Chapter 9 Solution of fundamental of financial accouting by EDMONDS (4th edition)

ANSWERS TO QUESTIONS - CHAPTER 9

1. Long-term operational assets are those assets that are used by a business to generate revenue. In contrast, investments are simply held for the production of interest and dividends and/or for price appreciation.

2. Tangible assets are those assets that have a physical existence. Some examples include buildings and equipment. Intangible assets are those assets that represent some rights and privileges associated with owning the asset. Some examples include copyrights, leases, and trademarks.

3. Specifically identifiable intangible assets are those assets that are purchased for a specific value or have a known value. Examples include patents, leases, and copyrights. Intangible assets that are not specifically identifiable are those purchased as part of the purchase of a whole business or group of assets. The value of these assets are determined by the excess of the purchase price of the group over the value of the specifically identifiable assets. The most common assets in this group include goodwill and covenants not to compete.

4. Depreciation is the systematic allocation of the cost of property, plant and equipment to the accounting periods over which they are to be used. Some examples of assets that are depreciated include buildings, machinery, and office equipment.

5. Natural resources are assets that are produced by nature. Some examples include oil, coal, minerals, timber, etc. They are called wasting assets because their value "wastes away" as the resources are removed from the earth.

9-1

6. Land is not a depreciable asset because land has an infinite life. Land is not destroyed by its use. Natural resources can be removed but the land will remain. When land and natural resources are purchased together, the cost of each must be accounted for separately.

7. Amortization is the systematic allocation of the cost of intangible assets over their estimated useful lives.

8. The historical cost concept requires that long-term operational assets be recorded at the amount paid for them. This is the amount that will be shown on the balance sheet as long as the asset is owned. As time passes the asset may increase or decline in value, but this change is not reflected on the books of the company. However, the historical cost of assets may be reduced by depreciation over their lives.

9. The cost of a building includes the amount paid for the building plus any amounts that are paid to put it to its intended use. Some common costs include the purchase price, title search fee, legal fees, sales commissions, remodeling, and improvements.

10. A basket purchase of assets is the purchase of a group of assets for a single purchase price. For example, building, land and equipment could be purchased for one price, $80,000. When a group of assets are purchased together, the purchase price must be allocated among the different assets. One of the more common methods of making the allocation is the relative fair market value method. The fair market value of each asset is determined and then its ratio to the total fair market value of all assets is applied to the total purchase price.

11. The life cycle of a long-term operational asset simply describes the process of acquiring, using, and retiring the asset. This process includes obtaining the funding

9-2

to acquire the asset, acquiring the asset, using the asset, and disposing of the asset.

12. Straight-line depreciation. This method allocates an equal amount of depreciation to each period over the useful life of the asset. Example: Asset cost of $4,000 with a 4-year life and no salvage value would produce a depreciation expense of $1,000 per year. This method is appropriate when the usefulness of an asset is consistent over the asset's life.

Units-of-production depreciation. When this method of depreciation is used, depreciation is calculated for each estimated unit of use, e.g. cost per mile. This estimated unit cost is then applied to the actual use of the asset for the period. Example: Asset cost of $4,000 with estimated use of 20,000 miles would produce a cost per mile of .20. If the asset was used 4,000 miles in the year, the depreciation would be $800 (.20 X 4,000). This method is more appropriate when the usefulness of an asset is related to the amount of use.

Double-declining balance depreciation. This is an accelerated depreciation method that allocates more of the cost of an asset to expense in the early years of the asset's life. It is called double-declining balance because the method applies twice the straight-line rate to the book value of the asset.

Example: Asset cost of $4,000 with an estimated useful life of 4 years would produce an expense of $2,000 in the first year [$4,000 X (2 X .25)]. The amount of depreciation expense will decrease each year of the asset's life. This method is appropriate when the usefulness of an asset decreases more in the early years of life than it does in the later years of the asset's life.

9-3

13. Recognition of depreciation expense reduces total assets; while the asset account containing the asset that is being depreciated is not changed, the contra asset account, accumulated depreciation, is increased which, in turn, reduces total assets. Total equity is decreased when an expense is recognized.

14. The recognition of depreciation expense does not affect cash flows. Depreciation recognition is simply the allocation of part of a previously acquired asset to expense. Cash is affected when the asset is purchased, an improvement is made to the asset and when it is sold.

15. Total assets will be lower at the end of the first year of the asset’s life if MalMax chooses the double-declining balance method of computing depreciation rather than straight-line. This results because more expense is recognized in the early years of an asset’s life when double declining balance is used. However, at the end of the asset’s life, total assets will be the same regardless of the method chosen because the amount of total depreciation recognized over the asset’s life is the same regardless of the depreciation method chosen.

16. When the total cost of an asset is expensed in the year acquired, total expense will be overstated and net income will be understated. Because all of a plant asset's cost is erroneously expensed, assets will be understated and retained earnings will be understated because net income was understated.

17. Salvage value is the estimated value of a plant asset at the end of its useful life to the business.

18. Accumulated depreciation is a contra asset account. As the cost of a plant asset is expensed, a contra asset account is credited, rather than a direct reduction of

9-4

the related asset account. This method is used because the expired cost is an estimate, not an exact amount. In addition, this method provides more information to financial information users, in that the original cost is shown in the asset account and the estimated expired cost is shown as accumulated depreciation.

19. Recording the depreciation recognized in the contra asset account allows the total cost of the asset and the total amount expensed to be shown in the accounts and on the balance sheet. This provides more information to the reader of the financial statements, e.g., some judgment can be made about the age and use of the asset.

20. Book value is computed as the cost of an asset less the accumulated depreciation of that equipment, $5,000 $3,000 = $2,000. This does not represent the fair market value of the equipment because the accumulated depreciation is only an estimate of the expired cost. In addition, the value of the equipment may not be related to its original cost.

21. The method of depreciation chosen should represent as closely as possible the expiration of the cost of that piece of equipment. For instance, double-declining balance may be used for an asset that will decline in usefulness more in the early years of the life of the piece of equipment. Straight-line depreciation should be used when the cost expires at a constant rate.

22. MACRS, Modified Accelerated Cost Recovery System, is the prescribed method to be used for tax purposes. Under MACRS, useful lives are classified in set recovery periods. The prescribed method of MACRS uses, in most cases, the double-declining balance method switching to straight-line in the later years. The straight-line method of MACRS can also be used.

9-5

MACRS is generally required for tax reporting. It is not GAAP.

23. The method required for tax purposes, MACRS, does not necessarily reflect the use of the asset. The recovery period and method is set by the Internal Revenue Service with no regard for how each piece of equipment will be used. This method promotes consistency in recovery periods and methods in similar assets regardless of use or type of business. For most property, MACRS is based on the double-declining balance method, switching to straight-line. Generally, other methods may not be used for tax purposes.

24. Deferred taxes are taxes that will be paid in future years that result from different accounting methods being used for financial statement reporting and income tax reporting. Deferred taxes are generally shown as a liability on the balance sheet.

25. When an asset is purchased and put into service, an estimate is made of the expected useful life of the asset. However, as the asset is used, it may become apparent that the estimate was incorrect or circumstances may have changed (i.g., the asset is used more than expected) to cause the estimate to be incorrect. When these situations arise, it is necessary to revise the estimated useful life of the asset and, consequently, the amount of depreciation expense per period. The revised estimated useful life will affect the amount of depreciation per year. If the estimated life is longer than originally expected, the amount of depreciation per year will decrease; if the estimated useful life is shorter than originally expected, the amount of depreciation per year will be larger.

26. When an expenditure to an asset improves the quality, this improvement is accounted for as if a new asset is purchased; the equipment account is debited. The

9-6

improvement is depreciated over the remaining life of the original asset, since the life of the asset is not extended, only the quality is improved.

When an expenditure extends the life of the asset, this expenditure in effect reduces some of the depreciation already taken on the asset. This is accomplished by reducing the accumulated depreciation account (a debit to accumulated depreciation). Depreciation is recalculated by spreading the remaining book value, reduced by salvage value, over the remaining estimated life of the asset.

27. When a long-term operational asset is sold for a gain, total assets increase by the amount of the gain. The gain is the amount the asset is sold for over the book value of the asset. However, the cash flow from the sale of the equipment is the amount the asset is sold for (assuming it is sold for cash). The total amount of cash received is shown as a cash inflow in the investing section of the statement of cash flows.

28. Depletion is the process of systematically allocating the cost of natural resources to expense based on estimated production of the asset. The most common method used to calculate depletion is units-of-production. An estimated cost per unit of resource is determined by dividing the cost of the asset by the estimated production. The amount of expense for each period is based on the number of units extracted and sold.

29. Some of the most common intangible assets include patents, copyrights, and goodwill. Amortization is generally based on the legal life of the asset, the useful life of the asset, or, if these do not apply, a maximum period of 40 years. The asset is generally amortized over the shortest of these possible lives. The period over which an intangible asset can be

9-7

amortized for tax purposes is generally determined according to terms specified by tax law. These terms are generally different from those used for financial accounting.

30. Most countries have developed accounting principles that they apply to financial statements. While there are many similarities, some significant differences do exist. For example, in Britain, any purchased goodwill is charged to retained earnings in the year of the purchase, while in the U.S., goodwill is set up as an asset. Japanese accounting principles report research and development expense differently from U.S. GAAP. In Japan, R&D is set up as an asset and expensed over a period of time, whereas, in the U.S., R&D is expensed in the year incurred.

31. Some industries are very capital intensive while others are labor intensive. When evaluating managerial performance, one must understand the industry that a company is in and compare within the industry.

9-8

SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 9

EXERCISE 9-1A

Note: There are many possibilities for answers to this question. The answers given are only a few examples of long-term operational assets that these companies may own. Also note that even though the companies have very different business activities, they may have some of the same kinds of long-term operational assets.

Greyhound Bus Company:

Buses, Buildings, Office Equipment, Computer Equipment, Land, etc.

Exxon/Mobile:

Ships, Automobiles, Drilling Equipment, Oil Wells, Office Equipment, Buildings, Land, Communications Equipment, etc.

Merry Maids:

Automobiles, Vans, Cleaning Equipment, Maintenance Tools, Buildings, Land, Office Equipment, etc.

Placer/Dome Gold Mining Company:

Mining Equipment, Office Equipment, Buildings, Land, Gold Mine, etc.

9-9

EXERCISE 9-2A

Long-Term Operational Assets:a. Nob. Yesc. Yes (If the company is in a business that uses or sells timber)d. Yes (As long as it is not held for investment purposes)e. Yesf. Yesg. Noh. Yesi. Yesj. Nok. No (Even if it were for a period of one year or longer, it would be

classified as an investment.)l. Yes

EXERCISE 9-3A

a. Delivery Van T

b. Land T

c. Franchise I

d. Computer T

e. Copyright I

f. Copper Mine T

g. Plant Warehouse T

h. Drill Press T

i. Patent I

j. Oil Well T

k. Desk T

l. Goodwill I

9-10

EXERCISE 9-4A

Costs that are to be capitalized:List Price $90,000Less: Discount (4,500)Freight Cost 1,000Training Fee 900

Total Costs $87,400

The operator salary and increase in insurance are operating expenses.

EXERCISE 9-5A

a. Basket Purchase

b. % of* Purchase AllocatedTotal Appraised Value App. Val. Price Cost Land $140,000 .20 x $600,000 = $120,000Building 560,000 .80 x 600,000 = 480,000Total $700,000

*Land: $140,000 $700,000 = .20; Building: $560,000 $700,000 = .80

c. No, the historical cost concept requires that assets be recorded at the amount paid for them.

d.

Balance Sheet Income Statement Statemt. ofAssets = Liab. + S. Equity Rev. Exp. = Net Inc. Cash Flows

Cash + Land + Bldg. = +(600,000) + 120,000 + 480,000 = NA + NA NA NA = NA (600,000) IA

9-11

EXERCISE 9-6A

a.Asset Appraised Value Percent of Appraised Value

Land $120,000 20%Building 300,000 50%Equipment 180,000 30%Total $600,000 100%

Asset % of App. Value Purchase Price Allocated CostLand 20% x $500,000 = $100,000Building 50% x 500,000 = 250,000Equipment 30% x 500,000 = 150,000Total $500,000

b.Assets = Liab. Rev. Exp. = Net. Inc. Cash Flow

Cash + Land + Building + Equip. = N. Pay.(100,000) + 100,000 + 250,000 + 150,000 = 400,000 NA NA = NA (100,000) IA

c.Account Titles Debit Credit

Land 100,000Buildings 250,000Equipment 150,000

Cash 100,000Notes Payable 400,000

9-12

EXERCISE 9-7A

Depreciation Calculation: (Cost Accumulated Depr.) x (2 x SL Rate)

Year 1 ($160,000 $ -0-) x (2 x .20) = $64,000Year 2 ($160,000 $64,000) x (2 x .20) = $38,400

Swift CompanyT-Accounts

Assets = Stockholders’ Equity

Cash Common Stock Retained Earnings2001 2001 2001

160,000 160,000 160,000 cl 28,000 92,000 Bal. 160,000 Bal. 28,000

Bal. 92,000 20022002 26,600

65,000 Bal. 54,600Bal. 157,000

Service Revenue2001

Asset 92,0002001 cl 92,000

160,000 Bal. -0-Bal. 160,000 2002

65,000cl 65,000

Accumulated Depr. Bal. -0-2001 64,000 Depreciation Expense Bal. 64,000 20012002 64,000 cl 64,000

38,400 Bal. -0-Bal. 102,400 2002

38,400 cl 38,400Bal. -0-

9-13

EXERCISE 9-7A (cont.)

Swift CompanyFinancial Statements

2001 2002

Income Statements

Service Revenue $92,000 $65,000

Depreciation Expense (64,000) (38,400)

Net Income $28,000 $26,600

Balance Sheets

AssetsCash $ 92,000 $157,000Asset 160,000 160,000Accumulated Depreciation (64,000) (102,400)

Total Assets $188,000 $214,600

Stockholders’ EquityCommon Stock $160,000 $160,000Retained Earnings 28,000 54,600

Total Stockholders’ Equity $188,000 $214,600

Statements of Cash Flows

Cash Flows From Operating Activities:Inflow from Customers $92,000 $ 65,000

Cash Flows From Investing Activities:Outflow to Purchase Asset (160,000) -0-

Cash Flows From Financing Activities:Inflow from Stock Issue 160,000 -0-

Net Change in Cash 92,000 65,000Plus: Beginning Cash Balance -0- 92,000Ending Cash Balance $92,000 $157,000

9-14

EXERCISE 9-8A

a. Calculation of Depreciation:Van Cost $30,000Sales Tax 1,000

Total Cost $31,000

Depreciable Cost: $31,000 $6,000 = $25,000 Depreciation: $25,000 5 years = $5,000 per year

2002 Depreciation: $5,0002003 Depreciation: $5,000

b. 2002 Debit Credit

Depreciation Expense ……………….. 5,000 Accumulated Depreciation ….. 5,000

c. Cost $31,000Less: Accumulated Depreciation (15,000) ($5,000 x 3)Book Value, 1/1/2005 $16,000

Gain on Sale = $20,000 $16,000 = $4,000

2005 Debit Credit

Cash ………………………………… 20,000 Accumulated Depreciation ……….. 15,000 Delivery Van …………………. 31,000 Gain on Sale …………………. 4,000

9-15

EXERCISE 9-9Aa.1. Straight-Line Calculation:

Cost $40,000Less: Salvage ( 2,000)Cost to Be Depreciated $38,000 5 = $7,600 depr. per year

2. Double-Declining Balance Calculation:

Cost Accumulated Depreciation x (2 x Straight-Line Rate)

Year 1 ($40,000 $0 ) x (2 x .20) = $16,000Year 2 ($40,000 $16,000) x (2 x .20) = 9,600Year 3 ($40,000 $25,600) x (2 x .20) = 5,760Year 4 ($40,000 $31,360) x (2 x .20) = 3,456Year 5 ($40,000 $34,816) x (2 x .20) = 3,184 * Total $38,000

*Since the total depreciable cost is $38,000 ($40,000 $2,000), the balance must be expensed in Year 5 ($38,000 $34,816).

b.Expert Manufacturing

Statements Model

Balance Sheet Income Statement Stmt. ofAssets = S. Equity Rev Exp. = Net Inc. Cash Flows

Cash + D. Press Acc. Depr = Ret. Ear.(40,000) + 40,000 NA = NA NA NA = NA (40,000) IA

Straight-LineNA + NA 7,600 = (7,600) NA 7,600 = (7,600) NA

DDBNA + NA 16,000 = (16,000) NA 16,000 = (16,000) NA

9-16


c. 1.Expert Manufacturing

General Journal

Date Account Title Debit Credit

Yr. 1 Depreciation Expense 7,600Accumulated Depreciation 7,600

Entries for years 2-5 will be the same.

c. 2.Expert Manufacturing

General Journal







9-17

EXERCISE 9-10A

a. Historical Cost $20,000Less: Accumulated Depreciation (15,000)Book Value $ 5,000

b. Sales Price $ 6,000Less: Book Value ( 5,000)Gain on Sale $ 1,000

c. Net income would increase by $1,000, the amount of the gain, in the year of the sale.

d. Total assets would increase by $1,000, the amount of the gain. Cash would increase by $6,000; plant assets would decrease by $20,000; and accumulated depreciation would decrease by $15,000.

e. Cash would increase by $6,000 (Inflow from Investing Activities).

9-18

EXERCISE 9-11A

a. Double-Declining Balance

(Cost Accum. Depr.) x (2 x SL Rate) = Depr. Exp. Per Year

2005: ($40,000 $0) x (2 x .20) = 16,0002006: ($40,000 $16,000) x (2 x .20) = $9,6002007: ($40,000 $25,600) x (2 x .20) = 5,7602008: ($40,000 $31,360) x (2 x .20) = 3,4562009: ($40,000 $34,816) x (2 x .20) = 2,074 1,184*Total Accumulated Depreciation $36,000

*Since the total depreciable cost is $36,000 ($40,000 $4,000), the total depreciation taken in 2009 is $1,184 ($36,000 $34,816).

b. Units-of-Production

(Cost Salvage) Estimated Production = Depr. Cost per Unit

$40,000 $4,000 = $36,000$36,000 2,000,000 = $.018 cost per unit

Annual Depreciation = Depr. Cost per Unit x Actual Annual Units

2005: $.018 x 550,000 = $ 9,9002006: $.018 x 480,000 = 8,6402007: $.018 x 380,000 = 6,8402008: $.018 x 390,000 = 7,0202009 $.018 x 240,000 = 4,320 3,600*Total Accumulated Depr. $36,000

*The total depreciable cost is $36,000 ($40,000 $4,000). The depreciation taken in 2009 is limited to $3,600 [$36,000 ($9,900 + $8,640 + $6,840 + $7,020)].

9-19


c. Calculation of Book Value

Double-Declining Balance

Cost $40,000Less: Accumulated Depr. (36,000)Book Value $ 4,000

Units-of-Production

Cost $40,000Less: Accumulated Depr. (36,000 ) Book Value $ 4,000

Calculation of GainUnits-of-

DDB ProductionSales Price $5,200 $5,200Book Value (4,000) (4,000)Gain $1,200 $1,200

9-20

EXERCISE 9-12A

a. MACRS depreciation = Cost x Table %

7-year property

2002 $120,000 x .1429 = $17,1482003 $120,000 x .2449 = $29,388

b. 5-year property

2002 $120,000 x .20 = $24,0002003 $120,000 x .32 = $38,400

EXERCISE 9-13A

Depreciation

Expense 2001: $48,000 $6,000 = $42,000; $42,000 3 = $14,000

2002: (Same as year 2001) $14,000

2003:Cost $48,000

Less: Acc.Depr. (28,000) Book Value $20,000 $4,000* = $16,000

New Book Value: $16,000 2** = $8,000

*revised salvage**revised remaining life

2004: (Same as year 2003) $8,000

9-21

EXERCISE 9-14A

Delivery Truck: Book value would still be $5,000; the $700 repair cost will be expensed.

Building: $56,000 will be the new book value. Old book value was $50,000 ($90,000 $40,000), plus the $6,000 cost of the new roof that will reduce accumulated depreciation. Or, the cost of $90,000 less new accumulated depreciation of $34,000 ($40,000 $6,000) yields a book value of $56,000.

9-22

EXERCISE 9-15Aa.

Assets = Stockholders’ Equity Rev. - Exp. = Net Inc. Cash Flow

Cash + F. Lift A. Dep. = C. Stock + Ret. Ear.12,000 + 106,000 50,000 = 24,000 + 44,000 NA NA = NA NA

(10,000) + NA NA = NA + (10,000) NA 10,000 = (10,000) (10,000) OA

b.Assets = Stockholders’

EquityRev. Exp. = Net Inc. Cash Flow

Cash + F. Lift - A. Depr. = C. Stock + Ret. Ear.12,000 + 106,000 50,000 = 24,000 + 44,000 NA NA = NA NA

(10,000) + NA (10,000) = NA + NA NA NA = NA (10,000) IA

c.Assets = Stockholders’


Cash + F. Lift - A. Dep. = C. Stock + Ret. Ear.12,000 + 106,000 50,000 = 24,000 + 44,000 NA NA = NA NA

(10,000) + 10,000 NA = NA + NA NA NA = NA (10,000) IA

9-23

EXERCISE 9-16A

a. $30,000 2 = $15,000 additional depreciation expense for 2005 and 2006.

b. $30,000 of expense would be recognized in 2005 and $-0- in 2006.

c. $-0- cash outflow from operating activities in 2005, $-0- cash outflow from operating activities in 2006 (cash outflow is from investing activities).

d. $30,000 cash outflow from operating activities in 2005 and $-0- in 2006.

9-24

EXERCISE 9-17A

a. Depletion charge per unit: $500,000 800,000 cubic yds = $.625 per cubic yd.

b. Depletion Calculation:Year 1 $.625 x 350,000 = $218,750Year 2 $.625 x 380,000 = $237,500

Valley Sand and GravelStatements Model

Assets = Stockholders’ Equity Rev. Exp. = Net Inc. Cash FlowCash + Sand Res. = C. Stock + Ret. Ear.

800,000 + NA = 800,000 + NA NA NA = NA NA (500,000) + 500,000 = NA + NA NA NA = NA (500,000) IA

Depletion for Year 1NA + (218,750) = NA + (218,750) NA 218,750 = (218,750) NA


c.Year 1

Debit Credit Depletion Expense 218,750

Sand Reserves 218,750

Year 2Depletion Expense 237,500

Sand Reserves 237,500

9-25

EXERCISE 9-18A

a. Patent $28,000 5 = $5,600 per year

b.Dallas Manufacturing

Statements Model

Assets = S. Equity Rev. - Exp. = Net Inc. Cash FlowCash + Patent + G. Will =94,000 + NA + NA = 94,000 NA NA = NA NA

Pur. (88,000)+28,000 + 60,000 = NA NA NA = NA (88,000) IA

Pat. NA + (5,600) + NA = (5,600) NA 5,600 = (5,600) NA

Debit Credit

c. Patents 28,000Goodwill 60,000

Cash 88,000

Amortization Expense - Patents 5,600Patents 5,600

9-26

EXERCISE 9-19A

a. Purchase Price:Cash Paid $300,000Liabilities Assumed 30,000Total 330,000FMV of Assets (270,000)Goodwill $ 60,000

b.Alpha PeripheralsStatements Model

Assets = Liab. + S. Equity Rev. Exp. = Net Inc. Cash FlowCash + Assets + G. Will = +400,000 + NA + NA = + 400,000 NA NA = NA NA

Pur. (300,000) + 270,000 + 60,000 = 30,000 + NA NA NA = NA (300,000) IA

9-27

SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 9

PROBLEM 9-20A

Office Equipment:List Price $25,000

Discount (250)Transportation-In 900Installation 650

$26,300Note: The $450 damage from unloading is not a part of the cost of the equipment. The $90 is routine maintenance.

Basket Purchase:Allocation is based on relative market values:

Asset Fair Market Value Percent of FMVOffice Furn. $ 6,000 12%Copier 6,000 12%Computers 28,000 56%Laser Printers 10,000 20%Total $50,000 100%

Asset% of Fair

Market Value x Purchase Price =Allocated

CostsOffice Furn. 12% x $40,000 = $ 4,800Copier 12% x 40,000 = 4,800Computers 56% x 40,000 = 22,400Laser Printers 20% x 40,000 = 8,000Total $40,000

Land and Building: Land

Purchase Price $ 60,000Demolition of Barn 3,000Proceeds of Barn (2,000)Site Preparation 6,000Total Cost of Land $ 67,000

Building Construction Costs $180,000

9-28

PROBLEM 9-21A

Astro CompanyFinancial Statements

Income Statements

2005 2006 2007 2008 2009

Revenue $6,000 $6,200 $6,500 $7,000 $ -0-

Depr. Expense* (5,500) (5,500) (5,500) (5,500) -0-

Operating Income 500 700 1,000 1,500 -0-

Loss -0- -0- -0- -0- (500)**

Net Income $ 500 $700 $1,000 $1,500 $ (500)

Statements of Changes in Stockholders’ Equity

Beg. Com. Stock $ -0- $25,000 $25,000 $25,000 $25,000Plus: Stk. Issued 25,000 -0- -0- -0- -0-End. Com. Stock 25,000 25,000 25,000 25,000 25,000

Beg. Ret. Earn. -0- 500 1,200 2,200 3,700Plus: Net Income 500 700 1,000 1,500 (500)End. Ret. Earn. 500 1,200 2,200 3,700 3,200

Total Stk. Equity $25,500 $26,200 $27,200 $28,700 $28,200

*Depreciation: $25,000 $3,000 (salvage value) = $22,000; $22,000 4 = $5,500 per year

**Sale of Asset: Sales price $2,500 less book value $3,000=$500 loss

9-29

PROBLEM 9-21A (cont.)

Astro CompanyFinancial Statements

Balance Sheets

2005 2006 2007 2008 2009

AssetsCash $ 6,000 $12,200 $18,700 $25,700 $28,200Equipment 25,000 25,000 25,000 25,000 -0-Less, Acc. Dep. (5,500) (11,000) (16,500) (22,000) -0-

Total Assets $25,500 $26,200 $27,200 $28,700 $28,200

Stockholders’ EquityCommon Stock $25,000 $25,000 $25,000 $25,000 $25,000Retained Earnings 500 1,200 2,200 3,700 3,200

Total Stk. Equity $25,500 $26,200 $27,200 $28,700 $28,200


Operating Act.:Inflow from Cust. $6,000 $ 6,200 $ 6,500 $ 7,000 $ -0-

Net Cash Op. Act. 6,000 6,200 6,500 7,000 -0-

Investing Act.:Inflow from Sale -0- -0- -0- -0- 2,500Outflow for Equip. (25,000) -0- -0- -0- -0-

Net Cash Inv. Act. (25,000) -0- -0- -0- 2,500

Financing Act.Inflow from Stock 25,000 -0- -0- -0- -0-

Net Cash Fin. Act. 25,000 -0- -0- -0- -0-

Net Change in Cash 6,000 6,200 6,500 7,000 2,500Plus: Beg. Cash Bal. -0- 6,000 12,200 18,700 25,700Ending Cash Bal. $6,000 $12,200 $18,700 $25,700 $28,200

9-30

PROBLEM 9-22Aa.

Business Solutions ServicesHorizontal Statements Model

Event Assets = Liab. + S. Equity Net Income Cash Flow

20071. + NA + NA + FA2. + NA NA NA IA3. + NA NA NA IA4. + NA + + + OA5. NA OA6. NA NA7. NA NA + NA NA

20081. NA OA2. NA OA3. + NA + + + OA4. NA OA5. NA NA6. NA NA + NA NA

20091. + NA NA NA IA2. NA OA3. + NA + + + OA4. NA NA5. NA NA + NA NA

9-31

PROBLEM 9-22A (cont.)Note: The journal entries are provided for the use of the instructor.

Business Solutions ServicesGeneral Journal

Event Account Titles Debit Credit

20071. Cash 50,000

Common Stock 50,000

2. Computer 15,000Cash 15,000

3. Computer 500Cash 500

4. Cash 20,000Service Revenue 20,000

5. Service Fee Expense 800Cash 800

6. Depreciation Expense1 6,200Accumulated Depreciation 6,200

7. cl Service Revenue 20,000Service Fee Expense 800Depreciation Expense 6,200Retained Earnings 13,000

20081. Maintenance Expense 550

Cash 550

2. Maintenance Expense 600Cash 600


1($15,500 -0-) x (2 x .20) = $6,200

9-32

PROBLEM 9-22A b. (cont.)Business Solutions Services

General Journal


20084. Service Fee Expense 900

Cash 900


6. cl Service Revenue 30,000Maintenance Expense 1,150Service Fee Expense 900Depreciation Expense 3,720Retained Earnings 24,230

20091. Accumulated Depreciation 2,500

Cash 2,500

2. Service Fee Expense 800Cash 800



5. cl Service Revenue 35,000Service Fee Expense 800Depreciation Expense 4,040Retained Earnings 30,160

2($15,500 $6,200) x (2 x .20) = $3,720 depreciation for 20083[$15,500 ($9,920 $2,500)] x (2 x .25) = $4,040 depreciation for 2009

9-33

PROBLEM 9-22A b. (cont.)Note: T-accounts are provided for the use of the instructor.

Business Solutions ServicesT-Accounts



1. 50,000 2. 15,000 1. 50,000 7. 13,0004. 20,000 3. 500 Bal.

50,000Bal.13,000

5. 800 2008Bal.53,700 6. 24,2302008 Bal.

37,2303. 30,000 1. 550 2009

2. 600 5. 30,1604. 900 Bal.

67,390Bal.81,6502009 Service Revenue3. 35,000 1. 2,500 2007

2. 800 7. 20,000 4. 20,000Bal.

113,350Bal. -0-

20086. 30,000 3. 30,000

Computer Bal. -0-2007 20092. 15,000 5. 35,000 3. 35,0003. 500 Bal. -0-Bal.15,500

Maintenance Expense

Accumulated Depr. 20082007 1. 550

6. 6,200 2. 600 6. 1,150Bal.6,200 Bal. -0-

20085. 3,720Bal.9,920

20091. 2,500 4. 4,040

Bal.11,460

9-34

PROBLEM 9-22A b. (cont.)

Business Solutions ServicesT-Accounts


Service Fee Expense20075. 800 7. 800Bal. -0-20084. 900 6. 900Bal. -0-20092. 800 5. 800Bal. -0-

Depreciation Expense

20076. 6,200 7. 6,200Bal. -0-20085. 3,720 6. 3,720Bal. -0-20094. 4,040 5. 4,040Bal. -0-

9-35

PROBLEM 9-22A b. (cont.)

Business Solutions ServicesFinancial Statements

Income Statements

2007 2008 2009

Service Revenue $20,000 $30,000 $35,000

ExpensesMaintenance Expense -0- (1,150) -0-Service Fee Expense (800) (900) (800)Depreciation Expense (6,200) (3,720) (4,040)

Total Expenses (7,000) (5,770) (4,840)

Net Income $13,000 $24,230 $30,160


Beginning Common Stock $ -0- $50,000 $ 50,000Plus: Stock Issue 50,000 -0- -0-Ending Common Stock 50,000 50,000 50,000

Beginning Retained Earnings -0- 13,000 37,230Plus: Net Income 13,000 24,230 30,160Ending Retained Earnings 13,000 37,230 67,390

Total Stockholders’ Equity $63,000 $87,230 $117,390

9-36

PROBLEM 9-22A b.(cont.)

Business Solutions ServicesFinancial Statements

Balance Sheets

2007 2008 2009Assets

Cash $53,700 $81,650 $113,350Computer 15,500 15,500 15,500Less: Accumulated Depr. (6,200) (9,920) (11,460)

Total Assets $63,000 $87,230 $117,390

Liabilities $ -0- $ -0- $ - 0-

Stockholders’ EquityCommon Stock 50,000 50,000 50,000Retained Earnings 13,000 37,230 67,390

Total Stockholders’ Equity 63,000 87,230 117,390

Total Liab. and Stkholders’ Equity $63,000 $87,230 $117,390


Cash Flows From Oper. Act.:Inflow from Revenue $20,000 $30,000 $ 35,000Outflow for Expenses (800) (2,050) (800)Net Cash Flow from Oper. Act. 19,200 27,950 34,200

Cash Flows From Inv. Act.:Cash Outflow for Computer (15,500) -0- (2,500)

Net Cash Flow from Inv. Act. (15,500) -0- (2,500)

Cash Flows From Fin. Act.:Cash Inflow from Stock Issue 50,000 -0- -0-

Net Cash Flow from Fin. Act. 50,000 -0- -0-

Net Change in Cash 53,700 27,950 31,700Plus: Beginning Cash Balance -0- 53,700 81,650Ending Cash Balance $53,700 $81,650 $113,350

9-37

PROBLEM 9-23A

a. Straight-line

Cost $5,000Delivery Cost 200

Total 5,200Less: Salvage Value (1,200)Depreciable Cost $4,000 4 = $1,000 per year

2008: $1,0002009: $1,000


Total Estimated[Cost Salvage Value] Units of Production = Cost per Unit

$5,200 $1,200 1,000,000 = $.004 Per Copy

Current Units of AnnualCost per Copy x Production = Depreciation

2008: $.004 x 230,000 = $9202009: $.004 x 250,000 = $1,000

c. Double-Declining Balance

Accum. Depreciation AnnualCost at Beginning of Period x (2 x SL Rate) = Depreciation

2008: ($5,200 -0-) x (2 x .25) = $5,200 x .50 = $2,600

2009: ($5,200 2,600) x (2 x .25) = $2,600 x .50 = $1,300

9-38


d. MACRS

Cost x MACRS % = Annual Depreciation

2008: $5,200 x .20 = $1,0402009: $5,200 x .32 = $1,664

9-39

PROBLEM 9-24A

a. Straight-Line

(Cost Salvage Value) Useful Life = Annual Depreciation

Year 1 ($38,000 3,000) 5 = $7,000 per year2 7,0003 7,0004 7,0005 7,000

b. Double-Declining Balance


Year 1 ($38,000 $-0-) x (2 x .20) = $15,200 2 ($38,000 $15,200) x .40 = 9,120 3 ($38,000 $24,320) x .40 = 5,472

4 ($38,000 $29,792) x .40 = 3,283 5 ($38,000 $33,075) x .40 = 1,970 1,925**Balance of depreciable costs [$38,000 ($33,075 + $3,000)]

c. The amount of depreciation expense does not affect cash flow because depreciation is a non-cash item. However, if different methods are compared for tax reporting, then differences in cash flow can occur.

d. Straight-Line

Book value $38,000 $21,000* = $17,000

Sales Price $20,000Book Value (17,000)Gain $ 3,000

*7,000 x 3 = $21,000

9-40

PROBLEM 9-24A d. (cont.)

Double-Declining-Balance

Book Value $38,000 $29,792* = $8,208

Sales Price $20,000Book Value ( 8,208)Gain $11,792

*$15,200 + $9,120 + $5,472 = $29,792

9-41

PROBLEM 9-25A

Units-of-ProductionTotal Estimated

(Cost Salvage Value) Units of Production = Cost per Unit

AnnualCost per Unit x Current Units of Production = Depreciation

a. $35,000 $5,000 150,000 = $.20 per mile

2007 $.20 x 50,000 = $10,0002008 $.20 x 70,000 = 14,0002009 $.20 x 58,000 = 11,600 6,000*

*Limited to remaining cost to be depreciated [$35,000 ($24,000 + $5,000)]

9-42


b.Stubbs Corporation

Horizontal Statements Model

Balance Sheet Income Statement Statement ofAssets = Stockholders’ Equity Rev. Exp. = Net Inc. Cash Flows

Event Cash + Van A. Dep. = C. Stock + Ret. Ear. =Bal. 50,000 + NA NA = 50,000 + NA NA NA = NA NAVan (35,000) + 35,000 NA = NA + NA NA NA = NA (35,000) IARev. 21,000 + NA NA = NA + 21,000 21,000 NA = 21,000 21,000 OADepr. NA + NA 10,000 = NA + (10,000) NA 10,000 = (10,000) NABal. 36,000 + 35,000 10,000 = 50,000 + 11,000 21,000 10,000 = 11,000 (14,000) NC

c. Sales Price $ 4,000Book Value (5,000) (depreciated to salvage value; see a. above)Loss on Sale $(1,000)

Debit Credit Cash 4,000Accumulated Depreciation 30,000Loss on Sale 1,000

Equipment 35,000

9-43

PROBLEM 9-26A

Depreciation Calculation:

Straight Line:

Company A ($60,000 $4,000) 5 = $11,200 per year

Double-Declining Balance:

Company B 2005 ($60,000 $-0-) x (2 x .20) = $24,0002006 ($60,000 $24,000) x .4 = 14,4002007 ($60,000 $38,400) x .4 = 8,640

2008 ($60,000 $47,040) x .4 = 5,1842009 ($60,000 $52,224) x .4 = 3,110 *3,776*Increased to remaining depreciable cost.

Units-of-Production:

Company C Depr. Rate: $60,000 $4,000 200,000 = $.28 per hour

2005 $.28 x 50,000 = $14,000 2006 $.28 x 55,000 = 15,400

2007 $.28 x 40,000 = 11,2002008 $.28 x 44,000 = 12,3202009 $.28 x 31,000 = 8,680 limited to $3,080*

*Limited to remaining depreciable cost: [$60,000 - ($52,920 + $4,000)].

9-44


a. Company A - 2005Revenue $30,000Depreciation Expense (11,200)Net Income $18,800

Company B - 2005Revenue $30,000Depreciation Expense (24,000)Net Income $ 6,000

Company C - 2005Revenue $30,000Depreciation Expense (14,000)Net Income $16,000

Company A has the highest net income in 2005.

b. Company A - 2007Revenue $30,000Depreciation Expense (11,200)Net Income $18,800

Company B - 2007Revenue $30,000Depreciation Expense ( 8,640)Net Income $21,360

Company C - 2007Revenue $30,000Depreciation Expense (11,200)Net Income $18,800

Companies A and C have the lowest net income for 2007.

9-45


c. Company A Accumulated Depreciation2005 $11,2002006 11,2002007 11,200

$33,600

Cost $60,000Accumulated Depreciation (33,600)Book Value $26,400

Company B Accumulated Depreciation2005 $24,0002006 14,4002007 8,640

$47,040


Company C Accumulated Depreciation2005 $14,0002006 15,4002007 11,200

$40,600


Highest book value, 2007: Company A

9-46


d. Company A: Sales (four years) $120,000Depreciation (four years) (44,800)Retained Earnings - 2008 $ 75,200

Company B: Sales (four years) $120,000Depreciation (four years) (52,224)Retained Earnings - 2008 $ 67,776

Company C: Sales (four years) $120,000Depreciation (four years) (52,920)Retained Earnings - 2008 $ 67,080

Company A has the highest amount of reported Retained Earnings on the 2008 Balance Sheet. The Instructor should point out that at the end of the asset's five-year life, the effect on retained earnings is the same under all three methods.

e. The cash flow from operating activities will be the same for each company if income tax is not considered. Depreciation expense is not a cash flow item.

9-47

PROBLEM 9-27A

a.General Journal

Date Account Titles Debit Credit

20071/1 Coal Mine 720,000

Cash 720,000

7/1 Timber 1,650,000Land 150,000

Cash 1,800,000

12/31 Depletion Expense (80,000 x $3.60) 288,000Coal Mine 288,000

12/31 Depletion Expense (1,100,000 x $.55) 605,000Timber 605,000

20082/1 Silver Mine 900,000

Cash 900,000

8/1 Oil Reserves 880,000Cash 880,000

12/31 Depletion Expense (62,000 x $3.60) 223,200Coal Mine 223,200

12/31 Depletion Expense (1,450,000 x $.55) 797,500Timber 797,500

12/31 Depletion Expense (9,000 x $30) 270,000Silver Mine 270,000

12/31 Depletion Expense (78,000 x $4.00) 312,000Oil Reserves 312,000

9-48


Computations:

Coal Mine - Depletion Cost $720,000Estimated Tons 200,000 = $3.60 per ton

Timber - DepletionCost $1,800,000 $150,000 Estimated Board Feet 3,000,000 = .55 per board foot

Silver Mine - DepletionCost $900,000Estimated Tons 30,000 = $30 per ton

Oil Reserves - DepletionCost $880,000 Estimated Barrels 250,000 30,000 = $4.00 per barrel

(profitable)

9-49


b. Natural ResourcesCoal Mine (less depletion) $ 208,800Timber (less depletion) 247,500Silver Mine (less depletion) 630,000Oil Reserves (less depletion) 568,000Total 1,654,300Land 150,000Total Natural Resources $1,804,300

c. Undepleted Cost of Coal Mine at 1/1/2009: $208,800

Revised Estimated Tons of Coal: 50,000

Revised Depletion Rate per Ton: $208,800 50,000 = $4.176 per ton 2009 depletion: $4.176 x 35,000 = $146,160


Coal Mine 146,160

9-50

PROBLEM 9-28Aa.


Date Assets = Liab. + S. Equity Net Income Cash Flows1/1/02 + NA NA NA IA12/31/02 NA NA

5/5/03 NA OA12/31/03 NA NA

1/1/04 + NA NA NA IA12/31/04 NA NA

3/1/05 NA OA12/31/05 NA NA

1/1/06 + NA NA NA IA12/31/06 NA NA

7/1/07* NA NA7/1/07** + NA + + + IA

*To record depreciation for 2007.**To record sale of asset. The plus in the assets column represents the net increase in assets resulting from the sale of the equipment. Cash increases by a greater amount than the decrease in the book value of the equipment.

b.Year Computation Depr. Exp.

2002 ($24,000 $4,000) 5 $4,0002003 Same as 2002 4,0002004 ($24,000 + $3,000 $8,000 $4,000) 3 5,0002005 Same as 2004 5,0002006 ($27,000 $4,000 $12,400 acc. depr.) 3 3,533

9-51


c.Computation of Book Value

Year Cost Acc. Depr. = Book Value2002 $24,000 $4,000 = $20,0002003 24,000 8,000 = 16,0002004 27,000 13,000 = 14,0002005 27,000 18,000 = 9,0002006 27,000 15,933 = 11,067

d. Computation of Depreciation Expense for 2007:$3,533 x 6/12 = $1,767

Book Value at Date of Sale:12/31/06 $11,067 (see above)2007 Depreciation (1,767)Book Value $ 9,300

Selling Price $9,500Less: Book Value (9,300)Gain on Sale $ 200

9-52

PROBLEM 9-29Aa.

Kaye ManufacturingStatements Model

Assets = Stockholders’ Equity Rev. Exp. = Net Inc. Cash FlowDate Cash + Equip. A. Depr. = C. Stock + Ret. Ear.

Bal. 15,000 + 26,000 11,000 = 8,000 + 22,000 NA NA = NA NA1/2 (6,000) + 6,000 NA = NA + NA NA NA = NA (6,000) IA8/1 (920) + NA NA = NA + (920) NA 920 = (920) (920) OA10/2 (620) + NA NA = NA + (620) NA 620 = (620) (620) OA12/31 NA + NA 4,500* = NA + (4,500) NA 4,500 = (4,500) NABal. 7,460 + 32,000 15,500 = 8,000 + 15,960 -0- 6,040 = (6,040) (7,540) NC

*Depreciation Calculation: ($26,000 + $6,000) $11,000 = $21,000; ($21,000 $3,000) 4 = $4,500

9-53


b.Kaye Manufacturing

General Journal

Date Account Titles Debit Credit1/2/05 Machinery 6,000

Cash 6,000

8/1/05 Maintenance Expense 920Cash 920


12/31/05 Depreciation Expense 4,500Accumulated Depreciation 4,500

9-54

PROBLEM 9-30A

a. Purchase Price $1,395,000 Less: FMV of Assets Acquired

Equipment $600,000Land 250,000Building 155,000Franchise 150,000 (1,155,000)

Goodwill Purchased $ 240,000

b. Debit Credit Amortization Expense1 30,000

Franchise 30,000

1$150,000 5 = $30,000

9-55

PROBLEM 9-31A

a. Any permanent impairment will be written off in the year the impairment is determined.

b.Date Account Title Debit Credit

2003 Impairment Loss 50,000Goodwill 50,000

9-56

SOLUTIONS TO EXERCISES - SERIES B - CHAPTER 9

EXERCISE 9-1B

Note: There are many possibilities for answers to this question. The answers given are only a few examples of long-term operational assets that these companies may own. Also note that even though the companies have very different business activities, they may have some of the same kinds of long-term operational assets.

Lansing Farms:

Farm Equipment, Buildings, Office Equipment, Computer Equipment, Land, etc.

American Airlines:

Airplanes, Machinery & Equipment, Office Equipment, Buildings, Land, Communications Equipment, etc.

IBM:

Manufacturing Equipment, Computer Equipment, Buildings, Land, Office Equipment, etc.

Northwest Mutual Insurance Co.:

Office Equipment, Buildings, Land, etc.

9-57

EXERCISE 9-2B

Long-Term Operational Assets:

a. Nob. Yesc. Yesd. Noe. Nof. Yesg. Yesh. Noi. No j. Nok. Yesl. Yes

EXERCISE 9-3B

No. Tangible (T), Intangible (I)

a. Retail Store Building T

b. Shelving for Inventory T

c. Trademark I

d. Gas Well T

e. Drilling Rig T

f. FCC License for TV Station I

g. 18-Wheel Truck T

h. Timber T

i. Log Loader T

j. Dental Chair T

k. Goodwill I

l. Business Web Page T

9-58

EXERCISE 9-4B

Costs that are to be capitalized:List Price $100,000Less: Discount (4,000)Freight Cost 500Training Fee 1,000

Total Costs $97,500

The operator salary and increase in insurance are operating expenses.

EXERCISE 9-5Ba. % of* Purchase Allocated

Total Appraised Value App. Val. Price Cost Land $270,000 .30 x $800,000 = $240,000Building 630,000 .70 x 800,000 = 560,000Total $900,000 $800,000

*Land: $270,000 $900,000 = .30; Building: $630,000 $900,000 = .70

b. No, the historical cost concept requires that assets be recorded at the amount paid for them.

c.

Balance Sheet Income Statement Statemt. ofAssets = Liab. + S. Equity Rev. Exp. = Net Inc. Cash Flows

Cash + Land + Bldg. = +(800,000) + 240,000 + 560,000 = NA + NA NA NA = NA (800,000) IA

9-59

EXERCISE 9-6B

a.Asset Appraised Value Percent of Appraised Value

Land $105,000 30%Building 210,000 60%Furniture 35,000 10%Total $350,000 100%

Asset % of App. Value Purchase Price Allocated CostLand 30% x $300,000 = $ 90,000Building 60% x 300,000 = 180,000Furniture 10% x 300,000 = 30,000Total $300,000

b.Assets = Liab. Rev. Exp. = Net. Inc. Cash Flow

Cash + Land + Buildings + Furn. = N. Pay.(50,000) + 90,000 + 180,000 + 30,000 = 250,000 NA NA = NA (50,000) IA

c.Account Titles Debit Credit

Land 90,000Buildings 180,000Furniture 30,000

Cash 50,000Notes Payable 250,000

9-60

EXERCISE 9-7B

Depreciation Calculation: (Cost Accumulated Depr.) x (2 x SL Rate)

Year 1 ($120,000 $ -0-) x (2 x .1667) = $40,000Year 2 ($120,000 $40,000) x (2 x .1667) = $26,667

Jet Manufacturing CompanyT-Accounts



120,000 120,000 120,000 cl 36,000 76,000 Bal. 120,000 Bal. 36,000

Bal. 76,000 20022002 58,533

85,200 Bal. 94,533Bal. 161,200

Sales Revenue2001

Asset 76,0002001 cl 76,000

120,000 Bal. -0-Bal. 120,000 2002

85,200cl 85,200

Accumulated Depr. Bal. -0-2001 40,000 Depreciation Expense Bal

.40,000 2001

2002 40,000 cl 40,00026,667 Bal. -0-

Bal.

66,667 2002

26,667 cl 26,667Bal. -0-

9-61

EXERCISE 9-7B (cont.)

Jet Manufacturing CompanyFinancial Statements

2001 2002

Income Statements

Sales Revenue $76,000 $85,200

Depreciation Expense (40,000) (26,667)

Net Income $36,000 $58,533

Balance Sheets

AssetsCash $ 76,000 $161,200Asset 120,000 120,000Accumulated Depreciation (40,000) (66,667)

Total Assets $156,000 $214,533

Stockholders’ EquityCommon Stock $120,000 $120,000Retained Earnings 36,000 94,533

Total Stockholders’ Equity $156,000 $214,533


Cash Flows From Operating Activities:Inflow from Customers $76,000 $85,200

Cash Flows From Investing Activities:Outflow to Purchase Asset (120,000) -0-

Cash Flows From Financing Activities:Inflow from Stock Issue 120,000 -0-

Net Change in Cash 76,000 85,200Plus: Beginning Cash Balance -0- 76,000Ending Cash Balance $76,000 $161,200

9-62

EXERCISE 9-8B

a. Calculation of Depreciation:Taxi Cost $27,000Sales Tax 500

Total Cost $27,500

Depreciable Cost: $27,500 $2,500 = $25,000 Depreciation: $25,000 5 years = $5,000 per year

2002 Depreciation: $5,0002003 Depreciation: $5,000

b. 2002 Debit Credit

Depreciation Expense ……………….. 5,000 Accumulated Depreciation ….. 5,000

c. Cost $27,500Less: Accumulated Depreciation (10,000) ($5,000 x 2)Book Value, 1/1/2004 $17,500

Loss on Sale = $15,000 $17,500 = $2,500

2004 Debit Credit

Cash ………………………………… 15,000 Accumulated Depreciation ……….. 10,000 Loss on Sale………………………….. 2,500

Taxi ……………………..…… 27,500

9-63

EXERCISE 9-9Ba.1. Straight-Line Calculation:

Cost $48,000Less: Salvage ( 3,000)Cost to Be Depreciated $45,000 5 = $9,000 depr. per year

2. Double-Declining Balance Calculation:

Cost Accumulated Depreciation x (2 x Straight-Line Rate)

Year 1 ($48,000 $0 ) x (2 x .20) = $19,200Year 2 ($48,000 $19,200) x (2 x .20) = 11,520Year 3 ($48,000 $30,720) x (2 x .20) = 6,912Year 4 ($48,000 $37,632) x (2 x .20) = 4,147Year 5 ($48,000) $41,779) x (2 x .20) = 2,488 3,221*Total $45,000

*Since the total depreciable cost is $45,000 ($48,000 $3,000), the balance of depreciable cost is expensed in year 5. ($45,000 $41,779)

b.Sun Drugstore

Statements Model

Balance Sheet Income Statement Stmt. ofAssets = S. Equity Rev Exp. = Net Inc. Cash Flows

Cash + Comp. Acc. Depr = Ret. Ear.(48,000) + 48,000 NA = NA NA NA = NA (48,000) IA

Straight-LineNA + NA 9,000 = (9,000) NA 9,000 = (9,000) NA

DDBNA + NA 19,200 = (19,200) NA 19,200 = (19,200) NA

9-64


c. 1.Sun Drugstore

General Journal



Entries for years 2-5 will be the same.

c. 2.Sun Drugstore

General Journal







9-65

EXERCISE 9-10B

a. Historical Cost $27,000Less: Accumulated Depreciation (13,000)Book Value $14,000

b. Sales Price $14,000Less: Book Value (14,000)Gain on Sale $ -0 -

c. Net income would not be affected.

d. Total assets would not be affected. However, cash would increase by $14,000; plant assets would decrease by $27,000; and accumulated depreciation would decrease by $13,000.

e. Cash would increase by $14,000 (Inflow from Investing Activities).

9-66

EXERCISE 9-11B

a. Double-Declining Balance

(Cost Accum. Depr.) x (2 x SL Rate) = Depr. Exp. Per Year

2006: ($28,000 $0) x (2 x .25) = $14,0002007: ($28,000 $ 14,000) x (2 x .25) = 7,0002008: ($28,000 $21,000) x (2 x .25) = 3,5002009: ($28,000 $24,500) x (2 x .25) = 1,750 1,500*Total Accumulated Depreciation $26,000

*Since the total depreciable cost is $26,000 ($28,000 $2,000), the total depreciation taken in 2009 is $1,500 ($26,000 $24,500).


(Cost Salvage) Estimated Production = Depr. Cost per Unit

$28,000 $2,000 = $26,000$26,000 1,300,000 = $.020 cost per page

Annual Depreciation = Depr. Cost per Page x Actual Annual Units

2006: $.020 x 350,000 = $ 7,0002007: $.020 x 370,000 = 7,4002008: $.020 x 280,000 = 5,6002009: $.020 x 320,000 = 6,400 6,000*Total Accumulated Depr. $26,000

*The total depreciable cost is $26,000 ($28,000 $2,000). The depreciation taken in 2009 is $6,000 [$26,000 ($7,000 + $7,400 + $5,600)].

9-67


c. Calculation of Book Value


Cost $28,000Less: Accumulated Depr. (26,000)Book Value $ 2,000

Units-of-Production

Cost $28,000Less: Accumulated Depr. (26,000 ) Book Value $ 2,000

Calculation of Gain (Loss) Units-of-

DDB ProductionSales Price $1,500 $1,500Book Value (2,000) (2,000)Gain (Loss) $ (500) $ (500 )

9-68

EXERCISE 9-12B

a. MACRS depreciation = Cost x Table %

7-year property

2001: $40,000 x .1429 = $ 5,7162002: $40,000 x .2449 = $ 9,796

b. 5-year property

2001: $40,000 x .20 = $8,0002002: $40,000 x .32 = $12,800

EXERCISE 9-13B


2001: $36,000 $6,000 = $30,000; $30,000 3 = $10,000

2002: (Same as year 2001.) $10,000

2003:Cost $36,000

Less: Acc.Depr. (20,000) Book Value $16,000 $4,000* = $12,000

New Book Value: $12,000 2** = $6,000

*revised salvage**revised remaining life

2004: (Same as year 2003.) $6,000

9-69

EXERCISE 9-14B

Tow Truck: Book value would still be $5,600; the $620 repair cost will be expensed.

Building: $67,500 will be the new book value. Old book value was $63,500 ($90,000 $26,500), plus the $4,000 cost of the new roof that will reduce accumulated depreciation. Or, the cost of $90,000 less new accumulated depreciation of $22,500 ($26,500 $4,000) yields a book value of $67,500.

9-70

EXERCISE 9-15Ba.

Assets = Stockholders’ Equity Rev. - Exp. = Net Inc. Cash Flow

Cash + Comp. A. Dep. = C. Stock + Ret. Ear.37,000 + 42,000 19,000 = 40,000 + 20,000 NA NA = NA NA

(3,000) + NA NA = NA + (3,000) NA 3,000 = (3,000) (3,000) OA

b.Assets = Stockholders’


Cash + Comp. - A. Depr. = C. Stock + Ret. Ear.37,000 + 42,000 19,000 = 40,000 + 20,000 NA NA = NA NA

(3,000) + NA (3,000) = NA + NA NA NA = NA (3,000) IA

c.Assets = Stockholders’


Cash + Comp. - A. Dep. = C. Stock + Ret. Ear.37,000 + 42,000 19,000 = 40,000 + 20,000 NA NA = NA NA

(3,000) + 3,000 NA = NA + NA NA NA = NA (3,000) IA

9-71

EXERCISE 9-16B

a. $26,000 2 = $13,000 additional depreciation expense for 2001 and 2002.

b. $26,000 of expense would be recognized in 2001 and $-0- in 2002.

c. $-0- cash outflow from operating activities in 2001, $-0- cash outflow from operating activities in 2002 (cash outflow is from investing activities).

d. $26,000 cash outflow from operating activities in 2001 and $-0- in 2002.

9-72

EXERCISE 9-17B

a. Depletion charge per unit: $450,000 22,500 tons = $20 per ton

b. Depletion Calculation:Year 1 $20 x 10,000 = $200,000Year 2 $20 x 8,000 = $160,000

Stover CoalStatements Model

Assets = Stockholders’ Equity Rev. Exp. = Net Inc. Cash FlowCash + Coal Res. = C. Stock + Ret. Ear.

600,000 + NA = 600,000 + NA NA NA = NA NA (450,000) + 450,000 = NA + NA NA NA = NA (450,000) IA



c.Year 1


Coal Reserves 200,000

Year 2Depletion Expense 160,000

Coal Reserves 160,000

9-73

EXERCISE 9-18B

a. Patent $24,000 2 = $12,000 per yearThe goodwill is not amortized under FASB Statement No. 142.

b.Bevel Manufacturing

Statements Model

Assets = S. Equity Rev. - Exp. = Net Inc. Cash FlowCash + Patent + G. Will =90,000 + NA + NA = 90,000 NA NA = NA NA

Pur. (44,000) +24,000 + 20,000 = NA NA NA = NA (44,000) IA

Pat. NA +(12,000) + NA = (12,000) NA 12,000 = (12,000) NA

Debit Credit c. Patents 24,000

Goodwill 20,000Cash 44,000

Amortization Expense - Patents 12,000Patents 12,000

9-74

EXERCISE 9-19B

a. Purchase Price:Cash Paid $200,000Liabilities Assumed 40,000Total 240,000FMV of Assets (185,000)Goodwill $ 55,000

b.Sea Corp.

Statements Model

Assets = Liab. + S Equity Rev. Exp. = Net Inc. Cash FlowCash + Assets + G. Will = +300,000 + NA + NA = + 300,000 NA NA = NA NA

Pur. (200,000) + 185,000 + 55,000 = 40,000 + NA NA NA = NA (200,000) IA

c. Goodwill will not be written off under the new guidelines unless it is determined that the amount of purchased goodwill has been impaired. Impairment is tested by comparing the purchase cost of the goodwill with its current fair market value. If fair market value is determined to be less than historical cost, the decline is recorded as an impairment loss.

9-75

SOLUTIONS TO PROBLEMS -SERIES B - CHAPTER 9

PROBLEM 9-20B

Office EquiptmentList Price $60,000Discount (1,200)Transportation-In 1,600Installation 2,200

$62,600

Note: The $1,000 damage from unloading is not a part of the cost of the equipment. The $300 is routine maintenance.

Basket PurchaseAllocation is based on relative market values:

Asset Fair Market Value Percent FMV ValueCopier $10,000 50%Computer 6,000 30%Scanner 4,000 20%Total 20,000 100%

Asset% of Fair Market

Value x Purchase Price =Allocated

CostsCopier 50% x $15,000 = $ 7,500Computer 30% x 15,000 = 4,500Scanner 20% x 15,000 = 3,000

Total $15,000

Land and Buildingc. Land

Purchase Price $200,000Demolition of Old Building 10,000Proceeds from Old Building (7,000)Site Preparation 14,000Total Cost of Land $217,000

Building Construction Costs $500,000

9-76

PROBLEM 9-21B

Hobart CompanyFinancial Statements

Income Statements

2001 2002 2001 2004 2005

Revenue $15,200 $14,400 $13,000 $12,000 $ -0-

Depr. Expense* (12,000) (12,000) (12,000) (12,000) -0-

Operating Income 3,200 2,400 1,000 -0- -0-

Gain/(Loss) -0- -0- -0- -0- (5,200)**

Net Income $3,200 $2,400 $1,000 $ -0- $(5,200)


Beg. Com. Stock $ -0- $60,000 $60,000 $60,000 $60,000Plus: Stock Issued 60,000 -0- -0- -0- -0-End. Com. Stock 60,000 60,000 60,000 60,000 60,000

Beg. Ret. Earn. -0- 3,200 5,600 6,600 6,600Plus: Net Income 3,200 2,400 1,000 -0- (5,200)End. Ret. Earn. 3,200 5,600 6,600 6,600 1,400

Total Stk. Equity $63,200 $65,600 $66,600 $66,600 $61,400

*Depreciation: $60,000 $12,000 (salvage value) = $48,000; $48,000 4 = $12,000 per year

**Sale of Asset: Sales Price $6,800 less book value $12,000=$5,200 loss

9-77

PROBLEM 9-21B (cont.)

Hobart CompanyFinancial Statements

Balance Sheets

2001 2002 2003 2004 2005

AssetsCash $15,200 $29,600 $42,600 $54,600 $61,400Equipment 60,000 60,000 60,000 60,000 -0-Less, Acc. Dep. (12,000) (24,000) (36,000) (48,000) -0-

Total Assets $63,200 $65,600 $66,600 $66,600 $61,400

Stockholders’ EquityCommon Stock $60,000 $60,000 $60,000 $60,000 $60,000Retained Earn. 3,200 5,600 6,600 6,600 1,400

Total Stkhldrs’ Equity $63,200 $65,600 $66,600 $66,600 $61,400


Operating Act.:Inflow from Cust. $15,200 $14,400 $13,000 $12,000 $ -0-

Net Cash Op. Act. 15,200 14,400 13,000 12,000 -0-

Investing Act.:Inflow from Equip. -0- -0- -0- -0- 6,800Outflow for Equip. (60,000) -0- -0- -0- -0-

Net Cash Inv. Act. (60,000) -0- -0- -0- 6,800

Financing Act.Inflow from Stock 60,000 -0- -0- -0- -0-

Net Cash Fin. Act. 60,000 -0- -0- -0- -0-

Net Change in Cash 15,200 14,400 13,000 12,000 6,800Plus: Beg. Cash Bal. -0- 15,200 29,600 42,600 54,600Ending Cash Bal. $15,200 $29,600 $42,600 $54,600 $61,400

9-78

PROBLEM 9-22Ba.

Jim’s Towing ServiceHorizontal Statements Model

Event Assets = Liab. + S. Equity Net Income Cash Flow

20071. + NA + NA + FA2. + NA NA NA IA3. + NA NA NA IA4. + NA + + + OA5. NA OA6. NA NA7. NA NA + NA NA

20081. NA OA2. NA OA3. + NA + + + OA4. NA OA5. NA NA6. NA NA + NA NA

20091. + NA NA NA IA2. NA OA3. + NA + + + OA4. NA NA5. NA NA + NA NA

9-79

PROBLEM 9-22B (cont.)Note: Journal entries are not required, but are provided for the use of the instructor.

Jim’s Towing Service, General Journal


20071. Cash 40,000

Common Stock 40,000

2. Wrecker 26,000Cash 26,000

3. Wrecker 1,800Cash 1,800


5. Gas & Oil Expense 3,000Cash 3,000

6. Depreciation Expense* 8,600Accumulated Depreciation 8,600

7. cl Service Revenue 17,600Gas & Oil Expense 3,000Depreciation Expense 8,600Retained Earnings 6,000

20081. Maintenance Expense 400

Cash 400

2. Maintenance Expense 600Cash 600


*$26,000 + $1,800 = $27,800; $27,800 $2,000 = $25,800; $25,800 3 = $8,600 depreciation per year

9-80

PROBLEM 9-22B b. (cont.)Note: Journal entries are provided for the use of the instructor.

Jim’s Towing ServiceGeneral Journal


20084. Gas & Oil Expense 4,200

Cash 4,200

5. Depreciation Expense 8,600Accumulated Depreciation 8,600

6. cl Service Revenue 18,000Maintenance Expense 1,000Gas & Oil Expense 4,200Depreciation Expense 8,600Retained Earnings 4,200

20091. Accumulated Depreciation 1,400

Cash 1,400

2. Gas & Oil Expense 3,600Cash 3,600


4. Depreciation Expense* 5,000Accumulated Depreciation 5,000

5. cl Service Revenue 30,000Gas & Oil Expense 3,600Depreciation Expense 5,000Retained Earnings 21,400

*$27,800 $2,000 $17,200 + $1,400 = $10,000; $10,000 2 = $5,000 depreciation per year

9-81

PROBLEM 9-22B b. (cont.)Note: The T-accounts are provided for the use of the instructor.

Jim’s Towing ServiceT-Accounts



1. 40,000 2. 26,000 1. 40,000 7. 6,0004. 17,600 3. 1,800 Bal.

40,000Bal. 6,000

5. 3,000 2008Bal.

26,8006. 4,200

2008 Bal.10,200

3. 18,000 1. 400 20092. 600 5. 21,4004. 4,200 Bal.

31,600Bal.

39,6002009 Service Revenue3. 30,000 1. 1,400 2007

2. 3,600 7. 17,600 4. 17,600Bal.

64,600Bal. -0-

20086. 18,000 3. 18,000

Wrecker Bal. -0-2007 20092. 26,000 5. 30,000 3. 30,0003. 1,800 Bal. -0-Bal.

27,800Maintenance

ExpenseAccumulated Depr. 2008

2007 1. 4006. 8,600 2. 600Bal.8,600 Bal.1,000

2008 6. 1,0005. 8,600 Bal. -0-Bal.

9-82

17,20020091. 1,400 4. 5,000

Bal.20,800

9-83

PROBLEM 9-22B b. (cont.)

Jim’s Towing ServiceT-Accounts


Gas & Oil Expense20075. 3,000 7. 3,000Bal. -0-20084. 4,200 6. 4,200Bal. -0-20092. 3,600 5. 3,600Bal. -0-


20076. 8,600 7. 8,600Bal. -0-20085. 8,600 6. 8,600Bal. -0-20094. 5,000 5. 5,000Bal. -0-

9-84

PROBLEM 9-22B (cont.)b.

Jim’s Towing ServiceFinancial Statements

Income Statements

2007 2008 2009

Service Revenue $17,600 $18,000 $30,000

ExpensesMaintenance Expense -0- (1,000) -0-Gas & Oil Expense (3,000) (4,200) (3,600)Depreciation Expense (8,600) (8,600) (5,000)

Total Expenses (11,600) (13,800) (8,600)

Net Income $6,000 $4,200 $21,400


Beginning Common Stock $ -0- $40,000 $40,000Plus: Stock Issued 40,000 -0- -0-Ending Common Stock 40,000 40,000 40,000

Beginning Retained Earnings -0- 6,000 10,200Plus: Net Income 6,000 4,200 21,400Ending Retained Earnings 6,000 10,200 31,600

Total Stockholders’ Equity $46,000 $50,200 $71,600

9-85

PROBLEM 9-22Bb. (cont.)

Jim’s Towing ServiceFinancial Statements

Balance Sheets

2007 2008 2009Assets

Cash $26,800 $39,600 $64,600Wrecker 27,800 27,800 27,800Less: Accumulated Depr. (8,600) (17,200) (20,800)

Total Assets $46,000 $50,200 $71,600

Liabilities $ -0- $ -0- $ -0-

Stockholders’ EquityCommon Stock 40,000 40,000 40,000Retained Earnings 6,000 10,200 31,600

Total Stockholders’ Equity 46,000 50,200 71,600

Total Liabilities and Stkhld. Equity $46,000 $50,200 $71,600


Cash Flows From Oper. Act.:Inflow from Revenue $17,600 $18,000 $30,000Outflow for Expenses (3,000) (5,200) (3,600)Net Cash Flow from Oper. Act. 14,600 12,800 26,400

Cash Flows From Inv. Act.:Cash Outflow for Wrecker (27,800) -0- (1,400)

Net Cash Flow from Inv. Act. (27,800) -0- (1,400)

Cash Flows From Fin. Act.:Cash Inflow from Stock Issue 40,000 -0- -0-

Net Cash Flow from Fin. Act. 40,000 -0- -0-

Net Change in Cash 26,800 12,800 25,000Plus: Beginning Cash Balance -0- 26,800 39,600Ending Cash Balance $26,800 $39,600 $64,600

9-86

PROBLEM 9-23B

a. Straight-LineCost $70,000Delivery Cost 2,000Installation Charge 1,000

Total Cost 73,000Less: Salvage Value ( 3,000)

$70,000 5 = $14,000 per year2001 $14,0002002 $14,000



2001 ($73,000 $0) x (2 x .2) = $29,200 2002 ($73,000 $29,200) x (2 x .2) = $17,520

c. Units-of-Production

1. Total Estimated(Cost Salvage Value) Units of Production = Cost per Unit

$73,000 $3,000 140,000 = $.50 per unit

2. Cost per Unit x Current Units of = Annual Production Depreciation

2001 $.50 x 26,000 = $13,0002002 $.50 x 21,000 = $10,500

9-87


d. MACRS

Cost x MACRS % = Annual Depreciation

2001 $73,000 x .1429 = $10,4322002 $73,000 x .2449 = $17,878

9-88

PROBLEM 9-24B

a. Straight-Line

(Cost Salvage Value) Useful Life = Annual Depreciation

Year 1 ($60,000 $5,000) 5 = $11,000 per year2 11,0003 11,0004 11,0005 11,000



Year 1 ($60,000 $-0-) x (2 x .20) = $24,0002 ($60,000 $24,000) x .40 = 14,400

3 ($60,000 $38,400) x .40 = 8,6404 ($60,000 $47,040) x .40 = 5,1845 ($60,000 $52,224) x .40 = 3,110 2,776*

*Balance of depreciable cost ($55,000 $52,224= $2,776)

c. Depreciation expense is a non-cash item and does not affect cash flow. However, when different methods are used for tax purposes, this can cause differences in taxable income and the amount of tax paid.

9-89


d. Straight-Line

Book Value: $60,000 44,000* = $16,000

Sales Price $15,000Book Value (16,000)Loss $ (1,000 )

*$11,000 x 4 = $44,000


Book Value: $60,000 52,224** = $7,776

Sales Price $15,000Book Value ( 7,776)Gain $ 7,224

**$24,000 + $14,400 + $8,640 + $5,184 = $52,224

e. The $8,224 difference in gain is caused by the additional depreciation expense recorded in years 1-4 under the double-declining balance method ($52,224 $44,000 = $8,224).

9-90

PROBLEM 9-25B

Units-of-Production Total Estimated

(Cost Salvage Value) Units of Production = Cost per Unit

Cost per Unit x Current Units of Production = Annual Depreciation

a. $700,000 $20,000 100,000 = $6.8 per machine hour

2001 $6.8 x 32,000 = $ 217,6002002 $6.8 x 33,000 = 224,4002003 $6.8 x 35,000 = 238,0002004 $6.8 x 28,000 = 190,400* -0-2005 = -0- (no remaining cost)

*Limited to remaining cost to be depreciated [$700,000 ($680,000 + $20,000)]

9-91


b.Telcom



Event Cash + Equip. A. Dep. = C. Stock + Ret. Ear. =Bal. 800,000 + NA NA = 800,000 + NA NA NA = NA NAEqu. (700,000) + 700,000 NA = NA + NA NA NA = NA (700,000) IARev. 320,000 + NA NA = NA + 320,000 320,000 NA = 320,000 320,000 OADepr. NA + NA 217,600 = NA + (217,600) NA 217,600 = (217,600) NABal. 420,000 + 700,000 217,600 = 800,000 + 102,400 320,000 217,600 = 102,400 (380,000) NC

c. Sales Price $18,000Book Value (20,000)Loss on Sale $ (2,000)

Debit Credit Cash 18,000Accumulated Depreciation 680,000Loss on Sale 2,000

Equipment 700,000

9-92

PROBLEM 9-26B

Depreciation Computations:

Straight-Line

Company A: $40,000 $5,000 4 = $8,750 per year


Company B: 2001 $ 40,000 $ -0- x (2 x .25) = $20,0002002 40,000 20,000 x .5 = 10,0002003 40,000 30,000 x .5 = 5,000

2004 -0-**

**No remaining cost to be depreciated

Units-of-Production

Per Unit Cost: ($40,000 $5,000) ÷ 200,000 = .175 per mile

Company C:2001 $.175 x 66,000 = $11,5502002 $.175 x 42,000 = 7,3502003 $.175 x 40,000 = 7,0002004 $.175 x 60,000 = 10,500 limited to 9,100*

*Limited to remaining cost to be depreciated [$35,000 ($11,550 + $7,350 + $7,000)

9-93


a. Company A - 2001Revenue $30,000Depreciation Expense (8,750)Net Income $21,250

Company B - 2001Revenue $30,000Depreciation Expense (20,000)Net Income $ 10,000

Company C - 2001Revenue $30,000Depreciation Expense (11,550 ) Net Income $18,450

A has the highest net income in 2001.

b. Company A - 2004Revenue $30,000Depreciation Expense (8,750)Net Income $21,250

Company B - 2004Revenue $30,000Depreciation Expense ( -0-)Net Income $30,000

Company C - 2004Revenue 30,000Depreciation Expense (9,100)Net Income $20,900

Company C has the lowest net income for 2004.

9-94


c. Company A Accumulated Depreciation2001 $ 8,7502002 8,7502003 8,750

$26,250


Company B Accumulated Depreciation2001 $20,0002002 10,0002003 5,000

$35,000

Cost $40,000Accumulated Depreciation (35,000)Book Value $ 5,000

Company C Accumulated Depreciation2001 $11,5502002 7,3502003 7,000

$25,900


Highest book value for 2003: Company C, $14,100

9-95


d. Sales (four years) $120,000Depreciation (four years) (35,000)Retained Earnings $ 85,000

All companies have the same retained earnings because over the four-year period, the total depreciation is the same.

e. The cash flow from operating activities will be the same for each company if income tax is not considered. Depreciation expense is not a cash flow item.

9-96

PROBLEM 9-27Ba.

General Journal


20011/1 Silver Mine 1,600,000

Cash 1,600,000

7/1 Timber 1,400,000Land 100,000

Cash 1,500,000

12/31 Depletion Expense (12,000 x $16)1 192,000Silver Mine 192,000

12/31 Depletion Expense (500,000 x $1.40)2 700,000Timber 700,000

20022/1 Gold Mine 1,800,000

Cash 1,800,000

9/1 Oil Reserves 1,360,000Cash 1,360,000

12/31 Depletion Expense (20,000 x $16) 320,000Silver Mine 320,000

12/31 Depletion Expense (300,000 x $1.40) 420,000Timber 420,000

12/31 Depletion Expense (4,000 x $60)3 240,000Gold Mine 240,000

12/31 Depletion Expense (50,000 x $5)4 250,000Oil Reserves 250,000

Computations:1Silver Mine depletion: $1,600,000 100,000 = $16 per ton2Timber depletion: ($1,500,000 $100,000) 1,000,000 = $1.40 per bd. ft.3Gold Mine depletion: $1,800,000 30,000 = $60 per ton4Oil Reserves depletion: $1,360,000 272,000 (profitable) = $5 per barrel

9-97


b. Natural ResourcesSilver Mine (less depletion) $1,088,000Timber (less depletion) 280,000Gold Mine (less depletion) 1,560,000Oil Reserves (less depletion) 1,110,000

Total Natural Resources 4,038,000Land 100,000Total $4,138,000

c. Gold Mine Undepleted Cost at 1/2003 $1,560,000(Cost $1,800,000 $240,000)

$1,560,000 20,000 = $78 per ton

Debit Credit Depletion Expense (6,000 x $78) 468,000

Gold Mine 468,000

9-98

PROBLEM 9-28Ba.


Date Assets = Liab. + S. Equity Net Income Cash Flows1/1/01 + NA NA NA IA12/31/01 NA NA

9/30/02 NA OA12/31/02 NA NA

1/1/03 + NA NA NA IA12/31/03 NA NA

6/1/04 NA OA12/31/04 NA NA

1/1/05 + NA NA NA IA12/31/05 NA NA

10/1/06* NA NA10/1/06** + NA + + + IA

*To record depreciation for 2006.**To record sale of asset. The plus in the assets column represents the net

increase in assets resulting from the sale of the equipment. Cash increases by a greater amount than the decrease in the book value of the equipment.

b.Year Computation Depr. Exp.

2001 ($80,000 $5,000) 5 $15,0002002 Same as 2001 15,0002003 ($80,000 + $3,000 $30,000 $5,000) 3 16,0002004 Same as 2003 16,0002005 ($83,000 $5,000 $54,000 acc. depr) 3 8,000

9-99


c.Computation of Book Value

Year Cost Acc. Depr. = Book Value2001 $80,000 $15,000 = $65,0002002 80,000 30,000 = 50,0002003 83,000 46,000 = 37,0002004 83,000 62,000 = 21,0002005 83,000 62,000 = 21,000

d. Computation of Depreciation Expense for 2006:$8,000 x 9/12 = $6,000

Book Value at Date of Sale:12/31/05 $21,000 (see above)2006 Depreciation (6,000)Book Value $15,000

Selling Price $18,000Less: Book Value (15,000)Gain on Sale $ 3,000

9-100

PROBLEM 9-29Ba.

Mercury CompanyStatements Model

Assets = Stockholders’ Equity Rev. Exp. = Net Inc. Cash FlowNo. Cash + Equip. A. Depr. = C. Sock + Ret. Ear.

Bal. 14,000 + 20,000 12,000 = 4,000 + 18,000 NA NA = NA NA1/4 (4,000) + NA (4,000) = NA + NA NA NA = NA (4,000) IA7/6 (160) + NA NA = NA + (160) NA 160 = (160) (160) OA8/7 (360) + NA NA = NA + (360) NA 360 = (360) (360) OA12/31 (5,000) + NA NA = NA + (5,000) NA 5,000 = (5,000) (5,000) OA12/31 NA + NA 4,500* = NA + (4,500) NA 4,500 = (4,500) NATot. 4,480 20,000 12,500 4,000 7,980 NA 10,020 (10,020) 9,520 NC

*Computation of Depreciation Expense:Cost $20,0002007 Depr. $6,000 2008 Depr. 6,0002009 Overhaul (4,000 ) (8,000 ) Book Value $12,000 $3,000 salvage = $9,000 new depreciable cost

New Depreciable Cost: 9,000 2 = $4,500

9-101


b.Mercury Company

General Journal


1/4/09 Accumulated Depreciation 4,000Cash 4,000



12/31/09 Gasoline Expense 5,000Cash 5,000

12/31/09 Depreciation Expense 4,500Accumulated Depreciation 4,500

9-102

PROBLEM 9-30B

a. Purchase Price $1,200,000 Less: FMV of Assets Purchased:

Equipment $400,000Land 100,000Building 400,000Franchise 20,000 (920,000)

Goodwill Purchased $ 280,000

b. Debit Credit Amortization Expense 2,000*

Franchise 2,000

Computation:

*$20,00010 = $2,000 per year

9-103

PROBLEM 9-31B

Date Account Titles Debit Credit2001 Impairment Loss 50,000

Goodwill 50,000

9-104

ATC 9-1

a. Straight-line. See note 1 on page 31 of the annual report.

b. “..goodwill and other intangibles….” See Note 1 on page 32 of the annual report.

c. 3 to 8 years. Also from Note 1, page 32.

d. In 2001, the percentage of identifiable assets located in the Americas was: 60.2% ($2,553 $4,244). Therefore, 39.8% of the assets were located outside the Americas. See Note 10 on page 44 of the annual report.

9-105

ATC 9-2

Computation of depreciation expense:

Straight-line:(Cost Salvage Value) useful life = depreciation per year

($46,000 $6,000) 4 = $10,000 per year

Double-declining balance:(Cost Accumulated depreciation) x (2 x SL rate)

($46,000 $0-) x (2 x .25) = $23,000 depreciation for year 1

MACRS:Cost x MACRS table factor

$46,000 x .20 = $9,200

9-106

ATC 9-2 (cont.) Note: It is useful to prepare a horizontal statements model before preparing the financial statements.

Horizontal Statement ModelUsing Straight-line Depreciation


Event Cash + Equip. A. Dep. = C. Stock + Ret. Ear. =1. 60,000 + NA NA = 60,000 + NA NA NA = NA 60,000 FA2. (46,000) + 46,000 NA = NA + NA NA NA = NA (46,000) IA3. 42,000 + NA NA = NA + 42,000 42,000 NA = 42,000 42,000 OA4. (8,200) + NA NA = NA + (8,200) NA 8,200 = (8,200) (8,200)OA5. (12,000) + NA NA = NA + (12,000) NA 12,000 = (12,000) (12,000)OA6. NA + NA 10,000 = NA + (10,000) NA 10,000 = (10,000) NA7.* (3,540) + NA NA = NA + (3,540) NA 3,540 = (3,540) (3,540)OABal. 32,260 + 46,000 10,000 = 60,000 + 8,260 42,000 33,740 = 8,260 32,260 NC

*$42,000 $8,200 $12,000 $10,000 = $11,800 net income before income tax. $11,800 x .30 = $3,540.

9-107

ATC 9-2 (cont.)

Horizontal Statement ModelUsing Double-Declining Balance Depreciation


Event Cash + Equip. A. Dep. = C. Stock + Ret. Ear. =1. 60,000 + NA NA = 60,000 + NA NA NA = NA 60,000 FA2. (46,000) + 46,000 NA = NA + NA NA NA = NA (46,000) IA3. 42,000 + NA NA = NA + 42,000 42,000 NA = 42,000 42,000 OA4. (8,200) + NA NA = NA + (8,200) NA 8,200 = (8,200) (8,200)OA5. (12,000) + NA NA = NA + (12,000) NA 12,000 = (12,000) (12,000)OA6. NA + NA 23,000 = NA + (23,000) NA 23,000 = (23,000) NA7.* NA + NA NA = NA + NA NA NA = NA NABal. 35,800 + 46,000 23,000 = 60,000 + (1,200) 42,000 43,200 = (1,200) 35,800 NC

* Since the company has a net loss of $1,200, there is no income tax expense.

9-108

ATC 9-2 (cont.)

Horizontal Statement ModelUsing MACRS Depreciation


Event Cash + Equip. A. Dep. = C. Stock + Ret. Ear. =1. 60,000 + NA NA = 60,000 + NA NA NA = NA 60,000 FA2. (46,000) + 46,000 NA = NA + NA NA NA = NA (46,000) IA3. 42,000 + NA NA = NA + 42,000 42,000 NA = 42,000 42,000 OA4. (8,200) + NA NA = NA + (8,200) NA 8,200 = (8,200) (8,200)OA5. (12,000) + NA NA = NA + (12,000) NA 12,000 = (12,000) (12,000)OA6. NA + NA 9,200 = NA + (9,200) NA 9,200 = (9,200) NA7.* (3,780) + NA NA = NA + (3,780) NA 3,780 = (3,780) (3,780)OABal. 32,020 + 46,000 9,200 = 60,000 + 8,820 42,000 33,180 = 8,820 32,020 NC

*$42,000 $8,200 $12,000 $9,200 = $12,600 net income before tax. $12,600 x .30 = $3,780

9-109

ATC 9-2 (cont.)a.

Sweet’s BakeryFinancial Statements

Income Statements

SL DDB MACRSSales Revenue $42,000 $42,000 $42,000

ExpensesSupplies Expense (8,200) (8,200) (8,200)Operating Expenses (12,000) (12,000) (12,000)Depreciation Expense (10,000) (23,000) (9,200)Income Tax Expense (3,540) -0- (3,780)

Total Expenses (33,740) (43,200) (33,180)

Net Income $ 8,260 $ (1,200) $ 8,820

Balance Sheets

AssetsCash $32,260 $35,800 $32,020Equipment 46,000 46,000 46,000Less: Accumulated Depreciation (10,000) (23,000) (9,200)Total Assets 68,260 58,800 68,820

Liabilities $ -0- $ -0- $ -0-

Stockholders’ EquityCommon Stock 60,000 60,000 60,000Ending Retained Earnings 8,260 (1,200) 8,820Total Stockholders’ Equity 68,260 58,800 68,820

Total Liab. and Stkholders’ Equity $68,260 $58,800 $68,820

b. Net income is different for the year because of the difference in depreciation expense for the three methods. Because income before tax is different, the amount of income tax paid will also be different. However over the life of the asset, the total amount of depreciation taken will be the same for each of the methods.

9-110

ATC 9-3

Real World Case -- Different Numbers for Different Industries

The companies and the set of ratios to which each relates are as follows:Anheuser Busch (A-B) Company 4Darden Restaurants (Darden) Company 3 Deere & Co. (Deere) Company 1Pfizer Company 2

Students can probably identify Darden as Company 3 based on the lengths of the operating cycles. Company 3 had the shortest at 21 days. The fact that “sales per employee” is lowest at Company 3 is another indication that it is Darden. If not for the length of the operating cycles, and high sales per employee, Company 1 might be associated with Darden due to the relatively high percentage of current assets at Company 1.

Students who know anything about beer brewing will probably determine that A-B’s operating cycle is not longer than 300 days, so this will eliminate Companies 1 and 2, and leave Company 4, which has a 51-day operating cycle, as being A-B. However, students may be confused by the high level of sales per employee at A-B if they think of A-B as a company that has a lot of employees driving trucks to deliver beer to stores. Some students may not be aware that the delivery truck drivers are employees of the distributor, not the brewer.

The analysis above leaves Companies 1 and 2 as being Deere and Pfizer. Perhaps the easiest way to identify Company 2 as being Pfizer is its VERY high gross margin percentage. Although most students may not know that pharmaceutical companies usually have such high margins, they should be able to conclude that an equipment manufacturer does not.

One factor that may seem odd for Company 1 being identified as Deere is the fact that most of its assets are current assets. It seems logical to assume that most of the assets of a manufacturer of heavy equipment would consist of property, plant, and equipment. Deere has a lot of receivables that it finances for its customers.

9-111

ATC 9-4

The Greentree Publishing Company

Financial Statements

Using: Straight-LineDepreciation

Double-Declining Balance Depreciation

Income Statement

Revenue $25,000 $25,000

Expense, Depreciation (9,000 )1 (20,000 )2

Net Income $16,000 $ 5,000

Balance Sheets

Assets Cash Equipment Accumulated Depreciation

$25,00080,000

(9,000 )

$25,00080,000

(20,000 )

Total Assets $96,000 $85,000

Liabilities $ -0 - $ -0 -

Stockholders’ Equity Common Stock Retained Earnings

80,000 16,000

80,000 5,000

Total Stockholders’ Equity 96,000 85,000

Total Liab. and Stk. Equity $96,000 $85,000 1$80,000 $8,000 = $72,000; $72,000 8 = $9,000 depreciation2$80,000 x (2 x .125) = $20,000 depreciation

a. $16,000 $96,000 = 16.7%b. $5,000 $85,000 = 5.9%c. It appears that Greentree is utilizing its assets more effectively using the

straight-line method, when in reality, there is no difference in performance.

9-112

ATC 9-5

a. 1. Compute depreciation expense for 2001:

Qin : ($40,000 $4,000) ÷ 5 yrs = $7,200Roche: ($40,000 x (2 x .20) = $16,000

2. Compute the book value of the equipment as of 12/31/01:Qin : $40,000 $7,200 = $32,800Roche: $40,000 $16,000 = $24,000

3. Compute the total expenses and net earnings for 2001: Qin Roche

Revenue $100,000 $100,000Exp. (excl depr.) (60,000) (60,000)Depr. expense (7,200) (16,000)Net earnings $ 32,800 $ 24,000

Note: Total exp. $ 67,200 $ 76,000

4. Compute the total assets as of 12/31/01: Oin Roche

Assets at 1/1/01 $200,000 $200,000Add net earnings 32,800 24,000 Assets at 12/31/01 $232,800 $224,000

5. Compute the total Stockholders’ Equity as of 12/31/01: Qin

Stockholders’ Equity at 1/1/01 $120,000 $120,000Add net earnings 32,800 24,000 Stockholders’ Equity at 12/31/01 $152,800 $144,000

Note: Total liabilities did not change for either company; they remained at $80,000.

9-113

ATC 9-5 (cont.)

b. 1. Debt-to-Assets:Qin: $80,000 ÷ $232,800 = 34.4%Roche: $80,000 ÷ $224,000 = 35.7%

2. Return-on-Assets:Qin : $32,800 ÷ $232,800 = 14.1%Roche: $24,000 ÷ $224,000 = 10.7%

3. Return-on-Equity:Qin: $32,800 ÷ $152,800 = 21.5%Roche: $24,000 ÷ $144,000 = 16.7%

c. They each produced the same amount of cash flows, therefore, neither produced more or less real wealth than the other.

9-114

ATC 9-6

This problem is used to test thinking and writing skills. Students should realize that the equipment of the two companies had originally cost different amounts. Also, the numbers indicate that the equipment of Company A is older than that of Company B assuming both companies use the same depreciation methods.

9-115

ATC 9-7

a. Posey’s predictions are correct if her belief about asset usage is correct. Using straight-line depreciation will allow Bailey to depreciate his equipment evenly over the equipment’s life. If actual usage of the equipment is greater in the early years, corresponding revenue would be high while depreciation expense would be low compared to actual usage. The result would be to overstate net income. In future periods when usage declines, revenues will decline. Since depreciation expense will remain the same, net income will decline. Depending on the severity of the decline in usage (i.e., lower revenue), net losses could occur. Posey, on the other hand, will show a correlation between revenues and depreciation expense. When revenues are high, corresponding with high equipment usage, her depreciation expense will be high. As revenues decline there will be a parallel decline in expense; thereby resulting in a more stable amount of reported income.

b. Assuming that Posey’s belief about asset usage is accurate, then Bailey’s approach may be questionable but not illegal. Accountants strive to accurately report on the financial condition of a company. Accordingly, accountants are ethically bound to make fair representations in the financial reports that they prepare or audit.

c. The usage of a single depreciation method may in fact thwart comparability. Suppose that Bailey, in fact, uses assets evenly over their useful lives while Posey’s company uses its assets more in the early years and less as the assets age. Under these circumstances comparisons between Bailey and Posey would be facilitated if Bailey used straight-line depreciation while Posey used accelerated depreciation. Companies need alternative recording procedures in order to accurately reflect their financial condition. Accountants prepare and audit statements under the assumption that users have a reasonable grasp of accounting practices and procedures. It is the investor’s responsibility to become reasonably informed of generally accepted accounting principles before they attempt to use financial statements to make business decisions.

9-116

ATC 9-7 (cont.)

d. Featherson obviously has little understanding of accounting or how to interpret accounting information. He apparently does not understand that different accounting procedures can result in financial reports that differ when no differences exist in the underlying substance between companies. Further, he appears to have a misunderstanding of the auditor’s role in financial reporting. The auditor merely attests to whether the statements are prepared in accordance with GAAP. An unqualified opinion is not intended to constitute a recommendation to invest. Featherson’s lack of accounting knowledge is likely to adversely affect his investment decisions. When it does, he will have no one to blame but himself. As stated above, it is the users’ responsibility to attain a reasonable level of knowledge prior to attempting to use accounting reports when making business decisions.

9-117

ATC 9-8

Using the EDGAR Database

NOTE: This solution was accurate as of January 3, 2002. However, the EDGAR database is subject to update at any time, so this solution will likely be “dated” at the time you assign this case to your students.

The data for Microsoft is from the June 30, 2001, financial statements and the data for Intel are from December 30, 2000. Dollars amounts are in millions.

a.Current Assets

Property, Plant and Equipment

Total Assets

Microsoft:Dollar Amount: $39,637 $ 2,309 $ 59,257% of Total Assets: 66.9% 3.9% 100%

Intel:Dollar Amount: $21,150 $15,013 $ 47,945% of Total Assets: 44.1% 31.3% 100%

b. Intel manufactures computer hardware (chips). This requires the use of lots of expensive equipment. Microsoft produces software. Writing software uses more people than equipment. Thus, Intel has more of its assets invested in equipment than does Microsoft. Also, it appears that Intel has more total assets than Microsoft, but keep in mind that a lot of Microsoft’s important assets, personnel, goodwill, market share, etc. do not show-up on traditional financial statements.

9-118

Documents

Chapter 9 Solution of fundamental of financial accouting by EDMONDS (4th edition)