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Chapter 7

Plant Assets & Intangibles


Short Exercises
(5 min.) S 7-1
1. Property and Equipment, at Cost
Millions
Aircraft

$ 2,392

Package handling and ground support


equipment

12,229

Computer and electronic equipment.

28,159

Vehicles.

581

Facilities and other.

1,432

Total cost..

44,793

Less: Accumulated depreciation.


Net property and equipment

2. Cost
Book value

(14,900)
$29,893

= $44,793 million
= $29,893 million

Book value is less than cost because accumulated depreciation is


subtracted from cost to compute book value.

Chapter 7

Plant Assets & Intangibles

(5 min) S 7-2

Land ($210,000 .30*)..


Building ($210,000 .10)..
Equipment ($210,000 .60).
Note Payable..
*Supporting computations:

Current
Market
Value

63,000
21,000
126,000
210,000

Percent of Total

Land.

$ 66,000

$66,000 / $220,000

30.0%

Building...

22,000

$22,000 / $220,000

10.0%

Equipment..

132,000

$132,000 / $220,000

60.0%

Total.

$220,000

100.0%

(5 min.) S 7-3
Income Statement
Revenues

CORRECT

Expenses

UNDERSTATED

Net income

Financial Accounting 8/e Solutions Manual

OVERSTATED

(10 min.) S 7-4


1. First-year depreciation:
Straight-line ($44,400,000 $5,400,000) / 5 years

$ 7,800,000

Units-of-production [($44,400,000 $5,400,000) /


6,500,000 miles] 725,000 miles..

$ 4,350,000

Double-declining-balance ($44,400,000 40%)...

$17,760,000

Second-year depreciation:
Straight-line ($44,400,000 $5,400,000) / 5 years

$ 7,800,000

Units-of-production [($44,400,000 $5,400,000) /


6,500,000 miles] 1,225,000 miles...

$ 7,350,000

Double-declining-balance [($44,400,000 $17,760,000)


40%].
$10,656,000

2. Book value:

Cost
Less: Accumulated
Depreciation

StraightLine

Units-ofProduction

DoubleDecliningBalance

$44,400,000

$44,400,000

$44,400,000

(7,800,000)
Chapter 7

(4,350,000)

(17,760,000)

Plant Assets & Intangibles

Book value, Year 1..

$36,600,000

Financial Accounting 8/e Solutions Manual

$40,050,000

$26,640,000

(10 min.) S 7-5


1. Double-declining-balance

(DDB)

depreciation

offers

the

tax

advantage for the first year of an assets use. Because DDBs firstyear depreciation is greater than first-year depreciation under other
methods, net income is lower. Lower net income results in lower
taxes and more cash that the taxpayer can invest to earn a return.
2.

DDB depreciation..
Straight-line depreciation...
Excess depreciation tax deduction.
Income tax rate..
Income tax savings for first year..

$17,760,000
(7,800,000)
$ 9,960,000
.36
$ 3,585,600

(5-10 min.) S 7-6


First-year depreciation (for a partial year):
a. Straight-line (41,000,000 5,200,000) / 5 years
3/12
b. Units-of-production (41,000,000 5,200,000) /
5,200,000 miles 390,000 miles) or
2,683,200 if depletion per unit is rounded
Chapter 7

1,790,000

2,685,000

Plant Assets & Intangibles

c. Double-declining-balance (41,000,000 2/5


3/12)..

4,100,000

SL depreciation produces the highest net income (lowest depreciation).


DDB

depreciation

produces

the

lowest

net

income

(highest

depreciation).
(10 min.) S 7-7
Depreciation Expense Concession Stand......
Accumulated Depreciation Concession Stand

15,000

15,000

Depreciation for years 1-5:


$90,000 / 10 years = $ 9,000 per year
$ 9,000 5 years = $45,000 for years 1-5

Assets remaining
depreciable
book value

(New) Estimated
useful life remaining

(New) Annual
depreciation

$90,000 $45,000

3 years

$15,000 per year

$45,000

(5-10 min.) S 7-8


6

Financial Accounting 8/e Solutions Manual

1. ($67,850,000 $2,950,000) / 11 years 5 = $29,500,000


2.
2017
Jan. 1 Cash...........
Accumulated Depreciation...
Loss on Sale of Airplane...
Airplane.

Chapter 7

8,000,000
29,500,000
30,350,000
67,850,000

Plant Assets & Intangibles

(5-10 min.) S 7-9


1. Units-of-production depreciation method is similar to the method
used to calculate depletion.

2. Oil Inventory ($18* .8).


Oil Reserves...
*$18 = $234 / 13

3. Cost of Oil Sold ($18 .2)


Oil Inventory..

Billions
14.4
14.4

Billions
3.6
3.6

(5-10 min.) S 7-10


Req. 1
Cost of goodwill purchased:
Purchase price paid for Seacoast Snacks, Inc.
Market value of Seacoast Snacks net assets:
Market value of Seacoast Snacks assets
Less: Seacoast Snacks liabilities
Market value of Seacoast Snacks net assets
Cost of goodwill

Req. 2
8

Financial Accounting 8/e Solutions Manual

Millions
$8.2
$12.0
(10.0)
2.0
$6.2

In future years PTL, Inc. will determine whether its goodwill has been
impaired. If the goodwills value has not been impaired, there is nothing
to record. But if goodwills value has been impaired, PTL, Inc. will
record a loss and write down the book value of the goodwill.

(5 min.) S 7-11
(Dollar amounts in millions)
Return on assets
15%

= Net income Average total assets


=
$18

$120

(5 min.) S 7-12
2012 Return on assets

Net income

Average total assets

17.7%

$42,500

$240,000

2013 Return on assets

Net income

Average total assets

18.0%

$45,000

$250,000

(5 min.) S 7-13

Chapter 7

Plant Assets & Intangibles

Southeast Satellite Systems, Inc.


Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from investing activities:
Purchase of other companies.

$(15.0)

Capital expenditures.........

(8.0)

Proceeds from sale of North American operations......

13.0

Net cash (used for) investing activities.......

10

Millions

Financial Accounting 8/e Solutions Manual

$(10.0)

(5 min.) S 7-14

Asset

a.
b.
c.
d.

Book
Value

Equipment $160,000
Trademark
$320,000
Land
$56,000
Factory
$3 million
building

Estimated
Future
Fair
Impaired?
Cash
Value
(Y or N)
Flows
$120,000 $100,000
Y
$420,000 $380,000
N
$30,000
$28,000
Y
$3 million $2 million
N

Chapter 7

Amount
of Loss

Plant Assets & Intangibles

$60,000
-$28,000
--

11

Exercises
(5-10 min.) E 7-15A
Land:

$330,000 + $2,500 + $5,500 + $5,000 = $343,000

Land improvements: $51,000 + $11,000 + $2,000 = $64,000


Building: $54,000 + $750,000 = $804,000

(10-15 min.) E 7-16A


Allocation of cost to individual machines:

Appraised
Percentage of Total
Machine Value
Appraised (Market) Value

Total
Cost

$ 63,000

$63,000 / $210,000 =

.30 $204,000 .30

= $ 61,200

107,100

107,100 / 210,000 =

.51

204,000 .51

104,040

39,900

39,900 / 210,000 =

.19

204,000 .19

38,760

Totals

$210,000

Sale price of machine No. 1.


Cost.
Gain on sale of machine

12

Cost of
Each
Machine

Financial Accounting 8/e Solutions Manual

1.00

$204,000

$63,000
61,200
$ 1,800

(5-10 min.) E 7-17A


(a) Sales tax

Capital Expenditure

(b) Transportation and insurance

Capital Expenditure

(c) Purchase price

Capital Expenditure

(d) Installation
(e) Training of personnel

Capital Expenditure
Capital Expenditure

(f) Reinforcement to platform

Capital Expenditure

(g) Income tax


(h) Major overhaul

Immediate Expense
Capital Expenditure

(i) Ordinary recurring repairs


(j) Lubrication before machine is placed in

Immediate Expense

service
(k) Periodic lubrication

Capital Expenditure
Immediate Expense

Chapter 7

Plant Assets & Intangibles

13

(15 min.) E 7-18A


Journal
ACCOUNT TITLES
1. a. Land
Cash........................................................
b. Building
($1,300 + $15,300 + $685,000 + $28,220)....
Note Payable...........................................
Cash ($1,300 + $15,300 + $28,220)........
c. Depreciation Expense.................................
Accumulated Depreciation
($729,820 $336,000) / 35 6/12...........

DEBIT

CREDIT

483,000
483,000

729,820
685,000
44,820
5,626
5,626

2. BALANCE SHEET
Plant assets:
Land...
Building.
Less Accumulated depreciation.

$483,000
$729,820
(5,626)

Building, net.

724,194

3. INCOME STATEMENT
Expense:
Depreciation expense...

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Financial Accounting 8/e Solutions Manual

5,626

Chapter 7

Plant Assets & Intangibles

15

(15-20 min.) E 7-19A

Req. 1
Year

Straight-Line

Units-ofProduction

2012

$ 4,025

$ 6,210

$ 9,300

2013

4,025

5,520

4,650

2014

4,025

1,610

2,150

2015

4,025

2,760

-0-

$16,100

$16,100

_____

Double-DecliningBalance

$16,100

Computations:
Straight-line: ($18,600 $2,500) 4 = $4,025 per year.
Units-of-production: ($18,600 $2,500) 35,000 miles = $.46 per mile;
2012

13,500

$.46

$ 6,210

2013

12,000

.46

5,520

2014

3,500

.46

1,610

2015

6,000

.46

2,760

Double-declining-balance Twice the straight-line rate: 1/4 2 = 50%


2012 $18,600 .50

= $9,300

2013 ($18,600 $9,300) .50 = $4,650


2014 ($9,300 $4,650)

= $4,650 $2,500 (residual value) = $2,150

Req. 2
The units-of production method tracks the wear and tear on the van
most closely.

16

Financial Accounting 8/e Solutions Manual

Req. 3
For income tax purposes, the double-declining-balance method is best
because it provides the most depreciation and, thus, the largest tax
deductions in the early life of the asset. The company can invest the
tax savings to earn a return on the investment.
(15 min.) E 7-20A
INCOME STATEMENT
Expenses:
Depreciation expense Building
[($53,000 + $103,000 + $66,000) $56,000] / 20....

8,300

Depreciation expense Furniture and Fixtures


($59,000 2/5).........................................................

23,600

Supplies expense
($9,600 $1,200).....................................................

8,400

BALANCE SHEET
Current assets:
Supplies......................................................................

1,200

Plant assets:
Building ($53,000 + $103,000 + $66,000)

$222,000

Less: Accumulated depreciation.

(8,300)

$213,700

Furniture and fixtures.....


Less: Accumulated depreciation.

59,000
(23,600)

35,400

Chapter 7

Plant Assets & Intangibles

17

STATEMENT OF CASH FLOWS


Cash flows from investing activities:
Purchase of buildings ($53,000* + $66,000).....................

$(119,000)

Purchase of furniture and fixtures...................................

(59,000)

_____
*Does not include the $103,000 note payable because Sunshine Bakery
paid no cash on the note.

18

Financial Accounting 8/e Solutions Manual

(10-15 min.) E 7-21A

Journal
DATE

ACCOUNT TITLES

DEBIT

Year

20 Depreciation Expense ($355,000 40).


Accumulated Depreciation Building..

8,875

Year

21 Depreciation Expense..
Accumulated Depreciation Building..

16,840*

_____
*Computations:

CREDIT

8,875

16,840

Depreciable cost: $445,000 $90,000 = $355,000


Depreciation through year 20: = $8,875 20 = $177,500
Assets remaining depreciable book value:
$445,000 $177,500 $14,900 (new residual value) = $252,600
New annual depreciation:
$252,600 15 (revised life remaining) = $16,840

Chapter 7

Plant Assets & Intangibles

19

(15-20 min.) E 7-22A

DATE
2013
Sept.

Journal
ACCOUNT TITLES

DEBIT CREDIT

Depreciation for 9 months:

30

Depreciation Expense..............................

1,566a

Accumulated Depreciation
Fixtures............................................

1,566

Sale of fixtures:
30 Cash..

2,600

Accumulated Depreciation
Store Fixtures ($3,480 + $1,566)..

5,046

Loss on Sale of Fixtures..

1,054b

Fixtures..

8,700

_____
2012 depreciation: $8,700 2/5 = $3,480

2013 depreciation: ($8,700 $3,480) 2/5 9/12 = $1,566

Loss on sale of fixtures:


Sale price of old fixtures.

$ 2,600

Book value of old fixtures:


Cost..

$8,700

Less: Accumulated depreciation ($3,480 +


$1,566)....

(5,046)

Loss on sale...

20

Financial Accounting 8/e Solutions Manual

( 3,654)
$(1,054)

(10-15 min.) E 7-23A


Cost of old truck..

$360,000

Less: Accumulated depreciation:

($360,000 $50,000)

75 + 85 + 135 + 39
1,000

(103,540)a

Book value of old truck..


_____
a
Alternate solution setup for accumulated depreciation:
($360,000 $50,000)
1,000,000 miles

_______
$256,460

$.31 per mile

75,000 + 85,000 + 135,000 + 39,000 = 334,000 miles driven


Accumulated depreciation

334,000 miles $.31

$103,540

Calculation of gain or loss:


Purchase price of Freightliner truck

$210,000

Cash paid for Freightliner truck

(20,000)

Trade-in value of Mack truck

190,000

Book value of Mack truck

(256,460)

Net loss on disposal of Mack truck

$ (66,460)

Journal
DATE

ACCOUNT TITLES

DEBIT
Chapter 7

CREDIT

Plant Assets & Intangibles

21

2015

22

Truck Freightliner
Accumulated Depreciation Mack
Truck..................................................
Loss on Disposal of Mack Truck....
Truck Mack
Cash................................................

Financial Accounting 8/e Solutions Manual

210,000
103,540
66,460
360,000
20,000

(10-15 min.) E 7-24A

DATE

Journal
ACCOUNT TITLES

DEBIT

(a) Purchase of mineral assets:


Mineral Asset.
Cash

425,000

(b) Payment of fees and other costs:


Mineral Asset ($110 + $2,000)
Cash

2,110

CREDIT

425,000

2,110

Mineral Asset..
Cash.

55,390
55,390

(c) Depletion for the first year


Mineral Asset Inventory..
Mineral Asset

67,550*

(d) Sale of ore


Cost of Mineral Asset Sold.....
Mineral Asset Inventory.

57,900

67,550

57,900

_____
*$425,000 + $110 + $2,000 + $55,390 = $482,500
$482,500 250,000 tons = $1.93 per ton
35,000 tons $1.93 = $67,550
30,000 tons x $1.93 = $57,900

Chapter 7

Plant Assets & Intangibles

23

(10-15 min.) E 7-25A

DATE
Req. 1
(a)

Journal
ACCOUNT TITLES
Purchase of patent:
Patents..............................................
Cash..............................................

(b) Amortization for each year:


Amortization Expense Patents
($1,500,000 15)..........................
Patents.........................................

DEBIT

CREDIT

1,500,000
1,500,000

100,000
100,000

Req. 2
Impairment of patent in year 10:
Impairment Loss on Patents...........
Patents.........................................

500,000**
500,000

Yes, the asset is impaired because its net book value ($500,000*) is
greater than the estimated future cash flows ($400,000).
_____
*Asset remaining book value: $1,500,000 ($100,000 10) = $500,000
**Impairment loss: $500,000 [$500,000 (book value) - $0 (fair value)]

24

Financial Accounting 8/e Solutions Manual

(5-10 min.) E 7-26A


Req. 1
Cost of goodwill purchased:

Millions
Purchase price paid for HarborSide.com...................

$20

Market value of HarborSides net assets:


Market value of HarborSides assets ($15 + $21).

$36

Less: HarborSides liabilities..................................

(28)

Market value of HarborSides net assets...............

Cost of goodwill...........................................................

$ 12

Req. 2
Journal
DATE
ACCOUNT TITLES
Current Assets................................................
Long-Term Assets...........................................
Goodwill...........................................................
Liabilities...................................................
Cash...........................................................

DEBIT CREDIT
15
21
12
28
20

Req. 3
Caltron will determine whether its goodwill has been impaired in value.
If the goodwills value has not been impaired, there is nothing to

Chapter 7

Plant Assets & Intangibles

25

record. But if goodwills value has been impaired, Caltron will record a
loss and write down the book value of the goodwill.

26

Financial Accounting 8/e Solutions Manual

(5-10 min.) E 7-27A


Req. 1
Profit margin for the year ended January 31, 2011:
Net earnings
Net sales

$ 2,010
$48,815

4.12%

Req. 2
Asset turnover for the year ended January 31, 2011:
Net sales
Average total assets

$48,815
$33,699

= 1.45

Req. 3
Return on assets for the year ended January 31, 2011:
Net earnings
Average total assets
_____

$ 2,010
$33,699

5.96% or (4.12% x 1.45 = 5.97%)*

*difference due to rounding

Chapter 7

Plant Assets & Intangibles

27

(10 min.) E 7-28A


a.

Sale of building
(or disposal of building).

$ 680,000

b.

Insurance proceeds from fire


(or disposal of building).

190,000

c.

Renovation of store
(or capital expenditures)

(130,000)

d.

Purchase of store fixtures


(or capital expenditures)

(60,000)

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Chapter 7

Plant Assets & Intangibles

29

(5-10 min.) E 7-29B


Land:

$160,000 + $150,000 + $5,000 + $2,000 + $3,000 = $320,000

Land improvements: $46,000 + $16,000 + $7,000 = $69,000


Building: $58,000 + $700,000 = $758,000

(10-15 min.) E 7-30B


Req. 1
Allocation of cost to individual machines:
Appraised
Percentage of Total
Machine Value
Appraised (Market) Value

$ 50,000 $ 50,000 / $200,000 =

Total
Cost

.25 $192,000 .25 = $ 48,000

96,000

96,000 / 200,000 =

.48

192,000 .48 =

92,160

54,000

54,000 / 200,000 =

.27

192,000 .27 =

51,840

Totals

$200,000

1.00

$192,000

Req. 2
Sale price of machine no. 3..

$54,000

Cost.

(51,840)

Gain on sale of machine

30

Cost of
Each
Machine

Financial Accounting 8/e Solutions Manual

2,160

(5-10 min.) E 7-31B

(a) Sales tax

Capital Expenditure

(b) Transportation and insurance

Capital Expenditure

(c) Purchase price

Capital Expenditure

(d) Installation
(e) Training of personnel

Capital Expenditure
Capital Expenditure

(f) Reinforcement to platform

Capital Expenditure

(g) Income tax


(h) Major overhaul

Immediate Expense
Capital Expenditure

(i) Ordinary recurring repairs


(j) Lubrication before machine is placed in

Immediate Expense

service
(k) Periodic lubrication

Capital Expenditure
Immediate Expense

Chapter 7

Plant Assets & Intangibles

31

(15 min.) E 7-32B

Req. 1
Journal
ACCOUNT TITLES
a. Land
Cash.....
b. Building
($1,700 + $15,700 + $705,000 + $30,040).......
Note Payable..
Cash ($1,700 + $15,700 + $30,040)
c. Depreciation Expense
Accumulated Depreciation
($752,440 $340,000) / 35 4/12...

DEBIT

CREDIT

485,000
485,000

752,440
705,000
47,440
3,928
3,928

Req. 2
BALANCE SHEET
Plant assets:
Land.........................................................
Building...................................................
Less: Accumulated depreciation..........
Building, net............................................

$485,000
$752,440
(3,928)
748,512

Req. 3
INCOME STATEMENT
Expense:
Depreciation expense............................
32

Financial Accounting 8/e Solutions Manual

3,928

Chapter 7

Plant Assets & Intangibles

33

(15-20 min.) E 7-33B

Req. 1
Year

Straight-Line

Units-ofProduction

Double-DecliningBalance

2012

$ 4,525

$ 4,800

$11,000

2013

4,525

5,120

5,500

2014

4,525

2,900

1,600

2015

4,525

5,280

-0-

$18,100

$18,100

_____

$18,100

Computations:
Straight-line: ($22,000 $3,900) 4 = $4,525 per year.
Units-of-production: ($22,000 $3,900) 113,125 miles = $.16 per mile;
2012

30,000

$.16

$ 4,800

2013

32,000

.16

5,120

2014

18,125

.16

2,900

2015

33,000

.16

5,280

Double-declining-balance Twice the straight-line rate: 1/4 2 = 50%


2012 $22,000 .50

= $11,000

2013 ($22,000 $11,000) .50

= $5,500

2014 ($11,000 - $5,500) $3,900 = $5,500 $3,900 (residual value)


= $1,600

Req. 2
The units-of production method tracks the wear and tear on the van
most closely.
34

Financial Accounting 8/e Solutions Manual

Req. 3
For income tax purposes, the double-declining-balance method is best
because it provides the most depreciation and, thus, the largest tax
deductions in the early life of the asset. The company can invest the
tax savings to earn a return on the investment.
(15 min.) E 7-34B
INCOME STATEMENT
Expenses:
Depreciation expense Building
[($158,000 + $65,000) $50,000] / 20

$ 8,650

Depreciation expense Furniture and Fixtures


($51,000 2/5)

20,400

Supplies expense
($9,000 $1,300)

7,700

BALANCE SHEET
Current assets:
Supplies

$ 1,300

Plant assets:
Building ($158,000 + $65,000).

$223,000

Less: Accumulated depreciation

(8,650)

Furniture and fixtures...

51,000

Less: Accumulated depreciation

(20,400)

Chapter 7

$214,350

Plant Assets & Intangibles

30,600
35

STATEMENT OF CASH FLOWS


Cash flows from investing activities:
Purchase of buildings ($54,000* + $65,000).

$(119,000)

Purchase of furniture and fixtures.


(51,000)
_____
*Does not include the $104,000 note payable because Early Bird Caf
paid no cash on the note.

36

Financial Accounting 8/e Solutions Manual

(10-15 min.) E 7-35B

Journal
DATE
Year

ACCOUNT TITLES

DEBIT CREDIT

20 Depreciation Expense ($357,000 40)......


Accumulated Depreciation Building

Year

21 Depreciation Expense.................................
Accumulated Depreciation Building
_____
*Computations:

8,925

8,925

17,080*
17,080

Depreciable cost: $450,000 $93,000 = $357,000


Depreciation through year 20: $357,000 40 = $8,925 20 = $178,500
Assets remaining depreciable book value:
$450,000 $178,500 $15,300 = $256,200
New annual depreciation: $256,200 15 (revised life remaining)
= $17,080

Chapter 7

Plant Assets & Intangibles

37

(15-20 min.) E 7-36B

DATE
2013
Oct.
31

31

Journal
ACCOUNT TITLES
Depreciation for 10 months:
Depreciation Expense
Accumulated Depreciation
Fixtures..
Sale of fixtures:
Cash
Accumulated Depreciation
Store Fixtures ($3,280 + $1,640)..
Loss on Sale of Fixtures.
Fixtures..

DEBIT CREDIT
1,640a
1,640

2,200
4,920
1,080b

_____
a
2012 depreciation: $8,200 2/5 = $3,280
2013 depreciation: ($8,200 $3,280) 2/5 10/12 = $1,640

8,200

Loss on sale of fixtures:


Sale price of old fixtures

$2,200

Book value of old fixtures:


Cost

$8,200

Less: Accumulated depreciation

(4,920)

Loss on sale..

38

Financial Accounting 8/e Solutions Manual

(3,280)
$(1,080)

Chapter 7

Plant Assets & Intangibles

39

(10-15 min.) E 7-37B


Cost of old truck

$430,000

Less: Accumulated depreciation:

($430,000 $20,000)

81+ 111 + 141 + 41


1,000

(153,340)a

Book value of old truck


_____
a
Alternate solution setup for accumulated depreciation:
($430,000 $20,000)
1,000,000 miles

_______
$276,660

$.41 per mile

81,000 + 111,000 + 141,000 + 41,000 = 374,000 miles driven


Accumulated depreciation

374,000 miles $.41

$153,340

Calculation of gain or loss:


Purchase price of Freightliner truck..

40

$250,000

Cash paid for Freightliner truck..

(24,000)

Trade-in value of Mack truck...

226,000

Book value of Mack truck.

(276,660)

Net loss on disposal of Mack truck...

$ (50,660)

Financial Accounting 8/e Solutions Manual

Journal
ACCOUNT TITLES

DATE
2015

Truck Freightliner
Accumulated Depreciation Mack
Truck..................................................
Loss on Disposal of Mack Truck
Truck Mack
Cash................................................

DEBIT

CREDIT

250,000
153,340
50,660
430,000
24,000
(10-15 min.) E 7-38B

DATE

Journal
ACCOUNT TITLES AND
EXPLANATION

DEBIT

(a) Purchase of mineral assets:


Mineral Asset.
Cash

428,000

(b) Payment of fees and other costs:


Mineral Asset ($130 + $2,300)
Cash

2,430

Mineral Asset.
Cash
(c) Depletion for the year
Mineral Asset Inventory..
Mineral Asset
(d) Sales of ore
Cost of Mineral Asset Sold.
Chapter 7

CREDIT

428,000

2,430
66,820
66,820

76,500*
76,500

61,200**
Plant Assets & Intangibles

41

Mineral Asset Inventory.


_____
*$428,000 + $2,430 + $66,820 = $497,250
$497,250 325,000 tons = $1.53 per ton
50,000 tons $1.53 = $76,500
**40,000 tons x $1.53 = $61,200

42

Financial Accounting 8/e Solutions Manual

61,200

(10-15 min.) E 7-39B

DATE
Req. 1
(a)

Journal
ACCOUNT TITLES
Purchase of patent:
Patents.............................................
Cash.............................................

(b) Amortization for each year:


Amortization Expense Patents
($1,200,000 12)..............................
Patents........................................
Req. 2

Impairment loss:
Impairment Loss on Patents..........
Patents.........................................

DEBIT

CREDIT

1,200,000
1,200,000

100,000
100,000

400,000
400,000

The asset is impaired because the net book value ($400,000) is greater
than the estimated future cash flows ($350,000). The amount of the
impairment loss is $400,000 (net book value minus fair value of $-0-).

Chapter 7

Plant Assets & Intangibles

43

(5-10 min.) E 7-40B


Req. 1
Cost of goodwill purchased:
Millions
Purchase price paid for Northeast.com.

$19

Market value of Northeasts net assets:


Market value of Northeasts assets ($11 + $25)..

$36

Less: Northeasts liabilities..

(22)

Market value of Northeasts net assets.

14

Cost of goodwill

$5

Req. 2

DATE

Journal
ACCOUNT TITLES
Current Assets..

11

Long-Term Assets....

25

Goodwill..

Liabilities

22

Cash.

19

Req. 3

44

DEBIT CREDIT

Financial Accounting 8/e Solutions Manual

Doltron will determine whether its goodwill has been impaired in value.
If the goodwills value has not been impaired, there is nothing to
record. But if goodwills value has been impaired, Doltron will record a
loss and write down the book value of the goodwill.

Chapter 7

Plant Assets & Intangibles

45

(5-10 min.) E 7-41B


Req. 1
Profit margin for the year ended January 31, 2011:
Net earnings
Net sales

$ 1,116
$82,189

= 1.36%

Req. 2
Asset turnover for the year ended January 31, 2011:
Net sales
Average total assets

$82,189
$23,505

= 3.5

Req. 3
Return on assets for the year ended January 31, 2011:
Net earnings
Average total assets
_____

$ 1,116 = 4.75% or (1.36% x 3.5 = 4.76%) *


$23,505

*difference due to rounding

46

Financial Accounting 8/e Solutions Manual

(10 min.) E 7-42B


a.

Sale of building
(or disposal of building).

$ 620,000

b.

Insurance proceeds from fire


(or disposal of building).

100,000

c.

Renovation of store
(or capital expenditures)

(140,000)

d.

Purchase of store fixtures


(or capital expenditures)

(80,000)

Chapter 7

Plant Assets & Intangibles

47

48

Financial Accounting 8/e Solutions Manual

Quiz
Q7-43

Q7-44

Q7-45

Q7-46

Q7-47

[$480,000 / ($480,000 + $270,000) ($3,000,000 +


$1,000,000)] 15 = $170,667
DDB [($34,000 2/5) = $13,600; ($34,000 $13,600 2/5)]
UOP ($34,000 $4,000) /100,000 hrs. = $.30 25,000 hrs.)

Q7-48

($26,000 $2,000) / 6 3 = $12,000;


($26,000 $12,000) / 7 = $2,000

Q7-49

Q7-50

Q7-51

Q7-52

SL depreciation = $1,050 [($9,200 $800) / 8


Book value = $7,100 [$9,200 ($1,050 x 2)]

Q7-53

$800 gain = $7,900 (sale price) $7,100 (book value)

Q7-54

($832,000 $68,800) (54,000 / 240,000) = $171,720

Q7-55

$66 ($72 $23) = $17

Q7-56

$1,000,000 $820,000

Q7-57

$45,000 / $500,000

Chapter 7

Plant Assets & Intangibles

49

50

Financial Accounting 8/e Solutions Manual

Problems
(20-30 min.) P 7-58A
Req. 1

ITEM

LAND

(a)

$280,000

(b)

8,300

LAND
SALES
IMPROVEMENTS BUILDING

(c)

GARAGE
BUILDING FURNITURE

$ 70,000
$ 31,400

(d)

300

(e)

5,900

(f)

1,500

(g)

500

(h)

19,200

(i)

516,000

(j)

41,000

(k)

9,600

(l)

6,900*

(m)

52,500

(n)

7,800

(o)

4,500

38,250

2,250

(p)

$79,800

(q)

1,200

Totals

$294,500

Computations:
(a)
Land:
Garage building:

$104,600

$583,550

$113,250

$81,000

$320,000 / $400,000 $350,000 = $280,000


$ 80,000 / $400,000 $350,000 = $70,000
Chapter 7

Plant Assets & Intangibles

51

(o)

Land improvements: $ 45,000 .10 = $4,500


Sales building:
$ 45,000 .85 = $38,250
Garage building:
$ 45,000 .05 = $2,250

_____
*Some accountants would debit this cost to the Land account.

52

Financial Accounting 8/e Solutions Manual

(continued) P 7-58A
Req. 2
DATE

Journal
ACCOUNT TITLES

DEBIT CREDIT

Dec. 31 Depreciation Expense Land


Improvements ($104,600 / 20 9/12)...
Accumulated Depreciation
Land Improvements
31 Depreciation Expense Sales Building
($583,550 / 50 9/12)...
Accumulated Depreciation
Sales Building..
31 Depreciation Expense Garage
Building ($113,250 / 50 9/12)..
Accumulated Depreciation
Garage Building..
31 Depreciation Expense Furniture
($81,000 / 12 9/12).....
Accumulated Depreciation
Furniture

3,923*
3,923

8,753
8,753

1,699
1,699

5,063
5,063

____
*$3,664 ($97,700 / 20 9/12) if $6,900 (l in Req. 1) is debited to Land.

Chapter 7

Plant Assets & Intangibles

53

54

Financial Accounting 8/e Solutions Manual

(continued) P 7-58A
Req. 3
This problem shows how to determine the cost of a plant asset. It also
demonstrates the computation of depreciation for a variety of plant
assets. Because virtually all businesses use plant assets, a manager
needs to understand how those assets costs and depreciation
amounts are determined. Depreciation affects net income. Managers
need to understand the meaning, components, and computation of net
income, because often their performance is measured by how much
net income the business earns. This problem covers all these concepts
with specific examples.

Student responses will vary.

Chapter 7

Plant Assets & Intangibles

55

(15 min.) P 7-59A


Req. 1
Journal
ACCOUNT TITLES

DEBIT

Equipment...
Cash.

108,000

Depreciation Expense Buildings.


Accumulated Depreciation Buildings

30,700

Depreciation Expense Equipment...


Accumulated Depreciation Equipment..

40,000

CREDIT

108,000

30,700*

40,000**

*($701,000 $87,000) / 20
**[($409,000 $263,000) 2/10 + ($108,000 2/10 6/12)]

Req. 2
BALANCE SHEET
Property, plant, and equipment:
Land
Buildings

$147,000
$ 701,000

Less: Accumulated Depreciation


($348,000 + $30,700)
Equipment ($409,000 + $108,000)
Less: Accumulated Depreciation
56

Financial Accounting 8/e Solutions Manual

(378,700)
$ 517,000

322,300

($263,000 + $40,000).................
Total property, plant, and equipment..

Chapter 7

(303,000)

214,000
$683,300

Plant Assets & Intangibles

57

(25-35 min.) P 7-60A

DATE
Jan.

Journal
ACCOUNT TITLES
4 Equipment (new)
Accumulated Depreciation
Equipment
Equipment (old)...
Cash ($178,000 $77,000).
Gain on Trade-in of Equipment
[$77,000 - ($134,000 - $61,000)]

June 29 Depreciation Expense Building.


Accumulated Depreciation
Building..
[($650,000 $220,000) / 40 6/12]
29 Cash...................................................
Note Receivable.................................
Accumulated Depreciation
Building ($140,000 + $5,375).............
Building.....................................
Oct.

58

DEBIT
178,000
61,000

134,000
101,000
4,000

5,375
5,375

110,000
394,625
145,375

30 Land*................................................
144,000
Building**...........................................
216,000
Cash...........................................
*[$160,800 / ($160,800 + $241,200) $360,000]
**[$241,200 / ($160,800 + $241,200) $360,000]

Financial Accounting 8/e Solutions Manual

CREDIT

650,000

360,000

(continued) P 7-60A

DATE
Dec.

Journal
ACCOUNT TITLES

31 Depreciation Expense
Equipment ($178,000 2/8)...............
Accumulated Depreciation
Equipment.................................
31 Depreciation Expense Buildings.
Accumulated Depreciation
Buildings...................................
[$216,000 (30% $216,000)] / 40
2/12

Chapter 7

DEBIT

CREDIT

44,500
44,500
630
630

Plant Assets & Intangibles

59

(30-40 min.) P 7-61A


Req. 1
Straight-Line Depreciation Schedule
Depreciation for the Year

DATE

1-07-2012
12-31-2012
12-31-2013
12-31-2014
12-31-2015
12-31-2016

ASSET
COST

$277,000

DEPRECIATION DEPRECIABLE DEPRECIATION ACCUMULATED


RATE

COST
=
EXPENSE
DEPRECIATION

1/5
1/5
1/5
1/5
1/5

$252,000
252,000
252,000
252,000
252,000

$50,400
50,400
50,400
50,400
50,400

Asset cost: $240,000 + $1,400 + $6,500 + $29,100 = $277,000


Depreciation for each year: ($277,000 $25,000) / 5 years = $50,400

60

Financial Accounting 8/e Solutions Manual

50,400
100,800
151,200
201,600
252,000

ASSET BOOK
VALUE

$277,000
226,600
176,200
125,800
75,400
25,000

(continued) P 7-61A
Req. 1
Units-of-Production Depreciation Schedule
Depreciation for the Year

DATE

ASSET
COST

1-07-2012
$277,000
12-31-2012
12-31-2013
12-31-2014
12-31-2015
12-31-2016
Total documents

DEPRECIATION NUMBER OF
DEPRECIATION ACCUMULATED ASSET BOOK
PER DOCUMENT DOCUMENTS =
EXPENSE
DEPRECIATION
VALUE

$1.12
1.12
1.12
1.12
1.12

50,000
47,500
45,000
42,500
40,000
225,000

$56,000
53,200
50,400
47,600
44,800

$ 56,000
109,200
159,600
207,200
252,000

$277,000
221,000
167,800
117,400
69,800
25,000

Depreciation per document: ($277,000 $25,000) / 225,000 documents = $1.12 per document

Chapter 7

Plant Assets & Intangibles

61

(continued) P 7-61A
Req. 1
Double-Declining-Balance Depreciation Schedule
Depreciation for the Year

DATE

1-07-2012

ASSET
COST

DDB RATE

ASSET BOOK DEPRECIATION ACCUMULATED ASSET BOOK


VALUE
=
EXPENSE
DEPRECIATION
VALUE

$277,000

12-31-2012
12-31-2013
12-31-2014
12-31-2015
12-31-2016

$277,000
.40*
.40
.40
.40

$277,000
166,200
99,720
59,832
35,899

* DDB rate: (1/5 years 2) = 2/5 = .40


** Depreciation for 2016: $35,899 - $25,000 = $10,899

62

Financial Accounting 8/e Solutions Manual

$110,800
66,480
39,888
23,933
10,899**

$ 110,800
177,280
217,168
241,101
252,000

166,200
99,720
59,832
35,899
25,000

(continued) P 7-61A
Req. 2
The depreciation method that maximizes reported income in the first
year of the computers life is the straight-line method, which produces
the lowest depreciation for that year ($50,400). The method that
maximizes cash flow by minimizing income tax payments in the first
year is the double-declining-balance method (or MACRS depreciation
when used for tax purposes) which produces the highest depreciation
amount for that year ($110,800).
Req. 3
DEPRECIATION METHOD THAT
IN THE EARLY YEARS
MAXIMIZES
MINIMIZES
REPORTED
INCOME TAX
INCOME
PAYMENTS

Net income for first year:


Cash provided by operations
before income tax
Depreciation expense
Income before income tax
Income tax expense (32%)

SL

DDB

Net income advantage of SL over DDB

$158,000
$158,000
50,400
110,800
107,600
47,200
34,432
15,104
$ 73,168
$ 32,096
$41,072

Cash flow analysis for first year:


Cash provided by operations before
income tax
Income tax expense

$158,000
34,432

Chapter 7

$158,000
15,104

Plant Assets & Intangibles

63

Cash provided by operations


(cash flow)
Cash flow advantage of DDB over SL

64

Financial Accounting 8/e Solutions Manual

$123,568
$142,896
$19,328

(20-25 min.) P 7-62A


Req. 1
Millions
Cost of plant assets...

$4,831

Less: Accumulated depreciation

(2,124)

Book value, net

$2,707

Req. 2
Evidences of the purchase of plant assets and goodwill:
1. Property, plant, and equipment increased on the balance sheet.
2. Goodwill increased on the balance sheet.
3. Statement of cash flows reports Additions to property, plant, and
equipment.

Req. 3
Property, Plant, and Equipment
2/28/11 Bal.

4,197 Cost of

Purchased
during 2012
2/29/12 Bal.

Accum. depr.

assets sold
713

in 2012

Accumulated Depreciation
2/28/11 Bal.

of assets sold
79

in 2012

4,831

1,729

Depr. during
65

2012
2/29/12 Bal.

460
2,124

Goodwill
2/28/11 Bal.

512

Purchased
during 2012
2/29/12 Bal.

_____

43*
555

*Determined by deduction, since there was no loss on goodwill.


Chapter 7

Plant Assets & Intangibles

65

Req. 4
Feb.

66

29 Loss on Impairment ($555 - $450)


Goodwill

Financial Accounting 8/e Solutions Manual

105
105

(20-30 min.) P 7-63A


Req. 1
Journal
DATE
ACCOUNT TITLES
Iron Ore..
Cash..

DEBIT
2,400,000

Iron Ore..
Cash..

63,000

Iron Ore..
Cash..

73,000

Iron Ore....................
Note Payable...

34,100

Iron Ore Inventory...


Iron Ore

428,350*

Accounts Receivable (25,000 $33)..


Sales Revenue

825,000

Cost of Iron Ore Sold (25,000 x $13.18).


Iron Ore Inventory.

329,500

Operating Expenses...
Cash..

246,000

Income Tax Expense (see Req. 2)..


Income Tax Payable.

69,860

Chapter 7

CREDIT
2,400,000

63,000

73,000

34,100

428,350

825,000

329,500

246,000

Plant Assets & Intangibles

69,860

67

*$2,400,000 + $63,000 +$73,000 + $34,100 =


$2,570,100; $2,570,100 / 195,000 = $13.18 x
32,500

68

Financial Accounting 8/e Solutions Manual

(continued) P 7-63A
Req. 2
Mid Atlantic Energy Company
Income Statement Iron Ore Operations
Year 1
Sales revenue.

$825,000

Cost of iron ore sold....

$329,500

Other operating expenses..

246,000

575,500

Income before tax............

249,500

Income tax expense (28%)..

69,860

Net income..

$ 179,640

The iron ore operations were profitable. Net income of $179,640 on


sales of $825,000 is quite high (21.8% of sales).

Req. 3

Iron ore inventory ($428,350 - $329,500)..

Iron ore ($2,570,100 - $428,350)..

$2,141,750

Chapter 7

Plant Assets & Intangibles

98,850

69

Req. 1

(30-40 min.) P 7-64A

To determine the gain or loss on the sale of a plant asset, compare the
cash received to the assets book value, as follows:
Billions
Cash received from sale of asset.

$ 0.8

Book value of asset sold:


Cost.
Less: Accumulated depreciation.

$ 1.6
(1.0)

Gain (Loss) on sale..

( 0.6 )
$ 0.2

Req. 2
Balance sheet at December 31, 2012:
Property, plant, and equipment ($4.9 + $1.3 $1.6)
Less: Accumulated depreciation ($2.6 + $1.8 $1.0).
Property, plant, and equipment, net (book value)...

$ 4.6
(3.4)
$ 1.2

Req. 3
Statement of cash flows for 2012:
Cash flows from operating activities:
Net income ($26.6 $21.7)..

$ 4.9

Reconciliation of net income to


net cash provided by operations:
Depreciation

1.8

Cash flows from investing activities:


Purchases of property, plant, and equipment
70

Financial Accounting 8/e Solutions Manual

(1.3)

Sales of property, plant, and equipment

Chapter 7

Plant Assets & Intangibles

0.8

71

(20-30 min.) P 7-65A


Req. 1

Jan. 29, 2011

Net income

Jan. 30, 2010

$ 2,920

$ 2,488

Net revenue

$67,390

$65,357

= Profit margin

= 4.33%

= 3.81%

Req. 2
Jan. 29, 2011
Sales (net revenue)
Average total assets
= Asset turnover

Jan. 30, 2010

$67,390
$44,119
=

1.53

$65,357

$44,320
=

1.47

Req. 3
Jan. 29, 2011
Net income
Average total assets

Jan. 30, 2010

$ 2,920

$ 2,488

$44,119

$44,320

6.62%

5.61%

= Return on assets

Req. 4
All of the following contributed to the increase in ROA during the most
recent year:
72

Financial Accounting 8/e Solutions Manual

Sales increased, increasing net income, profit margin, and asset


turnover.
Expenses decreased, increasing net income and profit margin.
Assets decreased, increasing the asset turnover.

Chapter 7

Plant Assets & Intangibles

73

(20-30 min.) P 7-66B

Req. 1
ITEM

LAND

(a)

$297,000

(b)

8,000

(c)

LAND
IMPROVEMENTS

SALES
BUILDING

GARAGE

$ 63,000
$ 31,300

(d)

600

(e)

5,200

(f)

1,700

(g)

200

(h)

19,400

(i)

512,000

(j)

41,500

(k)

9,700

(l)

6,100*

(m)

52,300

(n)

7,200

(o)

4,200

34,860

2,940

(p)

$79,000

(q)

1,400

Totals

$310,800

$102,800

$576,160 $107,440

Computations:
(a)
Land: $330,000 / $400,000 $360,000 = $297,000
Garage: $70,000 / $400,000 $360,000 = $63,000
(o) Land improvements: $42,000 .10 = $4,200
Sales building: $42,000 .83 = $34,860
Garage: $42,000 .07 = $2,940
74

FURNITURE

Financial Accounting 8/e Solutions Manual

$80,400

_____
*Some accountants would debit this cost to the Land account.

Chapter 7

Plant Assets & Intangibles

75

(continued) P 7-66B
Req. 2

DATE

Journal
ACCOUNT TITLES

Dec. 31 Depreciation Expense Land


Improvements ($102,800 / 25 6/12)...
Accumulated Depreciation
Land Improvements
31 Depreciation Expense Sales
Building ($576,160 / 40 6/12)..
Accumulated Depreciation
Sales Building......................................
31 Depreciation Expense Garage
($107,440 / 40 6/12)
Accumulated Depreciation
Garage
31 Depreciation Expense Furniture
($80,400 / 10 6/12)..
Accumulated Depreciation
Furniture.

DEBIT CREDIT

2,056*
2,056

7,202
7,202

1,343
1,343

4,020
4,020

_____
*$1,934 ($96,700 / 25 6/12) if $6,100 (l in Req. 1) is debited to Land.

76

Financial Accounting 8/e Solutions Manual

(continued) P 7-66B
Req. 3
This problem shows how to determine the cost of a plant asset. It also
demonstrates the computation of depreciation for a variety of plant
assets. Because virtually all businesses use plant assets, a manager
needs to understand how those assets costs and depreciation are
determined. Depreciation affects net income. Managers need to
understand the meaning, components, and computation of net income
because often their performance is measured by how much net income
the business earns. This problem covers all these concepts with
specific examples.

Student responses will vary.

Chapter 7

Plant Assets & Intangibles

77

(15 min.) P7-67B


Req. 1
Journal
ACCOUNT TITLES

DEBIT

CREDIT

Equipment...
Cash.

100,000

Depreciation Expense Buildings.


Accumulated Depreciation Buildings

30,850*

Depreciation Expense Equipment


Accumulated Depreciation Equipment..

38,800**

100,000

30,850

38,800

*($702,000 $85,000) / 20 = $30,850]


**[($408,000 $264,000) 2/10] + ($100,000 2/10 6/12) = $38,800]

Req. 2
BALANCE SHEET
Property, plant, and equipment:
Land...........................................................
Buildings...................................................

$ 143,000
$702,000

Less: Accumulated Depreciation


($344,000 + $30,850).......................
78

Financial Accounting 8/e Solutions Manual

(374,850)

327,150

Equipment ($408,000 + $100,000)............

$508,000

Less: Accumulated Depreciation


($264,000 + $38,800).......................
Total property, plant, and equipment..........

Chapter 7

(302,800)

205,200
$675,350

Plant Assets & Intangibles

79

DATE
Jan.

Journal
ACCOUNT TITLES

3 Equipment (new)................................
Accumulated Depreciation
Equipment..........................................
Equipment (old)..
Cash....
Gain on Trade-in of Equipment...

June 30 Depreciation Expense Building


[($640,000 $240,000) / 40 x 6/12]....
Accumulated Depreciation
Building.........................................

(25-35 min.) P 7-68B


DEBIT
178,000
68,000
131,000
105,000
10,000

5,000
5,000

June 30 Cash...................................................
Note Receivable.................................
Accumulated Depreciation
Building ($100,000 + $5,000).............
Building.........................................

120,000
415,000

Oct.

64,000
256,000

31 Land ($70,200 / $351,000 $320,000)..


Building ($280,800 / $351,000 $320,000)
Cash...............................................

Dec. 31 Depreciation Expense


Equipment ($178,000 2/4)..............
Accumulated Depreciation
Equipment......................................
Dec. 31

80

Depreciation Expense Building


[($256,000 - $25,600) / 40 X 2/12]......
Accumulated Depreciation
Building.....................................

Financial Accounting 8/e Solutions Manual

CREDIT

105,000
640,000

320,000

89,000
89,000
960
960

(30-40 min.) P 7-69B


Req. 1
Straight-Line Depreciation Schedule
Depreciation for the Year

DATE

1-04-2012

ASSET
COST

DEPRECIATION
DEPRECIABLE DEPRECIATION
RATE

COST
=
EXPENSE

ACCUMULATED
DEPRECIATION

$279,500

ASSET BOOK
VALUE

$279,500

12-31-2012

1/5

$255,000

$51,000

$ 51,000

228,500

12-31-2013

1/5

255,000

51,000

102,000

177,500

12-31-2014

1/5

255,000

51,000

153,000

126,500

12-31-2015

1/5

255,000

51,000

204,000

75,500

12-31-2016

1/5

255,000

51,000

255,000

24,500

Asset cost: $235,000 + $1,100 + $6,200 + $37,200 = $279,500


Depreciation for each year: ($279,500 $24,500) / 5 years = $51,000

Chapter 7

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81

(continued) P 7-69B
Req. 1
Units-of-Production Depreciation Schedule
Depreciation for the Year

DATE

1-04-2012

ASSET
COST

DEPRECIATION
DOCUMENT

NUMBER OF
DOCUMENTS

DEPRECIATION ACCUMULATED
EXPENSE
DEPRECIATION

$279,500

ASSET BOOK
VALUE

$279,500

12-31-2012

$1.70

35,000

$59,500

$ 59,500

220,000

12-31-2013

1.70

32,500

55,250

114,750

164,750

12-31-2014

1.70

30,000

51,000

165,750

113,750

12-31-2015

1.70

27,500

46,750

212,500

67,000

12-31-2016

1.70

25,000

42,500

255,000

24,500

Total documents

150,000

Depreciation per document: ($279,500 $24,500) / 150,000 documents = $1.70

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Financial Accounting 8/e Solutions Manual

(continued) P 7-69B
Req. 1
Double-Declining-Balance Depreciation Schedule
Depreciation for the Year

DATE

1-04-2012

ASSET
COST

DDB RATE

ASSET BOOK
DEPRECIATION
VALUE
=
EXPENSE

ACCUMULATED
DEPRECIATION

$279,500

ASSET BOOK
VALUE

$279,500

12-31-2012

.40*

$279,500

$111,800

$111,800

167,700

12-31-2013

.40

167,700

67,080

178,880

100,620

12-31-2014

.40

100,620

40,248

219,128

60,372

12-31-2015

.40

60,372

24,149

243,277

36,223

36,223

11,723**

255,000

24,500

12-31-2016

*DDB rate = (1/5 years 2) = 2/5 = .40


**Depreciation for 2016: $36,223 $24,500 = $11,723

Chapter 7

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83

(continued) P 7-69B

Req. 2

The depreciation method that maximizes reported income in the first


year of the computers life is the straight-line method. Straight-line
produces the lowest depreciation for that year ($51,000).
The method that maximizes cash flow by minimizing income tax
payments in the first year is the double-declining-balance method (or
MACRS depreciation when used for tax purposes), which produces the
highest depreciation amount for that year ($111,800).
Req. 3

Net income for first year:


Cash provided by operations before income tax
Depreciation expense

DEPRECIATION METHOD
THAT IN THE EARLY
YEARS
MAXIMIZES MINIMIZES
REPORTED INCOME TAX
INCOME
PAYMENTS
SL
DDB
$154,000
$154,000
51,000

111,800

Income before income tax

103,000

42,200

Income tax expense (40%)

41,200

16,880

$ 61,800

$ 25,320

Net income
Net income advantage of SL over DDB

$ 36,480

Cash flow analysis for first year:


Cash provided by operations before
income tax
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Financial Accounting 8/e Solutions Manual

$154,000

$154,000

Income tax expense

41,200

16,880

$ 112,800

$ 137,120

Cash provided by operations


(called cash flow)
Cash flow advantage of DDB over SL

$24,320

Chapter 7

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85

(20-25 min.) P 7-70B


Req. 1

Millions
Cost of plant assets..

$ 4,838

Less: Accumulated depreciation..

(2,124)

Book value of plant assets.

$ 2,714

Req. 2
Evidences of the purchase of plant assets and goodwill:
1. Property, plant, and equipment increased on the balance sheet.
2. Goodwill increased on the balance sheet.
3. Statement of cash flows reports Additions to property, plant and
equipment.
Req. 3
Property, Plant, and Equipment
2/28/11 Bal.

4,192 Cost of

Purchased
during 2012
2/29/12 Bal.

Accum. depr.

assets sold
723

in 2012

Accumulated Depreciation
2/28/11Bal.

of assets sold
77

4,838

in 2012

Depr. during
66

2012
2/29/12 Bal.

Goodwill
2/28/11 Bal.

510

Purchased
during 2012
2/29/12 Bal.

_____

47*
557

*Determined by deduction, since there was no loss on goodwill.


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1,729
461
2,124

Req. 4
Feb.

29 Loss on Impairment.................................
Goodwill ($557 - $450).........................

Chapter 7

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107

87

(20-30 min.) P 7-71B

Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION
Iron Ore .....
Cash..

88

DEBIT
2,800,000

Iron Ore .
Cash..

67,000

Iron Ore .....


Cash..

76,500

Iron Ore .....


Note Payable...

38,550

Iron Ore Inventory...


Iron Ore

478,515*

Accounts Receivable (25,000 $37)..


Sales Revenue

925,000

Cost of Iron Ore Sold (25,000 x $13.87).


Iron Ore Inventory..

346,750

Operating Expenses...
Cash..

254,000

Income Tax Expense (see Req. 2)..


Income Tax Payable..

113,488

Financial Accounting 8/e Solutions Manual

CREDIT
2,800,000

67,000

76,500

38,550

478,515

925,000

346,750

254,000

113,488

*$2,800,000 + $67,000 + $76,500 +$38,550 =


$2,982,050; $2,982,050 / 215,000 = $13.87 x
34,500

(continued) P 7-71B
Req. 2
Central Energy Company
Income Statement Iron Ore Mine Project
Year 1
Sales revenue..
Cost of iron ore sold..
$346,750
Operating expenses...
254,000
Income before tax...
Income tax expense (35%)
Net income

$925,000
600,750
324,250
113,488
$ 210,762

The Iron Ore Mine project was very profitable. Net income of $210,762 on
sales of $925,000 (23%) is outstanding.

Req. 3

Iron ore inventory ($478,515 - $346,750)..

Iron ore ($2,982,050 - $478,515)..

$ 2,503,535

Chapter 7

131,765

Plant Assets & Intangibles

89

Req. 1

(30-40 min.) P 7-72B

To determine the gain or loss on the sale of a plant asset, compare the
cash received to the assets book value, as follows:
Billions
Cash received from sale of asset................................

$ 0.6

Book value of asset sold:


Cost...........................................................................

$0.9

Less: Accumulated depreciation...........................

(0.8)

Gain (Loss) on sale.......................................................

( 0.1)
$0.5

Req. 2
Balance sheet at December 31, 2012:
Property, plant, and equipment ($4.8 + $2.0 $0.9).......
Less: Accumulated depreciation ($2.8 + $1.3 $0.8).....
Property, plant, and equipment, net (book value)...........

$ 5.9
(3.3)
$ 2.6

Req. 3
Statement of cash flows for 2012:
Cash flows from operating activities:
Net income ($26.2 $22.0)

$4.2

Reconciliation of net income to


net cash provided by operations:
Depreciation
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1.3

Cash flows from investing activities:


Purchases of property, plant, and equipment..

$(2.0)

Sales of property, plant, and equipment .

0.6

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91

(20-30 min.) P 7-73B


Req. 1

Jan. 31, 2011

Jan. 31, 2010

$ 1,114

$ 991

Net revenue

$18,391

$17,178

= Profit margin

= 6.06%

= 5.77%

Jan. 31, 2011

Jan. 31, 2010

$18,391

$17,178

Average total assets

$13,362

$12,262

= Asset turnover

Net income

Req. 2

Sales

Req. 3

Net income

1.38

Jan. 31, 2011


$ 1,114

1.40

Jan. 31, 2010


$

991

Average total assets

$13,362

$12,262

= Return on assets

= 8.34%

= 8.08%

Req. 4
The following contributed to the increase in ROA during the most recent
year.
Sales increased, increasing net income and profit margin.
Assets increased, decreasing the asset turnover.
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Challenge Exercises and Problem


(10-15 min.) E 7-74
Req. 1
Current Assets..
Assets of Discontinued Operations.
Property and Equipment
Goodwill..
Intangible Assets..
Other Assets..
Liabilities...
Cash and Common Stock.

(in millions)
5,288
2,264
6,579
8,946
679
31
12,038
11,749

Req. 2
Loss from Impairment.
Goodwill....

Chapter 7

5,382

Plant Assets & Intangibles

5,382

93

(15-20 min.) E 7-75

Net income under straight-line depreciation.

Millions
$64

Difference in depreciation for 2013 (year 2 of 8):


Straight line depreciation, as reported...

$30

DDB depreciation for year 2 (see below)

45

Increase in depreciation expense....

15

Decrease in net income...

(15)

Net income Kerusi can expect for 2013


if the company uses DDB depreciation..

$49

DDB depreciation by year:


Year
1
$240 2/8..
2
($240 $60) 2/8.............

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Financial Accounting 8/e Solutions Manual

Millions
$60
45

(15-25 min.) E 7-76


Year
1
1. Total current assets
2. Equipment, net
3. Net income

15.0 U*
15.0 U*

2
3
Millions of Euros ()
No effect
10.0 U**
5.0 U
5.0 O
5.0 O

Correct
5.0 O

_____
U = Understated
O = Overstated
* Cost (20.0 million) Depreciation expense (5 million)
= 15 million
** Cost (20.0 million) Two years depreciation (10.0 million)
= 10.0 million

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95

(20-30 min.) P 7-77

Req.1
Property and Equipment
Bal 5/31/2008 (BS)

29,305

Capital expenditures (SCF) 2,459

202
2,302

Bal.5/31/2009 (BS)

Impairment (note)
Original cost of plant and
equipment sold (plug)

29,260

Accumulated Depreciation
Acc. Depr. on assets sold

1,784

(plug)

15,827 Bal. 5/31/2008 (BS)


1,800 Depr. exp.(note)
15,843 Bal 5/31/2009 (BS)

Req. 2
Journal
DATE ACCOUNT TITLES AND EXPLANATION
Property and Equipment........................
Cash....................................................

96

DEBIT
2,459

Depreciation Expense............................
Accumulated Depreciation................

1,800

Loss on Impairment of Assets...............


Property and Equipment...................

202

Cash (SCF)...............................................
Accumulated Depreciation.....................
Loss on Sale of Assets...........................
Property and Equipment...............

79
1,784
439

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CREDIT
2,459

1,800

202

2,302

Decision Cases
(30-45 min.) Decision Case 1
Req. 1
La Petite France Bakery and Burgers Ahoy!
Income Statements
For the Year Ended December 31
La Petite France
Burgers Ahoy!
ACCOUNT TITLE
(FIFO and SL)
(LIFO and DDB)
Sales revenue
$350,000
$350,000
Cost of goods sold..
Gross margin.......

128,000*
222,000

Operating expenses....... $50,000


Depreciation expense
La Petite (SL):
[($150,000 $20,000) / 10]. 13,000
Burgers (DDB):
($150,000 1/10 2)...
Total expenses..
63,000
Income before tax.......
159,000
Income tax expense (40%).
63,600
Net income.
$ 95,400

Chapter 7

149,000*
201,000
$50,000

30,000
80,000
121,000
48,400
$ 72,600

Plant Assets & Intangibles

97

(continued) Decision Case 1


Req. 1
*Cost of goods sold:
La Petite (FIFO):

Units
10,000
5,000
7,000
3,000
25,000

Burgers (LIFO):

10,000
7,000
5,000
3,000
25,000

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Financial Accounting 8/e Solutions Manual

$4
5
6
7

=
=
=
=

$7
6
5
4

=
=
=
=

Cost
$ 40,000
25,000
42,000
21,000
$128,000
$ 70,000
42,000
25,000
12,000
$149,000

(continued) Decision Case 1


Req. 2
INVESTMENT NEWSLETTER
TO:

Our Clients

FROM:

Student Name

RE:

Selecting the stock of La Petite France Bakery or Burgers


Ahoy! as a long-term investment

In picking a stock we suggest you consider the following factors:


La Petite France and Burgers Ahoy! are basically identical companies.
The two companies started operations at the same time and engaged in
essentially the same transactions. Their main difference lies in the
accounting methods that they use.
1. La Petite Frances income statement reports a net income of $95,400
compared to $72,600 for Burgers Ahoy!. On the surface La Petite
France appears to be more profitable. This difference is illusory,
however, because La Petite uses the FIFO method to account for
inventories and the straight-line method to account for depreciation of
its plant assets. If prices continue to rise, use of these methods result
in the highest possible reported income. However, this may not result
in a higher price for La Petite Frances stock.
Chapter 7

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99

2. Burgers Ahoy! reports a lower net income than La Petite France, but
Burgers has more cash to invest in promising projects because
Burgers pays less in income taxes. Burgers uses the LIFO method for
inventories and the double-declining-balance method for depreciation.
These methods result in lower net incomes. More
(continued) Decision Case 1

importantly, LIFO and DDB result in the lowest amount of income tax
and thereby save money that Burgers can invest in new projects.
3. Over the long run we favor Burgers Ahoy! because Burgers will have
more cash to invest. That should result in higher real profits even if
those profits dont show up on the income statement immediately.

Student responses will vary.

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(20-30 min.) Decision Case 2


1. A dishonest manager might debit the cost of an expense to a plant
asset account in order to overstate reported asset and income
amounts. Remember the WorldCom case discussed in the chapter.

2. A dishonest manager might debit an expense account for the cost of a


plant asset for two reasons: (1) To obtain a quicker tax deduction for
the expense than for depreciation expense over the life of the asset,
and (2) To understate reported asset and income amounts.

3. We support the recording and reporting of intangible assets at cost,


less accumulated amortization, in accordance with GAAP because the
business paid a price for intangibles like any other asset. The
argument for recording intangibles at $1 or $0 is consistent with the
perspective of a lender, who might reason that, in the liquidation of a
business, most of its intangibles are worthless. However, accounting
serves other users besides lenders. Also, someone who evaluates a
company and believes its intangibles are worthless can simply
subtract the intangibles cost from total assets and from total owners
equity to compute revised totals for analytical purposes. But the
reverse is not true. If intangibles were not reported on the balance
sheet, a user of the statements who believes the intangibles have
Chapter 7

Plant Assets & Intangibles

101

value could not add the unknown amount to compute revised total
assets and total owner equity.

Student responses will vary.

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Ethical Issue
Req. 1
The ethical issue in this case is What is the proper amount of the
purchase price to allocate to the land and the proper amount to allocate
to the building?

The taxpayer wants to allocate as much of the

purchase price as possible to the building because tax laws allow a


deduction from taxable income for depreciation expense on plant assets
other than land. The greater the allocation to the building, the greater the
depreciation deduction, and therefore the lower the tax payments
because there is no tax deduction on the land. The cost of the land is not
depreciated.
Req. 2 and Req. 3
The stakeholders in this situation include United Jersey Bank, their
management, their shareholders, the Internal Revenue Service, and
taxpayers in general.

The immediate economic consequences of the

decision are positive for United Jersey Bank as well as their


management.

However, those consequences, as well as legal

consequences, could ultimately turn negative for them if an IRS audit


finds them to be unlawfully evading taxes.

United Jersey Banks

allocation was unethical. The nations taxpayers you and I are


robbed of fair and equitable treatment by this dishonest tactic.
Chapter 7

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103

Req. 4
United Jersey Bank should change the allocation of their purchase price
to 60% building and 40% land. In the long run, for fair and equitable
treatment for all taxpayers, as well as the best economic and legal
outcome, there is nothing like the truth.

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Focus on Financials: Amazon.com, Inc.


(30-40 min.)
Req. 1
Fixed assets include furniture and fixtures, heavy equipment,
technology, infrastructure, internal-use software and website
development.
Req. 2
Note 1 states that the depreciation method used for the financial
statements is the straight-line method. Note 1 does not state the
method used for income-tax purposes, but Amazon.com most likely
uses the Modified Accelerated Cost Recovery System (MACRS).
This method is preferable for income-tax purposes because it provides
the most depreciation expense as quickly as possible. This decreases
immediate tax payments and saves cash for use in the business.
Req. 3
Millions

Depreciation and amortization expense

$ 552

Accumulated depreciation and amortization..

$ 842

Chapter 7

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105

Accumulated depreciation and amortization exceeds depreciation and


amortization expense because the expense is for only the current year.
Accumulated depreciation and amortization is the sum of the
depreciation and amortization amounts for all years the company has
used its property and equipment.
Req. 4
During 2010, Amazon.com, Inc. paid $979 million to purchase fixed
assets, including internal-use software and website development. These
expenditures increased significantly from $373 million in 2009. This is
good news. The company increased its investment in these types of
assets by about 162% in 2010, indicating that they were expanding their
operations.
Req. 5
Amazon.com, Inc. reports goodwill of $1,349 million on its 2010 balance
sheet, and acquired intangible assets, included within Other Assets on
the balance sheet, of $745 million. As explained in Notes 1 and 4 to the
Consolidated Financial Statements, the company does not amortize
goodwill and other indefinite-lived assets. It evaluates the remaining
useful lives of assets that are not being amortized to determine whether
circumstances continue to support an indefinite life. Amazon.com, Inc.
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Financial Accounting 8/e Solutions Manual

performs an annual impairment test for goodwill and writes goodwill off
when its value is impaired.

Amazon.com, Inc. amortizes the cost of the other intangibles over their
estimated useful lives.

Chapter 7

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107

Focus on Analysis: RadioShack, Corp.


(20-30 min.)
Req. 1
RadioShack Corporation paid $80.1 million for capital expenditures
during fiscal 2010. This information is found in the investing activities
section of the cash flows statement.
Req. 2
Property and equipment are recorded at cost less accumulated
depreciation and amortization.

Major additions and betterments that

substantially extend the useful life of an asset are capitalized and


depreciated. Expenditures for normal maintenance and repairs are
charged directly to expense as incurred.
Req. 3
Depreciation and amortization are calculated using the straight-line
method over the following useful lives: 10-40 years for buildings; 2-15
years for furniture, fixtures, equipment and software; leasehold
improvements are amortized over the shorter of the terms of the
underlying leases, including certain renewal periods, or the estimated
useful lives of the improvements.

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Req. 4
Gross property, plant and equipment (from Note 3) at the end of fiscal
2010 was $1,094.4 million. It was $1,081.7 million at the end of fiscal
2009.

Accumulated depreciation and amortization (from Note 3) was

$820.1 million at the end of fiscal 2010 and $799.4 million at the end of
(continued) RadioShack, Corp.
fiscal 2009.

Accordingly, the book value of property, plant, and

equipment (net assets) was $274.3 million at the end of fiscal 2010 and
$282.3 million at the end of fiscal 2009. Gross PPE increased slightly
during 2010 but net PPE still declined slightly during 2010. This change
indicates that the major cause for the change in property, plant, and
equipment was an additional year depreciation recorded because the
assets were used an additional year.

Req. 5
2010
Net income

2009

$ 206.1

205.0

Average total assets

(2,175.4 +$2,429.3) / 2 $2,429.3 + $2,254.0 / 2

= Return on assets

8.95%

= 8.75%

Radio Shacks performance was slightly better in 2010 than in 2009.


Return on Assets is slightly higher in 2010 than in 2009.

Chapter 7

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109

Group Projects
Student responses will vary.

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