Chapter 10 Fixed assets and intangible assets solution

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CHAPTER 10 FIXED ASSETS AND INTANGIBLE ASSETS

DISCUSSION QUESTIONS

1. a. Property, plant, and equipment b. Current assets (merchandise inventory) 2. Real estate acquired as speculation should

be listed in the balance sheet under the cap-tion “Investments,” below the Current Assets section.

3. $435,000 4. Capital expenditures include the cost of

acquiring fixed assets and the cost of improving an asset. These costs are re-corded by increasing (debiting) the fixed as-set account. Capital expenditures also in-clude the costs of extraordinary repairs, which are recorded by decreasing (debiting) the asset’s accumulated depreciation ac-count. Revenue expenditures are recorded as expenses and are costs that benefit only the current period and are incurred for nor-mal maintenance and repairs of fixed as-sets.

5. Capital expenditure 6. 10 years 7. a. No b. No 8. 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.

9. 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.

10. 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 10–1A

Sept. 30 Delivery Truck ..................................................... 1,425 Cash................................................................ 1,425

30 Repairs and Maintenance Expense................... 35 Cash................................................................ 35

PE 10–1B

June 9 Accumulated Depreciation—Delivery Van........ 1,300 Cash................................................................ 1,300

9 Delivery Van ........................................................ 600 Cash................................................................ 600

PE 10–2A

a. $245,000 ($275,000 – $30,000) b. 10% = (1/10) c. $24,500 ($245,000 × 10%), or ($245,000/10 years)

PE 10–2B

a. $920,000 ($980,000 – $60,000) b. 5% = (1/20) c. $46,000 ($920,000 × 5%), or ($920,000/20 years)

PE 10–3A

a. $288,000 ($315,000 – $27,000) b. $3.20 per hour ($288,000/90,000 hours) c. $11,840 (3,700 hours × $3.20)



PE 10–3B

a. $110,000 ($150,000 – $40,000) b. $0.275 per mile ($110,000/400,000 miles) c. $22,000 (80,000 miles × $0.275)

PE 10–4A

a. 25% = [(1/8) × 2] b. $47,500 ($190,000 × 25%)

PE 10–4B

a. 4% = [(1/50) × 2] b. $32,800 ($820,000 × 4%)

PE 10–5A

a. $4,900 [($94,000 – $20,500)/15] b. $59,700 [$94,000 – ($4,900 × 7)] c. $7,450 [($59,700 – $15,000)/6]

PE 10–5B

a. $10,750 [($300,000 – $42,000)/24] b. $149,500 [$300,000 – ($10,750 × 14)] c. $25,900 [($149,500 – $20,000)/5]

PE 10–6A

a. $9,750 [($215,000 – $39,500)/18]

b. $9,000 loss {$128,000 – [$215,000 – ($9,750 × 8)]}

c. Cash................................................................................ 128,000 Accumulated Depreciation—Equipment ..................... 78,000 Loss on Sale of Equipment........................................... 9,000 Equipment................................................................. 215,000



PE 10–6B

a. $90,000 = $450,000 × [(1/10) × 2)] = $450,000 × 20%

b. $31,500 gain, computed as follows: Cost .................................................... $450,000 Less: First-year depreciation ........... (90,000) Second-year depreciation ...... (72,000) [($450,000 – $90,000) × 20%] Book value at end of second year.... $288,000

Gain on sale ($319,500 – $288,000) = $31,500

c. Cash................................................................................ 319,500 Accumulated Depreciation—Equipment ..................... 162,000 Equipment................................................................. 450,000 Gain on Sale of Equipment...................................... 31,500

PE 10–7A

a. $0.36 per ton = $90,000,000/250,000,000 tons

b. $10,800,000 = (30,000,000 tons × $0.36 per ton)

c. Dec. 31 Depletion Expense ....................................... 10,800,000 Accumulated Depletion.......................... 10,800,000 Depletion of mineral deposit.

PE 10–7B

a. $0.75 per ton = $300,000,000/400,000,000 tons

b. $63,000,000 = (84,000,000 tons × $0.75 per ton)

c. Dec. 31 Depletion Expense ....................................... 63,000,000 Accumulated Depletion.......................... 63,000,000 Depletion of mineral deposit.



PE 10–8A

a. Dec. 31 Loss from Impaired Goodwill...................... 750,000 Goodwill .................................................. 750,000 Impaired goodwill. b. Dec. 31 Amortization Expense—Patents ................. 20,000 Patents..................................................... 20,000 Amortized patent rights [($864,000/18) × 5/12].

PE 10–8B

a. Dec. 31 Loss from Impaired Goodwill...................... 1,200,000 Goodwill .................................................. 1,200,000 Impaired goodwill. b. Dec. 31 Amortization Expense—Patents ................. 18,000 Patents..................................................... 18,000 Amortized patent rights [($288,000/12) × 9/12].

PE 10–9A

a. Fixed Asset Turnover: 2012 2011

Net sales............................... $3,572,000 $3,526,000 Fixed assets: Beginning of year ........... $900,000 $820,000 End of year...................... $980,000 $900,000 Average fixed assets........... $940,000 $860,000 [($900,000 + $980,000) ÷ 2] [($820,000 + $900,000) ÷ 2] Fixed asset turnover ........... 3.8 4.1 ($3,572,000 ÷ $940,000) ($3,526,000 ÷ $860,000) b. The decrease in the fixed asset turnover ratio from 4.1 to 3.8 indicates an un-

favorable trend in the efficiency of using fixed assets to generate sales.



PE 10–9B

a. Fixed Asset Turnover: 2012 2011

Revenue................................ $740,000 $520,000 Fixed assets: Beginning of year ........... $425,000 $375,000 End of year...................... $500,000 $425,000 Average fixed assets........... $462,500 $400,000 [($425,000 + $500,000) ÷ 2] [($375,000 + $425,000) ÷ 2] Fixed asset turnover ........... 1.6 1.3 ($740,000 ÷ $462,500) ($520,000 ÷ $400,000) b. The increase in the fixed asset turnover ratio from 1.3 to 1.6 indicates a favor-

able trend in the efficiency of using fixed assets to generate sales.



EXERCISES

Ex. 10–1

a. New printing press: 1, 2, 3, 4, 5

b. Used printing press: 7, 8, 9, 10

Ex. 10–2

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. 10–3

Initial cost of land ($25,000 + $300,000) .................... $325,000 Plus: Legal fees .......................................................... $ 2,100 Delinquent taxes ............................................... 14,000 Demolition of building...................................... 9,000 25,100 $350,100 Less salvage of materials........................................... 3,500 Cost of land ................................................................. $346,600

Ex. 10–4

Capital expenditures: 1, 2, 3, 4, 5, 8, 10

Revenue expenditures: 6, 7, 9

Ex. 10–5

Capital expenditures: 1, 2, 3, 4, 6, 10

Revenue expenditures: 5, 7, 8, 9



Ex. 10–6

Feb. 4 Accumulated Depreciation—Delivery Truck .... 4,300 Cash................................................................ 4,300

May 6 Delivery Truck ..................................................... 1,900 Cash................................................................ 1,900

Sept. 10 Repairs and Maintenance Expense................... 60 Cash................................................................ 60

Ex. 10–7

a. No. The $7,500,000 represents the original cost of the equipment. Its replace-ment cost, which may be more or less than $7,500,000, is not reported in the financial statements.

b. No. The $6,175,000 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. 10–8

(a) 25% (1/4), (b) 12.5% (1/8), (c) 10% (1/10), (d) 6.25% (1/16), (e) 4% (1/25), (f) 2.5% (1/40), (g) 2% (1/50)

Ex. 10–9

$6,625 [($120,000 – $14,000)/16]

Ex. 10–10

s ,, $ ,$

hour0004000037000185 − = $3.70 depreciation per hour

140 hours at $3.70 = $518 depreciation for February



Ex. 10–11

a. Depreciation per Rate per Mile:

Truck #1 ($75,000 – $15,000)/200,000 = $0.30 Truck #2 ($38,000 – $3,000)/200,000 = $0.175 Truck #3 ($72,900 – $9,900)/300,000 = $0.21 Truck #4 ($90,000 – $20,000)/250,000 = $0.28

Credit to Accumulated Truck No. Rate per Mile Miles Operated Depreciation

1 30.0 cents 19,500 $ 5,850 2 17.5 36,000 6,300 3 21.0 25,000 2,100* 4 28.0 26,000 7,280 Total ............................................................................................. $21,530

*Mileage depreciation of $5,250 (21 cents × 25,000) is limited to $2,100, which reduces the book value of the truck to $9,900, its residual value.

b. Depreciation Expense—Trucks.................................... 21,530 Accumulated Depreciation—Trucks....................... 21,530 Truck depreciation.

Ex. 10–12

First Year Second Year a. 4% of $80,000 = $3,200 4% of $80,000 = $3,200

or or

($80,000/25) = $3,200 ($80,000/25) = $3,200

b. 8% of $80,000 = $6,400 8% of ($80,000 – $6,400) = $5,888

Ex. 10–13

a. 6 1/4% of ($344,000 – $50,000) = $18,375 or [($344,000 – $50,000)/16]

b. Year 1: 12.5% of $344,000 = $43,000 Year 2: 12.5% of ($344,000 – $43,000) = $37,625



Ex. 10–14

a. Year 1: 9/12 × [($64,000 – $4,000)/8] = $5,625 Year 2: ($64,000 – $4,000)/8 = $7,500

b. Year 1: 9/12 × 25% of $64,000 = $12,000 Year 2: 25% of ($64,000 – $12,000) = $13,000

Ex. 10–15

a. $16,250 [($900,000 – $250,000)/40]

b. $510,000 [$900,000 – ($16,250 × 24 yrs.)]

c. $30,000 [($510,000 – $240,000)/9 yrs.]

Ex. 10–16

a. June 30 Carpet............................................................ 15,000 Cash......................................................... 15,000

b. Dec. 31 Depreciation Expense.................................. 625 Accumulated Depreciation..................... 625 Carpet depreciation

[($15,000/12 years) × 1/2].

Ex. 10–17

a. Cost of equipment .................................................................... $380,000 Accumulated depreciation at December 31, 2012 (4 years at $21,250* per year) ............................................. 85,000 Book value at December 31, 2010 ........................................... $295,000 *($380,000 – $40,000)/16 = $21,250 b. (1) Depreciation Expense—Equipment ...................... 10,625 Accumulated Depreciation—Equipment ......... 10,625 Truck depreciation ($21,250 × 6/12 = $10,625).

(2) Cash......................................................................... 270,000 Accumulated Depreciation—Equipment............... 95,625* Loss on Sale of Equipment.................................... 14,375 Equipment.......................................................... 380,000 *($85,000 + $10,625 = $95,625)



Ex. 10–18

a. 2009 depreciation expense: $40,000 [($425,000 – $65,000)/9] 2010 depreciation expense: $40,000 2011 depreciation expense: $40,000

b. $305,000 [$425,000 – ($40,000 × 3)]

c. Cash................................................................................ 290,000 Accumulated Depreciation—Equipment ..................... 120,000 Loss on Disposal of Fixed Assets ............................... 15,000 Equipment................................................................. 425,000

d. Cash................................................................................ 310,000 Accumulated Depreciation—Equipment ..................... 120,000 Equipment................................................................. 425,000 Gain on Sale of Equipment...................................... 5,000

Ex. 10–19

a. $15,000,000/120,000,000 tons = $0.125 depletion per ton 24,000,000 × $0.125 = $3,000,000 depletion expense

b. Depletion Expense......................................................... 3,000,000 Accumulated Depletion ........................................... 3,000,000 Depletion of mineral deposit.

Ex. 10–20

a. ($300,000/12) + ($72,000/9) = $33,000 total patent expense

b. Amortization Expense—Patents .................................. 33,000 Patents ...................................................................... 33,000 Amortized patent rights ($25,000 + $8,000).



Ex. 10–21

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

Current Preceding Year Year

Land and buildings.................................................... $ 955 $ 810 Machinery, equipment, and internal-use software . 1,932 1,491 Office furniture and equipment ................................ 115 122 Other fixed assets related to leases ........................ 1,665 1,324 $4,667 $3,747 Less accumulated depreciation ............................... 1,713 1,292 Book value ................................................................. $2,954 $2,455

A comparison of the book values of the current and preceding years indicates that they increased. A comparison of the total cost and accumulated depre-ciation reveals that Apple purchased $920 million ($4,667 – $3,747) of addi-tional fixed assets, which was offset by the additional depreciation expense of $421 million ($1,713 – $1,292) taken during the current year.

b. The book value of fixed assets should normally increase during the year. Al-though additional depreciation expense will reduce the book value, most companies invest in new assets in an amount that is at least equal to the depreciation expense. However, during periods of economic downturn, com-panies purchase fewer fixed assets, and the book value of their fixed assets may decline.

Ex. 10–22

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.



Ex. 10–23

a. Fixed Asset Turnover Ratio = AssetsFixedofValueBookAverageRevenue

Fixed Asset Turnover Ratio = $86,546)/2 + ($91,466

$107,808

Fixed Asset Turnover Ratio = 1.21

b. Verizon earns $1.21 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 asset turnover ratio is slightly lower at 1.10. Thus, Verizon is using its fixed assets slightly more efficiently than the industry as a whole.

Ex. 10–24

a. Best Buy: 12.04 ($45,015/$3,740)

RadioShack: 13.54 ($4,225/$312)

b. RadioShack’s fixed asset turnover ratio of 13.54 is higher than Best Buy’s fixed asset turnover ratio of 12.04. Thus, RadioShack is generating $1.50 ($13.54 – $12.04) more revenue for each dollar of fixed assets than is Best Buy. On this basis, RadioShack is managing its fixed assets slightly more efficiently than is Best Buy.

Appendix Ex. 10–25

a. Price (fair market value) of new equipment ............................... $400,000 Trade-in allowance of old equipment ......................................... 175,000 Cash paid on the date of exchange ............................................ $225,000 b. Price (fair market value) of new equipment .............. $400,000 Less assets given up in exchange: Book value of old equipment.............................. $160,000 Cash paid on the exchange ................................ 225,000 385,000 Gain on exchange of equipment................................ $ 15,000




a. Price (fair market value) of new equipment ............................... $400,000 Trade-in allowance of old equipment ......................................... 175,000 Cash paid on the date of exchange ............................................ $225,000 b. Price (fair market value) of new equipment ................ $400,000 Less assets given up in exchange: Book value of old equipment................................ $185,000 Cash paid on the exchange .................................. 225,000 410,000 Loss on exchange of equipment.................................. $ 10,000


a. Depreciation Expense—Equipment ............................. 4,500 Accumulated Depreciation—Equipment ................ 4,500 Equipment depreciation ($18,000 × 3/12). b. Accumulated Depreciation—Equipment ..................... 220,500 Equipment ...................................................................... 350,000 Loss on Exchange of Fixed Assets.............................. 9,500 Equipment................................................................. 280,000 Cash .......................................................................... 300,000


a. Depreciation Expense—Trucks.................................... 3,750 Accumulated Depreciation—Trucks....................... 3,750 Truck depreciation ($7,500 × 6/12). b. Accumulated Depreciation—Trucks ............................ 45,750 Trucks............................................................................. 80,000 Trucks ....................................................................... 60,000 Cash .......................................................................... 65,000 Gain on Exchange of Fixed Assets ........................ 750



PROBLEMS

Prob. 10–1A

1. Land Other Item Land Improvements Building Accounts

a. $ 3,000 b. 350,000 c. 18,000 d. 5,000 e. (3,000)* f. 12,000 g. $ 4,200 h. 17,500 i. 44,000 j. $(750,000)* k. 5,500 l. $15,000 m. 9,000 n. 1,000 o. 2,500 p. (6,000)* q. 800,000 r. 37,500

s. (350)* 2. $402,500 $25,000 $885,350

*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.

4. Since Land Improvements are depreciated, depreciation expense of $1,750 ($17,500 × 1/20 × 2) would be overstated and net income would be under-stated by $1,750 on the income statement. On the balance sheet, Land would be understated by $17,500, Land Improvements would be overstated by $15,750 ($17,500 – $1,750), and Owner’s Capital would be understated by $1,750.



Prob. 10–2A

1.

Depreciation Expense a. Straight- b. Units-of- c. Double- Line Production Declining-Balance Year Method Method Method

2010 $31,250 $35,625 $67,500 2011 31,250 31,500 22,500 2012 31,250 26,625 3,750 Total $93,750 $93,750 $93,750

Calculations:

Straight-line method:

($101,250 – $7,500)/3 = $31,250 each year

Units-of-production method:

($101,250 – $7,500)/25,000 hours = $3.75 per hour

2010: 9,500 hours @ $3.75 = $35,625 2011: 8,400 hours @ $3.75 = $31,500 2012: 7,100 hours @ $3.75 = $26,625

Double-declining-balance method:

2010: $101,250 × 2/3 = $67,500 2011: ($101,250 – $67,500) × 2/3 = $22,500 2012: ($101,250 – $67,500 – $22,500 – $7,500*) = $3,750

*Book value should not be reduced below the residual value of $7,500.

2. The double-declining-balance method yields the most depreciation expense in 2010 of $67,500.

3. All three depreciation methods yield the same total depreciation over the three-year life of the equipment of $93,750, which is the cost of the equipment of $101,250 less the residual value of $7,500.



Prob. 10–3A

a. Straight-line method: 2010: [($135,000 – $6,000)/3] × 1/2 ........................................... $21,500 2011: ($135,000 – $6,000)/3....................................................... 43,000 2012: ($135,000 – $6,000)/3....................................................... 43,000 2013: [($135,000 – $6,000)/3] × 1/2 ........................................... 21,500 b. Units-of-production method: 2010: 1,500 hours @ $10.75* .................................................... $16,125 2011: 3,500 hours @ $10.75 ..................................................... 37,625 2012: 5,000 hours @ $10.75 ..................................................... 53,750 2013: 2,000 hours @ $10.75 ..................................................... 21,500

*($135,000 – $6,000)/12,000 hours = $10.75 per hour c. Double-declining-balance method: 2010: $135,000 × 2/3 × 1/2......................................................... $45,000 2011: ($135,000 – $45,000) × 2/3 .............................................. 60,000 2012: ($135,000 – $45,000 – $60,000) × 2/3.............................. 20,000 2013: ($135,000 – $45,000 – $60,000 – $20,000 – $6,000*) ..... 4,000

*Book value should not be reduced below $6,000, the residual value.



Prob. 10–4A

1. Accumulated Depreciation Depreciation, Book Value,

Year Expense End of Year End of Year

a. 1 $144,000* $144,000 $643,500 2 144,000 288,000 499,500 3 144,000 432,000 355,500 4 144,000 576,000 211,500 5 144,000 720,000 67,500 *[($787,500 – $67,500)/5]

b. 1 $315,000 [$787,500 × (1/5) × 2] $315,000 $472,500 2 189,000 [$472,500 × (1/5) × 2] 504,000 283,500 3 113,400 [$283,500 × (1/5) × 2] 617,400 170,100 4 68,040 [$170,100 × (1/5) × 2] 685,440 102,060 5 34,560* [$787,500 – $685,440 – $67,500] 720,000 67,500

*Book value should not be reduced below $67,500, the residual value. 2. Cash................................................................................ 115,000 Accumulated Depreciation—Equipment ..................... 685,440 Equipment................................................................. 787,500 Gain on Sale of Equipment...................................... 12,940* *($115,000 – $102,060) 3. Cash................................................................................ 98,900 Accumulated Depreciation—Equipment ..................... 685,440 Loss on Sale of Equipment........................................... 3,160* Equipment................................................................. 787,500 *($102,060 – $98,900)



Prob. 10–5A

2010 Jan. 9 Delivery Equipment ...................................................... 30,000 Cash ......................................................................... 30,000 Mar. 17 Truck Repair Expense.................................................. 400 Cash ......................................................................... 400 Dec. 31 Depreciation Expense—Delivery Equipment ............. 15,000 Accumulated Depreciation—Delivery Equipment 15,000 Delivery equipment depreciation.

[$30,000 × (1/4 × 2)] 2011 Jan. 2 Delivery Equipment ...................................................... 48,000 Cash ......................................................................... 48,000 Aug. 1 Depreciation Expense—Delivery Equipment ............. 4,375 Accumulated Depreciation—Delivery Equipment 4,375 Delivery equipment depreciation. [$30,000 – $15,000 × (1/4 × 2) × 7/12] 1 Accumulated Depreciation—Delivery Equipment ..... 19,375 Cash............................................................................... 12,500 Delivery Equipment................................................. 30,000 Gain on Sale of Delivery Equipment...................... 1,875 Sept. 23 Truck Repair Expense.................................................. 325 Cash ......................................................................... 325 Dec. 31 Depreciation Expense—Delivery Equipment ............. 19,200 Accumulated Depreciation—Delivery Equipment 19,200 Delivery equipment depreciation.

[$48,000 × (1/5 × 2)]



Prob. 10–5A (Concluded)

2012 July 1 Delivery Equipment ...................................................... 52,000 Cash ......................................................................... 52,000 Oct. 2 Depreciation Expense—Delivery Equipment ............. 8,640 Accumulated Depreciation—Delivery Equipment 8,640 Delivery equipment depreciation.

[$48,000 – $19,200 × (1/5 × 2) × 9/12]

2 Cash............................................................................... 17,000 Accumulated Depreciation—Delivery Equipment ..... 27,840 Loss on Sale of Delivery Equipment........................... 3,160 Delivery Equipment................................................. 48,000 Dec. 31 Depreciation Expense—Delivery Equipment ............. 6,500 Accumulated Depreciation—Delivery Equipment 6,500 Delivery equipment depreciation.

[$52,000 × (1/8 × 2) × 1/2]



Prob. 10–6A

1. a. $864,000/3,600,000 board feet = $0.24 per board foot; 1,500,000 board feet × $0.24 per board foot = $360,000

b. Loss on impairment of goodwill, $4,000,000

c. $1,170,000/12 years = $97,500; 3/4 of $97,500 = $73,125 2. a. Depletion Expense ................................................... 360,000 Accumulated Depletion ...................................... 360,000 Depletion of timber rights.

b. Loss on Impairment of Goodwill............................. 4,000,000 Goodwill............................................................... 4,000,000

c. Amortization Expense—Patents ............................. 73,125* Patents................................................................. 73,125* Patent amortization. *($1,170,000/12 years) = $97,500; $97,500 × 3/4 = $73,125



Prob. 10–1B

1. Land Other

Item Land Improvements Building Accounts a. $ 5,000 b. 540,000 c. 2,500 d. 15,000 e. $ 36,000 f. 10,000 g. (4,000)* h. 20,000 i. 6,000 j. $(750,000)* k. 9,000 l. 3,000 m. 2,000 n. $12,000 o. 14,500 p. 45,000 q. (3,000)* r. 800,000 s. (1,000)* 2. $597,500 $26,500 $886,000

*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.

4. Since Land Improvements are depreciated, depreciation expense of $2,900

($14,500 × 1/10 × 2) would be understated and net income would be over-stated by $2,900 on the income statement. On the balance sheet, Land would be overstated by $14,500, Land Improvements would be understated by $11,600 ($14,500 – $2,900), and Owner’s Capital would be overstated by $2,900.



Prob. 10–2B

1.

Depreciation Expense a. Straight- b. Units-of- c. Double- Line Production Declining-Balance Year Method Method Method

2011 $100,000 $120,000 $225,000 2012 100,000 160,000 112,500 2013 100,000 100,000 56,250 2014 100000 20,000 6,250* Total $400,000 $400,000 $400,000

Calculations:

Straight-line method:

($450,000 – $50,000)/4 = $100,000 each year

Units-of-production method:

($450,000 – $50,000)/10,000 hours = $40 per hour

2011: 3,000 hours @ $40 = $120,000 2012: 4,000 hours @ $40 = $160,000 2013: 2,500 hours @ $40 = $100,000 2014: 500 hours @ $40 = $20,000

Double-declining-balance method:

2011: $450,000 × 50% = $225,000 2012: ($450,000 – $225,000) × 50% = $112,500 2013: ($450,000 – $225,000 – $112,500) × 50% = $56,250 2014: ($450,000 – $225,000 – $112,500 – $56,250 – $50,000*) = $6,250

*Book value should not be reduced below the residual value of $50,000. 2. The double-declining-balance method yields the most depreciation expense

in 2011 of $225,000. 3. All three depreciation methods yield the same total depreciation over the

four-year life of the equipment of $400,000, which is the cost of the equipment of $450,000 less the residual value of $50,000.



Prob. 10–3B

a. Straight-line method: 2010: [($72,000 – $2,700)/3] × 9/12 ............................................. $17,325 2011: ($72,000 – $2,700)/3........................................................... 23,100 2012: ($72,000 – $2,700)/3........................................................... 23,100 2013: [($72,000 – $2,700)/3] × 3/12 ............................................. 5,775 b. Units-of-production method: 2010: 2,400 hours @ $7.70* ........................................................ $18,480 2011: 4,000 hours @ $7.70.......................................................... 30,800 2012: 2,000 hours @ $7.70.......................................................... 15,400 2013: 600 hours @ $7.70.......................................................... 4,620

*($72,000 – $2,700)/9,000 hours = $7.70 per hour c. Double-declining-balance method: 2010: $72,000 × 2/3 × 9/12........................................................... $36,000 2011: ($72,000 – $36,000) × 2/3................................................... 24,000 2012: ($72,000 – $36,000 – $24,000) × 2/3.................................. 8,000 2013: ($72,000 – $36,000 – $24,000 – $8,000 – $2,700*)............ 1,300




Prob. 10–4B

1. Accumulated Depreciation Depreciation, Book Value,

Year Expense End of Year End of Year

a. 1 $16,650* $16,650 $55,350 2 16,650 33,300 38,700 3 16,650 49,950 22,050 4 16,650 66,600 5,400 *[($72,000 – $5,400)/4]

b. 1 $36,000 [$72,000 × (1/4) × 2] $36,000 $36,000 2 18,000 [$36,000 × (1/4) × 2] 54,000 18,000 3 9,000 [$18,000 × (1/4) × 2] 63,000 9,000 4 3,600* [$72,000 – $63,000 – $5,400] 66,600 5,400


2. Cash................................................................................ 13,750 Accumulated Depreciation—Equipment ..................... 63,000 Equipment................................................................. 72,000 Gain on Sale of Equipment...................................... 4,750* *($13,750 – $9,000) 3. Cash................................................................................ 3,700 Accumulated Depreciation—Equipment ..................... 63,000 Loss on Sale of Equipment........................................... 5,300* Equipment................................................................. 72,000 *($9,000 – $3,700)



Prob. 10–5B

2010 Jan. 4 Delivery Equipment ...................................................... 54,000 Cash ......................................................................... 54,000

Feb. 24 Truck Repair Expense.................................................. 275 Cash ......................................................................... 275 Dec. 31 Depreciation Expense—Delivery Equipment ............. 13,500 Accumulated Depreciation—Delivery Equipment 13,500 Delivery equipment depreciation.

[$54,000 × (1/8 × 2)]

2011 Jan. 3 Delivery Equipment ...................................................... 60,000 Cash ......................................................................... 60,000 Mar. 7 Truck Repair Expense.................................................. 300 Cash ......................................................................... 300

Apr. 30 Depreciation Expense—Delivery Equipment ............. 3,375 Accum. Depreciation—Delivery Equipment.......... 3,375 Delivery equipment depreciation. [$54,000 – $13,500 × (1/8 × 2) × 4/12]

30 Accum. Depreciation—Delivery Equipment ............... 16,875 Cash............................................................................... 35,000 Loss on Sale of Delivery Equipment........................... 2,125 Delivery Equipment................................................. 54,000 Dec. 31 Depreciation Expense—Delivery Equipment ............. 12,000 Accum. Depreciation—Delivery Equipment.......... 12,000 Delivery equipment depreciation.

[($60,000 × (1/10 × 2)]



Prob. 10–5B (Concluded)

2012 July 1 Delivery Equipment ............................................. 64,000 Cash ................................................................ 64,000 Oct. 7 Depreciation Expense—Delivery Equipment .... 7,200 Accum. Depreciation—Delivery Equipment. 7,200 Delivery equipment depreciation.

[$60,000 – $12,000 × (1/10 × 2) × 9/12]

7 Cash...................................................................... 45,000 Accum. Depreciation—Delivery Equipment ...... 19,200 Delivery Equipment........................................ 60,000 Gain on Sale of Delivery Equipment............. 4,200 Dec. 31 Depreciation Expense—Delivery Equipment .... 6,400 Accum. Depreciation—Delivery Equipment. 6,400 Delivery equipment depreciation.

[$64,000 × (1/10 × 2) × 6/12]



Prob. 10–6B

1. a. Loss on impairment of goodwill, $1,800,000

b. $900,000/10 years = $90,000; 1/2 of $90,000 = $45,000

c. $1,560,000/12,000,000 board feet = $0.13 per board foot; 3,200,000 board feet × $0.13 per board foot = $416,000

2. a. Loss on Impairment of Goodwill............................. 1,800,000 Goodwill............................................................... 1,800,000

b. Amortization Expense—Patents ............................. 45,000 Patents................................................................. 45,000 Patent amortization.

c. Depletion Expense ................................................... 416,000 Accumulated Depletion ...................................... 416,000 Depletion of timber rights.



CASES & PROJECTS

CP 10–1

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 Rosa Salinas to use Zebra Consulting Co.’s computers and laser printers to service her part-time accounting business, even on an after-hours basis. In addition, it is improper for Rosa’s cli-ents to call her during regular working hours. Such calls may interrupt or inter-fere with Rosa’s ability to carry out her assigned duties for Zebra Consulting Co.

CP 10–2

You should explain to Jay and Cora 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 generally accepted accounting principles is the preparation and reporting of true economic 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 Jay and Cora 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.



CP 10–3

1. a. Straight-line method:

2010: ($500,000/5) × 1/2 ....................................................................... $ 50,000 2011: ($500,000/5) ................................................................................ 100,000 2012: ($500,000/5) ................................................................................ 100,000 2013: ($500,000/5) ................................................................................ 100,000 2014: ($500,000/5) ................................................................................ 100,000 2015: ($500,000/5) × 1/2 ....................................................................... 50,000 b. MACRS:

2010: ($500,000 × 20%)........................................................................ $100,000 2011: ($500,000 × 32%)........................................................................ 160,000 2012: ($500,000 × 19.2%)..................................................................... 96,000 2013: ($500,000 × 11.5%)..................................................................... 57,500 2014: ($500,000 × 11.5%)..................................................................... 57,500 2015: ($500,000 × 5.8%)....................................................................... 29,000



CP 10–3 (Continued)

2. a. Straight-line method: Year 2010 2011 2012 2013 2014 2015 Income before depreciation.......... $900,000 $900,000 $900,000 $900,000 $900,000 $900,000 Depreciation expense ................... 50,000 100,000 100,000 100,000 100,000 50,000 Income before income tax ............ $850,000 $800,000 $800,000 $800,000 $800,000 $850,000 Income tax...................................... 340,000 320,000 320,000 320,000 320,000 340,000 Net income ..................................... $510,000 $480,000 $480,000 $480,000 $480,000 $510,000 b. MACRS: Year 2010 2011 2012 2013 2014 2015 Income before depreciation.......... $900,000 $900,000 $900,000 $900,000 $900,000 $900,000 Depreciation expense ................... 100,000 160,000 96,000 57,500 57,500 29,000 Income before income tax ............ $800,000 $740,000 $804,000 $842,500 $842,500 $871,000 Income tax...................................... 320,000 296,000 321,600 337,000 337,000 348,400 Net income ..................................... $480,000 $444,000 $482,400 $505,500 $505,500 $522,600



CP 10–3 (Concluded)

3. For financial reporting purposes, Paul 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, Paul should consider selecting the method that will minimize taxes. Based on the analyses in (2), both meth-ods 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 early years of useful life and more in the later years. For example, in 2010 the income tax expense using MACRS is $320,000, which is $20,000 ($340,000 – $320,000) less than the income tax expense using the straight-line depreciation of $340,000. Atlas Construction Co. can invest such differences 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.

CP 10–4

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. You may wish to divide the class into three groups to report back on patents, copyrights, and trademarks separately. The following is some information on patents, copyrights, and trademarks that you may find helpful in your discussions.

Patents A patent is requested by filing a written application at the relevant patent office. The person or company filing the application is referred to as “the applicant.” The applicant may be the inventor or its assignee. The application contains a descrip-tion of how to make and use the invention that must provide sufficient detail for a person skilled in the art (i.e., the relevant area of technology) to make and use the invention. In some countries, there are requirements for providing specific infor-mation such as the usefulness of the invention, the best mode of performing the invention known to the inventor, or the technical problem or problems solved by the invention. Drawings illustrating the invention may also be provided.



CP 10–4 (Concluded)

The application also includes one or more claims, although it is not always a re-quirement to submit these when first filing the application. The claims set out what the applicant is seeking to protect in that they define what the patent owner has a right to exclude others from making, using, or selling, as the case may be. In other words, the claims define what a patent covers or the “scope of protec-tion.”

After filing, an application is often referred to as “patent pending.” While this term does not confer legal protection, and a patent cannot be enforced until granted, it serves to provide warning to potential infringers that if the patent is issued, they may be liable for damages.

Source: http://en.wikipedia.org/wiki/Patent#Application_and_prosecution. Copyright

While copyright in the United States automatically attaches upon the creation of an original work of authorship, registration with the Copyright Office puts a copy-right holder in a better position if litigation arises over the copyright. A copyright holder desiring to register his or her copyright should do the following:

1. Obtain and complete appropriate form. 2. Prepare clear rendition of material being submitted for copyright. 3. Send both documents to the U.S. Copyright Office in Washington, D.C.

Source: http://en.wikipedia.org/wiki/United_States_copyright_law#Procedural_issues. Trademark

The law considers a trademark to be a form of property. Proprietary rights in relation to a trademark may be established through actual use in the marketplace, or through registration of the mark with the trademarks office (or “trademarks registry”) of a particular jurisdiction. In some jurisdictions, trademark rights can be established through either or both means. Certain jurisdictions generally do not recognize trademarks rights arising through use. In the United States, the only way to qualify for a federally registered trademark is to first use the trademark in commerce.[5] If trademark owners do not hold registrations for their marks in such jurisdictions, the extent to which they will be able to enforce their rights through trademark infringement proceedings will therefore be limited. In cases of dispute, this disparity of rights is often referred to as “first to file” as opposed to “first to use.” Other countries such as Germany offer a limited amount of common law rights for unregistered marks where to gain protection, the goods or services must occupy a highly significant position in the marketplace—where this could be 40% or more market share for sales in the particular class of goods or services.

Source: http://en.wikipedia.org/wiki/Trademark#Maintaining_rights.



CP 10–5

a. Fixed Asset Turnover = AssetsFixedofValueBookAverage

Revenue

Wal-Mart: $96,335$405,607 = 4.21

Occidental Petroleum: $32,856$15,403 = 0.47

Comcast Corporation: $24,034$34,256 = 1.43

b. The fixed asset turnover measures the amount of revenue earned per dollar of

fixed assets. Wal-Mart earns $4.21 of revenue for every dollar of fixed assets, while Occidental earns $0.47 and Comcast Corporation earns $1.43 in reve-nue for every dollar of fixed assets. Occidental 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 Occidental and Comcast. Although not required by the exercise, the income from operations before tax as a percent of sales (operating margin) for the three companies is Occidental, 31.2%; Comcast, 14.3%; and Wal-Mart, 5.4%. Thus, the difference between the fixed asset turnovers seems reason-able. Generally, companies with very low fixed asset turnovers, such as gas and oil exploration and production (Occidental) and cable communications (Comcast), 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.

Documents

Chapter 10 Fixed assets and intangible assets solution