9

CHAPTER 9
Reporting and Analyzing Long-Lived Assets

ANSWERS TO QUESTIONS
1.
For plant assets, the cost principle states that plant assets are recorded at cost, which consists of
all expenditures necessary to acquire the asset and make it ready for its intended use.
2.
In a cash transaction, cost is equal to the cash paid.

In a noncash transaction, cost is equal to the cash equivalent price paid, which is the fair market
value of the asset given up or the fair market value of the asset received, whichever is more
clearly determinable.
3.
The primary advantages of leasing are (1) reduced risk of obsolescence, (2) little or no down payment, (3) shared tax advantages, and (4) reduced recorded assets and liabilities.
4.
When only the land is to be used, all demolition and removal costs of the building less any proceeds
from salvaged materials are necessary expenditures to make the land ready for its intended use.
Any costs for clearing, draining, filling, and grading are also part of the cost of the land.
When both the land and building are to be used, necessary costs of the building include remodeling
expenditures and the cost of replacing or repairing the roofs, floors, wiring, and plumbing.
5.
The potential benefits of leasing are (1) reduced risk of obsolescence (an obvious concern to
Kellum), (2) little or no required down payment, (3) shared tax advantages, (4) assets and
liabilities are not reported on the balance sheet.
6.
You should explain to the president that depreciation is a process of allocating the cost of a plant
asset to expense over its service (useful) life in a rational and systematic manner. Recognition of
depreciation is not intended to result in the accumulation of cash for replacement of the asset.
7.
(a) Salvage value is the expected cash value of the asset at the end of its useful life.
(b) Salvage value is used in determining depreciable cost in the straight-line method by subtracting
it from the plant assets cost.
8.
(a) Useful life is expressed in years under the straight-line method and in units of activity under
the units-of-activity method.
(b) The pattern of periodic depreciation expense over an assets useful life is constant under the
straight-line method and variable under the units-of-activity method.
9.
The effects of the three methods on annual depreciation expense are: Straight-lineconstant
amount; units-of-activityvarying amount; declining-balancedecreasing amounts.
10.
A revision of depreciation is made in current and future years but not retroactively. The rationale
is that continual restatement of prior periods would adversely affect the readers confidence in the
financial statements.
Copyright 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
9-1
Questions Chapter 9 (Continued)

11.
Ordinary repairs are made to maintain the operating efficiency and expected productive life of the
asset. Capital expenditures are additions and improvements made to increase efficiency, productive capacity, or expected useful life of the asset. Revenue expenditures are recognized as
expenses when incurred; capital expenditures are generally debited to the plant asset affected.
12.
In a sale of plant assets, the book value of the asset is compared to the proceeds received from
the sale. If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal
occurs. If the proceeds of the sale are less than the book value of the plant asset sold, a loss on
disposal occurs.
13.
The plant asset and related accumulated depreciation should continue to be reported on the
balance sheet without further depreciation or adjustment until the asset is retired. Reporting
the asset and related accumulated depreciation on the balance sheet informs the reader of the
financial statements that the asset is still being used by the company. However, once an asset is
fully depreciated, even if it is still being used, no additional depreciation should be taken on this
asset. In no situation can the depreciation on the plant asset exceed the cost of the plant asset.
14.
Tootsie Roll depreciates its buildings over 20 to 35 years and its machinery and equipment over
5 to 20 years.
15.
Depreciation and amortization are both concerned with writing off the cost of an asset to expense
over the periods benefited. Depreciation refers to allocating the cost of a plant asset to expense
and amortization to allocating the cost of an intangible asset to expense.
16.
It is true that successful marketing campaigns often benefit multiple accounting periods in the future,
enhancing the companys value, and potentially creating goodwill. However, from an accounting
perspective Ralphs proposal is unacceptable. First of all, accounting standards only allow the
recording of purchased goodwill that results from the purchase of another business. Internally
created goodwill is not allowed to be recorded. Second, marketing expenditures are to be treated
as expenses of the period in which they are incurred. They can not be capitalized. It is unethical
to capitalize costs simply to boost reported income by spreading the cost over multiple periods.
17.
The intern is not correct. If an intangible asset has a limited life, the cost of the asset should be
amortized over that assets useful life (the period of time when operations are benefited by use of
the asset) or its legal life, whichever is shorter. The cost of intangible assets with indefinite lives
should not be amortized.
18.
The favorable attributes which could result in goodwill include exceptional management, desirable
location, good customer relations, skilled employees, high quality products, fair pricing policies, and
harmonious relations with labor unions.
19.
Goodwill is the value of many favorable attributes that are intertwined in the business enterprise.
Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be
sold separately. Goodwill can only be sold if the entire business is sold.
20.
Goodwill is recorded only when there is an exchange transaction that involves the purchase of an
entire business. Goodwill is the excess of cost over the fair market value of the net assets (assets
less liabilities) acquired. The recognition of goodwill without an exchange transaction would lead
to subjective valuations which would reduce the reliability of financial statements.
9-2
Questions Chapter 9 (Continued)

Goodwill is not amortized because it has an indefinite life. It remains at its original value as an
intangible asset unless it is considered to be impaired. If it is impaired, it is written down.
21.
Research and development costs present several accounting problems. It is sometimes difficult
to assign the costs to specific projects, and there are uncertainties in identifying the extent and
timing of future benefits. As a result, research and development costs are usually recorded as an
expense when incurred.
22.
Campbell Soup Companys return on assets ratio is computed as follows:
Net income
Average total assets
$854
$3,095
= 27.6%
23.
The return on assets ratio is closely monitored by management. It is the product of the profit
margin ratio and the asset turnover ratio. At first glance, if this new product line has a lower profit
margin, then it will reduce the companys asset turnover ratio. However, it is likely that it will have
a higher turnover than the companys more expensive offerings. As a consequence, it is not possible
to know what effect the new product line will have on the companys return on assets without
knowing the expected effect on the companys asset turnover.
24.
(a) Grocery stores usually have a high asset turnover ratio and a low profit margin ratio.
(b) Car dealerships normally have a low asset turnover ratio and a high profit margin ratio.
25.
Since Aldrich uses the straight-line depreciation method, its depreciation expense will be lower in
the early years of an assets useful life as compared to using an accelerated method. Benjamins
depreciation expense in the early years of an assets useful life will be higher as compared to the
straight-line method. Aldrichs net income will be higher than Benjamins in the first few years of
the assets useful life.
26.
Yes, the tax regulations of the IRS allow a company to use a different depreciation method on the
tax return than is used in preparing financial statements. Garza Corporation uses an accelerated
depreciation method for tax purposes to minimize its income taxes.
27.
By selecting a higher estimated useful life, Mane Corp. is spreading the plant assets cost over a
longer period of time. The depreciation expense reported in each period is lower and net income
is higher. Nienstedts choice of a shorter estimated useful life will result in higher depreciation
expense reported in each period and lower net income.
28.
In the operating activities section of the statement of cash flows, depreciation expense (from
plant assets) and amortization expense (from intangible assets) are added back to net income to
determine net cash provided by operating activities. In the investing section, cash paid to purchase
plant assets or intangible assets is shown as a use of cash. If the company sells any of its used
plant assets, or if it sells intangibles, it would report the amount of cash received as a source of
cash from investing activities.
9-3
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 9-1
All of the expenditures should be included in the cost of the land. Therefore,
the cost of the land is $73,400 ($60,000 + $5,000 + $2,100 + $2,800 + $3,500).
BRIEF EXERCISE 9-2
The cost of the truck is $26,280 (cash price $24,000 + sales taxes $1,080 +
painting and lettering $1,200). The expenditures for insurance and motor
vehicle license should not be added to the cost of the truck.
BRIEF EXERCISE 9-3
The depreciable cost is $27,000 ($31,000 $4,000). With a 5-year useful life,
annual depreciation is $5,400 ($27,000 5). Under the straight-line method,
depreciation is the same each year. Thus, depreciation is $5,400 for both
the first and second years.
BRIEF EXERCISE 9-4
It is likely that management requested this accounting treatment to boost
reported net income. Land is not depreciated; thus, by reporting land at
$120,000 above its actual value the company increased yearly income by
$120,000
$6,000
or the reduction in depreciation expense. This practice is
20 years
not ethical because management is knowingly misstating asset values.
BRIEF EXERCISE 9-5

Book value, 1/1/10 ($36,000 $14,000) ...........................................
Less: Salvage value.........................................................................
Depreciable cost ...............................................................................
Remaining useful life........................................................................
Revised annual depreciation ($20,000 2) .....................................
9-4
$22,000
2,000
$20,000
2 years
$10,000
BRIEF EXERCISE 9-6

(a) Repair Expense.........................................................
Cash .....................................................................
45
(b) Delivery Truck ...........................................................

Cash .....................................................................
400
45
400
BRIEF EXERCISE 9-7

(a) Accumulated DepreciationDelivery
Equipment ..............................................................
Delivery Equipment .............................................
41,000
(b) Accumulated DepreciationDelivery

Equipment ..............................................................
Loss on Disposal ......................................................
Delivery Equipment.............................................
38,800
2,200
Cost of delivery equipment

Less accumulated depreciation
Book value at date of disposal
Proceeds from sale
Loss on disposal
41,000
41,000
$41,000
38,800
2,200
0
$ 2,200
BRIEF EXERCISE 9-8

(a) Depreciation Expense ..............................................
Accumulated DepreciationOffice Equipment ...
6,000
(b) Cash ...........................................................................

Accumulated DepreciationOffice Equipment .....
Loss on Disposal ......................................................
Office Equipment ..............................................
21,000
48,000
3,000
Cost of office equipment

Less accumulated depreciation
Book value at date of disposal
Proceeds from sale
Loss on disposal
6,000
72,000
$72,000
48,000*
24,000
21,000
$ 3,000
*$42,000 + $6,000
9-5
BRIEF EXERCISE 9-9

(a) Return on assets ratio =
(b) Asset turnover ratio =
$3.5
($30.0 + $29.0)2
= 11.9%
$21.6
= .73 times
($30.0 + $29.0) 2
BRIEF EXERCISE 9-10

(a) Amortization ExpensePatent ($150,000 5).......
Patent.................................................................
30,000
30,000
(b) Intangible Assets

Patent (Net of $30,000 of amortization) ..........
$120,000
BRIEF EXERCISE 9-11

NIKE, INC.
Partial Balance Sheet
As of May 31, 2007
(in millions)
Property, plant, and equipment
Land........................................................
Buildings................................................
Machinery and equipment ....................
Other plant assets .................................
Less: Accumulated depreciation ........
Total property, plant, and
equipment ...................................
Intangible assets
Goodwill .................................................
Patents and trademarks........................
Less: Accumulated amortization ........
Total intangible assets..................
$ 193.8
$ 840.9
1,817.2
767.2
1,940.8
1,484.5
$1,678.3
$ 130.8
$115.5
47.1
68.4
$ 199.2*
*Alternatively, many companies would simply show a single line for net
intangibles.
9-6
BRIEF EXERCISE 9-12

To determine net cash provided by operating activities, add depreciation
expense and amortization expense to net income:
Net cash provided by
= $157,000 + $12,000 + $6,000 = $175,000
Operating activities
*BRIEF EXERCISE 9-13
The declining-balance rate is 40% (1/5 X 2) and this rate is applied to the
book value at the beginning of the year. The computations are:
Book Value
Year 1
Year 2
$31,000
($31,000 $12,400)
Rate
Depreciation
40%
40%
$12,400
$ 7,440
*BRIEF EXERCISE 9-14

The depreciation cost per unit is 18 cents per mile computed as follows:
Depreciable cost ($27,500 $500) 150,000 = $.18
Depreciation expense for each year is as follows:
2009
28,000 miles X $.18 = $5,040
2010
30,000 miles X $.18 = $5,400
9-7
SOLUTIONS TO DO IT! REVIEW EXERCISES

DO IT! 9-1
The following four items are expenditures necessary to acquire the truck
and get it ready for use:
Negotiated purchase price.........................................
Installation of special shelving..................................
Painting and lettering .................................................
Sales tax ......................................................................
Total paid .........................................................
$24,000
1,100
900
1,300
$27,300
Thus, the cost of the truck is $27,300. The payments for the motor vehicle
license and for the insurance are operating costs and are expensed over
the first year of the trucks life.
DO IT! 9-2
Depreciation expense =
Cost Salvage
$15,000 $1,000
=
= $1,750
Useful life
8 years
The entry to record the first years depreciation would be:

Depreciation Expense ...........................................................
Accumulated Depreciation...........................................
9-8
1,750
1,750
DO IT! 9-3
(a)
(b)
Sale of truck for cash at a gain:

Cash...............................................................................
Accumulated DepreciationTruck .............................
Truck .......................................................................
Gain on Sale ...........................................................
Sale of truck for cash at a loss:
Cash...............................................................................
Accumulated DepreciationTruck .............................
Loss on Sale .................................................................
Truck .......................................................................
26,000
28,000
50,000
4,000
15,000
28,000
7,000
50,000
DO IT! 9-4
1.
2.
3.
4.
5.
Intangible assets
Amortization
Franchise
Research and development costs
Goodwill
9-9
SOLUTIONS TO EXERCISES
EXERCISE 9-1
(a)
The following points explain the application of the cost principle to

plant assets.
1.
2.
3.
(b)
1.
2.
3.
4.
Under the cost principle, the acquisition cost for a plant asset includes all expenditures necessary to acquire the asset and make
it ready for its intended use.
Cost is measured by the cash paid in a cash transaction, or by the
cash equivalent price paid when noncash assets are used in
payment.
The cash equivalent price is equal to the fair market value of the
asset given up or the fair market value of the asset received,
whichever is more clearly determinable.
Land
Factory Machinery
Delivery Truck
Land Improvements
5.
6.
7.
8.
Delivery Truck
Factory Machinery
Prepaid Insurance
License Expense
EXERCISE 9-2
1.
2.
3.
4.
5.
6.
7.
8.
9.
9-10
Factory Machinery
Truck
Factory Machinery
Land
Prepaid Insurance
Land Improvements
Land Improvements
Land
Building
EXERCISE 9-3
(a)
(b)
Cost of land
Cash paid...................................................................
Net cost of removing warehouse ($8,200 $1,700)...
Attorneys fee ............................................................
Real estate brokers fee............................................
Total ....................................................................
$80,000
6,500
1,500
5,000
$93,000
The architects fee ($9,100) should be debited to the building account.

The cost of the driveways and parking lot ($14,000) should be debited to
Land Improvements.
EXERCISE 9-4
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
False. Depreciation is a process of cost allocation, not asset valuation.

True.
False. The book value of a plant asset may be quite different from its
market value.
False. Depreciation applies to three classes of plant assets: land
improvements, building, and equipment.
False. Depreciation does not apply to land because its usefulness and
revenue-producing ability generally remain intact over time.
True.
False. Recognizing depreciation on an asset does not result in an
accumulation of cash for replacement of the asset.
True.
False. Depreciation expense is reported on the income statement, and
accumulated depreciation is reported as a deduction from plant assets
on the balance sheet.
False. Three factors affect the computation of depreciation: cost, useful
life, and salvage value (also called residual value).
EXERCISE 9-5
$90,000 $6,000
Straight-line method :
= $10,500 per year.
8
2010 depreciation = $10,500 X 4/12 = $3,500

2011 depreciation = $10,500.
9-11
EXERCISE 9-6
(a)
Type of Asset
Cost.........................................................
Accumulated depreciation ................
Book value, 1/1/10..................................
Less: Salvage value..............................
Depreciable cost (1)...............................
Building
$900,000
172,000
$728,000
35,000
$693,000
Warehouse
$120,000
23,000
$ 97,000
3,600
$ 93,400
42*
15**
Revised remaining useful life in years (2)

*(50 8)
**(20 5)
Revised annual depreciation (1) (2)

(b) Dec. 31
$16,500
$6,227
Depreciation ExpenseBuilding ..........

Accumulated Depreciation
Building ....................................
16,500
(a) Accumulated DepreciationDelivery Equipment ...

Loss on Disposal .....................................................
Delivery Equipment ..........................................
20,000
30,000
(b) Cash ..........................................................................

Accumulated DepreciationDelivery
Equipment............................................................
Gain on Disposal ..............................................
37,000
16,500
EXERCISE 9-7
(c) Cash ..........................................................................

Accumulated DepreciationDelivery
Equipment ...........................................................
Loss on Disposal .....................................................
9-12
50,000
20,000
50,000
7,000
18,000
20,000
12,000
50,000
EXERCISE 9-8
Jan.
1 Accumulated DepreciationMachinery............
Machinery.......................................................
62,000
June 30 Depreciation Expense.........................................

Accum. DepreciationComputer
($39,000 X 1/3 X 6/12)...............................
6,500
Cash .....................................................................
Accumulated DepreciationComputer
($39,000 X 2/3 = $26,000; $26,000 + $6,500) ....
Loss on Disposal
[$5,000 ($39,000 $32,500)] ........................
Computer .................................................
5,000
62,000
6,500
32,500
1,500
39,000
Dec. 31 Depreciation Expense.........................................

Accumulated DepreciationTruck
[($25,000 $3,000) X 1/5] ..........................
4,400
31 Cash .....................................................................
[($25,000 $3,000) X 4/5] ..............................
Truck.......................................................
Gain on Disposal ...................................
9,000
4,400
17,600
25,000
1,600
EXERCISE 9-9
1.
Depreciation is the process of allocating the cost of a long-lived asset

to expense over the assets useful life. Because the value of land generally
does not decline with time and usage, its usefulness and revenue producing ability does not decline. In addition, the useful life of land is
indefinite. Therefore, it would be incorrect for the student to depreciate
the land.
2.
Goodwill is an intangible asset with an indefinite life. According to

generally accepted accounting principles, goodwill is not amortized but
reviewed annually for impairment. If a permanent decline in value has
occurred the goodwill is written down and an impairment loss is recorded on the income statement. Therefore the amortization entry should
be reversed and no decline in value recorded until an impairment in
value occurs.
9-13
EXERCISE 9-9 (Continued)

3.
This is a violation of the cost principle. Because current market values

are subjective and not reliable, they are not used to increase the recorded value of an asset after acquisition. The appropriate accounting
treatment is to leave the building on the books at its zero book value.
EXERCISE 9-10
(a)
(b)
Asset turnover ratio =
$35,214
= 1.51 times
($22,690+ $24,000) 2
Return on assets ratio =
$2,016
= 8.6%
($22,690 + $24,000) 2
EXERCISE 9-11
(a)
Without new products
With new products
Return on assets ratio
$600,000 = .12
$5,000,000
$1,350,000 = .09
$15,000,000
Profit margin ratio
$600,000
= .06
$10,000,000
$1,350,000
= .08
$18,000,000
Asset turnover ratio
$10,000,000
= 2.0
$5,000,000
$18,000,000
= 1.2
$15,000,000
(b) The return on assets ratio declined from 12% to 9%. This means that
the company is not generating as much income from each dollar
invested in assets. It is common for companies to try to maximize their
return on assets, thus top management might not find this proposal very
desirable. The new product line would increase the companys profit
margin (the amount of net income generated from each dollar of sales)
from 6% to 8%. However, because of the huge investment in new assets
that the proposal requires, the asset turnover ratio plummets from
2.0 times down to 1.2 times.
9-14
EXERCISE 9-12
(a) ($ in millions)
1. Return on assets
$244.9
= 5.7%
($4,312.6 + $4,254.3) 2
2. Asset turnover
$11,408.5
= 2.7 times
($4,312.6 + $4,254.3) 2
3. Profit margin
$244.9
= 2.1%
$11,408.5
(b) Profit Margin X Asset Turnover = Return on Assets

= 2.1% X 2.7 times = 5.7%
(c) Asset turnover and profit margin vary considerably across industries.
Therefore, when you have a diverse group of businesses from several
industry types combined into one company, such as in Hopson Company, the ability to compare these ratios to other businesses becomes
very difficult. Hopson Company would almost need to calculate ratios for
each of the separate industry segments to allow for a meaningful analysis.
EXERCISE 9-13
Dec. 31 Amortization ExpenseCopyright .................
Copyright ($120,000 X 1/8)........................
15,000
31 Amortization ExpensePatent .......................

Patent ($54,000 X 1/4 X 8/12) ....................
9,000
15,000
9,000
The goodwill would not require an adjusting entry because it has an indefinite life.
9-15
EXERCISE 9-14
(a)
1/2/10
Patent.........................................................
Cash ....................................................
300,000
Goodwill.....................................................
Cash ....................................................
(Part of the entry to record
purchase of another company)
360,000
Franchise...................................................
Cash ....................................................
540,000
Research and Development Expense .....

Cash ....................................................
185,000
Amortization ExpensePatent ($300,000 5) .....

Amortization ExpenseFranchise
[($540,000 9) X 6/12] .......................................
Patent................................................................
Franchise..........................................................
60,000
4/1/10
7/1/10
9/1/10
(b)
(c)
300,000
360,000
540,000
185,000
30,000
60,000
30,000
Ending balances, 12/31/10:

Patent = $240,000 ($300,000 $60,000)
Goodwill = $360,000
Franchises = $510,000 ($540,000 $30,000)
EXERCISE 9-15
Alliance Atlantis Communications Inc.s change of accounting policy to
amortize broadcast rights will probably increase its reported income. Prior
to the change, Alliance Atlantis had amortized broadcast rights over a maximum of two years. Their new policy calls for amortization over the contracted
exhibition period. If this is greater than two years, annual amortization
expense will decrease and income will increase.
A change of this nature will make comparison of financial results with previous
years difficult. To evaluate the companys performance one will need to
make an adjustment for such changes in estimated lives.
9-16
EXERCISE 9-16
(a)
A company should depreciate its buildings because depreciation is

necessary in order to allocate the cost of the buildings to the periods
in which they are in use. This allows the cost of the buildings to be
matched against the revenues generated each year in accordance with
the matching principle.
(b)
A building can have a zero book value if it has no salvage value and it
is fully depreciatedthat is, if it has been used for a period at least as
long as its expected life. Because depreciation is used to allocate cost
rather than to reflect actual value, it is not at all unlikely that a building
could have a low or zero book value, but a substantial market value.
(c)
Examples of intangibles that might be found on a college campus are

franchise of a bookstore chain, license to operate radio station, a patents
developed by professors, and a permit to operate a bus service.
(d)
Typical company or product trade names are:

ClothesGap, Gitano, Dockers, Calvin Klein, Chaus, Guess.
PerfumePassion, Ruffles, Chanel No. 5, Diamonds.
CarsTransAm, Nova, Prelude, Coupe DeVille, Eclipse.
ShoesNike, Florsheim, L.A. Gear, Adidas.
Breakfast cerealsCheerios, Wheaties, Frosted Mini-Wheats,
Rice Krispies.
Trade names and trademarks are reported on a balance sheet if there is
a cost attached to them. If the trade name or trademark is purchased,
the cost is the purchase price. If it is developed by the enterprise, the
cost includes attorneys fees, registration fees, design costs, successful legal defense costs, and other expenditures directly related to
securing the trade name or trademark.
9-17
EXERCISE 9-17
10-year life
$62,000
Net Income
15-year life
$108,000*
*$62,000 + ($134,000 $88,000)

Calculation of net cash provided by operating activities:
Net income
Plus: depreciation expense
Net cash provided by operating activities
$ 62,000
134,000
$196,000
$108,000
88,000
$196,000
The CEO is correct regarding the impact on net income. By increasing the
expected useful life depreciation, expense would be lowered and net income
would increase. However, this move would be appropriate only if, in fact, a
15-year life was a better estimate of the expected period of use. The CEO is
incorrect in stating that cash provided by operating activities would be
increased. Depreciation expense does not use up cash. Therefore, net cash
provided by operating activities would be the same no matter what expected
life was used.
*EXERCISE 9-18
(a)
Depreciation cost per unit is $.80 per mile [($136,000 $8,000)

160,000].
(b)
Computation
Years
2010
2011
2012
2013
9-18
End of Year
Annual
Units of
Depreciation
Depreciation Accumulated
Activity X Cost/Unit
= Expense
Depreciation
40,000
52,000
41,000
27,000
$.80
.80
.80
.80
$32,000
41,600
32,800
21,600
$ 32,000
73,600
106,400
128,000
Book
Value
$104,000
62,400
29,600
8,000
*EXERCISE 9-19
(a)
Declining-balance method:
2010 depreciation = $90,000 X 25%* X 4/12 = $7,500
Book value January 1, 2011 = $90,000 $7,500 = $82,500
2011 depreciation = $82,500 X 25% = $20,625.
*(1/8) X 2 = 25%
(b)
Units-of-activity method:
$90,000 $6,000
=$1.20 per hour

70,000
2010 depreciation = 2,900 hours X $1.20 = $3,480.
9-19
SOLUTIONS TO PROBLEMS
PROBLEM 9-1A
Item
Land
1
2
3
4
5
6
7
8
9
10
$280,000
9-20
Building
Other Accounts
$ 6,800
Land Improvements
29,000
Land Improvements
24,000
$ 23,000
2,179
33,000
5,800
Property Tax Expense
640,000
(8,000)
$298,179
$696,000
PROBLEM 9-2A
(a) April
May
Land ....................................................... 2,200,000

Cash ................................................
2,200,000
Depreciation Expense...........................
Equipment.................................
($600,000 X 1/10 X 4/12)
20,000
Cash .......................................................
Equipment.......................................
Equipment.................................
Gain on Disposal ......................
170,000
20,000
440,000
600,000
10,000
Cost ........................................... $600,000

Accum. depr.Equipment ...... 440,000
[($600,000 X 1/10) X 7 + $20,000)]
Book value ................................ 160,000

Cash proceeds ......................... 170,000
Gain on disposal ...................... $ 10,000
June
Cash ....................................................... 1,800,000

Land.................................................
1,000,000
Gain on Disposal............................
800,000
July
Equipment.............................................. 1,300,000
Cash ................................................
1,300,000
Dec. 31
31
Depreciation Expense...........................
Equipment.................................
($500,000 X 1/10)
Equipment.......................................
Equipment.................................
50,000
50,000
500,000
500,000
9-21
PROBLEM 9-2A (Continued)

Cost.........................................
Accum. depr.Equipment
($500,000 X 1/10 X 10) ........
Book value..............................
(b) Dec. 31
31
$500,000
500,000
$
0
Depreciation Expense ............................

Buildings ....................................
($26,500,000 X 1/40)
662,500
662,500
Depreciation Expense ............................ 3,955,000

Equipment ..................................
3,955,000
$38,900,000* X 1/10...............
$ 1,300,000 X 1/10 X 6/12.....
$3,890,000
65,000
$3,955,000
*($40,000,000 $600,000 $500,000)

(c)
RIJO CORPORATION
December 31, 2011
Plant Assets*
Land .........................................................
Buildings..................................................
Less: Accumulated depreciation
buildings ......................................
Equipment................................................
equipment ....................................
Total plant assets ..............................
$ 4,200,000
$26,500,000
12,762,500
40,200,000
13,737,500
8,085,000
32,115,000
$50,052,500
*See T-accounts which follow.
9-22
PROBLEM 9-2A (Continued)

Land
12/31/10
04/01/11
3,000,000
2,200,000
12/31/11
Bal. 4,200,000
6/1/10
1,000,000
Buildings
12/31/10
26,500,000
12/31/11
Bal. 26,500,000
Equipment
12/31/10
07/01/11
40,000,000
1,300,000
12/31/11
Bal. 40,200,000
05/01/11
12/31/11
600,000
500,000
Accumulated DepreciationBuildings
12/31/10
12/31/11
12,100,000
662,500
12/31/11
Bal. 12,762,500
Accumulated DepreciationEquipment
05/01/11
12/31/11
440,000
500,000
12/31/10
5/1/11
12/31/11
12/31/11
5,000,000
20,000
50,000
3,955,000
12/31/11
Bal. 8,085,000
9-23
PROBLEM 9-3A
Jan.
1 Accumulated DepreciationMachinery .......

Machinery .................................................
June 30
June 30
71,000
71,000
Depreciation Expense ....................................

Accum. DepreciationComputer
($30,000 X 1/5 X 6/12)..........................
3,000
Cash.................................................................
Accumulated DepreciationComputer........
Computer..................................................
Gain on Disposal .....................................
10,000
21,000
Cost..................................................................
Accumulated DepreciationComputer
[($30,000 X 1/5) X 3 + $3,000] ....................
Book Value ......................................................
Cash Proceeds................................................
Gain on Disposal ............................................
$30,000
3,000
30,000
1,000
21,000
9,000
10,000
$ 1,000
Dec. 31 Depreciation Expense ....................................

[($31,000 $3,000) X 1/8]....................
3,500
31 Loss on Disposal ............................................

Accumulated DepreciationTruck ...............
Delivery Truck ..........................................
10,000
21,000
Cost..................................................................
[($31,000 $3,000) X 1/8 X 6] ..................
Book Value ......................................................
Proceeds .........................................................
Loss on Disposal ............................................
$31,000
9-24
3,500
31,000
21,000
10,000
0
$10,000
PROBLEM 9-4A
(a) Jan.
Jan.
June
July
45,000
45,000
Research and Development Expense ....... 210,000

Cash .......................................................
1
Sept. 1
Oct.
Patents .........................................................
Cash .......................................................
(b) Dec. 31
31
Patents .........................................................
Cash .......................................................
20,000
Advertising Expense...................................
Cash .......................................................
40,000
20,000
40,000
Copyright ..................................................... 200,000

Cash .......................................................
Amortization ExpensePatents................
Patents ...................................................
[($60,000 X 1/10) + ($45,000 X 1/9) +
($20,000 X 1/20 X 6/12)]
11,500
Amortization ExpenseCopyright............
Copyrights .............................................
[($36,000 X 1/10) + ($200,000 X
1/50 X 3/12)]
4,600
(d)
200,000
11,500
(c) Intangible Assets

Patents ($125,000 cost less $17,500 amortization) (1) .........
Copyrights ($236,000 cost less $29,800 amortization) (2).....
Total intangible assets...................................................
(1)
(2)
210,000
4,600
$107,500
206,200
$313,700
Cost ($60,000 + $45,000 + $20,000); amortization ($6,000 + $11,500).

Cost ($36,000 + $200,000); amortization ($25,200 + $4,600).
The intangible assets of Salmiento Corporation consist of two patents

and two copyrights. One patent with a cost of $60,000 is being amortized over 10 years. In addition, legal costs of $45,000 incurred in the successful defense of this patent are being amortized over the remaining
useful life, 9 years. The other patent with a cost of $20,000 is being amortized over 20 years. A copyright with a cost of $36,000 is being amortized
over 10 years; the other copyright with a cost of $200,000 is being
amortized over 50 years.
9-25
PROBLEM 9-5A
1.
2.
9-26
Research and Development Expense ........................ 150,000

Patents ..................................................................
Patents ..........................................................................
Amortization ExpensePatents
[$9,500 ($40,000 X 1/20)]................................
7,500
Goodwill........................................................................
Amortization ExpenseGoodwill ......................
1,000
150,000
7,500
1,000
PROBLEM 9-6A
(a)
(b)
Titus
Vane
1.
$240,000
= 7.3%
$3,300,000
$300,000
= 10.0%
$3,000,000
2.
Profit margin
$240,000
= 19.2%
$1,250,000
$300,000
= 25.0%
$1,200,000
3.
$1,250,000
= .38 times
$3,300,000
$1,200,000
= .40 times
$3,000,000
Based on the asset turnover ratio, Vane Corp. is more effective in using
assets to generate sales. Its asset turnover ratio is 5% higher than
Tituss ratio.
A factor that inhibits comparing the two companies is the differing
composition of total assets for each company. Eighty-two percent
[($2,400,000 + $300,000) $3,300,000] of Tituss total assets are plant
or intangible assets compared to only sixty percent ($1,800,000
$3,000,000) for Vane. Also, Vane reports no intangible assets.
9-27
PROBLEM 9-7A
(a)
Year
Computation
Accumulated
Depreciation
12/31
2008
2009
2010
2011
MACHINE 1
$84,000* X 1/6 = $14,000
$84,000 X 1/6 = $14,000
$84,000 X 1/6 = $14,000
$84,000 X 1/6 = $14,000
$14,000
28,000
42,000
56,000
*($96,000 $12,000)
2009
2010
2011
MACHINE 2
$85,000 X 40%* X 6/12 = $17,000
$68,000 X 40%
= $27,200
$40,800 X 40%
= $16,320
$17,000
44,200
60,520
*(1/5) X 2
2009
2010
2011
MACHINE 3
400 X $2.50a = $ 1,000
4,500 X $2.50 = $11,250
5,000 X $2.50 = $12,500
$ 1,000
12,250
24,750
($66,000 $6,000) 24,000
(b)
9-28
2009
Depreciation
Expense
MACHINE 2
$85,000 X 40% X 3/12 = $8,500
2010
$76,500 X 40%
Year
= $30,600
*PROBLEM 9-8A
(a)
STRAIGHT-LINE DEPRECIATION
Computation
Depreciable
Years
Cost
X
End of Year
Annual
Depreciation
Rate
= Expense
Depreciation
2010 $240,000*
2011 240,000
2012 240,000
2013 240,000
25%**
25%
25%
25%
$60,000
60,000
60,000
60,000
$ 60,000
120,000
180,000
240,000
Book
Value
$190,000
130,000
70,000
10,000
*($250,000 $10,000)
**1/4 = 25%
DOUBLE-DECLINING-BALANCE DEPRECIATION
Computation
Book Value
Beginning
Years
of Year
X
2010
2011
2012
2013
$250,000
125,000
62,500
31,250
End of Year
Annual
Depreciation
Rate
= Expense
Depreciation
50%*
50%
50%
50%
$125,000
62,500
31,250
21,250**
$125,000
187,500
218,750
240,000
Book
Value
$125,000
62,500
31,250
10,000
*(1/4) X 2 = 50%
**Adjusted so ending book value will equal salvage value.
(b)
Straight-line depreciation provides the lowest amount for 2010 depreciation expense ($60,000) and, therefore, the highest 2010 income. Over
the four-year period, both methods result in the same total depreciation
expense ($240,000) and, therefore, the same total income.
(c)
Double-declining-balance depreciation provides the highest amount

for 2010 depreciation expense ($125,000) and, therefore, the lowest
2010 income. Both methods result in the same total income over the
four-year period.
9-29
PROBLEM 9-1B
Item
1
2
3
4
5
6
7
8
9
10
9-30
Land
Building
Other Accounts
$250,000
6,000
32,000
7,100
21,900
40,000
629,500
$36,000
7,300
(12,700)
$282,400
Land Improvements
Property Tax Expense
$691,400
PROBLEM 9-2B
(a) April
May
Land ........................................................ 2,630,000

Cash .................................................
2,630,000
Depreciation Expense.............................
Equipment...................................
($750,000 X 1/10 X 4/12)
25,000
Cash .........................................................
Equipment.........................................
Equipment...................................
Gain on Disposal ........................
370,000
25,000
400,000
750,000
20,000
Cost .............................................. $750,000

Accum. depr.Equipment ......... 400,000
[($750,000 X 1/10) X 5 + $25,000)]
Book value ................................... 350,000

Cash proceeds ............................ 370,000
Gain on disposal ......................... $ 20,000
June
Cash ......................................................... 1,800,000

Land...................................................
800,000
Gain on Disposal..............................
1,000,000
July
Equipment................................................
Cash ..................................................
800,000
Depreciation Expense.............................
Equipment
($470,000 X 1/10).........................
47,000
Dec. 31
31
Equipment.........................................
Equipment...................................
800,000
47,000
470,000
470,000
9-31
PROBLEM 9-2B (Continued)

Cost.........................................
Accum. depr.Equipment
($470,000 X 1/10 X 10) ....
Book Value .............................
(b) Dec. 31
31
$470,000
470,000
$
0
Depreciation Expense ..........................

Buildings
($28,500,000 X 1/40) .................
712,500
712,500
Depreciation Expense .......................... 4,718,000

Equipment ................................
4,718,000
($46,780,000* X 1/10) ...........
[($800,000 X 1/10) X 6/12] ....
$4,678,000
40,000
$4,718,000
*($48,000,000 $750,000 $470,000)

(c)
KRETSINGER CORPORATION
December 31, 2010
Plant Assets*
Land .........................................................
Buildings..................................................
buildings ......................................
Equipment................................................
equipment ....................................
Total plant assets ..............................
$ 5,830,000
$28,500,000
12,812,500
47,580,000
15,687,500
8,920,000
38,660,000
$60,177,500
*See T-accounts which follow.
9-32
PROBLEM 9-2B (Continued)

Land
12/31/09
4/1/10
4,000,000
2,630,000
12/31/10
Bal. 5,830,000
6/1/10
800,000
Buildings
12/31/09
28,500,000
12/31/10
Bal. 28,500,000
Equipment
12/31/09
7/1/10
48,000,000
800,000
12/31/10
Bal. 47,580,000
5/1/10
12/31/10
750,000
470,000
Accumulated DepreciationBuildings
12/31/09
12/31/10
12,100,000
712,500
12/31/10
Bal. 12,812,500
5/1/10
12/31/10
400,000
470,000
12/31/09
5/1/10
12/31/10
12/31/10
5,000,000
25,000
47,000
4,718,000
12/31/10
Bal. 8,920,000
9-33
PROBLEM 9-3B
Jan.
June 30
Machinery
($52,000 X 1/10 X 10 years) .....
Machinery.......................................
9-34
52,000

Computer
($42,000 X 1/7 X 6/12)...............
3,000
Cash.......................................................
Computer........................................
Computer..................................
Gain on Disposal......................
23,000
Cost........................................................
Computer
[($42,000 X 1/7) X 3 + $3,000] ........
Book Value ............................................
Cash Proceeds......................................
Gain on Disposal ..................................
Dec. 31
52,000

Truck
[($30,000 $3,000) X 1/6].........
3,000
21,000
42,000
2,000
$42,000
21,000
21,000
23,000
$ 2,000
4,500
4,500
Problem 9-3B (Continued)

Dec. 31
[($30,000 $3,000) X 1/6 X 4] ........
Loss on Disposal ..............................
Truck.............................................
Cost ....................................................
[($30,000 $3,000) X 1/6 X 4] ........
Book Value.........................................
Proceeds ............................................
Loss on Disposal ..............................
18,000
12,000
30,000
$30,000
18,000
12,000
0
$12,000
9-35
PROBLEM 9-4B
(a) Jan. 2
Jan.June
July
Patents...........................................................
Cash .........................................................
27,000
27,000
Research and Development Expense......... 220,000

Cash .........................................................
220,000
1
Patents...........................................................
Cash .........................................................
12,000
12,000
Sept. 1
Advertising Expense .................................... 110,000

Cash .........................................................
110,000
Oct.
Copyright....................................................... 120,000
Cash .........................................................
120,000
(b) Dec. 31
31
Amortization ExpensePatents .................

Patents .....................................................
[($70,000 X 1/10) + ($27,000 X 1/9) +
($12,000 X 1/20 X 6/12)]
10,300
Amortization ExpenseCopyrights ...........

Copyrights ...............................................
[($48,000 X 1/8) + ($120,000 X
1/50 X 3/12)]
6,600
10,300
6,600
(c) Intangible Assets

Patents ($109,000 cost less $17,300 amortization) (1)..........
Copyrights ($168,000 cost less $24,600 amortization) (2)....
Total intangible assets ...................................................
(1)
(2)
$ 91,700
143,400
$235,100
Cost ($70,000 + $27,000 + $12,000); amortization ($7,000 + $10,300).

Cost ($48,000 + $120,000); amortization ($18,000 + $6,600).
(d) The intangible assets of Gore Company consist of two patents and two
copyrights. One patent with a cost of $70,000 is being amortized over
10 years; an additional $27,000 incurred in successfully defending this
patent is being amortized over 9 years. The other patent, obtained at cost
of $12,000, is being amortized over 20 years. A copyright with a cost of
$48,000 is being amortized over 8 years; the other copyright with a cost
of $120,000 is being amortized over 50 years.
9-36
PROBLEM 9-5B
1.
2.
Research and Development Expense........................ 120,000

Patents .................................................................
Patents..........................................................................
Amortization ExpensePatents
[$18,000 ($96,000 X 1/12)] .............................
10,000
Goodwill .......................................................................
Amortization ExpenseGoodwill ......................
500
120,000
10,000
500
9-37
PROBLEM 9-6B
(a)
(b)
Riverton
Salina
1.
$800,000
= 27%
$3,000,000
$900,000
= 33%
$2,700,000
2.
Profit margin
$800,000
= 33%
$2,400,000
$900,000
= 36%
$2,500,000
3.
$2,400,000
= .80 times
$3,000,000
$2,500,000
= .93 times
$2,700,000
Based on the asset turnover ratio, Salina Corp. is more effective in

using assets to generate sales. Its asset turnover ratio is 16% higher
than Rivertons ratio.
A factor that inhibits comparing the two companies is the differing
composition of total assets for each company. Fifteen percent
($450,000 $3,000,000) of Rivertons total assets are intangible assets.
Salina has no recorded intangible assets.
9-38
*PROBLEM 9-7B
(a)
Year
Computation
Accumulated
Depreciation
12/31
2009
2010
2011
BUS 1
$90,000 X 25% b = $22,500
$90,000 X 25% = $22,500
$90,000 X 25% = $22,500
$22,500
45,000
67,500
$96,000 $6,000
(1/4)
BUS 2
$135,000 X 50%c
$ 67,500 X 50%
$ 33,750 X 50%
2009
2010
2011
= $67,500
= $33,750
= $16,875
$ 67,500
101,250
118,125
(1/4) X 2
BUS 3
26,000 miles X $.65d = $16,900
34,000 miles X $.65 = $22,100
30,000 miles X $.65 = $19,500
2009
2010
2011
d
$16,900
$39,000
$58,500
($100,000 $9,000) 140,000 miles = $.65 per mile.
(b)
Depreciation
Expense
Year
(1) 2009
BUS 2
$135,000 X 50% X 10/12 = $56,250
(2) 2010
$78,750 X 50%e = $39,375
(1/4) X 2
9-39
*PROBLEM 9-8B
(a)
STRAIGHT-LINE DEPRECIATION
Computation
Depreciable
Years
Cost
X
2010
2011
2012
2013
2014
a
End of Year
Annual
Depreciation
Rate
= Expense
Depreciation
$300,000a
300,000
300,000
300,000
300,000
20%b
20%
20%
20%
20%
$60,000
60,000
60,000
60,000
60,000
$ 60,000
120,000
180,000
240,000
300,000
Book
Value
$270,000
210,000
150,000
90,000
30,000
$330,000 $30,000
1/5 = 20%
DOUBLE-DECLINING-BALANCE DEPRECIATION
Computation
Book Value
Beginning
Years
of Year
X
2010
2011
2012
2013
2014
c
$330,000
198,000
118,800
71,280
42,768
End of Year
Annual
Depreciation
Rate
= Expense
Depreciation
40%c
40%
40%
40%
40%
$132,000
79,200
47,520
28,512
12,768d
$132,000
211,200
258,720
287,232
300,000
Book
Value
$198,000
118,800
71,280
42,768
30,000
(1/5) X 2 = 40%
Adjusted so ending book value will equal salvage value.
(b)
Straight-line depreciation provides the lower amount for 2010 depreciation expense and, therefore, the higher 2010 income. Over the fiveyear period, both methods result in the same total depreciation expense
($300,000) and, therefore, the same total income.
(c)
Double-declining-balance depreciation provides the higher amount for

2010 depreciation expense and, therefore, the lower 2010 income. Both
methods result in the same total income over the five-year period.
9-40
CHAPTER 9
COMPREHENSIVE PROBLEM SOLUTION
(a) 1. Equipment.................................................................... 16,800

Cash .......................................................................
2. Depreciation ExpenseEquipment...........................
Accumulated DepreciationEquipment.............
450
Cash .............................................................................
Accumulated DepreciationEquipment...................
Equipment..............................................................
Gain on Disposal [$3,500 ($5,000 $2,250)] ....
3,500
2,250
3. Accounts Receivable ..................................................

Sales.......................................................................
5,000
Cost of Goods Sold.....................................................

Merchandise Inventory .........................................
3,500
4. Bad Debts Expense ($4,000 $500) ..........................

Allowance for Doubtful Accounts .......................
3,500
5. Interest Receivable ($10,000 X .08 X 9/12) ................

Interest Revenue ...................................................
600
6. Insurance Expense ($3,600 X 4/6)..............................

Prepaid Insurance .................................................
2,400
7. Depreciation ExpenseBuilding...............................
Accumulated DepreciationBuilding
[($150,000 $30,000) 30] ...................................
4,000
[($55,000 $5,500) 5] ......................................
9,900
[($16,800 $1,800) 5] X 8/12 ...........................
2,000
10. Amortization ExpensePatents ($9,000 9)............

Patent .....................................................................
1,000
16,800
450
5,000
750
5,000
3,500
3,500
600
2,400
4,000
9,900
2,000
1,000
9-41
COMPREHENSIVE PROBLEM (Continued)

11. Salaries Expense ...................................................
Salaries Payable ..............................................
2,200
12. Unearned Rent ($6,000 X 1/3) ...............................

Rent Revenue...................................................
2,000
13. Interest Expense ....................................................

Interest Payable
[($11,000 + $35,000) X .10] ...........................
4,600
14. Income Tax Expense .............................................

Income Tax Payable ........................................
15,000
9-42
2,200
2,000
4,600
15,000

(b)
PINKERTON CORPORATION
Trial Balance
December 31, 2010
Debits
$ 14,700
41,800
10,000
600
32,700
1,200
20,000
150,000
71,800
8,000
Cash ..................................................................
Accounts Receivable .......................................
Notes Receivable..............................................
Interest Receivable...........................................
Merchandise Inventory ....................................
Prepaid Insurance ............................................
Land...................................................................
Building .............................................................
Equipment.........................................................
Patent ................................................................
Allowance for Doubtful Accounts...................
Accumulated DepreciationBuilding ............
Accumulated DepreciationEquipment ........
Accounts Payable ............................................
Salaries Payable ...............................................
Unearned Rent..................................................
Notes Payable (short-term) .............................
Interest Payable................................................
Notes Payable (long-term)...............................
Income Tax Payable .........................................
Common Stock .................................................
Retained Earnings............................................
Dividends ..........................................................
12,000
Sales ..................................................................
Interest Revenue ..............................................
Rent Revenue ...................................................
Gain on Disposal ..............................................
Bad Debts Expense..........................................
3,500
Cost of Goods Sold..........................................
633,500
Depreciation ExpenseBuilding....................
4,000
Depreciation ExpenseEquipment................
12,350
Insurance Expense...........................................
2,400
Interest Expense...............................................
4,600
Other Operating Expenses ..............................
61,800
Amortization ExpensePatents .....................
1,000
Salaries Expense..............................................
112,200
Income Tax Expense........................................
15,000
Total ........................................................... $1,213,150
Credits
4,000
54,000
34,100
27,300
2,200
4,000
11,000
4,600
35,000
15,000
50,000
63,600
905,000
600
2,000
750
$1,213,150
9-43

(c)
Income Statement
For the Year Ended December 31, 2010
Sales........................................................
Cost of goods sold ................................
Gross profit ............................................
Operating expenses
Salaries expense..............................
Other operating expenses...............
Depreciation expenseequipment ..
Depreciation expensebuilding ....
Bad debts expense ..........................
Insurance expense...........................
Amortization expensepatents .....
Total operating expenses......................
Income from operations ........................
Other revenues and gains
Rent revenue ......................................
Gain on disposal ..............................
Interest revenue ...............................
Other expenses and losses
Interest expense...............................
Income before income taxes.................
Income tax expense...............................
Net income..............................................
$905,000
633,500
271,500
$112,200
61,800
12,350
4,000
3,500
2,400
1,000
197,250
74,250
2,000
750
600
3,350
(4,600)
(1,250)
73,000
15,000
$ 58,000
Retained Earnings Statement
For the Year Ending December 31, 2010
Retained earnings, 1/1/10...........................................
Add: Net income .......................................................
Less: Dividends .........................................................
Retained earnings, 12/31/10 .......................................
9-44
$ 63,600
58,000
121,600
12,000
$109,600

(d)
Balance Sheet
December 31, 2010
Current assets
Cash.............................................................
$ 14,700
Accounts receivable ..................................
$ 41,800
Less: Allowance for doubtful accounts ....
4,000
37,800
Notes receivable.........................................
10,000
Interest receivable......................................
600
Merchandise inventory ..............................
32,700
Prepaid insurance ......................................
1,200
Total current assets..............................
97,000
Property, plant, and equipment
Land.............................................................
20,000
Building ....................................................... $150,000
Less: Accum. depr.building..................
96,000
54,000
Equipment...................................................
71,800
Less: Accum. depr.equipment .............
34,100
37,700
153,700
Total property, plant, and equipment ...
Intangible assets
Patent ..........................................................
8,000
Total assets.......................................................
$258,700
Current liabilities
Notes payable (short-term)........................
Accounts payable.......................................
Income tax payable ....................................
Interest payable ..........................................
Unearned rent .............................................
Salaries payable .........................................
Total current liabilities .........................
Long-term liabilities
Notes payable (long-term) .........................
Total liabilities ..................................................
Stockholders equity
Common stock ...........................................
Retained earnings ......................................
Total liabilities and stockholders equity .......
$ 11,000
27,300
15,000
4,600
4,000
2,200
64,100
35,000
99,100
50,000
109,600
159,600
$258,700
9-45
BYP 9-1
FINANCIAL REPORTING PROBLEM
(a)
At December 31, 2007, total cost of property, plant and equipment was
$377,693,000; book value was $201,401,000.
(b)
Depreciation is calculated by use of the straight-line method over the

estimated useful lives of the assets.
(c)
Depreciation and amortization was: 2007, $15,859,000; 2006, $15,816,000;

2005, $14,687,000.
(d)
Tootsie Rolls purchases of property, plant, and equipment were: 2007,

$14,767,000; 2006, $39,207,000.
(e)
Goodwill and intangible assets with indefinite lives are not amortized,
but rather tested for impairment at least annually. The company tested
goodwill and trademarks during the fourth quarter of each year. It
recorded an impairment in 2005 but none in 2006 or 2007.
9-46
BYP 9-2
COMPARATIVE ANALYSIS PROBLEM
(a)
Tootsie Roll
$51, 625
1. Return on assets ratio
($812, 725+$791, 639)/2

$51,625
2. Profit margin
3. Asset turnover ratio
$497,717
Hershey Foods
= 6.4%
$214,154
($4,247,113+$4,157, 565)/2
$214,154
= 10.4%
$497,717
($812,725+ $791,639) 2
$4,946,716
= .62 times
= 5.1%
= 4.3%
$4,946,716
($4,247,113 + 4,157,565) 2
= 1.18 times
The asset turnover ratio measures how efficiently a company uses its
assets to generate sales. It shows the dollars of sales generated by each
dollar invested in assets. Hershey Foods asset turnover ratio (1.18) was
90% higher than Tootsie Rolls (.62) in 2007. Therefore, it can be concluded that Hershey Foods was significantly more efficient than Tootsie
Roll during 2007 in utilizing assets to generate sales. This efficiency
was partially offset by a profit margin (4.3%) that was significantly lower
than Tootsie Rolls (10.4%). Tootsie Roll is more effective in generating
profit from its sales but its lower asset turnover resulted in only a 6.4%
return on assets compared to Hersheys 5.1% return. What this shows
is that a company can generate a reasonable return on assets with a
lower profit margin, if it has a high turnover ratio.
9-47
BYP 9-3
RESEARCH CASE
(a) Examples of valuable assets that the article says currently do not show
up on a balance sheet include intellectual property, software investments,
staff and managerial expertise, research and development, advertising
and market research, and business processes.
(b) The toy maker Mattel has developed a reputation for quality toys. But
Mattels stock price fell when concerns arose concerning the safety of
its toys. JetBlue had developed a reputation for high quality customer
service. But its stock price fell when computer problems stranded
thousands of customers, thus tarnishing its reputation.
(c) The article suggests that companies that are environmentally and
socially responsible are creating intangible assets, not because of ideology, but because they are reducing their exposure to financial risk. For
example, they are reducing the probability that they will be sued. Companies that have strategies in place to deal with disasters are creating
value relative to those that dont because they have reduced risk
exposure.
(d) The United Nations ratified an approach referred to as the triple bottom
line (for people, planet and profit) which is to be applied in urban and
community accounting. Many companies use an approach internally
called the balanced scorecard which places value on factors that
improve a companys profitability but that dont show up in normal
financial measures. (The balanced scorecard is discussed further in
managerial accounting courses).
9-48
BYP 9-4
INTERPRETING FINANCIAL STATEMENTS
(All dollar data are in millions of dollars.)

(a)
Percentage change in sales:

2005 to 2007 ($1,654.5 $1,460.2) $1,460.2 = 13.3%.
Percentage change in net income:
2005 to 2007 (60.5 $37.0) $37.0 = 63.5%.
(b)
Gross profit rates:

2005
2006
2007
($1,460.2 $443.2) $1,460.2 = 69.6%.

($1,584.8 $469.7) $1,584.8 = 70.4%.
($1,654.5 $482.1) $1,654.5 = 70.9%.
The increase in the gross profit rate contributed to the rise in earnings
from 2005 to 2007. From 2005 to 2007 the gross profit rate increased
only slightly from 69.6% to 70.9%.
(c)
Profit margin ratio (Percentage of net income to net sales):

2005
2006
2007
$37.0 $1,460.2
$54.8 $1,584.8
$60.5 $1,654.5
= 2.5%.
= 3.5%.
= 3.7%.
Profit margin ratio increased from 2.5% to 3.5% from 2005 to 2006.
This large increase was followed in 2007 with a slight increase from
3.5% to 3.7%.
9-49
BYP 9-4 (Continued)

(d)
You would expect the return on assets ratio to improve with a 50%
decrease in the number of new restaurant openings.
Return on assets:
2006
2007
$54.8 [($1,150.9 + $1,185.1) 2] = 4.7%.

$60.5 [($1,185.1 + $1,197.0) 2] = 5.1%.
Total assets increased less than $12 million between 2006 and 2007.
This small increase in total assets, combined with a rise in profit margin
explains the slight increase in the return on assets.
9-50
BYP 9-5
A GLOBAL FOCUS
(a)
In the United States, goodwill is the amount of the purchase price in

excess of the fair value of the net assets purchased. This is the same
method used in the United Kingdom for determining the initial amount
to be recorded as goodwill.
(b)
The notes to the financial statements indicate that In prior years goodwill has been deducted from reserves in the period of acquisition.
What this means, essentially, is that when the acquisition of another
company resulted in the recording of goodwill, the acquiring company
simply wrote the goodwill off against its stockholders equity in the
year of the acquisition. By doing this, the goodwill never affected net
income.
(c)
Under the new standard the company is not allowed to write goodwill
off against stockholders equity in the year of acquisition. If goodwill
is considered to have a finite life, the company is supposed to amortize
the goodwill over the expected life of the goodwill. However, the company can still avoid charging any amortization expense by assuming that
the goodwill has an indefinite economic life.
(d)
In the United States, goodwill is not amortized because it is considered

to have an indefinite life. If a company in the United Kingdom assumes
that its goodwill has a finite life, it must amortize the goodwill over the
finite life. Otherwise it is assumed to have an indefinite life, and is
handled very similar to US GAAP in that it is not amortized.
9-51
BYP 9-6
FINANCIAL ANALYSIS ON THE WEB
Answers will vary depending on the company chosen by student.
9-52
BYP 9-7
DECISION MAKING ACROSS THE ORGANIZATION
(a)
(in thousands)
Proposed results
Proposed results
Current results without cannibalization with cannibalization
$12,000
Return on assets ratio $100,00 = .12
0
$13,500
$100,000 = .135
$12,000
$100,000 = .12
Profit margin ratio
$12,000
= .27
$45,000
$13,500
= .225
$60,000
$12,000
= .24
$50,000
$45,000
$100,00 = .45
0
$60,000
$100,000 = .60
$50,000
$100,000 = .50
(b)
If there is no cannibalization, return on assets increases from 12% to

13.5%. This occurs even though the profit margin decreases from 27%
to 22.5% because the asset turnover ratio increases significantly, from
.45 times to .60 times. However, if there is cannibalization, the return on
assets remains unchanged at 12% because the increase in the asset
turnover ratio is offset by the decrease in the profit margin ratio.
(c)
Yes, there are other alternatives. Here are some examples.

1.
Increase spending on marketing in an effort to increase sales of

high end product, without offering the new, low-end product line.
If this was successful it would increase the asset utilization, thus
increasing the asset turnover and return on assets.
2.
Consider marketing the new line under a different name, so as to

minimize the cannibalization. This might substantially increase
the marketing costs, and therefore reduce the profit margin ratio.
But the benefit of reducing cannibalization might make up for the
increased marketing costs.
3.
If neither of 1. or 2. seems feasible, they should consider closing

a plant. This would increase the asset turnover ratio and return on
assets ratio.
9-53
BYP 9-8
COMMUNICATION ACTIVITY
Answers will depend on the position selected by the student. Some points
that should be considered include:
1.
Some relatively small companies may spend less on R&D because they
must expense these costs. However, the vast majority of companies
realize that for continued growth and stability, R&D expenditures are
a high priority regardless of how they are recorded for accounting
purposes.
Requiring companies to expense R&D costs instead of allowing them
to be capitalized could leave U.S. companies at a competitive disadvantage as compared to non-U.S. companies. U.S. companies may be more
reluctant to invest millions of dollars on research and development
since the costs would negatively impact their financial statements in
the short-run.
2.
9-54
The tangible future benefits of R&D costs may not be realized for
several years, if ever. Conversely, the purchase of a long-lived asset
(i.e., equipment, building) will provide benefits immediately as well as in
future years. The conservatism concept dictates that when reasonable
doubt exists, a company should choose the option that has the least
favorable affect on income. Expensing R&D costs is an example of
applying the conservatism concept.
BYP 9-9
ETHICS CASE
(a)
The stakeholders in this situation are:

Danny Fort , president of Clean Air Anti-Pollution Company.
Steve Penny, controller.
The stockholders of Clean Air Anti-Pollution Company.
Potential investors in Clean Air Anti-Pollution Company.
(b)
The intentional misstatement of the life of an asset or the amount of the

salvage value is unethical for whatever the reason. There is nothing
unethical per se about changing the estimates used for the life of an
asset or of an assets salvage value if the change is an attempt to better
match cost and revenues and is a better allocation of the assets
depreciable cost over the assets useful life. In this case, it appears
from the controllers reaction that the revision in the life is intended
only to improve earnings which would be unethical.
The fact that the competition uses a longer life for its equipment is
not necessarily relevant. The competitions maintenance and repair
policies and activities may be different. The competition may use its
equipment fewer hours a year (e.g., one shift rather than two shifts
daily) than Clean Air Anti-Pollution Company.
(c)
Income before income taxes in the year of change is increased $155,000

($387,500 $232,500) by implementing the presidents proposed changes.
Old Estimates
Asset cost ..............................................................
Estimated salvage.................................................
Depreciable cost ...................................................
Depreciation per year (1/8) ...................................
$3,500,000
400,000
3,100,000
$ 387,500
Revised Estimates
Asset cost ..............................................................

Estimated salvage.................................................
Depreciable cost ...................................................
Depreciation taken to date ($387,500 X 2)...........
Remaining life in years .........................................
Depreciation per year ($2,325,000 10) ..............
$3,500,000
400,000
3,100,000
775,000
2,325,000
10 years
$ 232,500
9-55
BYP 9-10
ALL ABOUT YOU ACTIVITY
(a) 1 c 2 b 3 a 4 d 5 c
(b) For the most part, the value of a brand is not reported on a companys
balance sheet. Most companies are required to expense all costs related
to the maintenance of a brand name. Also any research and development
that went into the development of the related product is generally
expensed. The only way significant costs related to the value of the
brand are reported on balance sheet is when a company purchases
another company that has a significant tradename (brand). In that case,
given an objective transaction, companies are able to assign value to
the brand and report it on the balance sheet. A conservative approach
is used in this area because the value of the brand can be extremely
difficult to determine. It should be noted that international rules permit
companies to report brand values on their balance sheets.
9-56

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CHAPTER 9

Reporting and Analyzing Long-Lived Assets

In a cash transaction, cost is equal to the cash paid.

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 9 (Continued)

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 9 (Continued)

Campbell Soup Companys return on assets ratio is computed as follows:

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 9-5

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 9-6

(b) Delivery Truck ...........................................................

BRIEF EXERCISE 9-7

(b) Accumulated DepreciationDelivery

Cost of delivery equipment

BRIEF EXERCISE 9-8

(b) Cash ...........................................................................

Cost of office equipment

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 9-9

(b) Asset turnover ratio =

BRIEF EXERCISE 9-10

(b) Intangible Assets

BRIEF EXERCISE 9-11

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 9-12

*BRIEF EXERCISE 9-14

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO DO IT! REVIEW EXERCISES

The entry to record the first years depreciation would be:

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

Sale of truck for cash at a gain:

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

The following points explain the application of the cost principle to

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

The architects fee ($9,100) should be debited to the building account.

False. Depreciation is a process of cost allocation, not asset valuation.

2010 depreciation = $10,500 X 4/12 = $3,500

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

Revised remaining useful life in years (2)

Revised annual depreciation (1) (2)