. meeting future sales expectations.Entrepreneurial Decision — BTN 10-8 Part 1 (a) Under current conditions.000. we would want to explore the impact of this proposal on net income and other activities..000) and dividing by its average total assets of $1.

43 pesos in net sales for the prior year. In comparison. Inc.719 + $23.48 respectively).035)/2] = 1. ©McGraw-Hill Companies.39 in net sales for the current year and $1.46 in net sales for the prior year. Specifically.Global Decision — BTN 10-10 Note: Total asset turnover = Net sales / Average total assets 1.85 in net sales for the prior year. Total asset turnover for Grupo Bimbo (millions of pesos): Current Year: $41. each peso of Grupo Bimbo’s assets produces 1.373 / [($31.781 + $25. each dollar of Krispy Kreme’s assets produces $1.49 and $1.48 in net sales for the current year and $1. Grupo Bimbo and Krispy Kreme were the most efficient in producing net sales from total assets employed ($1.968 / [($23. 17th Edition . 2005 104 Fundamental Accounting Principles. whereas each dollar of Tastykake’s assets produces $1..49 pesos in net sales for the current year and 1.43 times 2.49 times One Year Prior: $34.781)/2] = 1.