Professional Documents
Culture Documents
QUESTIONS
1. A plant asset is tangible; it is used in the production or sale of other assets or services;
and it has a useful life longer than one accounting period.
2. The cost of a plant asset includes all normal and reasonable expenditures necessary to
get the asset in place and ready for its intended use.
3. Land is an asset with an unlimited life and, therefore, is not subject to depreciation.
Land improvements have limited lives and are subject to depreciation.
4. Often the lump-sum or basket purchase includes assets with different lives that must be
depreciated separately. Sometimes the purchase may include land, which is never
depreciated.
5. The Accumulated Depreciation—Machinery account is a contra asset account with a
credit balance that cannot be used to buy anything. The balance of the Accumulated
Depreciation—Machinery account reflects that portion of the machinery's original cost
that has been charged to depreciation expense. It also gives some indication of the
asset’s age and how soon it will need to be replaced. Any funds available for buying
machinery are shown on the balance sheet as liquid assets with debit balances.
6. The Modified Accelerated Cost Recovery System is not generally acceptable for financial
accounting purposes because it allocates depreciation over an arbitrary period that is
usually much shorter than the predicted useful life of the asset.
7. The materiality constraint justifies charging low-cost plant asset purchases to expense
because such amounts are unlikely to impact the decisions of financial statement users.
8. Ordinary repairs are made to keep a plant asset in normal, good operating condition, and
should be charged to expense of the current period. Extraordinary repairs are made to
extend the life of a plant asset beyond the original estimated life; they are recorded as
capital expenditures (and added to the asset account).
9. A company might sell or exchange an asset when it reaches the end of its useful life, or
if it becomes inadequate or obsolete, or if the company has changed its business plans.
An asset also can be damaged or destroyed by fire or some other accident that would
require its disposal.
10. The process of allocating the cost of natural resources to expense over the periods
when they are consumed is called depletion. The method to compute depletion is similar
to units-of-production depreciation.
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Solutions Manual, Chapter 8 455
11. No, depletion expense should be calculated on the units that are extracted (similar to the
units-of-production basis) and sold.
12. An intangible asset: (1) has no physical existence; (2) derives value from the unique
legal and contractual rights held by its owner; and (3) is used in the company’s
operations.
13. Intangible assets are generally recorded at their cost and amortized over their predicted
useful life. (However, some costs are not included, such as the research and
development costs leading up to a patent.) The costs of intangible assets are generally
allocated to amortization expense using the straight-line method over their useful lives.
If the useful life of an intangible asset is indefinite, then it is not amortized—instead, it is
annually tested for impairment.
14. A company has goodwill when its value exceeds the value of its individual assets and
liabilities. Goodwill appears in the balance sheet when one company acquires another
company or separate segment and pays a price that exceeds the combined values of all
its net assets (assets less liabilities) excluding goodwill.
15. No; this type of goodwill would not be amortized. Instead, the FASB (SFAS 142) requires
that goodwill be annually tested for impairment. If the book value of goodwill does not
exceed its fair (market) value, goodwill is not impaired. However, if the book value of
goodwill exceeds its fair value, an impairment loss is recorded equal to that excess.
(Details of this two-step test are in advanced courses.)
16. Total asset turnover is calculated by dividing net sales by average total assets.
Financial statement users can use total asset turnover to evaluate the efficiency of a
company in using its assets to generate sales.
17. The word “net” means that Polaris is reporting its property and equipment after
deducting accumulated depreciation to date.
18. Arctic Cat lists “Machinery, equipment and tooling” and “Land, building and
improvements” under the Property and equipment heading on the balance sheet. The
net book value of these assets is $39,230 thousand.
19. KTM titles its plant assets “Tangible fixed assets.” The book value of its Tangible fixed
assets is 84,256 EUR thousands.
20. Piaggio reports the following long-term assets that are discussed in this chapter:
Property, plant and equipment; Intangible assets.
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456 Financial Accounting Fundamentals, 4th Edition
QUICK STUDIES
Quick Study 8-1 (10 minutes)
1. The main difference between plant assets and current assets is that
current assets are consumed or converted into cash within a short
period of time, while plant assets have a useful life of more than one
accounting period.
Note: The $1,850 repair charge is an expense because it is not a normal and reasonable
expenditure necessary to get the asset in place and ready for its intended use.
Straight-line:
($65,800 - $2,000) / 4 years = $15,950 depreciation per year
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Solutions Manual, Chapter 8 457
Quick Study 8-5 (10 minutes)
$65,800 Cost
- 15,950 Accumulated depreciation (first year)
49,850 Book value at point of revision
- 2,000 Salvage value
47,850 Remaining depreciable cost
÷ 2 Years of life remaining
$23,925 Depreciation per year for years 2 and 3
First year:
$830,000 x 25% = $207,500
Second year:
($830,000 - $207,500) x 25% = $155,625
Third year:
($830,000 - $207,500 - $155,625) x 25% = $116,719* (rounded)
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458 Financial Accounting Fundamentals, 4th Edition
Quick Study 8-8 (10 minutes)
1. (a) Capital expenditure
(b) Revenue expenditure
(c) Revenue expenditure
(d) Capital expenditure
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Solutions Manual, Chapter 8 459
Quick Study 8-10 (10 minutes)
1. Ore Mine..........................................................................1,800,000
Cash ......................................................................... 1,800,000
To record cost of ore mine.
2. $1,800,000 - $200,000
Depletion per unit = 1,000,000 tons = $1.60 per ton
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460 Financial Accounting Fundamentals, 4th Edition
Quick Study 8-13 (10 minutes)
$14,800
Total asset turnover = ($15,869 + $17,819) / 2 = 0.80 times
($ thousands)
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Solutions Manual, Chapter 8 461
EXERCISES
Exercise 8-1 (15 minutes)
Note: The $180 repair charge is an expense because it is not a normal and reasonable
expenditure necessary to get the asset in place and ready for its intended use.
Cost of land
Purchase price for land ...........................................................
$ 280,000
Purchase price for old building .............................................. 110,000
Demolition costs for old building ........................................... 33,500
Costs to fill and level lot .........................................................
47,000
Total cost of land .....................................................................
$ 470,500
Journal entry
Land ................................................................................ 470,500
Land Improvements ....................................................... 87,800
Building........................................................................... 1,452,200
Cash .......................................................................... 2,010,500
To record costs of plant assets.
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462 Financial Accounting Fundamentals, 4th Edition
Exercise 8-3 (20 minutes)
Purchase price ........................................................... $375,280
Closing costs ............................................................. 20,100
Total cost of acquisition ........................................... $395,380
Journal entry
Land .......................................................................... 158,152
Land Improvements ................................................ 59,307
Building .................................................................... 177,921
Cash .................................................................. 395,380
To record costs of lump-sum purchase.
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Solutions Manual, Chapter 8 463
Exercise 8-5 (20 minutes)
Double-declining-balance depreciation
Depreciation rate: 100% / 4 years = 25% x 2 = 50%
Beginning-Year Depreciation Annual Year-End
Year Book Value Rate Depreciation Book Value
2013....... $154,000 50% $ 77,000 $77,000
2014....... 77,000 50 38,500 38,500
2015....... 38,500 50 13,500* 25,000
2016....... 25,000 -- -- 25,000
Total ...... $129,000
* Do not depreciate more than $13,500 in the third year since the
salvage value is not subject to depreciation.
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464 Financial Accounting Fundamentals, 4th Edition
Exercise 8-9 (10 minutes)
Alternate calculation
2012 depreciation ($280,000 x 40% x 9/12) ................................. $ 84,000
2013 depreciation
$280,000 x 40% x 3/12 ............................................................. $ 28,000
($280,000 - $84,000 - $28,000) x 40% x 9/12 ........................... 50,400
Total 2013 depreciation ............................................................... $ 78,400
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Solutions Manual, Chapter 8 465
Exercise 8-12 (30 minutes)
Straight-line depreciation
Income
before Depreciation Net
Depreciation Expense* Income
Year 1 ........ $ 88,500 $ 38,960 $ 49,540
Year 2 ........ 88,500 38,960 49,540
Year 3 ........ 88,500 38,960 49,540
Year 4 ........ 88,500 38,960 49,540
Year 5 ........ 88,500 38,960 49,540
Totals ........ $442,500 $194,800 $247,700
*($238,400 - $43,600) / 5 years = $38,960
** rounded
*** Must not use $20,598; instead take only enough depreciation in Year 4 to
reduce book value to the $43,600 salvage value.
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466 Financial Accounting Fundamentals, 4th Edition
Exercise 8-14 (25 minutes)
3. Cost of building
Before repairs..................................................................
$572,000
Add cost of repairs ......................................................... 68,350 $640,350
Less accumulated depreciation ....................................... 429,000
Revised book value of building ........................................ $211,350
Journal entry
Depreciation Expense.................................................... 21,135
Accumulated Depreciation–Building ....................... 21,135
To record depreciation.
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Solutions Manual, Chapter 8 467
Exercise 8-16 (20 minutes)
1. Disposed at no value
Jan. 3 Loss on Disposal of Milling Machine ......................... 68,000
Accumulated Depreciation—Milling Machine ........... 182,000
Milling Machine ........................................................ 250,000
To record disposal of milling machine.
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468 Financial Accounting Fundamentals, 4th Edition
Exercise 8-17 (25 minutes)
2017
July 1 Depreciation Expense ............................................. 7,500
Accumulated Depreciation--Machinery ............ 7,500
To record one-half year depreciation.*
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Solutions Manual, Chapter 8 469
Exercise 8-19 (10 minutes)
Jan. 1 Copyright ......................................................................
418,000
Cash.......................................................................... 418,000
To record purchase of copyright. 00
Dec. 31 Amortization Expense—Copyright ............................41,800
Accumulated Amortization—Copyright ................ 41,800
To record amortization of copyright
[$418,000 / 10 years].
$8,679,690
Total asset turnover for 2013 = ($1,982,000 + $1,800,000)/2 = 4.59
Analysis comments. Based on these calculations, Lok turned its assets over 1.23
(4.59 – 3.36) more times in 2013 than in 2012. This increase indicates that the
company became more efficient in using its assets. Moreover, it has improved its
efficiency in using assets relative to its competitors who average 3.0. Together,
these results based on total asset turnover indicate that Lok has markedly
improved its performance and is currently superior to its competitors.
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470 Financial Accounting Fundamentals, 4th Edition
Exercise 8-23A (15 minutes)
1. Book value of the old tractor ($96,000 - $52,500) .......................... $ 43,500
2. Loss on the exchange
Book value - Trade-in allowance ($43,500 - $29,000).............. $ 14,500
3. Debit to new Tractor account
Cash paid + Trade-in allowance ($83,000 + $29,000) .............. $112,000
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Solutions Manual, Chapter 8 471
Exercise 8-25 (20 minutes)
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472 Financial Accounting Fundamentals, 4th Edition
PROBLEM SET A
Problem 8-1A (50 minutes)
Part 1
Estimated Percent Apportioned
Market Value of Total Cost
Building ......................... $508,800 53% $477,000
Land ............................... 297,600 31 279,000
Land improvements ..... 28,800 3 27,000
Vehicles ......................... 124,800 13 117,000
Total ............................... $960,000 100% $900,000
2013
Jan. 1 Building...........................................................................
477,000
Land ................................................................................
279,000
Land Improvements ....................................................... 27,000
Vehicles ..........................................................................
117,000
Cash .......................................................................... 900,000
To record asset purchases.
Part 2
Part 3
Part 4
Accelerated depreciation does not lower the total amount of taxes paid over
the asset's life. Instead, it defers or postpones taxes to the later years of an
asset’s useful life. This is because accelerated methods charge a higher
portion of asset costs against revenue in earlier years and a lower portion in
later years. The result is to reduce taxable income more in earlier years but
less in later years. [Note: From a present value perspective, there is a tax
savings from use of accelerated depreciation. The company gets to use the
tax deferred amounts for investment purposes until they are due.]
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Solutions Manual, Chapter 8 473
Problem 8-2A (45 minutes)
Part 1
Land Land
Building Building Improve- Improvements
Land 2 3 ments 1 2
Purchase price* ...................
$1,612,000 $598,000 $390,000
Demolition ...........................
328,400
Land grading .......................175,400
New building........................ $2,202,000
New improvements ............. _________ _______ _________ _______ $164,000
Totals .................................
$2,115,800 $598,000 $2,202,000 $390,000 $164,000
Part 2
2013
Jan. 1 Land ...................................................................... 2,115,800
Building 2 ............................................................. 598,000
Building 3 ............................................................. 2,202,000
Land Improvements 1 ......................................... 390,000
Land Improvements 2 ......................................... 164,000
Cash ................................................................ 5,469,800
To record costs of plant assets.
Part 3
2013
Dec. 31 Depreciation Expense—Building 2 ..............................
26,900
Accumulated Depreciation—Building 2 ................ 26,900
To record depreciation [($598,000 - $60,000)/20].
31 Depreciation Expense—Building 3 ..............................
72,400
Accumulated Depreciation—Building 3 ................ 72,400
To record depreciation [($2,202,000 - $392,000)/25].
31 Depreciation Expense—Land Improv. 1 ......................
32,500
Accum. Depreciation—Land Improv. 1.................. 32,500
To record depreciation [$390,000/12].
31 Depreciation Expense—Land Improv. 2 ......................8,200
Accum. Depreciation—Land Improv. 2.................. 8,200
To record depreciation [$164,000/20].
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474 Financial Accounting Fundamentals, 4th Edition
Problem 8-3A (50 minutes)
2012
Jan. 1 Equipment ................................................................300,600
Cash ..................................................................... 300,600
To record loader costs ($287,600 +$11,500 +$1,500).
70,850*
Dec. 31 Depreciation Expense—Equipment ...........................
Accumulated Depreciation—Equipment ............. 70,850
To record depreciation.
*
2012 depreciation after January 3rd betterment
Total original cost ................................................................... $300,600
Plus cost of betterment .......................................................... 4,800
Revised cost of equipment ..................................................... 305,400
Less revised salvage ($20,600 + $1,400) .............................. 22,000
Cost to be depreciated............................................................ 283,400
Annual depreciation ($283,400 / 4 years)............................... $ 70,850
2013
Jan. 1 Equipment .................................................................... 5,400
Cash ........................................................................ 5,400
To record extraordinary repair on loader.
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Solutions Manual, Chapter 8 475
Problem 8-4A (40 minutes)
2012
Jan. 1 Trucks ...........................................................................22,000
Cash ........................................................................ 22,000
To record cost of truck ($20,515 + $1,485).
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476 Financial Accounting Fundamentals, 4th Edition
Problem 8-5A (25 minutes)
Double-Declining-
a b
Year Straight-Line Units-of-Production Balancec
1 ...................... $ 59,375 $110,000 $128,750
2 ...................... 59,375 62,300 64,375
3 ...................... 59,375 60,900 32,188
4 ...................... 59,375 4,300 12,187
Totals.............. $237,500 $237,500 $237,500
a
Straight- line:
Cost per year = $237,500/4 years = $59,375 per year
b
Units-of-production:
Cost per unit = $237,500/475,000 units = $0.50 per unit
Year Units Unit Cost Depreciation
1 ................ 220,000 $0.50 $110,000
2 ................ 124,600 0.50 62,300
3 ................ 121,800 0.50 60,900
4 ................ 15,200 0.50 4,300*
Total ......... $237,500
*
Take only enough depreciation in Year 4 to reduce book
value to the asset’s $20,000 salvage value.
c
Double-declining-balance:
(100%/4) x 2 = 50% depreciation rate
* rounded
**Take only enough depreciation in Year 4 to reduce book value to
the asset’s $20,000 salvage value.
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Solutions Manual, Chapter 8 477
Problem 8-6A (20 minutes)
1.
Jan. 2 Machinery ................................................................. 178,000
Cash .................................................................... 178,000
To record machinery purchase.
Jan. 3 Machinery ................................................................. 2,840
Cash .................................................................... 2,840
To record machinery costs.
Jan. 3 Machinery ................................................................. 1,160
Cash .................................................................... 1,160
To record machinery costs.
2. a. First year
Dec. 31 Depreciation Expense—Machinery ............................28,000
Accumulated Depreciation—Machinery .............. 28,000
To record depreciation [($182,000 - $14,000)/6].
b. Fifth year
Dec. 31 Depreciation Expense—Machinery ............................28,000
Accumulated Depreciation—Machinery .............. 28,000
To record year’s depreciation.
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478 Financial Accounting Fundamentals, 4th Edition
Problem 8-7A (20 minutes)
a.
July 23 Mineral Deposit ............................................................
4,715,000
Cash ........................................................................ 4,715,000
To record purchase of mineral deposit.
b.
July 25 Machinery .....................................................................
410,000
Cash ........................................................................ 410,000
To record costs of machinery.
c.
Dec. 31 Depletion Expense—Mineral Deposit ........................
441,600
Accum. Depletion—Mineral Deposit .................... 441,600
To record depletion [$4,715,000/
5,125,000 tons = $0.92 per ton.
480,000 tons x $0.92 = $441,600].
d.
Dec. 31 Depreciation Expense—Machinery ............................
38,400
Accum. Depreciation—Machinery ....................... 38,400
To record depreciation [$410,000/
5,125,000 tons = $0.08 per ton.
480,000 tons x $0.08 = $38,400].
Analysis Component
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Solutions Manual, Chapter 8 479
Problem 8-8A (20 minutes)
1.
2013 (a)
June 25 Leasehold .....................................................................
200,000
Cash ........................................................................ 200,000
To record payment for sublease.
(b)
July 1 Prepaid Rent.................................................................80,000
Cash ........................................................................ 80,000
To record prepaid annual lease rental.
(c)
July 5 Leasehold Improvements ........................................... 130,000
Cash ........................................................................ 130,000
To record costs of leasehold improvements.
2.
2013 (a)
Dec. 31 Rent Expense ...............................................................
10,000
Accumulated Amortization—Leasehold.............. 10,000
To record leasehold amortization ($200,000/10 x 6/12).
(b)
Dec. 31 Amortization Expense—Leasehold Improvements ...........6,500
Accumulated Amortization—Leasehold
Improvements ............................................................ 6,500
To record leasehold improvement amortization
($130,000/10 years remaining on lease x 6/12).
(c)
Dec. 31 Rent Expense ...............................................................
40,000
Prepaid Rent .......................................................... 40,000
To record one-half year lease rental ($80,000 x 6/12).
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480 Financial Accounting Fundamentals, 4th Edition
PROBLEM SET B
Problem 8-1B (50 minutes)
Part 1
Estimated Percent Apportioned
Market Value of Total Cost
Building .......................... $ 890,000 50% $ 900,000
Land ................................ 427,200 24 432,000
Land improvements ...... 249,200 14 252,000
Trucks............................. 213,600 12 216,000
Total ................................ $1,780,000 100% $1,800,000
2013
Jan. 1 Buildings ........................................................................
900,000
Land ................................................................................
432,000
Land Improvements ...................................................... 252,000
Trucks .............................................................................
216,000
Cash .......................................................................... 1,800,000
To record asset purchases.
Part 2
Year 2013 straight-line depreciation on building
[($900,000 - $120,000) / 12 years] = $65,000
Part 3
Year 2013 double-declining-balance depreciation on land improvements
(100% / 10 years) x 2 = 20% rate
$252,000 x 20% = $50,400
Part 4
Accelerated depreciation does not increase the total amount of taxes paid
over the asset’s life. Instead, it defers or postpones taxes to the later years of
an asset’s useful life. This is because accelerated methods charge a higher
portion of asset costs against revenue in earlier years and a lower portion in
later years. The result is to reduce taxable income more in earlier years and
less in later years. [Note: From a present value perspective, there is a tax
savings from use of accelerated depreciation. The company gets to use the
deferred tax amounts for investment purposes until they are due.]
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Solutions Manual, Chapter 8 481
Problem 8-2B (45 minutes)
Part 1
Land Land
Building Building Improve- Improve-
Land B C ments B ments C
Purchase price* .......... $ 868,000 $527,000 $155,000
Demolition .................. 122,000
Land grading .............. 174,500
New building............... $1,458,000
New improvements .... _________ _______ _________ _______ $103,500
Totals .......................... $1,164,500 $527,000 $1,458,000 $155,000 $103,500
Part 2
2013
Jan. 1 Land ......................................................................... 1,164,500
Building B................................................................ 527,000
Building C................................................................ 1,458,000
Land Improvements B ............................................ 155,000
Land Improvements C ............................................ 103,500
Cash ................................................................... 3,408,000
To record cost of plant assets.
Part 3
2013
Dec. 31 Depreciation Expense—Building B .......................................
28,500
Accumulated Depreciation—Building B.......................... 28,500
To record depreciation [($527,000 - $99,500)/15].
31 Depreciation Expense—Building C ...........................60,000
Accumulated Depreciation—Building C.............. 60,000
To record depreciation [($1,458,000 - $258,000)/20].
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482 Financial Accounting Fundamentals, 4th Edition
Problem 8-3B (50 minutes)
2012
Jan. 1 Equipment ....................................................................27,670
Cash ........................................................................ 27,670
To record costs of van ($25,860 + $1,810).
*
2012 depreciation after January 3rd betterment
Total original cost ....................................................................
$27,670
Plus cost of betterment ...........................................................
1,850
Revised cost of equipment...................................................... 29,520
Less revised salvage ($3,670 + $230) .................................... 3,900
Cost to be depreciated ............................................................
$25,620
Annual depreciation ($25,620 / 5 years) ................................. $ 5,124
2013
Jan. 1 Equipment .................................................................... 2,064
Cash ........................................................................ 2,064
To record extraordinary repair on van.
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Solutions Manual, Chapter 8 483
Problem 8-4B (40 minutes)
2012
Jan. 1 Machinery .....................................................................
114,270
Cash ........................................................................ 114,270
To record costs of machinery ($107,800 +$6,470).
Dec. 31 Depreciation Expense—Machinery ............................17,425
Accumulated Depreciation—Machinery .............. 17,425
To record depreciation [($114,270-$9,720)/6].
2013
27,500*
Dec. 31 Depreciation Expense—Machinery ............................
Accum. Depreciation—Machinery ....................... 27,500
To record depreciation.
*
2013 depreciation:
Total cost ..................................................................................
$114,270
Less accumulated depreciation (from 2012) .......................... 17,425
Book value ................................................................................96,845
Less revised salvage value ...................................................... 14,345
Remaining cost to be depreciated .......................................... $ 82,500
Revised useful life ....................................................................4 yrs.
Less 1 year in 2012 ...................................................................1 yrs.
Revised remaining useful life ..................................................3 yrs.
Total depreciation for 2013 ($82,500/ 3 yrs) .............................
$ 27,500
2014
Dec. 31 Depreciation Expense—Machinery ............................27,500
Accumulated Depreciation—Machinery .............. 27,500
To record depreciation.
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484 Financial Accounting Fundamentals, 4th Edition
Problem 8-5B (25 minutes)
Double-Declining-
Year Straight-Linea Units-of-Productionb Balancec
1 ................... $ 58,800 $ 71,120 $129,600
2 ................... 58,800 64,080 77,760
3 ................... 58,800 63,400 46,656
4 ................... 58,800 68,720 27,994
5 ................... 58,800 26,680 11,990
Totals .......... $294,000 $294,000 $294,000
a
Straight- line:
Cost per year = $294,000/5 years = $58,800 per year
b
Units-of-production:
Cost per unit = $294,000/1,470,000 units = $0.20 per unit
Year Units Unit Cost Depreciation
1 .............. 355,600 $0.20 $ 71,120
2 .............. 320,400 0.20 64,080
3 .............. 317,000 0.20 63,400
4 .............. 343,600 0.20 68,720
5 .............. 138,500 0.20 26,680*
Total ........ $294,000
* Take only enough depreciation in Year 5 to reduce book
value to the asset’s $30,000 salvage value.
c
Double-declining-balance (amounts rounded to the nearest dollar):
(100%/5) x 2 = 40% depreciation rate
Annual Accumulated Ending Book Value
Depreciation Depreciation ($324,000 Cost less
Beginning (40% of at the End of Accumulated
Year Book Value Book Value) the Year Depreciation)
1 ............ $324,000 $129,600 $129,600 $194,400
2 ............ 194,400 77,760 207,360 116,640
3 ............ 116,640 46,656 254,016 69,984
4 ............ 69,984 27,994* 282,010 41,990
5 ............ 41,990 11,990** 294,000 30,000
Total ..... $294,000
* rounded
** Take only enough depreciation in Year 5 to reduce book value to the
asset’s $30,000 salvage value.
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Solutions Manual, Chapter 8 485
Problem 8-6B (20 minutes)
1.
Jan. 1 Machinery .................................................................. 150,000
Cash ..................................................................... 150,000
To record machinery costs.
Jan. 2 Machinery .................................................................. 3,510
Cash ..................................................................... 3,510
To record machinery costs.
Jan. 4 Machinery .................................................................. 4,600
Cash ..................................................................... 4,600
To record machinery costs.
2. a. First year
Dec. 31 Depreciation Expense—Machinery ............................20,000
Accumulated Depreciation—Machinery .............. 20,000
To record depreciation [($158,110-$18,110)/7 = $20,000].
b. Sixth year
Dec. 31 Depreciation Expense—Machinery ............................20,000
Accumulated Depreciation—Machinery .............. 20,000
To record the sixth year’s depreciation.
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486 Financial Accounting Fundamentals, 4th Edition
Problem 8-7B (20 minutes)
a.
Feb. 19 Mineral Deposit ............................................................
5,400,000
Cash ........................................................................ 5,400,000
To record purchase of mineral deposit.
b.
Mar. 21 Machinery .....................................................................
400,000
Cash ........................................................................ 400,000
To record costs of machinery.
c.
Dec. 31 Depletion Expense—Mineral Deposit ........................
342,900
Accum. Depletion—Mineral Deposit .................... 342,900
To record depletion [$5,400,000/
4,000,000 tons = $1.35 per ton.
254,000 tons x $1.35 = $342,900].
d.
Dec. 31 Depreciation Expense—Machinery ............................
25,400
Accum. Depreciation—Machinery ....................... 25,400
To record depreciation [$400,000/
4,000,000 tons = $0.10 per ton.
254,000 tons x $0.10 = $25,400].
Analysis Component
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Solutions Manual, Chapter 8 487
Problem 8-8B (20 minutes)
1.
2013 (a)
Jan. 1 Leasehold .....................................................................40,000
Cash ........................................................................ 40,000
To record payment for sublease.
(b)
Jan. 1 Prepaid Rent.................................................................36,000
Cash ........................................................................ 36,000
To record prepaid annual lease rental.
(c)
Jan. 3 Leasehold Improvements ...........................................20,000
Cash ........................................................................ 20,000
To record costs of leasehold improvements.
2.
2013 (a)
Dec. 31 Rent Expense ............................................................... 8,000
Accumulated Amortization—Leasehold.............. 8,000
To record leasehold amortization ($40,000/5).
(b)
Dec. 31 Amortization Expense—Leasehold Improvements ......... 4,000
Accumulated Amortization—Leasehold
Improvements ........................................................... 4,000
To record leasehold improvement amortization
($20,000/5 years remaining on lease).
(c)
Dec. 31 Rent Expense ...............................................................36,000
Prepaid Rent .......................................................... 36,000
To record annual lease rental.
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488 Financial Accounting Fundamentals, 4th Edition
Serial Problem — SP 8
1. For the three months ended March 31, 2014, depreciation expense was
$400 for office equipment and $1,250 for the computer equipment.
Annualizing (multiplying quarterly results by four) these three-month
totals yield the following annual amounts for depreciation expense:
2.
December 31, December 31,
2013 2014
Office Equipment ........................................ $ 8,000 $ 8,000
Accumulated Depreciation–Office
Equipment .............................................. 400 2,000
Office Equipment (book value) ................. $ 7,600 $ 6,000
3.
Total asset turnover = Net sales / Average total assets
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Solutions Manual, Chapter 8 489
Reporting in Action — BTN 8-1
$1,991,139
12/31/10: = 2.18 times
($1,061,647+ $763,653)/2
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490 Financial Accounting Fundamentals, 4th Edition
Comparative Analysis — BTN 8-2
$2,656,949
Current Year: = 2.32 times
($1,228,024 + $1,061,647)/2
$450,728
Prior Year: = 1.81 times
($246,084 + $251,165)/2
2. Each dollar of Polaris’s assets produces $2.32 and $2.18 in net sales
for the current and prior year, respectively. Each dollar of Arctic Cat’s
assets produces $1.79 and $1.81 in net sales for the current year and
prior year, respectively. Polaris had an increase in asset efficiency
from last year to this year, whereas Arctic Cat had a decrease in asset
efficiency.
Polaris employs its assets more efficiently than Arctic Cat for both
years. In addition, Polaris’s and Arctic Cat’s total asset turnover
markedly exceeds the industry average of 1.0 for both years.
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Solutions Manual, Chapter 8 491
Ethics Challenge — BTN 8-3
2. When assets are placed in use on a day other than the first day of the
month an assumption is often made that the assets are placed in use on
the first day of the month nearest to the date of the purchase. For
example, for assets purchased on the 1st through 15th days of the month,
the first day of the month is assumed to be the purchase date. For
assets purchased on the 16th through month-end, the first day of the
next month is assumed to be the purchase date.
By selecting the first day of the following month, Choi is getting a one-
time deferral of some partial months of depreciation. She is still
employing a systematic and rational method of allocating costs if she
consistently chooses the first day of the following month. However,
since she appears to be using this method only with respect to current-
year additions, it appears that she is using accounting rules to reduce
depreciation expense this year. Also, her practice is not in keeping with
general business practices as described above. The facts of the
situation seem to suggest an ethical violation rather than a legitimate
depreciation decision rule.
3. By always assuming the first day of the following month as the date of
purchase, less depreciation is (initially) accrued for the assets
employed. This means depreciation expense will be less than if assets
were considered employed on the first of the month closest to the date
of purchase. With reduced depreciation charges, net income will be
higher for this current year. Therefore, this practice will result in a
higher profit margin for her company for this year.
The solution to this activity will vary based on the industry and the
companies chosen for analysis. Many instructors find it useful to report
the results from the teams to the class for purposes of classroom
discussion and analysis.
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492 Financial Accounting Fundamentals, 4th Edition
Taking It to the Net — BTN 8-5
2.
$ Change
Total from Prior %
Goodwill (in $ thousands) Amount Year Change
Balance, December 31, 2010 ....................$3,681,645
Balance, December 31, 2011 ....................$3,900,752 $219,107 6.0%
Goodwill has increased over this period. The increase is due mainly to
new goodwill recorded due to acquisitions in 2011 and, secondly, to
Foreign Currency Translation Adjustments that Yahoo! has experienced
over this period.
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Solutions Manual, Chapter 8 493
Teamwork in Action — BTN 8-6
* Depreciation is based on the estimated capacity of 60,000 miles. Even though the van is
driven 10,000 miles in the last year, depreciation can only be taken for the remaining 9,000
miles of estimated capacity. This will record depreciation to the estimated salvage value.
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494 Financial Accounting Fundamentals, 4th Edition
Teamwork in Action — BTN 8-6 - continued
Double-Declining-
Year Straight-line Balance Units of Production
For reporting purposes, each expert will have different results. But
each should show:
Plant Assets:
Transport Van ............................................................. $44,000
Less: Accumulated Depreciation .............................. ####*
####*
* Amounts vary by the method and the year selected for illustration. Experts should explain
the amounts shown.
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Solutions Manual, Chapter 8 495
Entrepreneurial Decision — BTN 8-7
Part 1
(a) Under current conditions, the total asset turnover is 3.2. This is
computed as net sales of $8,000,000 divided by its average total assets
of $2,500,000.* This means the company turns its assets over 3.2 times
per year or, stated differently, each $1 of assets produces $3.20 of net
sales per year.
Net sales
* Total asset turnover =
Average total assets
(b) Under this proposal, its asset turnover would increase to 4. This is
computed by taking its net sales of $12,000,000 ($8,000,000 +
$4,000,000) and dividing by its average total assets of $3,000,000. This
means the company would now turn its assets over 4 times per year or,
stated differently, each $1 of assets would now produce $4.00 of net
sales per year.
Part 2
The proposal would yield an improved total asset turnover of 4 vis-à-vis the
current total asset turnover of 3.2. However, we need to recognize that this
proposal depends on our confidence in both maintaining current sales,
meeting future sales expectations, and not losing or alienating current
and/or future customers due to the expanded operations. Assuming all of
our estimates are reasonable, we need to focus on any potential customer
concern and the impact on other dimensions of analysis that such a
proposal can bring about.*
*We must remember that total asset turnover is only one dimension of a complete analysis of this
proposal. For example, we would want to explore the impact of this proposal on net income and
other activities.
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496 Financial Accounting Fundamentals, 4th Edition
Hitting the Road — BTN 8-8
No formal solution exists for this activity. It is usually interesting for the
class to exchange their discoveries via class discussion. This is
particularly the case with respect to patents, copyrights, and trademarks.
€1,485,351
Prior Year: = 0.96 times
(€1,545,722+ €1,564,820)/2
2. Piaggio was less efficient in using its assets to generate net sales than
both Polaris and Arctic Cat. Specifically, in the current year each EUR
worth of assets generated 0.99 times that in net sales, compared to 2.32
times each dollar in net assets for Polaris, and 1.79 times each dollar in
net assets for Arctic Cat. Consequently, Polaris was most efficient in
generating net sales from its assets relative to both Piaggio and Arctic
Cat.
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Solutions Manual, Chapter 8 497
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498 Financial Accounting Fundamentals, 4th Edition