McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 9
Reporting and Interpreting Long-Lived
Tangible and Intangible Assets
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Fred Phillips, Ph.D., CA
Learning Objective 1
Define, classify, and explain
the nature of long-lived assets.
9-3
Definition and Classification
Actively Used in Operations



9-4
Value represented by rights
that produce benefits.
Will not be
up within the next year
Intangibles
withused
a limited
life, such as patents and
copyrights, are subject to
Examples
amortization.
 Land
Intangibles
Intangible
Tangiblewith an
 Assets subject to depreciation
unlimited (or indefinite)
and
equipment
No
Physical
life,
such as goodwill and Buildings
Physical
trademarks,
FurnitureSubstance
and fixtures
Substanceare not
amortized.
Learning Objective 2
Apply the cost principle to
the acquisition of long-lived
assets.
9-5
Acquisition of Tangible Assets
Acquisition cost includes:
1. purchase price, and
2. all expenditures needed to prepare
the asset for its intended use.
Recording costs as
assets is called
capitalizing the costs.
9-6
Acquisition of Tangible Assets

Purchase cost
Legal fees
Surveying fees
Broker’s commissions

Purchase/construction cost

Legal fees

Appraisal fees

Architectural fees

Purchase/construction cost

Sales taxes

Transportation costs

Installation costs

Land


Buildings
Equipment
9-7
Acquisition of Tangible Assets
Basket Purchase
The total cost of a combined
purchase of land and building is
allocated in proportion to their
relative market values.
Appraised
% ofpurchased
Purchase land
Apportioned
On January
1, Jones
and
Asset
Valuecash. Price
Cost
buildingValue
for $400,000
The appraised
b* $325,000,
a building,
c
b × c
values are
and land,
Land
$ 175,000 $175,000.
35% × $ 400,000 = $ 140,000
Building
Total
325,000
$ 500,000
65% ×
100%
400,000 =
260,000
$ 400,000
How much of the $400,000 purchase price will
* $175,000
= 35%
be÷ $500,000
charged
to the building and land
accounts?
$325,000 ÷ $500,000 = 65%
9-8
Cash Purchase
Cedar Fair purchased a new ride for $26,000,000 less a
$1,000,000 discount. Cedar Fair paid $125,000 for
transportation and $625,000 for installation of the ride.
Prepare the journal entry for the acquisition assuming Cedar
Fair paid cash for the new ride.
1 Analyze
2 Record
9-9
Credit Purchase
Instead of paying cash, assume that Cedar Fair issued a
note for the new ride, but paid cash for the transportation
and installation of the ride.
Prepare the journal entry for the acquisition.
1 Analyze
2 Record
9-10
Maintenance Costs Incurred
during Use
Type of
Expenditure
9-11
Identifying Characteristics
Accounting
Treatment
Ordinary
1. Relatively small, recurring expenditures
repairs and
that maintain normal operating condition
maintenance 2. Do not increase productivity
3. Do not extend life beyond original
estimate
Expense
Extraordinary 1. Relatively large, infrequent expenditures
repairs,
such as major overhauls or replacements
replacements,
of major components
and additions 2. May extend useful life
3. May increase productivity or efficiency
Capitalize
Depreciation Expense
Depreciation is a cost allocation process that matches costs
of operational assets with periods benefited by their use.
Acquisition
Cost
Cost Allocaton
Balance Sheet
9-12
Expense
Income Statement
Depreciation
Expense
Depreciation for
the current year
Income
Statement
Accumulated
Depreciation
Total of depreciation
to date for an asset
Balance
Sheet
Depreciation Expense
The effects of $130 of depreciation on the accounting
equation and the journal entry to record them follow:
1 Analyze
2 Record
Depreciation calculations require three amounts for each asset:
 Acquisition cost.
 Estimated useful life.
 Estimated residual value.
9-13
Depreciation Expense
2008 Depreciation
Includes $130 for 2008
Book value 2008
9-14
Learning Objective 3
Apply various depreciation
methods as economic benefits
are used up over time.
9-15
Depreciation Methods
 Straight-line
 Units-of-production
 Declining balance
We will use the following information to illustrate
the three methods of depreciation:
At the beginning of the year, Cedar Fair purchased
a new Go-Cart Ride for $62,500 cash. The ride
has an estimated useful life of 3 years and an
estimated residual value of $2,500.
9-16
Straight-Line Method
($62,500 - $2,500) ×
1
3
Depreciation Accumulated
Expense
Depreciation
Year
(debit)
(credit)
1
2
3
9-17
$ 20,000
20,000
20,000
$ 60,000
$
$
20,000
20,000
20,000
60,000
=
$20,000 per year
Accumulated Undepreciated
Depreciation
Balance
(credit balance) (book value)
$
62,500
$
20,000
42,500
40,000
22,500
60,000
2,500
Units-of-Production Method
The ride has a 100,000-mile estimated useful life.
If the ride is used 30,000 miles in the first year,
what is the amount of depreciation expense?
($62,500 - $2,500) ×
9-18
30,000
100,000
=
$18,000
Units-of-Production Method
9-19
Year
Miles
1
2
3
30,000
50,000
20,000
100,000
Depreciation
Depreciation
Expense
Expense
(debit)
$
$
18,000
30,000
12,000
60,000
Accumulated
Depreciation
(credit
Balance
balance)
$
18,000
48,000
60,000
Undepreciated
Balance
(book value)
$
62,500
44,500
14,500
2,500
Declining-Balance Method
What is the amount of amount of depreciation
for each of the first two years?
First Year
Second Year
×
2
3
=
$41,667
($62,500 - $41,667) ×
2
3
=
$13,889
($62,500 - $0)
Cost – Accumulated Depreciation
Annual computation ignores residual value.
9-20
Double-Declining-Balance Method
Year
Year
1
1
2
2
3
3
Depreciation
Depreciation
Expense
Expense
(debit)
(debit)
$$
$$
41,667
41,667
13,889
13,889
4,629
4,444
60,185
60,000
Accumulated
Accumulated Undepreciated
Undepreciated
Depreciation
Balance
Depreciation
Balance
Balance
(credit
balance) (book
(bookvalue)
value)
$$
62,500
62,500
$$
41,667
20,833
41,667
20,833
55,556
6,944
55,556
6,944
60,185
2,315
60,000
2,500
Below residual value
Depreciation expense is limited to the amount that
2
$4,629
($62,500
$55,556)
×
= value.
reduces book value to the estimated residual
Third Year
3
9-21
Partial Year Depreciation
Calculations
When a plant asset is acquired
during the year, depreciation is
calculated for the fraction of the
year the asset is owned.
9-22
Summary of Depreciation Methods
9-23
Tax Depreciation
For tax purposes, most corporations use
the Modified Accelerated Cost Recovery
System (MACRS).
MACRS depreciation provides for rapid
write-off of an asset’s cost in order to
stimulate new investment.
9-24
Learning Objective 4
Explain the effect of asset
impairment on the financial
statements.
9-25
Asset Impairment Losses
Impairment is the loss of a significant portion of the utility of an
asset through . . .
 Casualty.
 Obsolescence.
 Lack of demand for the asset’s services.
A loss should be recognized when an asset suffers a permanent
impairment.
Cedar Fair recorded a write-down of $3,200,000 on equipment.
1
Analyze
2 Record
9-26
Learning Objective 5
Analyze the disposal of longlived tangible assets.
9-27
Disposal of Tangible Assets
 Update depreciation to date of disposal.
 Record the disposal.
dr Cash (+A)
dr Accumulated Depreciation (-xA)
cr Equipment (-A)
cr Gain on Disposal (+R, +SE)
Gain if cash received is greater than asset’s book value
9-28
Book
value
Disposal of Tangible Assets
 Update depreciation to date of disposal.
 Record the disposal.
dr Cash (+A)
dr Loss on Disposal (+E, -SE)
dr Accumulated Depreciation (-xA)
cr Equipment (-A)
Loss if cash received is less than asset’s book value
9-29
Book
value
Disposal of Tangible Assets
Cedar Fair sold a hotel for $3,000,000 cash at the end of its
16th year of use. The hotel originally cost $20,000,000, and
was depreciated using the straight-line method with zero
residual value and a useful life of 20 years.
The amount of depreciation per
year is:
a.
b.
c.
d.
9-30
$0.
$500,000.
$1,000,000.
$2,000,000.
Annual Depreciation:
($20,000,000 - $0) ÷ 20 Years
= $1,000,000 per year
Disposal of Tangible Assets
Cedar Fair sold a hotel for $3,000,000 cash at the end of its
16th year of use. The hotel originally cost $20,000,000, and
was depreciatedAccumulated
using the straight-line
method
Depreciation
= with zero
residual value and a useful life of 20 years.
(16 yrs. × $1,000,000) = $16,000,000
The equipment’s
value at
date
BV = Cost -book
Accumulated
Depreciation
of sale is:- $16,000,000
BV = $20,000,000
= $4,000,000
a.
b.
c.
d.
9-31
$4,000,000.
$3,000,000.
$17,000,000.
$16,500,000.
Disposal of Tangible Assets
Cedar Fair sold a hotel for $3,000,000 cash at the end of its
16th year of use. The hotel originally cost $20,000,000, and
was depreciated using the straight-line method with zero
residual value and a useful life of 20 years.
The equipment’s sale resulted in:
a.
b.
c.
d.
9-32
a loss of $1,000,000.
a gain of $3,000,000.
a gain of $1,000,000.
a loss of $5,000,000.
Loss = Cash Received - Book Value
Loss = $3,000,000 - $4,000,000 = $1,000,000
Disposal of Tangible Assets
Analyze and prepare the journal entry to
record Cedar Fair’s sale of the hotel.
1
Analyze
2 Record
9-33
Learning Objective 6
Analyze the acquisition, use,
and disposal of long-lived
intangible assets.
9-34
Intangible Assets
Often provide
exclusive rights
or privileges.
Noncurrent assets
without physical
substance.
Intangible
Assets
Useful life is
often difficult
to determine.
9-35
Usually acquired
for operational
use.
Intangible Assets
Record at current cash
equivalent cost, including
purchase price, legal fees,
and filing fees.
Amortize intangibles with
limited lives over the shorter
of their economic lives or
legal lives using the
straight-line method.
9-36
Trademarks and Copyrights
A trademark is a symbol, design,
or logo associated with a business.
Internally developed
trademarks have no
recorded asset cost.
Purchased trademarks
are recorded at cost.
A copyright is an exclusive right granted by the federal
government to protect artistic or intellectual properties.
Legal life is
life of creator
plus 70 years.
9-37
Amortize cost
over the period
benefited.
Patents and Licensing Rights
A patent is an exclusive right granted by the federal
government to sell or manufacture an invention.
Cost is purchase
price plus legal
cost to defend.
Amortize cost
over the shorter of
useful life or 20 years.
Licensing rights grant limited permission to use a product
or service according to specific terms and conditions.
You may be using computer
software that is made
available to you through a
campus licensing agreement.
9-38
Franchises
A franchise provides legally protected rights
to sell products or provide services purchased
by a franchisee from the franchisor.
9-39
Goodwill
Purchase Price > Fair Market Value of Net Assets Acquired
9-40
Occurs when one
company buys
another company.
Only purchased
goodwill is an
intangible asset.
Is not amortized.
Is impairment
tested and may be
written down.
Amortization of Limited Life
Intangible Asset
Assume Cedar Fair purchased a patent for an uphill water-coaster
for $800,000 and intends to use it for 20 years. Each year, the company
would record $40,000 in Amortization Expense ($800,000 ÷ 20 years).
1 Analyze
Assets
Patent (-A) $40,000
2
9-41
=
Liabilities
Record
dr Amortization Expense (+E, -SE)
cr Patent (-A)
+ Stockholders' Equity
Amortization Expense
(+E, -SE)
-40,000
40,000
40,000
Summary of Accounting Rules
for Long-Lived Assets
Stage
Subject
Acquisition Purchased Asset
Use
Tangible Assets
Capitalize all related costs
Intangible Assets
Capitalize all related costs
Expense related costs
Capitalize related costs
Not applicable
Not applicable
straight-line
units-of-production
declining-balance
Do not depreciate land
Typically use straight line only
Write-down if necessary
Write-down if necessary
Report gain or (loss) when . . . Receive more (less) on
disposal than book value
Receive more (less) on
disposal than book value
Repairs/maintenance
Ordinary
Extraordinary
Depreciation/ amortization
Limited life
Unlimited life
Impairment test
Disposal
9-42
Do not amortize
Learning Objective 7
Interpret the fixed asset
turnover ratio.
9-43
Turnover Analysis
Fixed
=
Asset
Turnover
Net Sales Revenue
Average Net Fixed Assets
This ratio measures the sales
dollars generated by each dollar
invested in fixed assets.
For the year 2008, Cedar Fair had $1,000,000 of
revenue. End-of-year fixed assets were $1,800,000
and beginning-of-year fixed assets were $1,940,000.
(All numbers in millions.)
9-44
Turnover Analysis
Fixed
=
Asset
Turnover
Net Sales Revenue
Average Net Fixed Assets
Fixed
=
Asset
Turnover
$1,000,000
($1,800,000 + $1,940,000) ÷ 2
= 0.53
2008 Fixed Asset Turnover Comparisons
Yahoo!
5.68
9-45
Six Flags
0.64
Cedar Fair
0.53
Learning Objective 8
Describe the factors to
consider when comparing
companies’ long-lived assets.
9-46
Impact of Depreciation
Differences
Accelerated depreciation, in the early years of an asset’s
useful life, results in higher depreciation expense, lower
net income, and lower book value than would result
using straight-line depreciation.
Selling an asset with a low book value, resulting from
accelerated depreciation, might result in a gain.
Selling the same asset with a higher book value,
resulting from straight-line depreciation, might result in
a loss.
9-47
Supplement 9A
Natural Resources
Natural Resources
Depletion is the process of allocating a natural
resource’s cost over the period of its extraction.
Depletion is similar in concept to depreciation.
Depletion that is computed for a period is first added to
inventory and then expensed when the inventory is sold.
Total
depletion
cost
9-49
Cost of
goods sold
Inventory
for sale
Unsold
Inventory
Supplement 9B
Changes in Depreciation Estimates
Changes in Depreciation
Estimates
Predicted
residual value
Predicted
useful life
So depreciation
is an estimate.
Over the life of an asset, new information
may come to light that indicates the
original estimates need to be revised.
9-51
Changes in Depreciation
Estimates
Cedar Fair purchased equipment that cost
$60,000,000 with an estimated useful life of
20 years and an estimated salvage value of
$3,000,000. During year 5, Cedar Fair
changed the estimated useful life to 25 years
and lowered the estimated salvage value to
$2,400,000.
Calculate depreciation expense for year 5 and
thereafter using the straight-line method.
9-52
Changes in Depreciation
Estimates
When our estimates change, the new depreciation is:
Book value at
date of change
–
Residual value at
date of change
Remaining useful life at date of change
Asset original cost
$ 60,000,000
Accumulated depreciation for 4 years
(($60,000,000 – $3,000,000) ÷ 20) × 4 years
11,400,000
Remaining book value
$ 48,600,000
Revised annual depreciation
($48,600,000 – $2,400,000) ÷ 21
9-53
$ 2,200,000
Chapter 9
Solved Exercises
M9-4, M9-5, M9-6, E9-6, E9-7, E9-11
M9-4 Computing Book Value (Straight-Line Depreciation)
Calculate the book value of a two-year-old machine that cost $200,000, has an
estimated residual value of $40,000, and has an estimated useful life of four years.
The company uses straight-line depreciation.
($200,000 - $40,000) ×
1
4
Depreciation Accumulated
Expense
Depreciation
Year
(debit)
(credit)
1
2
9-55
$ 40,000
40,000
$
40,000
40,000
=
$40,000 per year
Accumulated Undepreciated
Depreciation
Balance
(credit balance) (book value)
$
200,000
$
40,000
160,000
80,000
120,000
M9-5 Computing Book Value (Units-of-Production Depreciation)
Calculate the book value of a two-year-old machine that cost $200,000, has an
estimated residual value of $40,000, and has an estimated useful life of 20,000
machine hours. The company uses units-of-production depreciation and ran the
machine 3,000 hours in year 1 and 8,000 hours in year 2.
1st Year Depreciation
($200,000 - $40,000) ×
3,000
20,000
= $24,000
8,000
20,000
= $64,000
2nd Year Depreciation
($200,000 - $40,000) ×
9-56
M9-5 Computing Book Value (Units-of-Production Depreciation)
Calculate the book value of a two-year-old machine that cost $200,000, has an
estimated residual value of $40,000, and has an estimated useful life of 20,000
machine hours. The company uses units-of-production depreciation and ran the
machine 3,000 hours in year 1 and 8,000 hours in year 2.
Year
1
2
9-57
Hours
3,000
8,000
Depreciation
Expense
(debit)
$
24,000
64,000
Accumulated
Depreciation
(credit balance)
$
24,000
88,000
Undepreciated
Balance
(book value)
$
200,000
176,000
112,000
M9-6 Computing Book Value (Double-Declining-Balance Depreciation)
Calculate the book value of a two-year-old machine that cost $200,000, has an
estimated residual value of $40,000, and has an estimated useful life of four years.
The company uses double-declining-balance depreciation. Round to the nearest
dollar.
1st Year Depreciation
×
2
4
=
$100,000
($200,000 - $100,000) ×
2
4
=
$50,000
($200,000 - $0)
2nd Year Depreciation
9-58
M9-6 Computing Book Value (Double-Declining-Balance Depreciation)
Calculate the book value of a two-year-old machine that cost $200,000, has an
estimated residual value of $40,000, and has an estimated useful life of four years.
The company uses double-declining-balance depreciation. Round to the nearest
dollar.
Year
1
2
9-59
Depreciation
Expense
(debit)
$
100,000
50,000
Accumulated
Depreciation
(credit balance)
$
100,000
150,000
Undepreciated
Balance
(book value)
$
200,000
100,000
50,000
E9-6 Computing Depreciation under Alternative Methods
PlasticWorks Corporation bought a machine at the beginning of the year at a cost
of $12,000. The estimated useful life was five years, and the residual value was
$2,000. Assume that the estimated productive life of the machine is 10,000 units.
Expected annual production was: year 1, 3,000 units; year 2, 3,000 units; year 3,
2,000 units; year 4, 1,000 units; and year 5, 1,000 units.
Required:
1. Complete a depreciation schedule for each of the alternative methods.
a. Straight-line.
b. Units-of-production.
c. Double-declining-balance.
1a. Straight-line
Year
0
1
2
3
4
5
9-60
Depreciation Expense
(debit)
($12,000
($12,000
($12,000
($12,000
($12,000
-
$2,000)
$2,000)
$2,000)
$2,000)
$2,000)
×
×
×
×
×
1/5
1/5
1/5
1/5
1/5
= $ 2,000
=
2,000
=
2,000
=
2,000
=
2,000
Accumulated
Depreciation
(credit balance)
$
2,000
4,000
6,000
8,000
10,000
Book
Value
$ 12,000
10,000
8,000
6,000
4,000
2,000
E9-6 Computing Depreciation under Alternative Methods
1b. Units-of-production
Year
0
1
2
3
4
5
Accumulated
Depreciation
(credit balance)
Depreciation Expense
(debit)
($12,000 ($12,000 ($12,000 ($12,000 ($12,000 -
$2,000)
$2,000)
$2,000)
$2,000)
$2,000)
×
×
×
×
×
3,000/10,000 = $ 3,000
3,000/10,000 =
3,000
2,000/10,000 =
2,000
3,000/10,000 =
1,000
3,000/10,000 =
1,000
$
3,000
6,000
8,000
9,000
10,000
Book
Value
$ 12,000
9,000
6,000
4,000
3,000
2,000
1c. Double-declining-balance
Year
0
1
2
3
4
5
9-61
Accumulated
Depreciation
(credit balance)
Depreciation Expense
(debit)
($12,000 - $0) × 2/5 =
($12,000 - $4,800) × 2/5 =
($12,000 - $7,680) × 2/5 =
$2,592 - $2,000 =
$ 4,800
2,880
1,728
592
$
4,800
7,680
9,408
10,000
10,000
Book
Value
$ 12,000
7,200
4,320
2,592
2,000
2,000
E9-6 Computing Depreciation under Alternative Methods
Required:
2. Which method will result in the highest net income in year 2? Does this higher
net income mean the machine was used more efficiently under this
depreciation method?
 The method that will result in the highest net income is the
one that reports the lowest depreciation expense.
 Straight-line depreciation method yields the lowest
depreciation expense in year 2 ($2,000), and therefore
results in the highest net income in year 2.
 This higher net income does not mean the equipment was
used more efficiently. It only means a smaller amount of the
asset’s cost was allocated to depreciation expense in year 2
using straight-line depreciation.
9-62
E9-7 Computing Depreciation under Alternative Methods
Sonic Corporation purchased and installed electronic payment equipment at its
drive-inn restaurants in San Marcos, TX, at a cost of $27,000. The equipment
has an estimated residual value of $1,500. The equipment is expected to
process 255,000 payments over its three-year useful life. Per year, expected
payment transactions are 61,200, year 1; 140,250, year 2; and 53,550, year 3.
Required:
Complete a depreciation schedule for each of the alternative methods.
1. Straight-line.
2. Units-of-production.
3. Double-declining-balance.
1. Straight-line
($27,000 - $1,500) ×
9-63
1
3
= $8,500 per year
E9-7 Computing Depreciation under Alternative Methods
1. Straight-line
Depreciation Accumulated
Expense
Depreciation
Year
(debit)
(credit)
1
2
3
9-64
$ 8,500
8,500
8,500
$ 25,500
$
$
8,500
8,500
8,500
25,500
Accumulated Undepreciated
Depreciation
Balance
(credit balance) (book value)
$
27,000
$
8,500
18,500
17,000
10,000
25,500
1,500
E9-7 Computing Depreciation under Alternative Methods
2. Units-of-production
1st Year Depreciation
($27,000 - $1,500)
×
61,200
255,000
= $6,120
×
140,250
255,000
= $14,025
×
53,550
255,000
= $5,355
2nd Year Depreciation
($27,000 - $1,500)
3rd Year Depreciation
($27,000 - $1,500)
9-65
E9-7 Computing Depreciation under Alternative Methods
2. Units-of-production
9-66
Year
Payments
1
2
3
61,200
140,250
53,550
255,000
Depreciation
Expense
(debit)
$
$
6,120
14,025
5,355
25,500
Accumulated
Depreciation
(credit balance)
$
6,120
20,145
25,500
Undepreciated
Balance
(book value)
$
27,000
20,880
6,855
1,500
E9-7 Computing Depreciation under Alternative Methods
3. Double-declining-balance
1st Year Depreciation
($27,000 - $0)
×
2
3
=
$18,000
2
3
=
$6,000
2
3
=
$2,000
2nd Year Depreciation
($27,000 - $18,000) ×
3rd Year Depreciation
[$27,000 – ($18,000 + $6,000)] ×
9-67
E9-7 Computing Depreciation under Alternative Methods
3. Double-declining-balance
Year
1
2
3
Depreciation
Expense
(debit)
$
$
18,000
6,000
2,000
1,500
26,000
25,500
Accumulated
Depreciation
(credit
Balance
balance)
$
18,000
24,000
26,000
25,500
Undepreciated
Balance
(book value)
$
27,000
9,000
3,000
1,000
1,500
Below residual value
Depreciation expense is limited to the amount that
reduces book value to the estimated residual value.
9-68
E9-11 Demonstrating the Effect of Book Value on Reporting an Asset
Disposal
FedEx Corporation is the world’s leading express-distribution company. In
addition to the world’s largest fleet of all-cargo aircraft, the company has more
than 53,700 ground vehicles that pick up and deliver packages. Assume that
FedEx sold a delivery truck for $16,000. FedEx had originally purchased the
truck for $28,000, and had recorded depreciation for three years.
Required:
1. Calculate the amount of gain or loss on disposal, assuming that
Accumulated Depreciation was: (a) $12,000, (b) $10,000, and (c) $15,000.
Sale price
Cost
Less: Accumulated Depreciation
Book Value
Gain (Loss)
9-69
a
$ 16,000
28,000
12,000
16,000
$
-
Case
b
$ 16,000
28,000
10,000
18,000
$ (2,000)
c
$ 16,000
28,000
15,000
13,000
$ 3,000
E9-11 Demonstrating the Effect of Book Value on Reporting an Asset
Disposal
Case (b) Book Value = $18,000
Assets
=
Liabilities
+
Cash
+ 16,000
Delivery Truck
– 28,000
Accumulated
Depreciation + 10,000
Stockholders' Equity
Loss on Disposal - 2,000
Case (c) Book Value = $13,000
Assets
Cash
+ 16,000
Delivery Truck
– 28,000
Accumulated
Depreciation + 15,000
9-70
=
Liabilities
+
Stockholders' Equity
Gain on Disposal + 3,000
E9-11 Demonstrating the Effect of Book Value on Reporting an Asset
Disposal
Required:
2. Using the following structure, indicate the effects (accounts, amounts, and
+ or -) for the disposal of the truck in each of the three preceding situations.
Assets
=
Liabilities
+
Stockholders’ Equity
Case (a) Book Value = $16,000
Assets
Cash
+ 16,000
Delivery Trucks – 28,000
Accumulated
Depreciation + 12,000
9-71
=
Liabilities
+
Stockholders' Equity
E9-11 Demonstrating the Effect of Book Value on Reporting an Asset
Disposal
Required:
3. Based on the three preceding situations, explain how the amount of
depreciation recorded up to the time of disposal affects the amount of gain or
loss on disposal.
The gain or loss reported on disposal is directly affected by the
book value of the asset, which itself is affected by the amount
of depreciation recorded before the disposal. With the same
sale price of $16,000 in each case . . .
 A larger amount of depreciation recorded before disposal
results in lower book value and a gain on disposal (case 1c).
 A smaller amount depreciation recorded before disposal
results in higher book value and a loss on disposal (case
1b).
9-72
E9-11 Demonstrating the Effect of Book Value on Reporting an Asset
Disposal
Required:
4. Prepare the journal entry to record the disposal of the truck for each situation
in requirement 1.
Case (a) Book value = $16,000
dr Cash (+A)
dr Accumulated Depreciation (-xA,+A)
cr Delivery Trucks (-A)
16,000
12,000
28,000
Case (b) Book value = $18,000
dr Cash (+A)
dr Accumulated Depreciation (-xA,+A)
dr Loss on Disposal (-SE)
cr Delivery Trucks (-A)
9-73
16,000
10,000
2,000
28,000
E9-11 Demonstrating the Effect of Book Value on Reporting an Asset
Disposal
Required:
4. Prepare the journal entry to record the disposal of the truck for each situation
in requirement 1.
Case (c) Book value = $13,000
dr Cash (+A)
dr Accumulated Depreciation (-xA,+A)
cr Gain on Disposal (+SE)
cr Delivery Trucks (-A)
9-74
16,000
15,000
3,000
28,000
End of Chapter 9