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# ACC1002X Financial Accounting

Semester 2 of Academic Year 2015-2016
SOLUTIONS to Optional Questions
CHAPTER 8: 8-44, 8-62, 8-68, 8-71

8-44
Leasehold Improvements would be increased, and Cash would be decreased by
\$120,000. The annual amortization would be based on the remaining life of the lease:
(\$120,000 ÷ 4 years) = \$30,000 per year. Note that amortization is over the remaining lease
term, not the physical life of the improvements.
8-62 Amounts are in millions of dollars.

Revenues (all cash)
Cash operating expenses
Cash provided by operations
before income taxes
Depreciation expense
Pretax income
Income tax expense
Net income
Supplementary analysis:
Cash provided by operations
before income taxes
Income tax expense
Net cash provided by operations
3.

1. Zero Income Taxes
2. 40% Income Taxes
Straight-line
Accelerated Straight-line Accelerated
Depreciation Depreciation Depreciation Depreciation
\$405,607
\$405,607
\$405,607
\$405,607
376,070
376,070
376,070
376,070
29,537
6,739
22,798

\$ 22,798

29,537
8,739
20,798

\$ 20,798

29,537
6,739
22,798
9,119
\$ 13,679

29,537
8,739
20,798
8,319
\$ 12,479

\$29,537

\$29,537

\$29,537

\$29,537

\$29,537
9,119
\$20,418

\$29,537
8,319
\$21,218

By itself, depreciation expense does not provide cash. This point is illustrated by part 1,
which compares the amounts shown with zero income taxes. Note that the cash provided
by operations (and the ending cash balances) are exactly the same. No matter what
depreciation expense is allocated to the year (whether \$6,739 million, \$8,739 million, or
zero), the \$29,537 million cash provided by operations and the ending cash will be
unaffected.

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075 million Accumulated depreciation. net income (and hence Retained Earnings) would be \$1.298   \$ 20.537 8. decrease by \$1.418 million using straight-line). the final cash balance would be \$800 million higher for accelerated than for straight-line.40 × \$2.000 more \$800 less The effect on Retained Earnings would be (\$2.000 million – \$800 million) = \$1.607 376.607 \$405.000 million Pretax income. by itself.964 million + \$2.739 9.679 million using straight-line). which compares amounts after taxes.479 million (compared with \$13.798 18. However.070 29. increase by tax savings.798 \$ 20.298 Page 2 of 4 . (\$32.537 6. (\$7. but accelerated shows a net increase in cash provided by operations after considering income taxes of \$21. Cash Note: A smaller credit to Cash increases the balance in Cash.298   \$ 22.739 11. The use of accelerated depreciation results in a strange combination of showing less net income but conserving more cash.200 million. \$2. Depreciation expense Cr.Examine part 2. depreciation does affect the cash outflow for income taxes. Accumulated depreciation \$2.000 million) = \$800 million Accumulated depreciation. Income tax expense \$800 less Cr.607 \$405. Accordingly.239 20. decrease by \$2.239 22. That is.607 376.000 million) = \$34. The \$2.537 29. 5.798 \$ 18.218 million (compared with \$20. depreciation does not affect the cash inflow provided by operations.964 million Journal entries (not required) may clarify the effects (in millions): Dr. increase by \$2.500 million increase in depreciation would cause net income to decrease but would have no effect on cash provided by operations (shown on the third line of the following table). decrease by \$800 million Retained earnings.200 million New balances: cash.275 million + \$800 million) = \$8.070 376. 4.000 more Dr.070 376.298 Accelerated Depreciation Before After \$405.200 million lower.070 29. Cash.798 20. The accelerated method shows net income of \$12. Revenues (all cash) Cash operating expenses Cash provided by operations Depreciation expense Pretax income Income tax expense Net income Straight-line Depreciation Before After \$405. Only sales to customers can provide more cash receipts from operations.537 29. Again. (.000 million Income tax expense.

Dr. Cash Dr. Accumulated depreciation Cr. Gain on sale of equipment 32 6 Dr. a. Thus.” 2. Income statement effects: Alaska would include the Gain on Sale of Equipment as a part of “Other Income (Expense). Proceeds Less: Net book value of equipment sold is [\$36  (6 × \$1)] Gain on sale of equipment A Cash +32 + Equipment \$32 30 \$ 2 = + L+ Accumulated Depreciation. (\$32 – \$30) = \$2. consisting of a decrease in Equipment of \$36 and a decrease in Accumulated Depreciation of \$6. Note that the effect of a decrease in Accumulated Depreciation (by itself) is an increase in assets. b. Cash Dr. The effect of removing the net book value is \$30. b The \$2 is usually carried separately until the end of the year as Gain on Sale of Equipment. Accumulated depreciation Dr. Equipment -36 +6 a SE Retained Earnings +2 b = a Accumulated depreciation for 6 years is (6 × \$1) = \$6. Equipment 29 6 1 36 2 36 Page 3 of 4 . 1. or Gain on Disposal of Equipment.8-68 Data are in millions. Equipment Cr. Loss on sale of equipment Cr.

\$3.4 175.0 120. 1.0 120.0 175.5) ÷ 10 yrs. × (\$25 . Dr. Sales price.4 54. Accumulated depreciation Cr.8-71 Amounts are in millions.0 120.6 \$120. (7 × \$25) Book value: Acquisition cost.4 175. This case highlights how current values of equipment may have little relation to book values.] = Gain on sale 2. (7 × \$25) = Less: Accumulated depreciation [7 × 8 yrs. Gain on sale of aircraft \$175. Cash (or Receivables) Dr.4 Page 4 of 4 . Aircraft Cr.