Solution Manual For Financial & Managerial Accounting, 10th by Carl S. Warren James M.

Solution Manual For Financial & Managerial

Accounting, 10th by Carl S. Warren James M. Reeve
Jonathan Duchac

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 CHAPTER 9
FIXED ASSETS AND INTANGIBLE ASSETS
EYE OPENERS
1. a. Tangible
b. Capable of repeated use in the opera-
tions of the business
e. Long-lived
2. a. Property, plant, and equipment
b. Current assets (merchandise inventory)
3. Real estate acquired as speculation should
be listed in the balance sheet under the cap-
tion “Investments,” below the Current Assets
section.
4. $298,500
5. Capital expenditures include the cost of ac-
quiring fixed assets and the cost of improv-
ing an asset. These costs are recorded by
increasing (debiting) the fixed asset account.
Capital expenditures also include the costs
of extraordinary repairs, which are recorded
by decreasing (debiting) the asset’s accu-
mulated depreciation account. Revenue ex-
penditures are recorded as expenses and
are costs that benefit only the current period
and are incurred for normal maintenance
and repairs of fixed assets.
6. Capital expenditure
7. A capital lease is accounted for as if the les-
see has purchased the asset and the asset
is written off over its useful life. An operating
lease is accounted for as a current-period
expense (rent expense).
8. Ordinarily not; if the book values closely ap-
proximate the market values of fixed assets,
it is coincidental.
9. a. No, it does not provide a special cash
fund for the replacement of assets. Un-
like most expenses, however, deprecia-
tion expense does not require an equiv-
alent outlay of cash in the period to
which the expense is allocated.
b. Depreciation is the cost of fixed assets
periodically charged to revenue over
their expected useful lives.
10. 12 years
509
11. a. No
b. No
12. a. An accelerated depreciation method is
most appropriate for situations in which
the decline in productivity or earning
power of the asset is proportionately
greater in the early years of use than in
later years, and the repairs tend to in-
crease with the age of the asset.
b. An accelerated depreciation method re-
duces income tax payable to the IRS in
the earlier periods of an asset’s life.
Thus, cash is freed up in the earlier peri-
ods to be used for other business pur-
poses.
c. MACRS was enacted by the Tax Re-
form Act of 1986 and provides for de-
preciation for fixed assets acquired after
1986.
13. No. Financial Accounting Standards No.
154, “Accounting Changes and Error Cor-
rections,” is quite specific about the treat-
ment of changes in depreciable assets’ esti-
mated service lives. Such changes should
be reflected in the amounts for depreciation
expense in the current and future periods.
The amounts recorded for depreciation ex-
pense in the past are not affected.
14. a. No, the accumulated depreciation for an
asset cannot exceed the cost of the as-
set. To do so would create a negative
book value, which is meaningless.
b. The cost and accumulated depreciation
should be removed from the accounts
when the asset is no longer useful and
is removed from service. Presumably,
the asset will then be sold, traded in, or
discarded.
15. a. Over the shorter of its legal life or years
of usefulness.
b. Expense as incurred.
c. Goodwill should not be amortized, but
written down when impaired.
 PRACTICE EXERCISES

PE 9–1A

May 27 Accumulated Depreciation—Delivery Van........ 950

Cash................................................................ 950
27 Delivery Van ........................................................ 450
Cash................................................................ 450

PE 9–1B

Oct. 9 Delivery Truck ..................................................... 1,150

Cash................................................................ 1,150
9 Repairs and Maintenance Expense ................... 40
Cash................................................................ 40

PE 9–2A

a. $410,000 ($485,000 – $75,000)

b. 4% = (1/25)
c. $16,400 ($410,000 × 4%), or ($410,000/25 years)

PE 9–2B

a. $120,000 ($125,000 – $5,000)

b. 12.5% = (1/8)
c. $15,000 ($120,000 × 12.5%), or ($120,000/8 years)

PE 9–3A

a. $99,000 ($134,000 – $35,000)

b. $0.33 per mile ($99,000/300,000 miles)
c. $17,160 (52,000 miles × $0.33)

510
PE 9–3B

a. $80,000 ($95,000 – $15,000)

b. $2.00 per hour ($80,000/40,000 hours)
c. $10,200 (5,100 hours × $2.00)

PE 9–4A

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

PE 9–4B

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

PE 9–5A

a. $12,000 [($250,000 – $34,000)/18]

b. $130,000 [$250,000 – ($12,000 × 10)]
c. $15,500 [($130,000 – $6,000)/8]

PE 9–5B

a. $8,125 [($80,000 – $15,000)/8]

b. $47,500 [$80,000 – ($8,125 × 4)]
c. $7,500 [($47,500 – $10,000)/5]

511
PE 9–6A

a. $81,000 = $324,000 × [(1/8) × 2)] = $324,000 × 25%

b. $17,750 gain, computed as follows:

Cost .................................................... $324,000
Less: First-year depreciation ........... (81,000)
Second-year depreciation ...... (60,750) [($324,000 – $81,000) × 25%]
Book value at end of second year.... $182,250
Gain on sale ($200,000 – $182,250) = $17,750

c. Cash................................................................................ 200,000
Accumulated Depreciation—Equipment ..................... 141,750
Equipment................................................................. 324,000
Gain on Sale of Equipment...................................... 17,750

PE 9–6B

a. $9,500 [($160,000 – $17,500)/15]

b. $13,000 loss {$90,000 – [$160,000 – ($9,500 × 6)]}

c. Cash................................................................................ 90,000
Accumulated Depreciation—Equipment ..................... 57,000
Loss on Sale of Equipment........................................... 13,000
Equipment................................................................. 160,000

512
PE 9–7A

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

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

c. Dec. 31 Depletion Expense ....................................... 18,693,000
Accumulated Depletion .......................... 18,693,000
Depletion of mineral deposit.

PE 9–7B

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

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

c. Dec. 31 Depletion Expense ....................................... 16,954,000

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

PE 9–8A

a. Dec. 31 Loss from Impaired Goodwill ...................... 500,000

Goodwill................................................... 500,000
Impaired goodwill.

b. Dec. 31 Amortization Expense—Patents ................. 24,250

Patents ..................................................... 24,250
Amortized patent rights
[($388,000/8) × 6/12].

PE 9–8B

a. Dec. 31 Loss from Impaired Goodwill ...................... 875,000

Goodwill................................................... 875,000
Impaired goodwill.

b. Dec. 31 Amortization Expense—Patents ................. 18,750

Patents ..................................................... 18,750
Amortized patent rights
[($425,000/17) × 9/12].

513
 EXERCISES

Ex. 9–1

a. New printing press: 1, 2, 3, 4, 6

b. Used printing press: 7, 8, 9, 11

Ex. 9–2

a. Yes. All expenditures incurred for the purpose of making the land suitable for
its intended use should be debited to the land account.

b. No. Land is not depreciated.

Ex. 9–3

Initial cost of land ($30,000 + $270,000) .................... $300,000

Plus: Legal fees .......................................................... $ 1,425
Delinquent taxes ............................................... 12,000
Demolition of building ...................................... 18,500 31,925
$331,925
Less: Salvage of materials ......................................... 4,500
Cost of land ................................................................. $327,425

Ex. 9–4

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

Ex. 9–5

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

514
Ex. 9–6

Feb. 16 Accumulated Depreciation—Delivery Truck .... 3,150

Cash................................................................ 3,150

July 15 Delivery Truck ..................................................... 1,100

Cash................................................................ 1,100

Oct. 3 Repairs and Maintenance Expense ................... 72

Cash................................................................ 72

Ex. 9–7

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

Ex. 9–8

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

Ex. 9–9

$3,350 [($93,750 – $10,000)/25]

Ex. 9–10

$145,000 − $7,000
= $1.84 depreciation per hour
75,000 hours

150 hours at $1.84 = $276 depreciation for July

515
Ex. 9–11

a. Depreciation per Rate per Mile:

Truck #1 ($50,000 – $6,500)/150,000 = $0.290

Truck #2 ($72,900 – $9,900)/300,000 = $0.210
Truck #3 ($38,000 – $3,000)/200,000 = $0.175
Truck #4 ($90,000 – $13,000)/200,000 = $0.385
Credit to
Accumulated
Truck No. Rate per Mile Miles Operated Depreciation
1 29.0 cents 23,000 $ 6,670
2 21.0 25,000 3,000*
3 17.5 36,000 6,300
4 38.5 40,000 15,400
Total ............................................................................................. $ 31,370
*Mileage depreciation of $5,250 (21 cents × 25,000) is limited to $3,000, which
reduces the book value of the truck to $9,900, its residual value.
b. Depreciation Expense—Trucks .................................... 31,370
Accumulated Depreciation—Trucks ....................... 31,370
Truck depreciation.

Ex. 9–12

First Year Second Year

a. 5% of $75,000 = $3,750 5% of $75,000 = $3,750

or or

($75,000/20) = $3,750 ($75,000/20) = $3,750

b. 10% of $75,000 = $7,500 10% of ($75,000 – $7,500) = $6,750

Ex. 9–13

a. 12 1/2% of ($172,000 – $20,000) = $19,000 or [($172,000 – $20,000)/8]

b. Year 1: 25% of $172,000 = $43,000

Year 2: 25% of ($172,000 – $43,000) = $32,250

516
Ex. 9–14

a. Year 1: 3/12 × [($85,000 – $5,000)/10] = $2,000

Year 2: ($85,000 – $5,000)/10 = $8,000

b. Year 1: 3/12 × 20% of $85,000 = $4,250

Year 2: 20% of ($85,000 – $4,250) = $16,150

Ex. 9–15

a. $17,500 [($1,050,000 – $420,000)/36]

b. $700,000 [$1,050,000 – ($17,500 × 20 yrs.)]

c. $20,000 [($700,000 – $300,000)/20 yrs.]

Ex. 9–16

a. Mar. 30 Carpet ............................................................ 12,000

Cash ......................................................... 12,000

b. Dec. 31 Depreciation Expense .................................. 600

Accumulated Depreciation..................... 600
Carpet depreciation
[($12,000/15 years) × 9/12].
Ex. 9–17

a. Cost of equipment .................................................................... $504,000

Accumulated depreciation at December 31, 2010
(4 years at $38,500* per year) ............................................. 154,000
Book value at December 31, 2010 ........................................... $350,000
*($504,000 – $42,000)/12 = $38,500

b. (1) Depreciation Expense—Equipment ...................... 9,625

Accumulated Depreciation—Equipment ......... 9,625
Truck depreciation ($38,500 × 3/12 = $9,625).
(2) Cash ......................................................................... 315,000
Accumulated Depreciation—Equipment............... 163,625*
Loss on Sale of Equipment .................................... 25,375
Equipment .......................................................... 504,000
*($154,000 + $9,625 = $163,625)

517
Ex. 9–18

a. 2007 depreciation expense: $29,250 [($265,500 – $31,500)/8]

2008 depreciation expense: $29,250
2009 depreciation expense: $29,250

b. $177,750 [$265,500 – ($29,250 × 3)]

c. Cash ................................................................................ 168,500
Accumulated Depreciation—Equipment ..................... 87,750
Loss on Disposal of Fixed Assets ............................... 9,250
Equipment................................................................. 265,500
d. Cash ................................................................................ 180,000
Accumulated Depreciation—Equipment ..................... 87,750
Equipment................................................................. 265,500
Gain on Sale of Equipment...................................... 2,250

Ex. 9–19

a. $16,200,000/90,000,000 tons = $0.18 depletion per ton

13,750,000 × $0.18 = $2,475,000 depletion expense
b. Depletion Expense ........................................................ 2,475,000
Accumulated Depletion ........................................... 2,475,000
Depletion of mineral deposit.

Ex. 9–20

a. ($750,000/15) + ($90,000/12) = $57,500 total patent expense

b. Amortization Expense—Patents .................................. 57,500
Patents ...................................................................... 57,500
Amortized patent rights ($50,000 + $7,500).

518
Ex. 9–21

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

Current Preceding
Year Year
Land and buildings.................................................... $ 626 $ 361
Machinery, equipment, and internal-use software . 595 470
Office furniture and equipment ................................ 94 81
Other fixed assets related to leases ........................ 760 569
$2,075 $1,481
Less accumulated depreciation ............................... 794 664
Book value ................................................................. $1,281 $ 817
A comparison of the book values of the current and preceding years indicates
that they increased. A comparison of the total cost and accumulated depreci-
ation reveals that Apple purchased $594 million ($2,075 – $1,481) of additional
fixed assets (assuming no sales of fixed assets), which was offset by the ad-
ditional depreciation expense of $130 million ($794 – $664) taken during the
current year.
b. The book value of fixed assets should normally increase during the year. Alt-
hough additional depreciation expense will reduce the book value, most
companies invest in new assets in an amount that is at least equal to the de-
preciation expense. However, during periods of economic downturn, compa-
nies purchase fewer fixed assets, and the book value of their fixed assets
may decline.

Ex. 9–22

1. Fixed assets should be reported at cost and not replacement cost.

2. Land does not depreciate.

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

519
Appendix 1 Ex. 9–23

N(N + 1) 20(20 + 1)
Sum of Years of Useful Life = = = 210
2 2

First year: 20/210 × $75,000 = $7,143

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

Appendix 1 Ex. 9–24

N(N + 1) 8(8 + 1)
Sum of Years of Useful Life = = = 36
2 2

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

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

Appendix 1 Ex. 9–25

N(N + 1) 10(10 + 1)
Sum of Years of Useful Life = = = 55
2 2

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

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

Appendix 2 Ex. 9–26

a.
Price (fair market value) of new equipment ...................................... $300,000
Trade-in allowance of old equipment ................................................ 120,000
Cash paid on the date of exchange ................................................... $180,000

b.
Price (fair market value) of new equipment ..................... $300,000
Less assets given up in exchange:
Book value of old equipment ..................................... $115,500
Cash paid on the exchange ........................................ 180,000 295,500
Gain on exchange of equipment ....................................... $ 4,500

520
Appendix 2 Ex. 9–27

a.
Price (fair market value) of new equipment ...................................... $300,000
Trade-in allowance of old equipment ................................................ 120,000
Cash paid on the date of exchange ................................................... $180,000

b.
Price (fair market value) of new equipment ....................... $300,000
Less assets given up in exchange:
Book value of old equipment ....................................... $127,750
Cash paid on the exchange .......................................... 180,000 307,750
Loss on exchange of equipment......................................... $ 7,750

Appendix 2 Ex. 9–28

a. Depreciation Expense—Equipment ............................. 15,000

Accumulated Depreciation—Equipment ................ 15,000
Equipment depreciation ($20,000 × 9/12).

b. Accumulated Depreciation—Equipment ..................... 235,000

Equipment ...................................................................... 462,000
Loss on Exchange of Fixed Assets ............................. 5,000
Equipment................................................................. 336,000
Cash .......................................................................... 366,000

Appendix 2 Ex. 9–29

a. Depreciation Expense—Trucks .................................... 4,000

Accumulated Depreciation—Trucks ....................... 4,000
Truck depreciation ($16,000 × 3/12).

b. Accumulated Depreciation—Trucks ............................ 68,000

Trucks ............................................................................. 150,000
Trucks ....................................................................... 96,000
Cash .......................................................................... 120,000
Gain on Exchange of Fixed Assets ........................ 2,000

521
Ex. 9–30

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

$93,469
Fixed Asset Turnover Ratio =
($85,294 + $82,356)/2

Fixed Asset Turnover Ratio = 1.12

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

Ex. 9–31

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

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

b. Circuit City’s fixed asset turnover ratio of 14.13 is higher than Best Buy’s
fixed asset turnover ratio of 12.72. Thus, Circuit City is generating $1.41
($14.13 – $12.72) more revenue for each dollar of fixed assets than is Best
Buy. On this basis, Circuit City is managing its fixed assets slightly more effi-
ciently than is Best Buy.

522
 PROBLEMS

Prob. 9–1A

1.
Land Other
Item Land Improvements Building Accounts
a. $ 4,000
b. 400,000
c. 2,500
d. 31,750
e. $ 36,000
f. 10,000
g. (3,000)*
h. 15,200
i. 5,400
j. $(600,000)*
k. 9,000
l. 3,000
m. 1,800
n. $ 12,000
o. 14,500
p. 33,000
q. (4,500)*
r. 700,000
s. (450)*
2. $469,450 $ 26,500 $773,950
*Receipt

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

523
Prob. 9–2A

Depreciation Expense
a. Straight- b. Units-of- c. Double-
Line Production Declining-Balance
Year Method Method Method
2009 $ 86,000 $129,000 $190,000
2010 86,000 107,500 95,000
2011 86,000 60,200 47,500
2012 86,000 47,300 11,500*
Total $344,000 $344,000 $344,000
Calculations:
Straight-line method:
($380,000 – $36,000)/4 = $86,000 each year
Units-of-production method:
($380,000 – $36,000)/8,000 hours = $43 per hour
2009: 3,000 hours @ $43 = $129,000
2010: 2,500 hours @ $43 = $107,500
2011: 1,400 hours @ $43 = $60,200
2012: 1,100 hours @ $43 = $47,300
Double-declining-balance method:
2009: $380,000 × 50% = $190,000
2010: ($380,000 – $190,000) × 50% = $95,000
2011: ($380,000 – $190,000 – $95,000) × 50% = $47,500
2012: ($380,000 – $190,000 – $95,000 – $47,500 – $36,000*) = $11,500
*Book value should not be reduced below the residual value of $36,000.

524
Prob. 9–3A

a. Straight-line method:
2008: [($48,600 – $3,000)/3] × 1/2 ............................................... $ 7,600
2009: ($48,600 – $3,000)/3 ........................................................... 15,200
2010: ($48,600 – $3,000)/3 ........................................................... 15,200
2011: [($48,600 – $3,000)/3] × 1/2 ............................................... 7,600

b. Units-of-production method:
2008: 1,800 hours @ $6.08* ........................................................ $10,944
2009: 2,600 hours @ $6.08 .......................................................... 15,808
2010: 2,000 hours @ $6.08 .......................................................... 12,160
2011: 1,100 hours @ $6.08 .......................................................... 6,688
*($48,600 – $3,000)/7,500 hours = $6.08 per hour

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

525
Prob. 9–4A

1.
Accumulated
Depreciation Depreciation, Book Value,
Year Expense End of Year End of Year
a. 1 $33,300* $ 33,300 $110,700
2 33,300 66,600 77,400
3 33,300 99,900 44,100
4 33,300 133,200 10,800
*[($144,000 – $10,800)/4]
b. 1 $72,000 [$144,000 × (1/4) × 2] $ 72,000 $ 72,000
2 36,000 [$72,000 × (1/4) × 2] 108,000 36,000
3 18,000 [$36,000 × (1/4) × 2] 126,000 18,000
4 7,200 [$144,000 – $126,000 – $10,800] 133,200 10,800

2. Cash ................................................................................ 19,750

Accumulated Depreciation—Equipment ..................... 126,000
Equipment................................................................. 144,000
Gain on Sale of Equipment...................................... 1,750*
*$19,750 – $18,000

3. Cash ................................................................................ 14,900

Accumulated Depreciation—Equipment ..................... 126,000
Loss on Sale of Equipment........................................... 3,100*
Equipment................................................................. 144,000
*$18,000 – $14,900

526
Prob. 9–5A

2008
Jan. 7 Delivery Equipment ...................................................... 45,600
Cash ......................................................................... 45,600

Feb. 27 Truck Repair Expense .................................................. 130

Cash ......................................................................... 130

Dec. 31 Depreciation Expense—Delivery Equipment ............. 11,400

Accumulated Depreciation—Delivery Equipment 11,400
Delivery equipment depreciation
[$45,600 × (1/8 × 2)].

2009
Jan. 8 Delivery Equipment ...................................................... 75,000
Cash ......................................................................... 75,000

Mar. 13 Truck Repair Expense .................................................. 200

Cash ......................................................................... 200

Apr. 30 Depreciation Expense—Delivery Equipment ............. 2,850

Accumulated Depreciation—Delivery Equipment 2,850
Delivery equipment depreciation
[($45,600 – $11,400) × (1/8 × 2) × 4/12].
30 Accumulated Depreciation—Delivery Equipment ..... 14,250
Cash............................................................................... 30,000
Loss on Sale of Delivery Equipment........................... 1,350
Delivery Equipment ................................................. 45,600

Dec. 31 Depreciation Expense—Delivery Equipment ............. 15,000

Accumulated Depreciation—Delivery Equipment 15,000
Delivery equipment depreciation
[$75,000 × (1/10 × 2)].

527
Prob. 9–5A Concluded

2010
July 1 Delivery Equipment ............................................. 82,000
Cash.................................................................. 82,000

Oct. 4 Depreciation Expense—Delivery Equipment .... 9,000

Accumulated Depreciation—Delivery
Equipment .................................................... 9,000
Delivery equipment depreciation
[($75,000 – $15,000) × (1/10 × 2) × 9/12].
4 Cash...................................................................... 53,000
Accumulated Depreciation—Delivery Equipment 24,000
Delivery Equipment ......................................... 75,000
Gain on Sale of Delivery Equipment .............. 2,000

Dec. 31 Depreciation Expense—Delivery Equipment .... 8,200

Accumulated Depreciation—Delivery
Equipment .................................................... 8,200
Delivery equipment depreciation
[$82,000 × (1/10 × 2) × 6/12].

528
Prob. 9–6A

1. a. Loss on impairment of goodwill, $20,000,000

b. $675,000/10 years = $67,500; 1/2 of $67,500 = $33,750
c. $1,665,000/9,000,000 board feet = $0.185 per board foot; 2,400,000 board
feet × $0.185 per board foot = $444,000

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

Goodwill............................................................... 20,000,000
b. Amortization Expense—Patents ............................. 33,750
Patents ................................................................. 33,750
Patent amortization.
c. Depletion Expense ................................................... 444,000
Accumulated Depletion ...................................... 444,000
Depletion of timber rights.

529
Prob. 9–1B

1.
Land Other
Item Land Improvements Building Accounts
a. $ 1,500
b. 300,000
c. 20,000
d. 5,000
e. (3,600)*
f. 15,800
g. $ 4,200
h. 17,500
i. 18,000
j. $(750,000)*
k. 4,500
l. $15,000
m. 9,000
n. 1,100
o. 1,500
p. (6,000)*
q. 800,000
r. 45,000
s. (350)*
2. $356,200 $25,100 $866,850
*Receipt

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

530
Prob. 9–2B

Depreciation Expense
a. Straight- b. Units-of- c. Double-
Line Production Declining-Balance
Year Method Method Method
2008 $ 21,000 $ 30,240 $ 45,000
2009 21,000 22,680 15,000
2010 21,000 10,080 3,000
Total $ 63,000 $ 63,000 $ 63,000
Calculations:
Straight-line method:
($67,500 – $4,500)/3 = $21,000 each year
Units-of-production method:
($67,500 – $4,500)/25,000 hours = $2.52 per hour
2008: 12,000 hours @ $2.52 = $30,240
2009: 9,000 hours @ $2.52 = $22,680
2010: 4,000 hours @ $2.52 = $10,080
Double-declining-balance method:
2008: $67,500 × 2/3 = $45,000
2009: ($67,500 – $45,000) × 2/3 = $15,000
2010: ($67,500 – $45,000 – $15,000 – $4,500*) = $3,000
*Book value should not be reduced below the residual value of $4,500.

531
Prob. 9–3B

a. Straight-line method:
2008: [($15,660 – $600)/3] × 1/2 ................................................ $2,510
2009: ($15,660 – $600)/3 ........................................................... 5,020
2010: ($15,660 – $600)/3 ........................................................... 5,020
2011: [($15,660 – $600)/3] × 1/2 ................................................ 2,510

b. Units-of-production method:
2008: 3,750 hours @ $0.80* ...................................................... $3,000
2009: 7,500 hours @ $0.80 ....................................................... 6,000
2010: 5,000 hours @ $0.80 ....................................................... 4,000
2011: 2,575 hours @ $0.80 ....................................................... 2,060

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

c. Double-declining-balance method:
2008: $15,660 × 2/3 × 1/2 ........................................................... $5,220
2009: ($15,660 – $5,220) × 2/3 .................................................. 6,960
2010: ($15,660 – $5,220 – $6,960) × 2/3.................................... 2,320
2011: ($15,660 – $5,220 – $6,960 – $2,320 – $600*) ................ 560

*Book value should not be reduced below $600, the residual value.

532
Prob. 9–4B

1.
Accumulated
Depreciation Depreciation, Book Value,
Year Expense End of Year End of Year
a. 1 $24,000* $ 24,000 $107,250
2 24,000 48,000 83,250
3 24,000 72,000 59,250
4 24,000 96,000 35,250
5 24,000 120,000 11,250
*[($131,250 – $11,250)/5]
b. 1 $52,500 [$131,250 × (1/5) × 2] $ 52,500 $ 78,750
2 31,500 [$78,750 × (1/5) × 2] 84,000 47,250
3 18,900 [$47,250 × (1/5) × 2] 102,900 28,350
4 11,340 [$28,350 × (1/5) × 2] 114,240 17,010
5 5,760 [$131,250 – $114,240 – $11,250] 120,000 11,250

2. Cash ................................................................................ 21,500

Accumulated Depreciation—Equipment ..................... 114,240
Equipment................................................................. 131,250
Gain on Sale of Equipment...................................... 4,490*
*$21,500 – $17,010

3. Cash ................................................................................ 12,500

Accumulated Depreciation—Equipment ..................... 114,240
Loss on Sale of Equipment........................................... 4,510*
Equipment................................................................. 131,250
*$17,010 – $12,500

533
Prob. 9–5B
2008
Jan. 6 Delivery Equipment ...................................................... 24,000
Cash ......................................................................... 24,000

July 19 Truck Repair Expense .................................................. 500

Cash ......................................................................... 500

Dec. 31 Depreciation Expense—Delivery Equipment ............. 12,000

Accumulated Depreciation—Delivery Equipment 12,000
Delivery equipment depreciation
[$24,000 × (1/4 × 2)].

2009
Jan. 2 Delivery Equipment ...................................................... 69,000
Cash ......................................................................... 69,000

Aug. 1 Depreciation Expense—Delivery Equipment ............. 3,500

Accumulated Depreciation—Delivery Equipment 3,500
Delivery equipment depreciation
[($24,000 – $12,000) × (1/4 × 2) × 7/12].

1 Accumulated Depreciation—Delivery Equipment ..... 15,500

Cash............................................................................... 10,250
Delivery Equipment ................................................. 24,000
Gain on Sale of Delivery Equipment ...................... 1,750

Oct. 24 Truck Repair Expense .................................................. 415

Cash ......................................................................... 415

Dec. 31 Depreciation Expense—Delivery Equipment ............. 27,600

Accumulated Depreciation—Delivery Equipment 27,600
Delivery equipment depreciation
[$69,000 × (1/5 × 2)].

534
Prob. 9–5B Concluded

2010
July 1 Delivery Equipment ...................................................... 70,000
Cash ......................................................................... 70,000

Oct. 1 Depreciation Expense—Delivery Equipment ............. 12,420

Accumulated Depreciation—Delivery Equipment 12,420
Delivery equipment depreciation
[($69,000 – $27,600) × (1/5 × 2) × 9/12].
1 Cash............................................................................... 25,000
Accumulated Depreciation—Delivery Equipment ..... 40,020
Loss on Sale of Delivery Equipment........................... 3,980
Delivery Equipment ................................................. 69,000

Dec. 31 Depreciation Expense—Delivery Equipment ............. 8,750

Accumulated Depreciation—Delivery Equipment 8,750
Delivery equipment depreciation
[$70,000 × (1/8 × 2) × 1/2].

Prob. 9–6B

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

feet × $0.26 per board foot = $356,200
b. Loss on impairment of goodwill, $5,000,000
c. $234,000/12 years = $19,500; 3/4 of $19,500 = $14,625

2. a. Depletion Expense ................................................... 356,200

Accumulated Depletion ...................................... 356,200
Depletion of timber rights.
b. Loss on Impairment of Goodwill ............................. 5,000,000
Goodwill............................................................... 5,000,000
c. Amortization Expense—Patents ............................. 14,625*
Patents ................................................................. 14,625*
Patent amortization.
*($234,000/12 years) = $19,500; $19,500 × 3/4 = $14,625

535
 SPECIAL ACTIVITIES

Activity 9–1

It is considered unprofessional for employees to use company assets for

personal reasons, because such use reduces the useful life of the assets for
normal business purposes. Thus, it is unethical for Esteban Appleby to use
Summerfield Consulting Co.'s computers and laser printers to service his part-
time accounting business, even on an after-hours basis. In addition, it is improper
for Esteban’s clients to call him during regular working hours. Such calls may in-
terrupt or interfere with Esteban’s ability to carry out his assigned duties for
Summerfield Consulting Co.

Activity 9–2

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

536
Activity 9–3

1. a. Straight-line method:
2008: ($200,000/5) × 1/2 ....................................................................... $20,000
2009: ($200,000/5) ................................................................................ 40,000
2010: ($200,000/5) ................................................................................ 40,000
2011: ($200,000/5) ................................................................................ 40,000
2012: ($200,000/5) ................................................................................ 40,000
2013: ($200,000/5) × 1/2 ....................................................................... 20,000

b. MACRS:
2008: ($200,000 × 20%) ........................................................................ $40,000
2009: ($200,000 × 32%) ........................................................................ 64,000
2010: ($200,000 × 19.2%) ..................................................................... 38,400
2011: ($200,000 × 11.5%) ..................................................................... 23,000
2012: ($200,000 × 11.5%) ..................................................................... 23,000
2013: ($200,000 × 5.8%) ....................................................................... 11,600

537
Activity 9–3 Continued

2.

a. Straight-line method Year

2008 2009 2010 2011 2012 2013
Income before depreciation .......... $500,000 $500,000 $500,000 $500,000 $500,000 $500,000
Depreciation expense ................... 20,000 40,000 40,000 40,000 40,000 20,000
Income before income tax ............ $480,000 $460,000 $460,000 $460,000 $460,000 $480,000
Income tax ...................................... 192,000 184,000 184,000 184,000 184,000 192,000
Net income ..................................... $288,000 $276,000 $276,000 $276,000 $276,000 $288,000

b. MACRS Year
2008 2009 2010 2011 2012 2013
Income before depreciation .......... $500,000 $500,000 $500,000 $500,000 $500,000 $500,000
Depreciation expense ................... 40,000 64,000 38,400 23,000 23,000 11,600
Income before income tax ............ $460,000 $436,000 $461,600 $477,000 $477,000 $488,400
Income tax ...................................... 184,000 174,400 184,640 190,800 190,800 195,360
Net income ..................................... $276,000 $261,600 $276,960 $286,200 $286,200 $293,040

538
Activity 9–3 Concluded

3. For financial reporting purposes, Mike should select the method that provides
the net income figure that best represents the results of operations. (Note to
Instructors: The concept of matching revenues and expenses is discussed in
Chapter 3.) However, for income tax purposes, Mike should consider select-
ing the method that will minimize current taxes. Based on the analyses in (2),
both methods of depreciation will yield the same total amount of taxes over
the useful life of the equipment. MACRS results in fewer taxes paid in the ear-
ly years of useful life and more in the later years. For example, in 2008 the
income tax expense using MACRS is $184,000, which is $8,000 ($192,000 –
$184,000) less than the income tax expense using the straight-line deprecia-
tion of $192,000. Lonesome Dove Construction Co. can invest such differ-
ences in the early years and earn income.

In some situations, it may be more beneficial for a taxpayer not to choose

MACRS. These situations usually occur when a taxpayer is expected to be
subject to a low tax rate in the early years of use of an asset and a higher tax
rate in the later years of the asset’s useful life. In this case, the taxpayer may
be better off to defer the larger deductions to offset the higher tax rate.

Activity 9–4

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

Activity 9–5

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

539
Solution Manual For Financial & Managerial Accounting, 10th by Carl S. Warren James M. R

Activity 9–6

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

$348,650
Wal-Mart: = 4.16
$83,865

$30,379
Alcoa Inc.: = 2.10
$14,495

$24,966
Comcast Corporation: = 1.25
$20,009

b. The fixed asset turnover measures the amount of revenue earned per dollar of
fixed assets. Wal-Mart earns $4.16 of revenue for every dollar of fixed assets,
while Alcoa only earns $2.10 and Comcast Corporation only earns $1.25 in
revenue for every dollar of fixed assets. This says that Alcoa and Comcast
require more fixed assets to operate their businesses than does Wal-Mart, for
a given level of revenue volume. Does this mean that Wal-Mart is a better
company? Not necessarily. Revenue is not the same as earnings. More likely,
Wal-Mart has a smaller profit margin than do Alcoa and Comcast. Although
not required by the exercise, the income from operations before tax as a per-
cent of sales (operating margin) for the three companies is: Comcast, 14.3%,
Alcoa, 9.9%, and Wal-Mart, 5.3%. Thus, the difference between the fixed asset
turnovers seems reasonable. Generally, companies with very low fixed asset
turnovers, such as aluminum making and cable communications, must be
compensated with higher operating margins.

Note to Instructors: You may wish to consider the impact of different fixed
asset turnover ratios across industries and the implications of these differ-
ences. This is a conceptual question designed to have students think about
how competitive markets would likely reward the low fixed asset turnover
companies for embracing high fixed asset commitments.

540

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