Wey IFRS 1e SM Ch09 Final Assets, Natural Resources, and Intangible Assets ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Do It! Exercises A Problems B

Copyright © 2011 John Wiley & Sons, Inc. Weygandt, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 9-1

CHAPTER 9

Plant Assets, Natural Resources,and Intangible Assets

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives QuestionsBrief

Exercises Do It! ExercisesA

ProblemsB

Problems

1. Describe how the cost principleapplies to plant assets.

1, 2, 3 1, 2 1 1, 2, 3 1A 1B

2. Explain the concept ofdepreciation.

4, 5 2 4

3. Compute periodic depreciationusing different methods.

6, 7, 8, 24,25, 26

3, 4, 5,6, 7

5, 6, 7, 8 2A, 3A,4A, 5A

2B, 3B,4B, 5B

4. Describe the procedure forrevising periodic depreciation.

9, 10 8, 9 9, 10 4A 4B

5. Distinguish between revenueand capital expenditures, andexplain the entries for each.

11, 27 10

6. Explain how to account forthe disposal of a plant asset.

12, 13 11, 12 3 11, 12 5A, 6A 5B, 6B

7. Compute periodic depletionof extractable naturalresources.

14, 15 13 4 13

8. Explain the basic issuesrelated to accounting forintangible assets.

16, 17, 18,19, 20,21, 22

14, 15 4 14, 15 7A, 8A 7B, 8B

9. Indicate how plant assets,natural resources, andintangible assets arereported.

23 16, 17 16 5A, 7A,9A

5B, 7B, 9B

*10. Explain how to accountfor the exchange of plantassets.

28, 29 18, 19 17, 18

http://www.freedownloadslide.blogspot.com

9-2 Copyright © 2011 John Wiley & Sons, Inc. Weygandt, IFRS, 1/e, Solutions Manual (For Instructor Use Only)

ASSIGNMENT CHARACTERISTICS TABLE

ProblemNumber Description

DifficultyLevel

TimeAllotted (min.)

1A Determine acquisition costs of land and building. Simple 20–30

2A Compute depreciation under different methods. Simple 30–40

3A Compute depreciation under different methods. Moderate 30–40

4A Calculate revisions to depreciation expense. Moderate 20–30

5A Journalize a series of equipment transactions related topurchase, sale, retirement, and depreciation.

Moderate 40–50

6A Record disposals. Simple 30–40

7A Prepare entries to record transactions related to acquisitionand amortization of intangibles; prepare the intangibleassets section.

Moderate 30–40

8A Prepare entries to correct errors made in recording andamortizing intangible assets.

Moderate 30–40

9A Calculate and comment on asset turnover ratio. Moderate 5–10

1B Determine acquisition costs of land and building. Simple 20–30

2B Compute depreciation under different methods. Simple 30–40

3B Compute depreciation under different methods. Moderate 30–40

4B Calculate revisions to depreciation expense. Moderate 20–30

5B Journalize a series of equipment transactions related topurchase, sale, retirement, and depreciation.

Moderate 40–50

6B Record disposals. Simple 30–40

7B Prepare entries to record transactions related to acquisitionand amortization of intangibles; prepare the intangibleassets section.

Moderate 30–40

8B Prepare entries to correct errors made in recording andamortizing intangible assets.

Moderate 30–40

9B Calculate and comment on asset turnover ratio. Moderate 5–10



WEYGANDT IFRS 1ECHAPTER 9

PLANT ASSETS, NATURAL RESOURCES,AND INTANGIBLE ASSETS

Number SO BT Difficulty Time (min.)

BE1 1 AP Simple 2–4



BE4 3 E Moderate 4–6




BE8 4 AN Moderate 4–6

BE9 4 AN Moderate 4–6









*BE18 10 AP Simple 4–6

*BE19 10 AP Simple 4–6

DI1 1 C Simple 4–6

DI2 2 AP Simple 2–4

DI3 6 AP Simple 6–8

DI4 7, 8 K Simple 2–4

EX1 1 C Simple 6–8

EX2 1 AP Simple 4–6


EX4 2 C Simple 4–6





EX9 4 AN Moderate 8–10

EX10 4 AP Moderate 6–8



PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLEASSETS (Continued)

Number SO BT Difficulty Time (min.)









P1A 1 C Simple 20–30

P2A 3 AP Simple 30–40

P3A 3 AN Moderate 30–40

P4A 3, 4 AP Moderate 20–30

P5A 3, 6, 9 AP Moderate 40–50

P6A 6 AP Simple 30–40

P7A 8, 9 AP Moderate 30–40

P8A 8 AP Moderate 30–40

P9A 9 AN Moderate 5–10

P1B 1 C Simple 20–30

P2B 3 AP Simple 30–40

P3B 3 AN Moderate 30–40

P4B 3, 4 AP Moderate 20–30

P5B 3, 6, 9 AP Moderate 40–50

P6B 6 AP Simple 30–40

P7B 8, 9 AP Moderate 30–40

P8B 8 AP Moderate 30–40

P9B 9 AN Moderate 5–10

BYP1 3, 8 AN Simple 15–20

BYP2 9 AN, E Simple 10–15

BYP3 2, 3 C Simple 10–15

BYP4 3 AP, E Moderate 20–25

BYP5 7 C Simple 5–10

BYP6 4 E Simple 10–15


BLOOM’S TAXONOMY TABLE


Co

rrel

atio

n C

har

t b

etw

een

Blo

om

’s T

axo

no

my,

Stu

dy

Ob

ject

ives

an

d E

nd

-of-

Ch

apte

r E

xerc

ises

an

d P

rob

lem

s

Stu

dy

Ob

ject

ive

Kn

ow

led

ge

Co

mp

reh

ensi

on

Ap

plic

atio

nA

nal

ysis

Syn

thes

isE

valu

atio

n

1.D

escr

ibe

ho

w t

he

cost

pri

nci

ple

app

lies

to p

lan

t as

sets

.Q

9-1

Q9-

2Q

9-3

DI9

-1

E9-

1P

9-1A

P9-

1B

BE

9-1

BE

9-2

E9-

2E

9-3

2.E

xpla

in t

he

con

cep

t o

fd

epre

ciat

ion

.Q

9-5

Q9-

4E

9-4

DI9

-2

3.C

om

pu

te p

erio

dic

dep

reci

atio

nu

sin

g d

iffe

ren

t m

eth

od

s.Q

9-6

Q9-

7Q

9-8

Q9-

24Q

9-25

Q9-

26

BE

9-3

BE

9-4

BE

9-5

BE

9-6

BE

9-7

E9-

5

E9-

6E

9-7

E9-

8P

9-2A

P9-

4A

P9-

5AP

9-2B

P9-

4BP

9-5B

P9-

3AP

9-3B

BE

9-4

4.D

escr

ibe

the

pro

ced

ure

fo

rre

visi

ng

per

iod

ic d

epre

ciat

ion

.Q

9-9

Q9-

10E

9-10

P9-

4AP

9-4B

BE

9-8

BE

9-9

E9-

9

5.D

isti

ng

uis

h b

etw

een

rev

enu

e an

dca

pit

al e

xpen

dit

ure

s, a

nd

exp

lain

the

entr

ies

for

each

.

Q9-

11Q

9-27

BE

9-10

6.E

xpla

in h

ow

to

acc

ou

nt

for

the

dis

po

sal o

f a

pla

nt

asse

t.Q

9-12

Q9-

13B

E9-

11B

E9-

12D

I9-3

E9-

11E

9-12

P9-

5A

P9-

6AP

9-5B

P9-

6B

7.C

om

pu

te p

erio

dic

dep

leti

on

of

extr

acta

ble

nat

ura

l res

ou

rces

.Q

9-14

DI9

-4Q

9-15

BE

9-13

E9-

13

8.E

xpla

in t

he

bas

ic is

sues

rel

ated

to a

cco

un

ting

for i

ntan

gib

le a

sset

s.Q

9-20

Q9-

16Q

9-17

Q9-

18Q

9-19

Q9-

21Q

9-22

DI9

-4

BE

9-14

BE

9-15

E9-

14E

9-15

P9-

7AP

9-8A

P9-

7BP

9-8B

9.In

dic

ate

ho

w p

lan

t as

sets

, nat

ura

lre

sou

rces

, an

d in

tan

gib

le a

sset

sar

e re

po

rted

.

Q9-

23B

E9-

16B

E9-

17

E9-

16P

9-5A

P9-

7A

P9-

5BP

9-7B

P9-

9AP

9-9B

*10.

Exp

lain

ho

w t

o a

cco

un

t fo

r th

eex

chan

ge

of

pla

nt

asse

ts.

Q9-

28Q

9-29

BE

9-18

BE

9-19

E9-

17E

9-18

Bro

aden

ing

Yo

ur

Per

spec

tive

Exp

lori

ng

th

e W

ebC

om

mu

nic

atio

nD

ecis

ion

Mak

ing

Acr

oss

th

e O

rgan

izat

ion

Fin

anci

al R

epor

ting

Co

mp

. An

alys

isC

om

p. A

nal

ysis

Dec

isio

n M

akin

g A

cro

ss t

he

Org

aniz

atio

nE

thic

s C

ase



ANSWERS TO QUESTIONS

1. For plant assets, the cost principle means that cost consists of all expenditures necessary to acquirethe asset and make it ready for its intended use.

2. Examples of land improvements include driveways, parking lots, fences, and underground sprinklers.

3. (a) When only the land is to be used, all demolition and removal costs of the building less anyproceeds from salvaged materials are necessary expenditures to make the land ready for itsintended use.

(b) When both the land and building are to be used, necessary costs of the building includeremodeling expenditures and the cost of replacing or repairing the roofs, floors, wiring, andplumbing.

4. You should explain to the president that depreciation is a process of allocating the cost of a plantasset to expense over its service (useful) life in a rational and systematic manner. Recognition ofdepreciation is not intended to result in the accumulation of cash for replacement of the asset.

5. (a) Residual value, also called salvage value, is the expected value of the asset at the end of itsuseful life.

(b) Residual value is used in determining depreciation in each of the methods except the declining-balance method.

6. (a) Useful life is expressed in years under the straight-line method and in units of activity underthe units-of-activity method.

(b) The pattern of periodic depreciation expense over useful life is constant under the straight-linemethod and variable under the units-of-activity method.

7. The effects of the three methods on annual depreciation expense are: Straight-line—constantamount; units of activity—varying amount; declining-balance—decreasing amounts.

8. Component depreciation is a method of allocating the cost of a plant asset into separateparts based on the estimated useful lives of each component. IFRS requires an entity touse component depreciation whenever significant parts of a plant asset have significantlydifferent useful lives.

9. A revision of depreciation is made in current and future years but not retroactively. The rationaleis that continual restatement of prior periods would adversely affect confidence in the financialstatements.

10. Revaluation is an accounting procedure that adjusts plant assets to fair value at thereporting date. Revaluation must be applied annually to assets that are experiencing rapidprice changes.



Questions Chapter 9 (Continued)

11. Revenue expenditures are ordinary repairs made to maintain the operating efficiency and productivelife of the asset. Capital expenditures are additions and improvements made to increase operatingefficiency, productive capacity, or useful life of the asset. Revenue expenditures are recognizedas expenses when incurred; capital expenditures are generally debited to the plant asset affected.

12. In a sale of plant assets, the book value of the asset is compared to the proceeds received from thesale. If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal occurs. Ifthe proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal occurs.

13. The plant asset and its accumulated depreciation should continue to be reported on thestatement of financial position without further depreciation adjustment until the asset is retired.Reporting the asset and related accumulated depreciation on the statement of financial positioninforms the reader of the financial statements that the asset is still in use. However, once an asset isfully depreciated, even if it is still being used, no additional depreciation should be taken. In nosituation can the accumulated depreciation on the plant asset exceed its cost.

14. Extractable natural resources consist of underground deposits of oil, gas, and minerals. Theselong-lived productive assets have two distinguishing characteristics: they are physically extractedin operations in or near the earth’s crust, and they are replaceable only by an act of nature.

15. Depletion is the allocation of the cost of extractable resources to expense in a rational andsystematic manner over the resource’s useful life. It is computed by multiplying the depletion costper unit by the number of units extracted and sold.

16. The terms depreciation, depletion, and amortization are all concerned with allocating the cost ofan asset to expense over the periods benefited. Depreciation refers to allocating the cost of aplant asset to expense, depletion to recognizing the cost of an extractable resource as expense,and amortization to allocating the cost of an intangible asset to expense.

17. The intern is not correct. The cost of an intangible asset should be amortized over that asset’suseful life (the period of time when operations are benefited by use of the asset). In addition,some intangibles have indefinite lives and therefore are not amortized at all.

18. The favorable attributes which could result in goodwill include exceptional management, desirablelocation, good customer relations, skilled employees, high-quality products, and harmonious relationswith labor unions.

19. Goodwill is the value of many favorable attributes that are intertwined in the business enterprise.Goodwill can be identified only with the business as a whole and, unlike other assets, cannot besold separately. Goodwill can only be sold if the entire business is sold. And, if goodwill appearson the statement of financial position, it means the company has purchased another company formore than the fair value of its net assets.




20. Goodwill is recorded only when there is a transaction that involves the purchase of an entirebusiness. Goodwill is the excess of cost over the fair value of the net assets (assets less liabilities)acquired. The recognition of goodwill without an exchange transaction would lead to subjectivevaluations which would reduce the reliability of financial statements.

21. Research and development costs present several accounting problems. It is sometimes difficultto assign the costs to specific projects, and there are uncertainties in identifying the extent andtiming of future benefits. As a result, IFRS requires that research costs be recorded as an expensewhen incurred. Development costs incurred prior to technological feasibility are also expensedbut development costs incurred after technological feasibility are capitalized.

22. Both types of development expenditures relate to the creation of new products but one isexpensed and the other is capitalized. Development costs incurred before a new productachieves technological feasibility are recorded as development expenses and appear as partof operating expenses on the income statement.

Cost incurred after technological feasibility are recorded as development costs and appear as anintangible asset on the statement of financial position.

23. McDonald’s asset turnover ratio is computed as follows:

assets total Average

sales Net=

$20.5billion$28.9 billion

= .71 times

24. Since Resco uses the straight-line depreciation method, its depreciation expense will be lower inthe early years of an asset’s useful life as compared to using an accelerated method. Yapan’sdepreciation expense in the early years of an asset’s useful life will be higher as compared tothe straight-line method. Resco’s net income will be higher than Yapan’s in the first few years ofthe asset’s useful life. And, the reverse will be true late in an asset’s useful life.

25. Yes, tax regulations often allow a company to use a different depreciation method on the taxreturn than is used in preparing financial statements. Lopez Corporation uses an accelerateddepreciation method for tax purposes to minimize its income taxes and thereby the cash outflowfor taxes.

26. By selecting a longer estimated useful life, May Corp. is spreading the plant asset’s cost over alonger period of time. The depreciation expense reported in each period is lower and net income ishigher. Won’s choice of a shorter estimated useful life will result in higher depreciation expensereported in each period and lower net income.

27. Expensing these costs will make current period income lower but future period income higher becausethere will be no additional depreciation expense in future periods. If the costs are ordinary repairs,they should be expensed.




*28. When assets are exchanged, the gain or loss on disposal is computed as the difference betweenthe book value and the fair value of the asset given up at the time of exchange.

*29. Yes, Tatum should recognize a gain equal to the difference between the fair value of the oldmachine and its book value. If the fair value of the old machine is less than its book value, Tatumshould recognize a loss equal to the difference between the two amounts.



SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 9-1

All of the expenditures should be included in the cost of the land. Therefore,the cost of the land is $81,000, or ($70,000 + $3,000 + $2,500 + $2,000 + $3,500).

BRIEF EXERCISE 9-2

The cost of the truck is £31,900 (cash price £30,000 + sales tax £1,500 + paintingand lettering £400). The expenditures for insurance and motor vehicle licenseshould not be added to the cost of the truck.

BRIEF EXERCISE 9-3

Depreciable cost of $36,000, or ($42,000 – $6,000). With a four-year useful life,annual depreciation is $9,000, or ($36,000 ÷ 4). Under the straight-line method,depreciation is the same each year. Thus, depreciation is $9,000 for both thefirst and second years.

BRIEF EXERCISE 9-4

It is likely that management requested this accounting treatment to boostreported net income. Land is not depreciated; thus, by reporting landat HK$1,200,000 above its actual value the company increased yearly

income by HK$60,000, HK$1,200,000

20 years

or the reduction in depreciation

expense. This practice is not ethical because management is knowinglymisstating asset values.

BRIEF EXERCISE 9-5

The declining balance rate is 50%, or (25% X 2) and this rate is applied to bookvalue at the beginning of the year. The computations are:

Book Value X Rate = Depreciation

Year 1Year 2

$42,000($42,000 – $21,000)

50%50%

$21,000$10,500



BRIEF EXERCISE 9-6

The depreciation cost per unit is 22 cents per mile computed as follows:

Depreciable cost ($33,500 – $500) ÷ 150,000 = $.22Year 1 30,000 miles X $.22 = $6,600Year 2 20,000 miles X $.22 = $4,400

BRIEF EXERCISE 9-7

Warehouse component: ($280,000 – $40,000)/20 = $12,000HVAC component: $40,000/10 = $4,000

Total component depreciation in first year $16,000

BRIEF EXERCISE 9-8

Book value, 1/1/11......................................................................................... €20,000Less: Salvage value .................................................................................... 2,000Depreciable cost............................................................................................ €18,000Remaining useful life ................................................................................... 4 yearsRevised annual depreciation (€18,000 ÷ 4)........................................... € 4,500

BRIEF EXERCISE 9-9

(a) Accumulated Depreciation—Plant Assets .................. 60,000Plant Assets.................................................................. 20,000Revaluation Surplus .................................................. 40,000(To record revaluation of plant assets)

(b) Accumulated Depreciation—Plant Assets .................. 60,000Revaluation Surplus ........................................................... 20,000

Plant Assets.................................................................. 80,000(To record revaluation of plant assets)



BRIEF EXERCISE 9-10

1. Repair Expense.................................................................... 45Cash................................................................................ 45

2. Delivery Truck ...................................................................... 400Cash................................................................................ 400

BRIEF EXERCISE 9-11

(a) Accumulated Depreciation—Delivery Equipment ......................................................................... 41,000

Delivery Equipment.................................................... 41,000

(b) Accumulated Depreciation—Delivery Equipment ......................................................................... 39,000Loss on Disposal................................................................. 2,000


Cost of delivery equipment CHF41,000 Less accumulated depreciation 39,000 Book value at date of disposal 2,000 Proceeds from sale 0 Loss on disposal CHF 2,000

BRIEF EXERCISE 9-12

(a) Depreciation Expense—Office Equipment.................. 5,250Accumulated Depreciation—Office Equipment ................................................................ 5,250

(b) Cash ......................................................................................... 20,000Accumulated Depreciation—Office Equipment......... 47,250Loss on Disposal................................................................. 4,750

Office Equipment ........................................................ 72,000



BRIEF EXERCISE 9-12 (Continued)

Cost of office equipment $72,000 Less accumulated depreciation 47,250* Book value at date of disposal 24,750 Proceeds from sale 20,000 Loss on disposal $ 4,750

*$42,000 + $5,250

BRIEF EXERCISE 9-13

(a) Depletion cost per unit = ¥7,000,000 ÷ 35,000,000 = ¥.20 depletion cost per ton¥.20 X 6,000,000 = ¥1,200,000

Depletion Expense.............................................. 1,200,000Accumulated Depletion............................ 1,200,000

(b) Ore mine................................................................. ¥7,000,000Less: Accumulated depletion ........................ 1,200,000 ¥5,800,000

BRIEF EXERCISE 9-14

(a) Amortization Expense—Patent (R$120,000 ÷ 10) ....... 12,000Patents............................................................................. 12,000

(b) Intangible AssetsPatents............................................................................. R$108,000



BRIEF EXERCISE 9-15

Research Expense ....................................................................... 300,000Development Expense................................................................ 400,000Development Costs...................................................................... 200,000

Cash ......................................................................................... 900,000(To record research and development costs)

BRIEF EXERCISE 9-16

SPAIN COMPANYStatement of Financial Position (partial)

December 31, 2011 Intangible assets

Goodwill..................................................... $410,000Property, plant, and equipment

Coal mine .................................................. $ 500,000Less: Accumulated depletion............ 108,000 $392,000Buildings ................................................... 1,100,000Less: Accumulated depreciation ..... 650,000 450,000

Total property, plant, and equipment.................................... 842,000

BRIEF EXERCISE 9-17

$61.5 ÷ $37.3 + $44.6

2

= 1.50 times

*BRIEF EXERCISE 9-18

Delivery Equipment (new).......................................................... 24,000Accumulated Depreciation—Delivery Equipment ............. 30,000Loss on Disposal.......................................................................... 12,000

Delivery Equipment (old) .................................................. 61,000Cash ......................................................................................... 5,000



*BRIEF EXERCISE 9-18 (Continued)

Fair value of old delivery equipment $19,000Cash paid 5,000Cost of new delivery equipment $24,000

Fair value of old delivery equipment $19,000Book value of old delivery equipment ($61,000 – $30,000) 31,000Loss on disposal $12,000

*BRIEF EXERCISE 9-19

Delivery Equipment (new) ......................................................... 43,000Accumulated Depreciation—Delivery Equipment............. 30,000

Gain on Disposal ................................................................. 7,000Delivery Equipment (old) .................................................. 61,000Cash......................................................................................... 5,000

Fair value of old delivery equipment $38,000Cash paid 5,000Cost of new delivery equipment $43,000

Fair value of old delivery equipment $38,000Book value of old delivery equipment ($61,000 – $30,000) 31,000Gain on disposal $ 7,000



SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 9-1

The following four items are expenditures necessary to acquire the truckand get it ready for use:

Negotiated purchase price ....................................................... £24,000Installation of special shelving ............................................... 1,100Painting and lettering................................................................. 900Sales tax ......................................................................................... 1,300

Total paid............................................................................... £27,300

Thus, the cost of the truck is £27,300. The payments for the motor vehiclelicense and for the insurance are operating costs and are expensed in thefirst year of the truck’s life.

DO IT! 9-2

Cost – Residual value $15,000 – $1,000Depreciation expense =Useful life

=8 years

= $1,750

The entry to record the first year’s depreciation would be:

Depreciation Expense................................................................ 1,750Accumulated Depreciation ................................................ 1,750 (To record annual depreciation on mower)

DO IT! 9-3

(a) Sale of truck for cash at a gain:Cash........................................................................................ 26,000Accumulated Depreciation—Truck................................ 28,000

Truck................................................................................ 50,000Gain on Disposal.......................................................... 4,000



DO IT! 9-3 (Continued)

(b) Sale of truck for cash at a loss:Cash........................................................................................ 15,000Loss on Disposal ................................................................ 7,000Accumulated Depreciation—Truck ............................... 28,000

Truck ............................................................................... 50,000

DO IT! 9-4

1. b. Intangible assets2. d. Amortization3. e. Franchise4. f. Development costs5. a. Goodwill6. c. Development expenses



SOLUTIONS TO EXERCISES

EXERCISE 9-1

(a) Under the cost principle, the acquisition cost for a plant asset includesall expenditures necessary to acquire the asset and make it ready for itsintended use. For example, the cost of factory machinery includes thepurchase price, freight costs paid by the purchaser, insurance costsduring transit, and installation costs.

(b) 1. Land2. Factory Machinery3. Delivery Equipment4. Land Improvements5. Delivery Equipment6. Factory Machinery7. Prepaid Insurance8. License Expense

EXERCISE 9-2

1. Factory Machinery2. Truck3. Factory Machinery4. Land5. Prepaid Insurance6. Land Improvements7. Land Improvements8. Land9. Building



EXERCISE 9-3

(a) Cost of landCash paid ................................................................................. €80,000Net cost of removing warehouse (€8,600 – €1,700) ................................................................ 6,900Attorney’s fee ......................................................................... 1,100Real estate broker’s fee ...................................................... 5,000

Total .................................................................................. €93,000

(b) The architect’s fee (€7,800) should be debited to the Building account.The cost of the driveways and parking lot (€14,000) should be debitedto Land Improvements.

EXERCISE 9-4

1. False. Depreciation is a process of cost allocation, not asset valuation.2. True.3. False. The book value of a plant asset may be quite different from its

fair value.4. False. Depreciation applies to three classes of plant assets: land improve-

ments, buildings, and equipment.5. False. Depreciation does not apply to land because its usefulness and

revenue-producing ability generally remain intact over time.6. True.7. False. Recognizing depreciation on an asset does not result in an accu-

mulation of cash for replacement of the asset.8. True.9. False. Depreciation expense is reported on the income statement, and

accumulated depreciation is reported as a deduction from plant assets onthe statement of financial position.

10. False. Three factors affect the computation of depreciation: cost, usefullife, and residual value (also called salvage value).



EXERCISE 9-5

(a) Depreciation cost per unit is R$1.60 per mile [(R$168,000 – R$8,000) ÷ 100,000].

(b) Computation End of Year

YearUnits ofActivity X

DepreciationCost /Unit =

AnnualDepreciation

ExpenseAccumulatedDepreciation

BookValue

2011201220132014

26,00032,00025,00017,000

R$1.60 1.60 1.60 1.60

R$41,600 51,200 40,000 27,200

R$ 41,600 92,800 132,800 160,000

R$126,400 75,200 35,200 8,000

EXERCISE 9-6

(a) Straight-line method:

$120,000 – $12,0005

= $21,600 per year.

2011 depreciation = $21,600 X 3/12 = $5,400.

(b) Units-of-activity method:

$120,000 – $12,00010,000

= $10.80 per hour.

2011 depreciation = 1,700 hours X $10.80 = $18,360.

(c) Declining-balance method:

2011 depreciation = $120,000 X 40% X 3/12 = $ 12,000.Book value January 1, 2012 = $120,000 – $12,000 = $108,000.2012 depreciation = $108,000 X 40% = $ 43,200.



EXERCISE 9-7

(a) (1) 2011: (R$30,000 – R$2,000)/8 = R$3,5002012: (R$30,000 – R$2,000)/8 = R$3,500

(2) (R$30,000 – R$2,000)/100,000 = R$0.28 per mile2011: 15,000 X R$0.28 = R$4,2002012: 12,000 X R$0.28 = R$3,360

(3) 2011: R$30,000 X 25% = R$7,5002012: (R$30,000 – R$7,500) X 25% = R$5,625

(b) (1) Depreciation Expense.................................................. 3,500Accumulated Depreciation—Delivery Truck........ 3,500

(2) Delivery Truck ................................................................ R$30,000Less: Accumulated Depreciation............................ 3,500

R$26,500

EXERCISE 9-8

Building depreciation: $1,920,000*/40 years = $ 48,000Personal property depreciation: $300,000/5 years = 60,000Land improvements depreciation: $180,000/10 years = 18,000Total component depreciation $126,000

*$2,400,000 – $300,000 – $180,000 = $1,920,000

EXERCISE 9-9

(a) Type of Asset Building Warehouse

Book value, 1/1/11Less: Residual valueDepreciable cost

Remaining useful life in years

Revised annual depreciation (a) ÷ (b)

(a)

(b)

$686,000 37,000$649,000

44

$ 14,750

$75,000 3,600$71,400

15

$ 4,760



EXERCISE 9-9 (Continued)

(b) Dec. 31 Depreciation Expense—Building............... 14,750Accumulated Depreciation— Building................................................. 14,750

EXERCISE 9-10

(a) Depreciation Expense........................................................ 70,000Accumulated Depreciation—Plant Assets.......... 70,000(To record depreciation expense)

(b) Accumulated Depreciation—Plant Assets.................. 70,000Plant Assets.................................................................. 30,000Revaluation Surplus................................................... 40,000(To adjust the plant assets to fair value and record revaluation surplus)

(c) Depreciation Expense........................................................ 80,000*Accumulated Depreciation—Plant Assets.......... 80,000(To record depreciation expense)

*$350,000 – $30,000 = $320,000; $320,000/4 years = $80,000

EXERCISE 9-11

Jan. 1 Accumulated Depreciation—Machinery .......... 62,000Machinery.......................................................... 62,000

June 30 Depreciation Expense............................................ 4,000Accumulated Depreciation—Computer (£40,000 X 1/5 X 6/12) ................................ 4,000

30 Cash............................................................................. 14,000Accumulated Depreciation—Computer (£40,000 X 3/5 = £24,000; £24,000 + £4,000)...................................................... 28,000

Gain on Disposal [£14,000 – (£40,000 – £28,000)] .............. 2,000Computer........................................................... 40,000




Dec. 31 Depreciation Expense ........................................... 6,000Accumulated Depreciation—Truck [(£39,000 – £3,000) X 1/6]......................... 6,000

31 Loss on Disposal .................................................... 9,000Accumulated Depreciation—Truck [(£39,000 – £3,000) X 5/6].................................. 30,000

Delivery Truck ................................................. 39,000

EXERCISE 9-12

(a) Cash...................................................................................... 28,000Accumulated Depreciation—Equipment [($50,000 – $5,000) X 3/5] .......................................... 27,000

Equipment................................................................. 50,000Gain on Disposal .................................................... 5,000

(b) Depreciation Expense [($50,000 – $5,000) X 1/5 X 4/12] .............................. 3,000

Accumulated Depreciation—Equipment........ 3,000

Cash...................................................................................... 28,000Accumulated Depreciation—Equipment ($27,000 + $3,000)......................................................... 30,000

Equipment................................................................ 50,000Gain on Disposal ................................................... 8,000

(c) Cash ........................................................................................ 11,000Accumulated Depreciation—Equipment..................... 27,000Loss on Disposal ................................................................ 12,000

Equipment..................................................................... 50,000




(d) Depreciation Expense [($50,000 – $5,000) ÷ 5 X 9/12] ..................................... 6,750

Accumulated Depreciation—Equipment............. 6,750

Cash......................................................................................... 11,000Accumulated Depreciation—Equipment ($27,000 + $6,750)............................................................ 33,750Loss on Disposal................................................................. 5,250

Equipment ..................................................................... 50,000

EXERCISE 9-13

(a) Dec. 31 Depletion Expense.......................................... 90,000Accumulated Depletion (100,000 X CHF.90) ............................ 90,000

Cost (a) CHF720,000Units estimated (b) 800,000 tonsDepletion cost per unit [(a) ÷ (b)] CHF.90

(b) The costs pertaining to the unsold units are reported in current assets aspart of inventory (20,000 X CHF.90 = CHF18,000).

EXERCISE 9-14

Dec. 31 Amortization Expense—Patent ....................... 12,000Patents ($90,000 ÷ 5 X 8/12)..................... 12,000

Note: No entry is made to amortize goodwill because it has an indefinite life.



EXERCISE 9-15

1/2/11 Patents .................................................................... 560,000Cash ................................................................ 560,000

4/1/11 Goodwill.................................................................. 360,000Cash ................................................................ 360,000 (Part of the entry to record purchase of another company)

7/1/11 Franchise................................................................ 440,000Cash ................................................................ 440,000

9/1/11 Research Expense .............................................. 185,000Cash ................................................................ 185,000

11/1/11 Development Expense....................................... 225,000Cash ................................................................ 225,000

12/31/11 Amortization Expense—Patent ($560,000 ÷ 7) .................................................... 80,000Amortization Expense—Franchise [($440,000 ÷ 10) X 1/2] .................................... 22,000

Patents....................................................... 80,000Franchise .................................................. 22,000

Ending balances, 12/31/11:Patent = $480,000 ($560,000 – $80,000).Goodwill = $360,000Franchise = $418,000 ($440,000 – $22,000).

EXERCISE 9-16

Asset turnover ratio = $4,900,000$1,400,000

= 3.5 times



*EXERCISE 9-17

(a) Trucks (new).......................................................................... 53,000Accumulated Depreciation—Trucks (old) ................... 22,000Loss on Disposal................................................................. 6,000

Trucks (old)................................................................... 64,000Cash ................................................................................ 17,000

Cost of old trucks £64,000 Less: Accumulated depreciation 22,000 Book value 42,000 Fair value of old trucks 36,000 Loss on disposal £ 6,000

Fair value of old trucks £36,000 Cash paid 17,000 Cost of new trucks £53,000

(b) Machine (new)....................................................................... 12,000Accumulated Depreciation—Machine (old) ................ 4,000

Gain on Disposal ........................................................ 1,000Machine (old)................................................................ 12,000Cash ................................................................................ 3,000

Cost of old machine £12,000 Less: Accumulated depreciation 4,000 Book value 8,000 Fair value of old machine 9,000 Gain on disposal £ 1,000

Fair value of old machine £ 9,000 Cash paid 3,000 Cost of new machine £12,000



*EXERCISE 9-18

(a) Delivery Truck (new) .......................................................... 4,000Loss on Disposal................................................................. 3,000Accumulated Depreciation—Delivery Truck (old)......................................................................... 15,000

Delivery Truck (old) ................................................... 22,000

Cost of old truck $22,000 Less: Accumulated depreciation 15,000 Book value 7,000 Fair value of old truck 4,000 Loss on disposal $ 3,000

(b) Delivery Truck (new) .......................................................... 4,000Accumulated Depreciation—Delivery Trucks (old)....................................................................... 8,000

Delivery Truck (old) ................................................... 10,000Gain on Disposal ........................................................ 2,000

Cost of old truck $10,000 Less: Accumulated depreciation 8,000 Book value 2,000 Fair value of old truck 4,000 Gain on Disposal $ 2,000

Cost of new delivery truck* $ 4,000

*Fair value of old truck



SOLUTIONS TO PROBLEMS

PROBLEM 9-1A

Item Land Building Other Accounts

1 2 3 4 5 6 7 8 910

€ 4,000)

( 145,000)

( 2,000)

( 15,000) (3,500)

(€162,500)

€700,000

35,000 10,000

€745,000

€ 5,000 Property Taxes Expense

14,000 Land Improvements



PROBLEM 9-2A

(a)

Year Computation

AccumulatedDepreciation

12/31

BUS 1200920102011

$ 90,000 X 20% = $18,000$ 90,000 X 20% = $18,000$ 90,000 X 20% = $18,000

$ 18,000 36,000 54,000

BUS 2200920102011

$120,000 X 50% = $60,000$ 60,000 X 50% = $30,000$ 30,000 X 50% = $15,000

$ 60,000 90,000 105,000

BUS 320102011

24,000 miles X $.60* = $14,40034,000 miles X $.60* = $20,400

$ 14,400 34,800

*$72,000 ÷ 120,000 miles = $.60 per mile.

(b) Year Computation Expense

BUS 21.

2.

2009

2010

$120,000 X 50% X 9/12 = $45,000

$75,000 X 50% = $37,500

$45,000

$37,500



PROBLEM 9-3A

(a) 1. Purchase price.......................................................................... R$ 38,000Sales tax ..................................................................................... 1,700Shipping costs.......................................................................... 150Insurance during shipping ................................................... 80Installation and testing .......................................................... 70

Total cost of machine.................................................... R$ 40,000

Machine.......................................................................... 40,000Cash ....................................................................... 40,000

2. Recorded cost........................................................................... R$ 40,000Less: Residual value ............................................................. 5,000Depreciable cost ...................................................................... R$ 35,000Years of useful life................................................................... ÷ 5

Annual depreciation....................................................... R$ 7,000

Depreciation Expense ............................................... 7,000Accumulated Depreciation ............................. 7,000

(b) 1. Recorded cost........................................................................... 160,000Less: Residual value ............................................................. 10,000Depreciable cost ...................................................................... R$150,000Years of useful life................................................................... ÷ 4

Annual depreciation....................................................... R$ 37,500

2.

Year

Book Value atBeginning of

Year DDB Rate

AnnualDepreciation


2011201220132014

R$160,000 80,000 40,000 20,000

*50%**50%**50%**50%*

R$80,000 40,000 20,000 10,000

R$ 80,000 120,000140,000

150,000

**100% ÷ 4-year useful life = 25% X 2 = 50%.



PROBLEM 9-3A (Continued)

3. Depreciation cost per unit = (R$160,000 – R$10,000)/125,000 units =R$1.20 per unit.

Annual Depreciation Expense

2011: R$1.20 X 45,000 = R$54,0002012: 1.20 X 35,000 = 42,0002013: 1.20 X 25,000 = 30,0002014: 1.20 X 20,000 = 24,000

(c) The declining-balance method reports the highest amount of depreciationexpense the first year while the straight-line method reports the lowest.In the fourth year, the straight-line method reports the highest amount ofdepreciation expense while the declining-balance method reports thelowest.

These facts occur because the declining-balance method is an acceler-ated depreciation method in which the largest amount of depreciationis recognized in the early years of the asset’s life. If the straight-linemethod is used, the same amount of depreciation expense is recognizedeach year. Therefore, in the early years less depreciation expense will berecognized under this method than under the declining-balance methodwhile more will be recognized in the later years.

The amount of depreciation expense recognized using the units-of-activitymethod is dependent on production, so this method could recognize moreor less depreciation expense than the other two methods in any yeardepending on output.

No matter which of the three methods is used, the same total amountof depreciation expense will be recognized over the four-year period.



PROBLEM 9-4A

YearDepreciation


2009201020112012201320142015

(b)$13,500(a)

13,500 (b)10,800(b)

10,800 10,800

12,800(c)

12,800

$13,500 27,000 37,800 48,600 59,400 72,200 85,000

(a) $90,000 – $9,0006 years

= $13,500

(b) Book value – Residual valueRemaining useful life

= $63,000 – $9,000

5 years = $10,800

(c) $30,600 – $5,0002 years

= $12,800



PROBLEM 9-5A

(a) Apr. 1 Land .......................................................... 2,130,000Cash ................................................. 2,130,000

May 1 Depreciation Expense......................... 26,000Accumulated Depreciation— Equipment (€780,000 X 1/10 X 4/12)......... 26,000

1 Cash .......................................................... 450,000Accumulated Depreciation— Equipment .......................................... 338,000

Equipment...................................... 780,000Gain on Disposal ......................... 8,000

Cost €780,000Accum. depreciation— equipment 338,000 [(€780,000 X 1/10 X 4) +

€26,000]Book value 442,000Cash proceeds 450,000Gain on disposal € 8,000

June 1 Cash .......................................................... 1,500,000Land ................................................. 400,000Gain on Disposal ......................... 1,100,000

July 1 Equipment............................................... 2,000,000Cash ................................................. 2,000,000

Dec. 31 Depreciation Expense......................... 50,000Accumulated Depreciation— Equipment (€500,000 X 1/10)...................... 50,000

31 Accumulated Depreciation— Equipment .......................................... 500,000

Equipment...................................... 500,000




Cost €500,000Accum. depreciation— equipment 500,000 (€500,000 X 1/10 X 10) Book value € 0

(b) Dec. 31 Depreciation Expense ........................ 570,000Accumulated Depreciation— Buildings ................................... 570,000 (€28,500,000 X 1/50)

31 Depreciation Expense ........................ 4,772,000Accumulated Depreciation— Equipment................................. 4,772,000

(€46,720,000* X 1/10) €4,672,000[(€2,000,000 X 1/10) X 6/12] 100,000

€4,772,000

*(€48,000,000 – €780,000 – €500,000)

(c) JIMENEZ COMPANYPartial Statement of Financial Position

December 31, 2012 Plant Assets*

Land .............................................................. € 5,730,000Buildings ..................................................... €28,500,000Less: Accumulated depreciation—

buildings ........................................ 12,670,000 15,830,000Equipment................................................... 48,720,000Less: Accumulated depreciation—

equipment...................................... 9,010,000 39,710,000Total...................................................... €61,270,000

*See T-accounts which follow.




LandBal. 4,000,000 Apr. 1 2,130,000

June 1 400,000

Bal. 5,730,000

BuildingsBal. 28,500,000 Bal. 28,500,000

Accumulated Depreciation—BuildingsBal. 12,100,000Dec. 31 adj. 570,000Bal. 12,670,000

EquipmentBal. 48,000,000 July 1 2,000,000

May 1 780,000Dec. 31 500,000

Bal. 48,720,000

Accumulated Depreciation—EquipmentMay 1 338,000 Dec. 31 500,000

Bal. 5,000,000May 1 26,000Dec. 31 50,000Dec. 31 adj. 4,772,000Bal. 9,010,000



PROBLEM 9-6A

(a) Accumulated Depreciation—Office Furniture............................................................................. 50,000Loss on Disposal................................................................. 25,000

Office Furniture ........................................................... 75,000

(b) Cash ......................................................................................... 21,000Accumulated Depreciation—Office Furniture............................................................................. 50,000Loss on Disposal................................................................. 4,000

Office Furniture ........................................................... 75,000

(c) Cash ......................................................................................... 31,000Accumulated Depreciation—Office Furniture............................................................................. 50,000

Gain on Disposal ........................................................ 6,000Office Furniture ........................................................... 75,000



PROBLEM 9-7A

(a) Jan. 2 Patents ............................................................... 45,000Cash ........................................................... 45,000

Jan.– ResearchJune Expense......................................................... 140,000

Cash ........................................................... 140,000

Sept. 1 Advertising Expense ..................................... 50,000Cash ........................................................... 50,000

Oct. 1 Franchise........................................................... 100,000Cash ........................................................... 100,000

(b) Dec. 31 Amortization Expense—Patents................ 12,000Patents ...................................................... 12,000 [($70,000 X 1/10) + ($45,000 X 1/9)]

31 Amortization Expense—Franchise ........... 5,300Franchise.................................................. 5,300 [($48,000 X 1/10) + ($100,000 X 1/50 X 3/12)]

(c) Intangible AssetsPatents ($115,000 cost – $19,000 amortization) (1) ................ $ 96,000Franchise ($148,000 cost – $24,500 amortization) (2)............ 123,500

Total intangible assets ............................................................ $219,500

(1) Cost ($70,000 + $45,000); amortization ($7,000 + $12,000).(2) Cost ($48,000 + $100,000); amortization ($19,200 + $5,300).



PROBLEM 9-8A

1. Research Expense .......................................................... 86,000Development Expense ................................................... 50,000

Patents ....................................................................... 136,000

Patents ................................................................................ 6,800Amortization Expense—Patents [$9,800 – ($60,000 X 1/20)]............................... 6,800

2. Goodwill.............................................................................. 920Amortization Expense—Goodwill ..................... 920

Note: Goodwill should not be amortized because it has an indefinite life unlikePatents.



PROBLEM 9-9A

(a) Luó Zhào

Asset turnover ratio

HK$1,200,000HK$2,500,000

= .48 timesHK$1,080,000HK$2,000,000

= .54 times

(b) Based on the asset turnover ratio, Zhào is more effective in using assetsto generate sales. Its asset turnover ratio is almost 13% higher than Luó’sratio.



PROBLEM 9-1B

Item Land Building Other Accounts

1 2 3 4 5 6 7 8 910

($ 5,000)

100,000

( 17,000)( (3,500)($118,500)

$500,000 19,000

9,000

$528,000

$ 7,500 Property Taxes Expense





PROBLEM 9-2B

(a)Year Computation

AccumulatedDepreciation

12/31

MACHINE 1200920102011

¥100,000 X 10% = ¥10,000¥100,000 X 10% = ¥10,000¥100,000 X 10% = ¥10,000

¥10,000 20,000 30,000

MACHINE 2200920102011

¥150,000 X 25% = ¥37,500¥112,500 X 25% = ¥28,125¥ 84,375 X 25% = ¥21,094

¥37,500 65,625 86,719

MACHINE 32011 2,000 X (¥85,000 ÷ 25,000) = ¥6,800 ¥ 6,800

(b) Year Depreciation Computation Expense

MACHINE 21.

2.

2009

2010

¥150,000 X 25% X 8/12 = ¥25,000

¥125,000 X 25% = ¥31,250

¥25,000

¥31,250



PROBLEM 9-3B

(a) 1. Purchase price.............................................................................. $ 55,000Sales tax ......................................................................................... 2,750Shipping costs.............................................................................. 100Insurance during shipping ....................................................... 75Installation and testing .............................................................. 75

Total cost of machine........................................................ $ 58,000

Machine.......................................................................... 58,000Cash ....................................................................... 58,000

2. Recorded cost............................................................................... $ 58,000Less: Residual value ................................................................. 5,000Depreciable cost .......................................................................... $ 53,000Years of useful life....................................................................... ÷ 4

Annual depreciation........................................................... $ 13,250

Depreciation Expense ............................................... 13,250Accumulated Depreciation ............................. 13,250

(b) 1. Recorded cost............................................................................... $100,000Less: Residual value ................................................................. 10,000Depreciable cost .......................................................................... $90,000Years of useful life....................................................................... ÷ 4

Annual depreciation........................................................... $ 22,500

2.

Year

Book Value atBeginning of

Year DDB Rate

AnnualDepreciation


2011201220132014

$100,000 50,000 25,000 12,500

*50%**50%**50%**50%*

$50,000 25,000 12,500

2,500**

$50,000 75,00087,500

90,000

*100% ÷ 4-year useful life = 25% X 2 = 50%.**$12,500 – $10,000 = $2,500.



PROBLEM 9-3B (Continued)

3. Depreciation cost per unit = ($100,000 – $10,000)/25,000 units =$3.60 per unit.

Annual Depreciation Expense

2011: $3.60 X 5,500 = $19,8002012: 3.60 X 7,000 = 25,2002013: 3.60 X 8,000 = 28,8002014: 3.60 X 4,500 = 16,200

(c) The units-of-activity method reports the lowest amount of depreciationexpense the first year while the declining-balance method reports thehighest. In the fourth year, the declining-balance method reports thelowest amount of depreciation expense while the straight-line methodreports the highest.

These facts occur because the declining-balance method is an accelerateddepreciation method in which the largest amount of depreciation isrecognized in the early years of the asset’s life. If the straight-line methodis used, the same amount of depreciation expense is recognized eachyear. Therefore, in the early years less depreciation expense will berecognized under this method than under the declining-balance methodwhile more will be recognized in the later years.

The amount of depreciation expense recognized using the units-of-activitymethod is dependent on production, so this method could recognize moreor less depreciation expense than the other two methods in any yeardepending on output.

No matter which of the three methods is used, the same total amountof depreciation expense will be recognized over the four-year period.



PROBLEM 9-4B

YearDepreciation


2009201020112012201320142015

£30,000(a)

30,000 24,000(b)

24,000 24,000 31,500(c)

31,500

£ 30,000 60,000 84,000

108,000 132,000 163,500 195,000

(a) £ £200,000 – 20,0006 years

= £30,000

(b) Book value – Residual valueRemaining useful life

= £ £140,000 – 20,000

5 years = £24,000

(c) £ £68,000 – 5,0002 years

= £31,500



PROBLEM 9-5B

(a) Apr. 1 Land .......................................................... 1,200,000Cash ................................................. 1,200,000

May 1 Depreciation Expense......................... 14,000Accumulated Depreciation— Equipment ................................. ($420,000 X 1/10 X 4/12) ........ 14,000

1 Cash .......................................................... 240,000Accumulated Depreciation— Equipment .......................................... 182,000

Equipment...................................... 420,000Gain on Disposal ......................... 2,000

Cost $420,000Accum. depreciation— equipment 182,000 [($420,000 X 1/10 X 4) + $14,000] Book value 238,000Cash proceeds 240,000Gain on disposal $ 2,000

June 1 Cash .......................................................... 1,000,000Land ................................................. 340,000Gain on Disposal ......................... 660,000

July 1 Equipment............................................... 1,100,000Cash ................................................. 1,100,000

Dec. 31 Depreciation Expense......................... 30,000Accumulated Depreciation— Equipment ($300,000 X 1/10)...................... 30,000

31 Accumulated Depreciation— Equipment .......................................... 300,000

Equipment...................................... 300,000




Cost $300,000Accum. depreciation— equipment 300,000 ($300,000 X 1/10 X 10) Book value $ 0

(b) Dec. 31 Depreciation Expense ........................ 400,000Accumulated Depreciation— Buildings ($20,000,000 X 1/50) ............... 400,000

31 Depreciation Expense ........................ 2,983,000Accumulated Depreciation— Equipment................................. 2,983,000

($29,280,000* X 1/10) $2,928,000[($1,100,000 X 1/10) X 6/12] 55,000

$2,983,000

*($30,000,000 – $420,000 – $300,000)

(c) STARKEY COMPANYPartial Statement of Financial Position

December 31, 2012 Plant Assets*

Land .............................................................. $ 2,860,000Buildings ..................................................... $20,000,000Less: Accumulated depreciation—

buildings ........................................ 8,400,000 11,600,000Equipment................................................... 30,380,000Less: Accumulated depreciation—

equipment...................................... 6,545,000 23,835,000Total...................................................... $38,295,000

*See T-accounts which follow.




LandBal. 2,000,000 Apr. 1 1,200,000

June 1 340,000

Bal. 2,860,000

BuildingsBal. 20,000,000 Bal. 20,000,000

Accumulated Depreciation—BuildingsBal. 8,000,000Dec. 31 adj. 400,000Bal. 8,400,000

EquipmentBal. 30,000,000 July 1 1,100,000

May 1 420,000Dec. 31 300,000

Bal. 30,380,000

Accumulated Depreciation—EquipmentMay 1 182,000 Dec. 31 300,000

Bal. 4,000,000May 1 14,000Dec. 31 30,000Dec. 31 adj. 2,983,000Bal. 6,545,000



PROBLEM 9-6B

(a) Accumulated Depreciation—Delivery Equipment ......................................................................... 26,000Loss on Disposal................................................................. 14,000


(b) Cash ......................................................................................... 29,000Accumulated Depreciation—Delivery Equipment ......................................................................... 26,000

Gain on Disposal ........................................................ 15,000Delivery Equipment.................................................... 40,000

(c) Cash ......................................................................................... 10,000Accumulated Depreciation—Delivery Equipment ......................................................................... 26,000Loss on Disposal................................................................. 4,000




PROBLEM 9-7B

(a) Jan. 2 Patents ............................................................ 45,000Cash ........................................................ 45,000

Jan.– ResearchJune Expense...................................................... 230,000

Cash ........................................................ 230,000

Sept. 1 Advertising Expense .................................. 125,000Cash ........................................................ 125,000

Oct. 1 Copyright........................................................ 200,000Cash ........................................................ 200,000

(b) Dec. 31 Amortization Expense—Patents............. 15,000Patents ................................................... 15,000 [($100,000 X 1/10) + ($45,000 X 1/9)]

31 Amortization Expense—Copyright ........ 7,000Copyright............................................... 7,000 [($60,000 X 1/10) + ($200,000 X 1/50 X 3/12)]

(c) Intangible AssetsPatents ($145,000 cost – $25,000 amortization) (1) ................ $120,000Copyright ($260,000 cost – $31,000 amortization) (2)............ 229,000

Total intangible assets ............................................................ $349,000

(1) Cost ($100,000 + $45,000); amortization ($10,000 + $15,000).(2) Cost ($60,000 + $200,000); amortization ($24,000 + $7,000).

(d) The intangible assets of the company consist of two patents and twocopyrights. One patent with a total cost of $145,000 is being amortizedin two segments ($100,000 over 10 years and $45,000 over 9 years); theother patent was obtained at no recordable cost. A copyright with a costof $60,000 is being amortized over 10 years; the other copyright with acost of $200,000 is being amortized over 50 years.



PROBLEM 9-8B

1. Development Expense ....................................................... 110,000Patents ........................................................................... 110,000

Patents .................................................................................... 5,500Amortization Expense—Patents [TL8,000 – (TL50,000 X 1/20)] ............................. 5,500

2. Goodwill.................................................................................. 2,000Amortization Expense—Goodwill ......................... 2,000

Note: Goodwill should not be amortized because it has an indefinite life unlikePatents.



PROBLEM 9-9B

(a) McLead Corp. Gene Corp.

Asset turnover ratio $1,100,000$1,000,000

= 1.10 times$990,000

$1,050,000 = .94 times

(b) Based on the asset turnover ratio, McLead Corp. is more effective in usingassets to generate sales. Its asset turnover ratio is 17% higher thanGene’s asset turnover ratio.



CHAPTER 9 COMPREHENSIVE PROBLEM SOLUTION

(a) 1. Equipment ............................................................................... 16,800Cash ................................................................................... 16,800

2. Depreciation Expense—Equipment................................ 450Accumulated Depreciation—Equipment................ 450

Cash .......................................................................................... 3,500Accumulated Depreciation—Equipment....................... 2,250

Equipment........................................................................ 5,000Gain on Disposal [$3,500 – ($5,000 – $2,250)]...... 750

3. Accounts Receivable........................................................... 5,000Sales................................................................................... 5,000

Cost of Goods Sold.............................................................. 3,500Merchandise Inventory ................................................ 3,500

4. Bad Debts Expense ($4,000 – $500) ............................... 3,500Allowance for Doubtful Accounts............................ 3,500

5. Interest Receivable ($10,000 X .08 X 9/12).................... 600Interest Revenue............................................................ 600

6. Insurance Expense ($3,600 X 4/6) ................................... 2,400Prepaid Insurance ......................................................... 2,400

7. Depreciation Expense—Building .................................... 4,000Accumulated Depreciation—Building[($150,000 – $30,000) ÷ 30].......................................... 4,000

8. Depreciation Expense—Equipment................................ 9,900Accumulated Depreciation—Equipment [($55,000 – $5,500) ÷ 5] ............................................. 9,900

9. Depreciation Expense—Equipment................................ 2,000Accumulated Depreciation—Equipment [($16,800 – $1,800) ÷ 5] X 8/12................................ 2,000



COMPREHENSIVE PROBLEM (Continued)

10. Amortization Expense—Patents ($9,000 ÷ 9)....... 1,000Patent .......................................................................... 1,000

11. Salaries Expense............................................................ 2,200Salaries Payable ...................................................... 2,200

12. Unearned Rent ($6,000 X 1/3) ..................................... 2,000Rent Revenue ........................................................... 2,000

13. Interest Expense............................................................. 4,600Interest Payable [($11,000 + $35,000) X .10] ................................ 4,600

14. Income Tax Expense ..................................................... 15,000Income Tax Payable ............................................... 15,000




(b) PINKERTON CORPORATIONTrial Balance

December 31, 2011

Debits CreditsCash.............................................................................Accounts Receivable .............................................Notes Receivable.....................................................Interest Receivable .................................................Merchandise Inventory..........................................Prepaid Insurance...................................................Land.............................................................................Building ......................................................................Equipment .................................................................Patent ..........................................................................Allowance for Doubtful Accounts .....................Accumulated Depreciation—Building..............Accumulated Depreciation—Equipment .........Accounts Payable ...................................................Salaries Payable ......................................................Unearned Rent .........................................................Notes Payable (short-term)..................................Interest Payable .......................................................Notes Payable (long-term)....................................Income Tax Payable ...............................................Share Capital—Ordinary.......................................Retained Earnings ..................................................Dividends...................................................................Sales............................................................................Interest Revenue .....................................................Rent Revenue ...........................................................Gain on Disposal .....................................................Bad Debts Expense ................................................Cost of Goods Sold ................................................Depreciation Expense—Building.......................Depreciation Expense—Equipment ..................Insurance Expense .................................................Interest Expense......................................................Other Operating Expenses...................................Amortization Expense—Patents ........................Salaries Expense.....................................................Income Tax Expense..............................................

Total ....................................................................

$ 14,70041,80010,000

60032,7001,200

20,000150,000

71,8008,000

12,000

3,500633,500

4,00012,3502,4004,600

61,8001,000

112,200 15,000$1,213,150

$ 4,00054,00034,10027,3002,2004,000

11,0004,600

35,00015,00050,00063,600

905,000600

2,000750

$1,213,150




(c) PINKERTON CORPORATIONIncome Statement

For the Year Ended December 31, 2011

Sales..................................................................Cost of goods sold .......................................Gross profit.....................................................Operating expenses

Salaries expense......................................Other operating expenses ....................Depreciation expense—equipment......Depreciation expense—building ........Bad debts expense..................................Insurance expense ..................................Amortization expense—patents..........

Total operating expenses...........................Income from operations .............................Other income and expense

Rent income...............................................Gain on disposal ......................................Interest revenue........................................

Interest expense............................................Income before income taxes.....................Income tax expense .....................................Net income ......................................................

$112,200 61,800 12,350 4,000 3,500 2,400 1,000

2,000750

600

$905,000 633,500 271,500

197,25074,250

3,350 4,600

73,000 15,000$ 58,000

PINKERTON CORPORATIONRetained Earnings Statement

For the Year Ending December 31, 2011

Retained earnings, 1/1/11...................................................Add: Net income .................................................................

Less: Dividends....................................................................Retained earnings, 12/31/11 ..............................................

$ 63,600 58,000 121,600 12,000 $109,600




(d) PINKERTON CORPORATIONStatement of Financial Position

December 31, 2011

Property, plant, and equipmentLand......................................................................Building ...............................................................Less: Accum. depr.—building ....................Equipment...........................................................Less: Accum. depr.—equipment ...............

Intangible assetsPatent ...................................................................

Current assetsPrepaid insurance ............................................Merchandise inventory...................................Interest receivable............................................Notes receivable ...............................................Accounts receivable........................................Less: Allowance for doubtful accounts......Cash......................................................................

Total assets ...............................................................

EquityShare capital—ordinary .................................Retained earnings ............................................

Non-current liabilitiesNotes payable (long-term).............................

Current liabilitiesNotes payable (short-term) ...........................Accounts payable.............................................Income tax payable..........................................Interest payable ................................................Unearned rent....................................................Salaries payable................................................

Total equity and liabilities ....................................

$150,000 54,000 71,800 34,100

41,800 4,000

$ 20,000

96,000

37,700

1,20032,700

60010,000

37,800 14,700

$ 50,000 109,600

11,00027,30015,0004,6004,000

2,200

$153,700

8,000

97,000$258,700

$159,600

35,000

64,100$258,700



BYP 9-1 FINANCIAL REPORTING PROBLEM

(a) Property, plant, and equipment is reported net, book value, on theDecember 27, 2008, statement of financial position at £1,761,000,000.The cost of the property, plant, and equipment is £3,330,000,000 asshown in Note 16.

(b) Depreciation expense is calculated on a straight-line basis over an asset’sestimated useful live. (see Note 1, item q).

(c) Depreciation expense was:

2008: £161,000,000. Amort: £35,000,000 in 20082007: £138,000,000.

(d) Cadbury’s capital spending was:

2008: £500,000,000.2007: £409,000,000.

(e) Cadbury’s statement of financial position reports £2,288,000,000 forgoodwill, £1,598,000,000 of acquisition intangibles, and £87,000,000 ofsoftware intangibles. In Note 15, the company indicates that acquisitionintangibles consist of brands.



BYP 9-2 COMPARATIVE ANALYSIS PROBLEM

(a) Cadbury Nestlé

Assetturnoverratio £5,384 ÷

£ £11, 338 + 8, 895

2 = .53 times CHF109,908 ÷

CHF115, 361+ CHF106, 215

2 = .99 times

(b) The asset turnover ratio measures how efficiently a company uses itsassets to generate sales. It shows the dollars of sales generated by eachdollar invested in assets. Nestlé’s asset turnover ratio (.99) was 87%higher than Cadbury’s (.53). Therefore, it can be concluded that Nestlé wasmore efficient during 2008 in utilizing assets to generate sales.



BYP 9-3 EXPLORING THE WEB

Answers will vary depending on the company selected.



BYP 9-4 DECISION MAKING ACROSS THE ORGANIZATION

(a) Reimer Company—Straight-line method

Annual DepreciationBuilding [($320,000 – $20,000) ÷ 40]...................................... $ 7,500Equipment [($110,000 – $10,000) ÷ 10] ................................. 10,000Total annual depreciation ......................................................... $17,500

Total accumulated depreciation ($17,500 X 3)............................ $52,500

Lingo Company—Double-declining-balance method

Year Asset ComputationAnnual

DepreciationAccumulatedDepreciation

2009

2010

2011

BuildingEquipmentBuildingEquipmentBuildingEquipment

$320,000 X 5%$110,000 X 20%$304,000 X 5%$ 88,000 X 20%$288,800 X 5%$ 70,400 X 20%

$16,000 22,000 15,200 17,600 14,440 14,080

$38,000

32,800

28,520$99,320

(b)

Year

ReimerCompany

Net Income

LingoCompany

Net IncomeAs Adjusted Computations for Lingo Company

200920102011

$ 84,000 88,400 90,000

$ 88,500 91,300 96,020

$68,000 + $38,000 – $17,500 = $88,500$76,000 + $32,800 – $17,500 = $91,300$85,000 + $28,520 – $17,500 = $96,020

Total net income $262,400 $275,820

(c) As shown above, when the two companies use the same depreciationmethod, Lingo Company is more profitable than Reimer Company. Whenthe two companies are using different depreciation methods, LingoCompany has more cash than Reimer Company for two reasons:



BYP 9-4 (Continued)

(1) its earnings are generating more cash than the earnings of ReimerCompany, and (2) depreciation expense has no effect on cash. Cashgenerated by operations can be arrived at by adding depreciation expenseto net income. If this is done, it can be seen that Lingo Company’s opera-tions generate more cash ($229,000 + $99,320 = $328,320) than ReimerCompany’s ($262,400 + $52,500 = $314,900). Based on the above analysis,Mrs. Vogts should buy Lingo Company. It not only is in a better financialposition than Reimer Company, but it is also more profitable.



BYP 9-5 COMMUNICATION ACTIVITY

To: Instructor

From: Student

Re: American Exploration Company footnote

American Exploration Company accounts for its oil and gas activities using thesuccessful efforts approach. Under this method, only the costs of successfulexploration are included in the cost of the extractable resource, and thecosts of unsuccessful explorations are expensed.

Depletion is determined using the units-of-activity method. Under this method,a depletion cost per unit is computed based on the total number of unitsexpected to be extracted. Depletion expense for the year is determined bymultiplying the units extracted and sold by the depletion cost per unit.



BYP 9-6 ETHICS CASE

(a) The stakeholders in this situation are:

� Dennis Harwood, president of Buster Container Company.� Shelly McGlone, controller.� The shareholders of Buster Container Company.� Potential investors in Buster Container Company.

(b) The intentional misstatement of the life of an asset or the amount of theresidual value is unethical for whatever the reason. There is nothing perse unethical about changing the estimate either of the life of an asset orof an asset’s residual value if the change is an attempt to better matchcost and revenues and is a better allocation of the asset’s depreciablecost over the asset’s useful life. In this case, it appears from thecontroller’s reaction that the revisions in the life are intended only toimprove earnings and, therefore, are unethical.

The fact that the competition uses a longer life on its equipment is notnecessarily relevant. The competition’s maintenance and repair policiesand activities may be different. The competition may use its equipmentfewer hours a year (e.g., one shift rather than two shifts daily) than BusterContainer Company.

(c) Income before income taxes in the year of change is increased $140,000by implementing the president’s proposed changes.

Old EstimatesAsset costEstimated residual valueDepreciable costDepreciation per year (1/8)

$3,100,000 300,000 2,800,000$ 350,000

Revised EstimatesAsset costEstimated residual valueDepreciable costDepreciation taken to date ($350,000 X 2)

Remaining life in yearsDepreciation per year

$3,100,000 300,000 2,800,000 700,000 2,100,000

10 years$ 210,000



Documents

Wey IFRS 1e SM Ch09 Final Assets, Natural Resources, and Intangible Assets ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Do It! Exercises A Problems B