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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. 565