CHAPTER 9 FIXED assets and intangible assets Download

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CHAPTER 9
FIXED ASSETS AND INTANGIBLE ASSETS
QUESTION INFORMATION
Number
EO9-1
EO9-2
EO9-3
EO9-4
EO9-5
EO9-6
EO9-7
EO9-8
EO9-9
EO9-10
EO9-11
EO9-12
EO9-13
EO9-14
EO9-15
PE9-1A
Objective
9-1
9-1
9-1
9-1
9-1
9-1
9-1
9-6
9-2
9-2
9-2
9-2
9-2
9-2
9-5
9-1
PE9-1B
9-1
PE9-2A
9-2
PE9-2B
9-2
PE9-3A
9-2
PE9-3B
9-2
PE9-4A
9-2
PE9-4B
9-2
PE9-5A
9-2
PE9-5B
9-2
PE9-6A
PE9-6B
PE9-7A
9-3
9-3
9-3
PE9-7B
9-3
PE9-8A
9-4
PE9-8B
9-4
PE9-9A
9-5
PE9-9B
9-5
Description
Capital and revenue
expenditure entries
Capital and revenue
expenditure entries
Straight-line depreciation
Straight-line depreciation
Units-of-production
depreciation
Units-of-production
depreciation
Double-decliningbalance depreciation
Double-decliningbalance depreciation
Revision of depreciation estimates
Revision of depreciation estimates
Sale of equipment
Sale of equipment
Exchange of similar
fixed assets
Exchange of similar
fixed assets
Entry for depletion of
mineral rights
Entry for depletion of
mineral rights
Entries for impaired
goodwill and amortization of patent
Entries for impaired
Difficulty
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Time
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
AACSB
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
AICPA
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
Easy
Easy
10 min
10 min
10 min
Analytic
Analytic
Analytic
FN-Measurement
FN-Measurement
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
529
SS
GL
Number
Objective
Ex9-1
9-1
Ex9-2
9-1
Ex9-3
9-1
Ex9-4
9-1
Ex9-5
9-1
Ex9-6
9-1
Ex9-7
Ex9-8
9-2
9-2
Ex9-9
9-2
Ex9-10
9-2
Ex9-11
9-2
Ex9-12
9-2
Ex9-13
9-2
Ex9-14
9-2
Ex9-15
9-2
Ex9-16
9-1, 9-2
Ex9-17
9-3
Ex9-18
9-3
Ex9-19
9-3
Ex9-20
9-3
Ex9-21
9-3
Ex9-22
9-3
Ex9-23
9-3
Ex9-24
Ex9-25
Ex9-26
9-4
9-5
9-6
Ex9-27
9-6
Ex9-28
FAI
Ex9-29
FAI
Ex9-30
Appendix
Description
goodwill and amortization of patent
Costs of acquiring
fixed assets
Determine cost of
land
Determine cost of
land
Capital and revenue
expenditures
Capital and revenue
expenditures
Capital and revenue
expenditures
Nature of depreciation
Straight-line depreciation rates
Straight-line depreciation
Depreciation by unitsof-production method
Depreciation by unitsof-production method
Depreciation by two
methods
Depreciation by two
methods
Partial-year depreciation
Revision of depreciation
Capital expenditure
and depreciation
Entries for sale of
fixed asset
Disposal of fixed
asset
Asset traded for similar asset
Asset traded for similar asset
Entries for trade of
fixed asset
Entries for trade of
fixed asset
Depreciable cost of
asset acquired by
exchange
Depletion entries
Amortization entries
Book value of fixed
assets
Balance sheet
presentation
Fixed asset turnover
ratio
Fixed asset turnover
ratio
Sum-of-the-yearsdigits depreciation
Difficulty
Time
AACSB
AICPA
Easy
10 min
Analytic
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
15 min
Analytic
FN-Measurement
Easy
Easy
5 min
10 min
Analytic
Analytic
FN-Measurement
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Moderate
20 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Moderate
10 min
Analytic
FN-Measurement
Moderate
15 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Moderate
20 min
Analytic
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Moderate
15 min
Analytic
FN-Measurement
Moderate
15 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
Easy
Moderate
10 min
10 min
15 min
Analytic
Analytic
Analytic
FN-Measurement
FN-Measurement
FN-Measurement
Moderate
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
530
SS
GL
Number
Ex9-31
Objective
Appendix
Ex9-32
Appendix
Pr9-1A
9-1
Pr9-2A
9-2
Pr9-3A
9-2
Pr9-4A
9-2, 9-3
Pr9-5A
9-1, 9-2,
9-3
Pr9-6A
9-4, 9-5
Pr9-1B
9-1
Pr9-2B
9-2
Pr9-3B
9-2
Pr9-4B
9-2, 9-3
Pr9-5B
9-1, 9-2,
9-3
Pr9-6B
9-4, 9-5
SA9-1
9-1
SA9-2
9-2
SA9-3
9-2
SA9-4
9-1
SA9-5
9-5
SA9-6
FAI
Description
Sum-of-the-yearsdigits depreciation
Partial-year depreciation
Allocate payments
and receipts to fixed
asset accounts
Compare three depreciation methods
Depreciation by three
methods; partial years
Depreciation by two
methods; trade of
fixed asset
Transactions for fixed
assets, including
trade
Amortization and
depletion entries
Allocate payments
and receipts to fixed
asset accounts
Compare three
depreciation methods
Depreciation by three
methods; partial years
Depreciation by two
methods; trade of
fixed asset
Transactions for fixed
assets, including
trade
Amortization and
depletion entries
Ethics and professional conduct in
business
Financial vs. tax
depreciation
Effect of depreciation
on net income
Shopping for a
delivery truck
Applying for patents,
copyrights, and
trademarks
Fixed asset turnover:
three industries
Difficulty
Easy
Time
10 min
AACSB
Analytic
AICPA
FN-Measurement
Moderate
10 min
Analytic
FN-Measurement
Moderate
1 hr
Analytic
FN-Measurement
Exl
Moderate
1 hr
Analytic
FN-Measurement
Exl
Moderate
1 hr
Analytic
FN-Measurement
Exl
Difficult
1 1/4
hr
Analytic
FN-Measurement
Exl
Difficult
1 1/2
hr
Analytic
FN-Measurement
Moderate
45 min
Analytic
FN-Measurement
Moderate
1 hr
Analytic
FN-Measurement
Exl
Moderate
1 hr
Analytic
FN-Measurement
Exl
Moderate
1 hr
Analytic
FN-Measurement
Exl
Difficult
1 1/4
hr
Analytic
FN-Measurement
Exl
Difficult
1 1/2
hr
Analytic
FN-Measurement
Moderate
45 min
Analytic
FN-Measurement
Easy
10 min
Ethics
BB-Industry
Easy
10 min
Analytic
FN-Measurement
Moderate
20 min
Analytic
FN-Measurement
Moderate
1 hr
Moderate
1 hr
Reflective
Thinking
Reflective
Thinking
BB-Critical
Thinking
BB-Critical
Thinking
Moderate
15 min
Analytic
FN-Measurement
531
SS
GL
KA
KA
KA
KA
EYE OPENERS
1. a. Tangible
b. Capable of repeated use in the operations of the business
e. Long-lived
2. a. Property, plant, and equipment
b. Current assets (merchandise inventory)
3. Real estate acquired as speculation should
be listed in the balance sheet under the caption “Investments,” below the Current Assets
section.
4. $590,000
5. Capital expenditures include the cost of acquiring fixed assets and the cost of improving an asset. These costs are recorded by
increasing (debiting) the fixed asset account.
Capital expenditures also include the costs
of extraordinary repairs, which are recorded
by decreasing (debiting) the asset’s accumulated depreciation account. Revenue expenditures are recorded as expenses and
are costs that benefit only the current period
and are incurred for normal maintenance
and repairs of fixed assets.
6. Capital expenditure
7. A capital lease is accounted for as if the lessee has purchased the asset and the asset
is written off over its useful life. An operating
lease is accounted for as a current period
expense (rent expense).
8. Ordinarily not; if the book values closely approximate the market values of fixed assets,
it is coincidental.
9. a. No, it does not provide a special cash
fund for the replacement of assets. Unlike most expenses, however, depreciation expense does not require an
equivalent outlay of cash in the period to
which the expense is allocated.
b. Depreciation is the cost of fixed assets
periodically charged to revenue over
their expected useful lives.
10. 13 years
11. a. No
b. No
12. a. An accelerated depreciation method is
most appropriate for situations in which
the decline in productivity or earning
power of the asset is proportionately
greater in the early years of use than in
later years, and the repairs tend to increase with the age of the asset.
b. An accelerated depreciation method reduces income tax payable to the IRS in
the earlier periods of an asset’s life. Thus,
cash is freed up in the earlier periods to
be used for other business purposes.
c. MACRS was enacted by the Tax Reform
Act of 1986 and provides for depreciation for fixed assets acquired after 1986.
13. No. Statement of Financial Accounting
Standards No. 154, “Accounting Changes
and Error Corrections,” is quite specific
about the treatment of changes in depreciable
assets’ estimated service lives. Such changes should be reflected in the amounts for
depreciation expense in the current and future periods. The amounts recorded for depreciation expense in the past are not affected.
14. a. No, the accumulated depreciation for an
asset cannot exceed the cost of the asset. To do so would create a negative
book value, which is meaningless.
b. The cost and accumulated depreciation
should be removed from the accounts
when the asset is no longer useful and is
removed from service. Presumably, the
asset will then be sold, traded in, or discarded.
15. a. Over the shorter of its legal life or years
of usefulness.
b. Expense as incurred.
c. Goodwill should not be amortized, but
written down when impaired.
532
PRACTICE EXERCISES
PE 9–1A
Feb. 13 Delivery Truck .....................................................
Cash................................................................
1,650
13 Repairs and Maintenance Expense ...................
Cash................................................................
25
1,650
25
PE 9–1B
Aug. 30 Accumulated Depreciation—Delivery Van ........
Cash................................................................
1,325
30 Delivery Van ........................................................
Cash................................................................
1,100
PE 9–2A
a. $82,000 ($88,000 – $6,000)
b. 20% = (1/5)
c. $16,400 ($82,000 × 20%), or ($82,000/5 years)
PE 9–2B
a. $268,000 ($316,000 – $48,000)
b. 2.5% = (1/40)
c. $6,700 ($268,000 × 2.5%), or ($268,000/40 years)
PE 9–3A
a. $115,000 ($120,000 – $5,000)
b. $2.30 per hour ($115,000/50,000 hours)
c. $9,660 (4,200 hours × $2.30)
533
1,325
1,100
PE 9–3B
a. $72,000 ($90,000 – $18,000)
b. $0.36 per mile ($72,000/200,000 miles)
c. $14,400 (40,000 miles × $0.36)
PE 9–4A
a. $82,000 ($88,000 – $6,000)
b. 40% = [(1/5) × 2]
c. $35,200 ($88,000 × 40%)
PE 9–4B
a. $268,000 ($316,000 – $48,000)
b. 5% = [(1/40) × 2]
c. $15,800 ($316,000 × 5%)
PE 9–5A
a. $9,375 [($90,000 – $15,000)/8]
b. $52,500 [$90,000 – ($9,375 × 4)]
c. $8,000 [($52,500 – $12,500)/5]
PE 9–5B
a. $11,000 [($189,000 – $24,000)/15]
b. $90,000 [$189,000 – ($11,000 × 9)]
c. $10,500 [($90,000 – $6,000)/8]
534
PE 9–6A
a. $13,000 [($158,000 – $28,000)/10]
b. $7,000 loss {$86,000 – [$158,000 – ($13,000 × 5)]}
c.
Cash................................................................................
Accumulated Depreciation—Equipment .....................
Loss on Sale of Equipment ..........................................
Equipment.................................................................
86,000
65,000
7,000
158,000
PE 9–6B
a. $50,000 = $250,000 × [(1/10) × 2)] = $250,000 × 20%
b. $18,000 loss, computed as follows:
Cost ....................................................
Less: First year depreciation ...........
Second year depreciation ......
Book value at end of second year ....
$250,000
(50,000)
(40,000) [($250,000 – $50,000) × 20%]
$160,000
Loss on sale ($160,000 – $142,000) = $18,000
c.
Cash................................................................................
Accumulated Depreciation—Equipment .....................
Loss on Sale of Equipment ..........................................
Equipment.................................................................
535
142,000
90,000
18,000
250,000
PE 9–7A
a. $156,000
List price of new equipment ........................................
Trade-in allowance on old equipment
($160,000 – $136,000) .............................................
Book value of old truck ($99,000 – $79,000) ..............
Unrecognized gain on exchange ................................
Cost of new equipment ................................................
$160,000
$ 24,000
20,000
(4,000)
$156,000
or
Book value of old equipment ($99,000 – $79,000) .....
Plus cash paid at date of exchange............................
Cost of new equipment ................................................
b.
Equipment (new) ..........................................................
Accumulated Depreciation—Equipment (old) ...........
Equipment (old).......................................................
Cash .........................................................................
$ 20,000
136,000
$156,000
156,000
79,000
99,000
136,000
PE 9–7B
a. $90,000
List price of new truck .................................................
Book value of old truck ($60,000 – $42,000) ..............
Trade-in allowance on old truck ($90,000 – $74,500)
Loss on exchange ........................................................
$ 90,000
$ 18,000
15,500
$ 2,500
Note to Instructors: In exchanges of similar assets where there is a loss, the
loss is recorded and the new asset is recorded at its list price.
b.
Truck (new) ...................................................................
Accumulated Depreciation—Truck (old) ....................
Loss of Exchange of Truck .........................................
Truck (old) ...............................................................
Cash .........................................................................
536
90,000
42,000
2,500
60,000
74,500
PE 9–8A
a.
$0.48 per ton = $36,000,000/75,000,000 tons
b. $14,088,000 = (29,350,000 tons × $0.48 per ton)
c.
Dec. 31
Depletion Expense ....................................... 14,088,000
Accumulated Depletion ..........................
14,088,000
Depletion of mineral deposit.
PE 9–8B
a.
$0.80 per ton = $88,000,000/110,000,000 tons
b. $27,040,000 = (33,800,000 tons × $0.80 per ton)
c.
Dec. 31
Depletion Expense ....................................... 27,040,000
Accumulated Depletion ..........................
27,040,000
Depletion of mineral deposit.
PE 9–9A
a.
Dec. 31
b. Dec. 31
Loss from Impaired Goodwill ......................
Goodwill ..................................................
Impaired goodwill.
100,000
Amortization Expense—Patents .................
Patents .....................................................
Amortized patent rights
[($450,000/12) × 7/12].
21,875
Loss from Impaired Goodwill ......................
Goodwill ..................................................
Impaired goodwill.
375,000
Amortization Expense—Patents .................
Patents .....................................................
Amortized patent rights
[($600,000/10) × 3/12].
15,000
100,000
21,875
PE 9–9B
a.
Dec. 31
b. Dec. 31
537
375,000
15,000
EXERCISES
Ex. 9–1
a. New printing press: 1, 2, 3, 4, 5
b. Used printing press: 7, 8, 10, 11
Ex. 9–2
a. Yes. All expenditures incurred for the purpose of making the land suitable for
its intended use should be debited to the land account.
b. No. Land is not depreciated.
Ex. 9–3
Initial cost of land ($25,000 + $175,000) ....................
Plus: Legal fees ..........................................................
Delinquent taxes ...............................................
Demolition of building ......................................
Less: Salvage of materials .........................................
Cost of land .................................................................
Ex. 9–4
Capital expenditures: 2, 4, 5, 6, 7, 9, 10
Revenue expenditures: 1, 3, 8
Ex. 9–5
Capital expenditures: 3, 4, 6, 7, 9, 10
Revenue expenditures: 1, 2, 5, 8
538
$200,000
$ 1,200
10,850
15,000
27,050
$227,050
2,400
$224,650
Ex. 9–6
Feb. 22 Accumulated Depreciation—Delivery Truck.....
Cash................................................................
2,300
Mar. 20 Delivery Truck .....................................................
Cash................................................................
900
Nov.
2 Repairs and Maintenance Expense ...................
Cash................................................................
2,300
900
67
67
Ex. 9–7
a. No. The $975,600 represents the original cost of the equipment. Its replacement cost, which may be more or less than $975,600, is not reported in the financial statements.
b. No. The $600,000 is the accumulation of the past depreciation charges on the
equipment. The recognition of depreciation expense has no relationship to
the cash account or accumulation of cash funds.
Ex. 9–8
(a) 50% (1/2), (b) 12.5% (1/8), (c) 10% (1/10), (d) 5% (1/20), (e) 4% (1/25), (f) 2.5%
(1/40), (g) 2% (1/50)
Ex. 9–9
$11,200 [($198,500 – $30,500)/15]
Ex. 9–10
$215,000  $27,000
= $2.35 depreciation per hour
80,000 hours
380 hours at $2.35 = $893 depreciation for October
539
Ex. 9–11
a.
Truck No.
Rate per Mile
Credit to
Accumulated
Depreciation
Miles Operated
1
42.0 cents
36,000
2
21.0
18,000
3
17.5
36,000
4
30.0
16,000
Total .............................................................................................
$ 15,120
3,150*
6,300
4,800
$ 29,370
*Mileage depreciation of $3,780 (21 cents × 18,000) is limited to $3,150, which
reduces the book value of the truck to $9,900, its residual value.
b. Depreciation Expense—Trucks ....................................
Accumulated Depreciation—Trucks .......................
29,370
29,370
Ex. 9–12
First Year
a. 6 1/4% of $44,800 = $2,800
Second Year
6 1/4% of $44,800 = $2,800
or
($44,800/16) = $2,800
b. 12 1/2% of $44,800 = $5,600
or
($44,800/16) = $2,800
12 1/2% of ($44,800 – $5,600) = $4,900
Ex. 9–13
a. 12 1/2% of ($86,000 – $10,000) = $9,500 or [($86,000 – $10,000)/8]
b. Year 1: 25% of $86,000 = $21,500
Year 2: 25% of ($86,000 – $21,500) = $16,125
Ex. 9–14
a. Year 1: 3/12 × [($68,000 – $18,000)/10] = $1,250
Year 2: ($68,000 – $18,000)/10 = $5,000
b. Year 1: 3/12 × 20% of $68,000 = $3,400
Year 2: 20% of ($68,000 – $3,400) = $12,920
540
Ex. 9–15
a. $12,500 [($750,000 – $300,000)/36]
b. $500,000 [$750,000 – ($12,500 × 20 yrs.)]
c. $15,000 [($500,000 – $200,000)/20 yrs.]
Ex. 9–16
a.
Mar. 29 Carpet ............................................................
Cash .........................................................
48,000
b. Dec. 31 Depreciation Expense..................................
Accumulated Depreciation.....................
Carpet depreciation
[($48,000/15 years) × 9/12].
2,400
48,000
2,400
Ex. 9–17
a.
Cost of equipment ....................................................................
Accumulated depreciation at December 31, 2008
(4 years at $27,500* per year) .............................................
Book value at December 31, 2008 ...........................................
*($360,000 – $30,000)/12 = $27,500
$360,000
110,000
$250,000
b. (1) Depreciation Expense—Equipment ......................
Accumulated Depreciation—Equipment .........
6,875
(2) Cash .........................................................................
Accumulated Depreciation—Equipment...............
Loss on Disposal of Fixed Assets .........................
Equipment ..........................................................
220,000
116,875
23,125
541
6,875
360,000
Ex. 9–18
a. 2005 depreciation expense: $16,250 [($147,500 – $17,500)/8]
2006 depreciation expense: $16,250
2007 depreciation expense: $16,250
b. $98,750 [$147,500 – ($16,250 × 3)]
c.
Cash ................................................................................
Accumulated Depreciation—Equipment .....................
Loss on Disposal of Fixed Assets ...............................
Equipment.................................................................
95,000
48,750
3,750
d. Cash ................................................................................
Accumulated Depreciation—Equipment .....................
Equipment.................................................................
Gain on Disposal of Fixed Assets ..........................
100,000
48,750
147,500
147,500
1,250
Ex. 9–19
a. $200,000 ($280,000 – $80,000)
b. $278,750 [$280,000 – ($80,000 – $78,750)], or
$278,750 ($200,000 + $78,750)
Ex. 9–20
a. $200,000 ($280,000 – $80,000)
b. $280,000. The new printing press’s cost cannot exceed $280,000 on a similar
exchange. The $23,250 loss on disposal ($103,250 book value – $80,000 tradein allowance) must be recognized.
542
Ex. 9–21
a.
Depreciation Expense—Equipment .............................
Accumulated Depreciation—Equipment ................
Equipment depreciation ($12,500 × 9/12).
9,375
b. Accumulated Depreciation—Equipment .....................
Equipment ......................................................................
Loss on Disposal of Fixed Assets ...............................
Equipment.................................................................
Cash ..........................................................................
Notes Payable ...........................................................
146,875
288,750
3,125
9,375
210,000
28,750
200,000*
*$288,750 – $60,000 – $28,750
Ex. 9–22
a.
Depreciation Expense—Trucks ....................................
Accumulated Depreciation—Trucks .......................
Truck depreciation ($8,000 × 3/12).
2,000
b. Accumulated Depreciation—Trucks ............................
Trucks .............................................................................
Trucks .......................................................................
Cash ..........................................................................
Notes Payable ...........................................................
34,000
74,000
2,000
48,000
10,000
50,000*
*$75,000 – $15,000 – $10,000
Ex. 9–23
a. $86,500. The new truck’s cost cannot exceed $86,500 in a similar exchange.
b. $81,000 [$86,500 – ($11,500 – $6,000)] or
$81,000 ($75,000 + $6,000)
Ex. 9–24
a. $30,000,000/75,000,000 tons = $0.40 depletion per ton
11,250,000 × $0.40 = $4,500,000 depletion expense
b. Depletion Expense ........................................................
Accumulated Depletion ...........................................
Depletion of mineral deposit.
543
4,500,000
4,500,000
Ex. 9–25
a. ($661,500/15) + ($105,000/12) = $52,850 total patent expense
b. Amortization Expense—Patents ..................................
Patents ......................................................................
Amortized patent rights ($44,100 + $8,750).
52,850
52,850
Ex. 9–26
a. Property, Plant, and Equipment (in millions):
Land and buildings....................................................
Machinery, equipment, and internal-use software .
Office furniture and equipment ................................
Other fixed assets related to leases ........................
Less accumulated depreciation ...............................
Book value .................................................................
Current
Year
Preceding
Year
$ 361
494
81
545
$1,481
664
$ 817
$ 351
422
79
446
$1,298
591
$ 707
A comparison of the book values of the current and preceding years indicates
that they increased. A comparison of the total cost and accumulated depreciation reveals that Apple purchased $183 million ($1,481 – $1,298) of additional
fixed assets, which was offset by the additional depreciation expense of $73
million ($664 – $591) taken during the current year.
b. The book value of fixed assets should normally increase during the year. Although additional depreciation expense will reduce the book value, most
companies invest in new assets in an amount that is at least equal to the depreciation expense. However, during periods of economic downturn, companies purchase fewer fixed assets, and the book value of their fixed assets
may decline.
544
Ex. 9–27
1. Fixed assets should be reported at cost and not replacement cost.
2. Land does not depreciate.
3. Patents and goodwill are intangible assets that should be listed in a separate
section following the Fixed Assets section. Patents should be reported at
their net book values (cost less amortization to date). Goodwill should not be
amortized, but should be only written down upon impairment.
Ex. 9–28
a. Fixed Asset Turnover Ratio =
Fixed Asset Turnover Ratio =
Revenue
Average Book Value of Fixed Assets
$75,112
($74,124 + $75,305)/2
Fixed Asset Turnover Ratio = 1.01
b. Verizon earns $1.01 revenue for every dollar of fixed assets. This is a low
fixed asset turnover ratio, reflecting the high fixed asset intensity in a telecommunications company. The industry average fixed turnover ratio is slightly higher at 1.10. Thus, Verizon is using its fixed assets slightly less efficiently
than the industry as a whole.
Ex. 9–29
a.
Best Buy: 11.65 ($27,433/$2,354)
Circuit City Stores, Inc.: 15.82 ($10,472/$662)
b. Circuit City’s fixed asset turnover ratio of 15.82 is higher than Best Buy’s
fixed asset turnover ratio of 11.65. Thus, Circuit City is generating $4.17
($15.82 – $11.65) more revenue for each dollar of fixed assets than is Best
Buy. On this basis, Circuit City is managing its fixed assets more efficiently
than is Best Buy.
545
Appendix Ex. 9–30
First year: 16/136 × $44,800 = $5,271
Second year: 15/136 × $44,800 = $4,941
Appendix Ex. 9–31
First year: 8/36 × ($86,000 – $10,000) = $16,889
Second year: 7/36 × ($86,000 – $10,000) = $14,778
Appendix Ex. 9–32
First year: 3/12 × 10/55 × ($68,000 – $18,000) = $2,273
Second year:
[(9/12 × 10/55 × ($68,000 – $18,000)] + [(3/12 × 9/55 × ($68,000 – $18,000)] =
$6,818 + $2,045 = $8,863
546
PROBLEMS
Prob. 9–1A
1.
Item
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
2.
Land
$ 3,000
400,000
10,000
12,800
3,900
(4,000)*
17,500
Land
Improvements
Building
$
Other
Accounts
40,000
4,800
$ 9,000
$(800,000)*
15,000
2,000
2,500
1,100
42,000
915,000
(4,000)*
$443,200
$ 25,100
(400)*
$1,001,400
*Receipt
3. Since land used as a plant site does not lose its ability to provide services, it
is not depreciated. However, land improvements do lose their ability to provide services as time passes and are therefore depreciated.
547
Prob. 9–2A
Depreciation Expense
a. Straightb. Units-ofLine
Production
Method
Method
Year
2006
2007
2008
Total
$ 28,000
28,000
28,000
$ 84,000
$ 32,000
30,000
22,000
$ 84,000
c. DoubleDeclining-Balance
Method
$ 60,000
20,000
4,000
$ 84,000
Calculations:
Straight-line method:
($90,000 – $6,000)/3 = $28,000 each year
Units-of-production method:
($90,000 – $6,000)/21,000 hours = $4.00 per hour
2006: 8,000 hours @ $4.00 = $32,000
2007: 7,500 hours @ $4.00 = $30,000
2008: 5,500 hours @ $4.00 = $22,000
Double-declining-balance method:
2006: $90,000 × 2/3 = $60,000
2007: ($90,000 – $60,000) × 2/3 = $20,000
2008: ($90,000 – $60,000 – $20,000 – $6,000*) = $4,000
*Book value should not be reduced below the residual value of $6,000.
548
Prob. 9–3A
a.
Straight-line method:
2006:
[($7,830 – $300)/3] × 1/2 ..................................................
$1,255
2007:
($7,830 – $300)/3 .............................................................
2,510
2008:
($7,830 – $300)/3 .............................................................
2,510
2009:
[($7,830 – $300)/3] × 1/2 ..................................................
1,255
b. Units-of-production method:
2006:
1,600 hours @ $0.75* ......................................................
$1,200
2007:
3,800 hours @ $0.75 .......................................................
2,850
2008:
3,400 hours @ $0.75 .......................................................
2,550
2009:
1,240 hours @ $0.75 .......................................................
930
*($7,830 – $300)/10,040 hours = $0.75 per hour
c.
Double-declining-balance method:
2006:
$7,830 × 2/3 × 1/2.............................................................
$2,610
2007:
($7,830 – $2,610) × 2/3 ....................................................
3,480
2008:
($7,830 – $2,610 – $3,480) × 2/3 .....................................
1,160
2009:
($7,830 – $2,610 – $3,480 – $1,160 – $300*) ..................
280
*Book value should not be reduced below $300, the residual value.
549
Prob. 9–4A
1.
Year
Accumulated
Depreciation,
End of Year
Book Value,
End of Year
$ 32,000
64,000
96,000
128,000
160,000
$143,000
111,000
79,000
47,000
15,000
$70,000 [$175,000 × (1/5) × 2]
$ 70,000
42,000 [$105,000 × (1/5) × 2]
112,000
25,200 [$63,000 × (1/5) × 2]
137,200
15,120 [$37,800 × (1/5) × 2]
152,320
7,680 [$175,000 – $152,320 – $15,000] 160,000
$105,000
63,000
37,800
22,680
15,000
Depreciation
Expense
a.
1
$32,000*
2
32,000
3
32,000
4
32,000
5
32,000
*[($175,000 – $15,000)/5]
b.
2.
1
2
3
4
5
Book value of old equipment ..............................................................
Boot given (cash and notes payable) ................................................
Cost of new equipment .......................................................................
$ 22,680
215,000
$237,680
or
Price of new equipment ......................................................................
Less unrecognized gain on exchange ($25,000 – $22,680) .............
Cost of new equipment .......................................................................
3.
4.
Accumulated Depreciation—Equipment .....................
Equipment ......................................................................
Equipment.................................................................
Cash ..........................................................................
Notes Payable ...........................................................
152,320
237,680
Accumulated Depreciation—Equipment .....................
Equipment ......................................................................
Loss on Disposal of Fixed Assets ...............................
Equipment.................................................................
Cash ..........................................................................
Notes Payable ...........................................................
*($22,680 – $18,000)
152,320
240,000
4,680*
550
$240,000
2,320
$237,680
175,000
15,000
200,000
175,000
15,000
207,000
Prob. 9–5A
2006
Jan.
9 Delivery Equipment ......................................................
Cash .........................................................................
32,000
Sept. 24 Truck Repair Expense ..................................................
Cash .........................................................................
470
Dec.
2007
Jan.
June
Nov.
Dec.
32,000
470
31 Depreciation Expense—Delivery Equipment .............
Acc. Depr.—Delivery Equipment............................
Delivery equipment depreciation
[$32,000 × (1/4 × 2)].
16,000
1 Delivery Equipment ......................................................
Cash .........................................................................
57,500
30 Depreciation Expense—Delivery Equipment .............
Acc. Depr.—Delivery Equipment............................
Delivery equipment depreciation
[50% × ($32,000 – $16,000) × 6/12].
4,000
30 Accumulated Depreciation—Delivery Equipment .....
Cash...............................................................................
Delivery Equipment .................................................
Gain on Disposal of Fixed Assets .........................
20,000
13,500
23 Truck Repair Expense ..................................................
Cash .........................................................................
550
31 Depreciation Expense—Delivery Equipment .............
Accumulated Depreciation—Delivery Equipment
Delivery equipment depreciation
[$57,500 × (1/5 × 2)].
23,000
551
16,000
57,500
4,000
32,000
1,500
550
23,000
Prob. 9–5A
2008
July
Oct.
Dec.
Concluded
1 Delivery Equipment ......................................................
Cash .........................................................................
60,000
1 Depreciation Expense—Delivery Equipment .............
Accumulated Depreciation—Delivery Equipment
Delivery equipment depreciation
[9/12 × 40% × ($57,500 – $23,000)].
10,350
1 Cash...............................................................................
Accumulated Depreciation—Delivery Equipment .....
Loss on Disposal of Fixed Assets ..............................
Delivery Equipment .................................................
22,000
33,350
2,150
31 Depreciation Expense—Delivery Equipment .............
Accumulated Depreciation—Delivery Equipment
Delivery equipment depreciation
[$60,000 × (1/8 × 2) × 1/2].
7,500
552
60,000
10,350
57,500
7,500
Prob. 9–6A
1.
2.
a.
$648,000/3,600,000 board feet = $0.18 per board foot; 1,200,000 board
feet × $0.18 per board foot = $216,000
b.
Goodwill is not amortized.
c.
$780,000/12 years = $65,000; 1/4 of $65,000 = $16,250
a. Depletion Expense ...................................................
Accumulated Depletion ......................................
Depletion of timber rights.
216,000
216,000
b. No entry for goodwill amortization.
c. Amortization Expense—Patents .............................
Patents .................................................................
Patent amortization.
553
16,250
16,250
Prob. 9–1B
1.
Item
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
2.
Land
$ 7,500
260,000
2,500
20,650
16,250
12,500
(5,000)*
Land
Improvements
Building
$
Other
Accounts
36,000
8,000
3,600
$(900,000)*
$ 18,000
3,000
4,200
15,000
(7,000)*
$322,400
$ 33,000
54,000
1,000,000
(600)*
$1,093,000
*Receipt
3. Since land used as a plant site does not lose its ability to provide services, it
is not depreciated. However, land improvements do lose their ability to provide services as time passes and are therefore depreciated.
554
Prob. 9–2B
Year
Depreciation Expense
a. Straightb. Units-ofLine
Production
Method
Method
2007
2008
2009
2010
Total
$107,500
107,500
107,500
107,500
$430,000
$152,000
136,000
102,000
40,000
$430,000
c. DoubleDeclining-Balance
Method
$237,500
118,750
59,375
14,375*
$430,000
Calculations:
Straight-line method:
($475,000 – $45,000)/4 = $107,500 each year
Units-of-production method:
($475,000 – $45,000)/21,500 hours = $20 per hour
2007: 7,600 hours @ $20 = $152,000
2008: 6,800 hours @ $20 = $136,000
2009: 5,100 hours @ $20 = $102,000
2010: 2,000 hours @ $20 = $40,000
Double-declining-balance method:
2007: $475,000 × 50% = $237,500
2008: ($475,000 – $237,500) × 50% = $118,750
2009: ($475,000 – $237,500 – $118,750) × 50% = $59,375
2010: ($475,000 – $237,500 – $118,750 – $59,375 – $45,000*) = $14,375
*Book value should not be reduced below the residual value of $45,000.
555
Prob. 9–3B
a.
Straight-line method:
2006: [($97,200 – $6,000)/3] × 1/2 ...............................................
2007: ($97,200 – $6,000)/3 ..........................................................
2008: ($97,200 – $6,000)/3 ..........................................................
2009: [($97,200 – $6,000)/3] × 1/2 ...............................................
$15,200
30,400
30,400
15,200
b. Units-of-production method:
2006: 3,650 hours @ $4* .............................................................
2007: 8,000 hours @ $4 ..............................................................
2008: 7,850 hours @ $4 ..............................................................
2009: 3,300 hours @ $4 ..............................................................
$14,600
32,000
31,400
13,200
*($97,200 – $6,000)/22,800 hours = $4 per hour
c.
Double-declining-balance method:
2006: $97,200 × 2/3 × 1/2 .............................................................
2007: ($97,200 – $32,400) × 2/3 ..................................................
2008: ($97,200 – $32,400 – $43,200) × 2/3 .................................
2009: ($97,200 – $32,400 – $43,200 – $14,400 – $6,000*) .........
*Book value should not be reduced below $6,000, the residual value.
556
$32,400
43,200
14,400
1,200
Prob. 9–4B
1.
Year
Accumulated
Depreciation,
End of Year
Book Value,
End of Year
$ 55,500
111,000
166,500
222,000
$184,500
129,000
73,500
18,000
$120,000 [$240,000 × (1/4) × 2]
$120,000
60,000 [$120,000 × (1/4) × 2]
180,000
30,000 [$60,000 × (1/4) × 2]
210,000
12,000 [$240,000 – $210,000 – $18,000] 222,000
$120,000
60,000
30,000
18,000
Depreciation
Expense
a.
1
$55,500*
2
55,500
3
55,500
4
55,500
*[($240,000 – $18,000)/4]
b.
2.
1
2
3
4
Book value of old equipment ..............................................................
Boot given (cash and notes payable) ................................................
Cost of new equipment .......................................................................
$ 30,000
280,000
$ 310,000
or
Price of new equipment ......................................................................
Less unrecognized gain on exchange ($45,000 – $30,000) .............
Cost of new equipment .......................................................................
3.
4.
Accumulated Depreciation—Equipment .....................
Equipment ......................................................................
Equipment.................................................................
Cash ..........................................................................
Notes Payable ...........................................................
210,000
310,000
Accumulated Depreciation—Equipment .....................
Equipment ......................................................................
Loss on Disposal of Fixed Assets ...............................
Equipment.................................................................
Cash ..........................................................................
Notes Payable ...........................................................
*($30,000 – $25,000)
210,000
325,000
5,000*
557
$ 325,000
15,000
$ 310,000
240,000
10,000
270,000
240,000
10,000
290,000
Prob. 9–5B
2006
Jan.
Mar.
Dec.
2007
Jan.
Feb.
Apr.
Dec.
9 Delivery Equipment ......................................................
Cash .........................................................................
38,000
15 Truck Repair Expense ..................................................
Cash .........................................................................
180
31 Depreciation Expense—Delivery Equipment .............
Accumulated Depreciation—Delivery Equipment
Delivery equipment depreciation
[$38,000 × (1/8 × 2)].
9,500
3 Delivery Equipment ......................................................
Cash .........................................................................
62,500
20 Truck Repair Expense ..................................................
Cash .........................................................................
150
30 Depreciation Expense—Delivery Equipment .............
Acc. Depr.—Delivery Equipment............................
Delivery equipment depreciation
[25% × ($38,000 – $9,500) × 1/3].
2,375
30 Acc. Depr.—Delivery Equipment .................................
Cash...............................................................................
Loss on Disposal of Fixed Assets ..............................
Delivery Equipment .................................................
11,875
25,000
1,125
31 Depreciation Expense—Delivery Equipment .............
Acc. Depr.—Delivery Equipment............................
Delivery equipment depreciation
($62,500 × (1/10 × 2)].
12,500
558
38,000
180
9,500
62,500
150
2,375
38,000
12,500
Prob. 9–5B
2008
July
Oct.
Dec.
Concluded
1 Delivery Equipment .............................................
Cash ................................................................
70,000
6 Depreciation Expense—Delivery Equipment ....
Acc. Depr.—Delivery Equipment...................
Delivery equipment depreciation
[9/12 × 20% ($62,500 – $12,500)].
7,500
6 Cash......................................................................
Acc. Depr.—Delivery Equipment ........................
Delivery Equipment ........................................
Gain on Disposal of Fixed Assets ................
43,900
20,000
31 Depreciation Expense—Delivery Equipment ....
Acc. Depr.—Delivery Equipment...................
Delivery equipment depreciation
(1/2 × 20% × $70,000).
7,000
559
70,000
7,500
62,500
1,400
7,000
Prob. 9–6B
1.
2.
a.
Goodwill is not amortized.
b.
$475,000/10 years = $47,500; 1/2 of $47,500 = $23,750
c.
$900,000/6,000,000 board feet = $0.15 per board foot; 800,000 board feet
× $0.15 per board foot = $120,000
a. No entry for goodwill amortization.
b. Amortization Expense—Patents .............................
Patents .................................................................
Patent amortization.
23,750
c. Depletion Expense ...................................................
Accumulated Depletion ......................................
Depletion of timber rights.
120,000
560
23,750
120,000
SPECIAL ACTIVITIES
SA 9–1
It is considered unprofessional for employees to use company assets for
personal reasons, because such use reduces the useful life of the assets for
normal business purposes. Thus, it is unethical for Leah Corbin to use Beartooth
Consulting Co.'s computers and laser printers to service her part-time accounting
business, even on an after-hours basis. In addition, it is improper for Leah’s
clients to call her during regular working hours. Such calls may interrupt or interfere with Leah’s ability to carry out her assigned duties for Beartooth Consulting
Co.
SA 9–2
You should explain to Clay and Haley that it is acceptable to maintain two sets of
records for tax and financial reporting purposes. This can happen when a
company uses one method for financial statement purposes, such as straight-line
depreciation, and another method for tax purposes, such as MACRS depreciation.
This should not be surprising, since the methods for taxes and financial statements are established by two different groups with different objectives. That is,
tax laws and related accounting methods are established by Congress. The
Internal Revenue Service then applies the laws and, in some cases, issues
interpretations of the law and congressional intent. The primary objective of the
tax laws is to generate revenue in an equitable manner for government use.
Generally accepted accounting principles, on the other hand, are established
primarily by the Financial Accounting Standards Board. The objective of generally
accepted accounting principles is the preparation and reporting of true economic
conditions and results of operations of business entities.
You might note, however, that companies are required in their tax returns to reconcile differences in accounting methods. For example, income reported on the
company’s financial statements must be reconciled with taxable income.
Finally, you might also indicate to Clay and Haley that even generally accepted
accounting principles allow for alternative methods of accounting for the same
transactions or economic events. For example, a company could use straight-line
depreciation for some assets and double-declining-balance depreciation for other
assets.
561
SA 9–3
1.
a. Straight-line method:
2006: ($150,000/5) × 1/2 .......................................................................
2007: ($150,000/5) ................................................................................
2008: ($150,000/5) ................................................................................
2009: ($150,000/5) ................................................................................
2010: ($150,000/5) ................................................................................
2011: ($150,000/5) × 1/2 .......................................................................
$15,000
30,000
30,000
30,000
30,000
15,000
b. MACRS:
2006: ($150,000 × 20%)........................................................................
2007: ($150,000 × 32%)........................................................................
2008: ($150,000 × 19.2%).....................................................................
2009: ($150,000 × 11.5%).....................................................................
2010: ($150,000 × 11.5%).....................................................................
2011: ($150,000 × 5.8%).......................................................................
562
$30,000
48,000
28,800
17,250
17,250
8,700
SA 9–3
Continued
2.
a. Straight-line method
Year
2006
2007
2008
2009
2010
2011
Income before depreciation ..........
$300,000
$300,000
$300,000
$300,000
$300,000
$300,000
Depreciation expense ...................
15,000
30,000
30,000
30,000
30,000
15,000
Income before income tax ............
$285,000
$270,000
$270,000
$270,000
$270,000
$285,000
Income tax ......................................
85,500
81,000
81,000
81,000
81,000
85,500
Net income .....................................
$199,500
$189,000
$189,000
$189,000
$189,000
$199,500
b. MACRS
Year
2006
2007
2008
2009
2010
2011
Income before depreciation ..........
$300,000
$300,000
$300,000
$300,000
$300,000
$300,000
Depreciation expense ...................
30,000
48,000
28,800
17,250
17,250
8,700
Income before income tax ............
$270,000
$252,000
$271,200
$282,750
$282,750
$291,300
Income tax ......................................
81,000
75,600
81,360
84,825
84,825
87,390
Net income .....................................
$189,000
$176,400
$189,840
$197,925
$197,925
$203,910
563
SA 9–3
Concluded
3. For financial reporting purposes, Tom should select the method that provides
the net income figure that best represents the results of operations. (Note to
Instructors: The concept of matching revenues and expenses is discussed in
Chapter 3.) However, for income tax purposes, Tom should consider selecting the method that will minimize taxes. Based upon the analyses in (2), both
methods of depreciation will yield the same total amount of taxes over the
useful life of the equipment. MACRS results in fewer taxes paid in the early
years of useful life and more in the later years. For example, in 2006 the
income tax expense using MACRS is $81,000, which is $4,500 ($85,500 –
$81,000) less than the income tax expense using the straight-line depreciation of $85,500. Cowboy Construction Co. can invest such differences in the
early years and earn income.
In some situations, it may be more beneficial for a taxpayer not to choose
MACRS. These situations usually occur when a taxpayer is expected to be
subject to a low tax rate in the early years of use of an asset and a higher tax
rate in the later years of the asset’s useful life. In this case, the taxpayer may
be better off to defer the larger deductions to offset the higher tax rate.
SA 9–4
Note to Instructors: The purpose of this activity is to familiarize students with the
differences in cost and other factors in leasing and buying a business vehicle.
SA 9–5
Note to Instructors: The purpose of this activity is to familiarize students with the
procedures involved in acquiring a patent, a copyright, and a trademark.
564
SA 9–6
a. Fixed Asset Turnover =
Revenue
Average Book Value of Fixed Assets
Wal-Mart:
$258,681
= 5.00
$51,686
Alcoa Inc.:
$21,504
= 1.74
$12,333
Comcast Corporation:
$18,348
= 1.00
$18,427
b. The fixed asset turnover measures the amount of revenue earned per dollar
of fixed assets. Wal-Mart earns $5.00 of revenue for every dollar of fixed assets, while Alcoa earns only $1.74 and Comcast Corporation earns only $1.00
in revenue for every dollar of fixed assets. This says that Alcoa and Comcast
require more fixed assets to operate their businesses than does Wal-Mart, for
a given level of revenue volume. Does this mean that Wal-Mart is a better
company? Not necessarily. Revenue is not the same as earnings. More likely,
Wal-Mart has a smaller profit margin than do Alcoa and Comcast. Although
not required by the exercise, the income from operations before tax as a percent of sales (operating margin) for the three companies is: Comcast, 10.6%,
Alcoa, 7.8%, and Wal-Mart, 5.5%. Thus, the difference between the fixed asset
turnovers seems reasonable. Generally, companies with very low fixed asset
turnovers, such as aluminum making and cable communications, must be
compensated with higher operating margins.
Note to Instructors: You may wish to consider the impact of different fixed
asset turnover ratios across industries and the implications of these differences. This is a conceptual question designed to have students think about
how competitive markets would likely reward the low fixed asset turnover
companies for embracing high fixed asset commitments.
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