CHAPTER 10
FIXED ASSETS AND INTANGIBLE ASSETS
DISCUSSION QUESTIONS
1. a. Property, plant, and equipment
b. Current assets (merchandise inventory)
2. Real estate acquired as speculation should
be listed in the balance sheet under the caption “Investments,” below the Current Assets
section.
3. $435,000
4. 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.
5. Capital expenditure
6. 10 years
7. a. No
b. No
8. a. An accelerated depreciation method is
most appropriate for situations in which
the decline in productivity or earning
power of the asset is proportionately
b.
c.
9. a.
b.
10. a.
b.
c.
greater in the early years of use than in
later years, and the repairs tend to increase with the age of the asset.
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.
MACRS was enacted by the Tax Reform Act of 1986 and provides for depreciation for fixed assets acquired after
1986.
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.
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.
Over the shorter of its legal life or years
of usefulness.
Expense as incurred.
Goodwill should not be amortized, but
written down when impaired.
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PRACTICE EXERCISES
PE 10–1A
Sept. 30 Delivery Truck .....................................................
Cash................................................................
1,425
30 Repairs and Maintenance Expense ...................
Cash................................................................
35
1,425
35
PE 10–1B
June
9 Accumulated Depreciation—Delivery Van........
Cash................................................................
1,300
9 Delivery Van ........................................................
Cash................................................................
600
1,300
PE 10–2A
a. $245,000 ($275,000 – $30,000)
b. 10% = (1/10)
c.
$24,500 ($245,000 × 10%), or ($245,000/10 years)
PE 10–2B
a. $920,000 ($980,000 – $60,000)
b. 5% = (1/20)
c.
$46,000 ($920,000 × 5%), or ($920,000/20 years)
PE 10–3A
a. $288,000 ($315,000 – $27,000)
b. $3.20 per hour ($288,000/90,000 hours)
c. $11,840 (3,700 hours × $3.20)
580
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600
PE 10–3B
a. $110,000 ($150,000 – $40,000)
b. $0.275 per mile ($110,000/400,000 miles)
c.
$22,000 (80,000 miles × $0.275)
PE 10–4A
a.
25% = [(1/8) × 2]
b. $47,500 ($190,000 × 25%)
PE 10–4B
a.
4% = [(1/50) × 2]
b. $32,800 ($820,000 × 4%)
PE 10–5A
a.
$4,900 [($94,000 – $20,500)/15]
b. $59,700 [$94,000 – ($4,900 × 7)]
c.
$7,450 [($59,700 – $15,000)/6]
PE 10–5B
a.
$10,750 [($300,000 – $42,000)/24]
b. $149,500 [$300,000 – ($10,750 × 14)]
c.
$25,900 [($149,500 – $20,000)/5]
PE 10–6A
a.
$9,750 [($215,000 – $39,500)/18]
b. $9,000 loss {$128,000 – [$215,000 – ($9,750 × 8)]}
c.
Cash................................................................................
Accumulated Depreciation—Equipment .....................
Loss on Sale of Equipment...........................................
Equipment.................................................................
128,000
78,000
9,000
215,000
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PE 10–6B
a.
$90,000 = $450,000 × [(1/10) × 2)] = $450,000 × 20%
b. $31,500 gain, computed as follows:
Cost ....................................................
Less: First-year depreciation ...........
Second-year depreciation ......
Book value at end of second year....
$450,000
(90,000)
(72,000) [($450,000 – $90,000) × 20%]
$288,000
Gain on sale ($319,500 – $288,000) = $31,500
c.
Cash................................................................................
Accumulated Depreciation—Equipment .....................
Equipment.................................................................
Gain on Sale of Equipment......................................
319,500
162,000
450,000
31,500
PE 10–7A
a.
$0.36 per ton = $90,000,000/250,000,000 tons
b. $10,800,000 = (30,000,000 tons × $0.36 per ton)
c.
Dec. 31
Depletion Expense ....................................... 10,800,000
Accumulated Depletion ..........................
10,800,000
Depletion of mineral deposit.
PE 10–7B
a.
$0.75 per ton = $300,000,000/400,000,000 tons
b. $63,000,000 = (84,000,000 tons × $0.75 per ton)
c.
Dec. 31
Depletion Expense ....................................... 63,000,000
Accumulated Depletion ..........................
63,000,000
Depletion of mineral deposit.
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PE 10–8A
a.
Dec. 31
b. Dec. 31
Loss from Impaired Goodwill......................
Goodwill ..................................................
Impaired goodwill.
750,000
Amortization Expense—Patents .................
Patents.....................................................
Amortized patent rights
[($864,000/18) × 5/12].
20,000
Loss from Impaired Goodwill......................
Goodwill ..................................................
Impaired goodwill.
1,200,000
Amortization Expense—Patents .................
Patents.....................................................
Amortized patent rights
[($288,000/12) × 9/12].
18,000
750,000
20,000
PE 10–8B
a.
Dec. 31
b. Dec. 31
1,200,000
18,000
PE 10–9A
a.
Fixed Asset Turnover:
Net sales...............................
Fixed assets:
Beginning of year ...........
End of year......................
Average fixed assets...........
2012
2011
$3,572,000
$3,526,000
$900,000
$980,000
$940,000
$820,000
$900,000
$860,000
[($900,000 + $980,000) ÷ 2] [($820,000 + $900,000) ÷ 2]
Fixed asset turnover ...........
3.8
4.1
($3,572,000 ÷ $940,000)
($3,526,000 ÷ $860,000)
b. The decrease in the fixed asset turnover ratio from 4.1 to 3.8 indicates an unfavorable trend in the efficiency of using fixed assets to generate sales.
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PE 10–9B
a.
Fixed Asset Turnover:
Revenue................................
Fixed assets:
Beginning of year ...........
End of year......................
Average fixed assets...........
2012
2011
$740,000
$520,000
$425,000
$500,000
$462,500
$375,000
$425,000
$400,000
[($425,000 + $500,000) ÷ 2] [($375,000 + $425,000) ÷ 2]
Fixed asset turnover ...........
1.6
1.3
($740,000 ÷ $462,500)
($520,000 ÷ $400,000)
b. The increase in the fixed asset turnover ratio from 1.3 to 1.6 indicates a favorable trend in the efficiency of using fixed assets to generate sales.
584
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EXERCISES
Ex. 10–1
a.
New printing press: 1, 2, 3, 4, 5
b. Used printing press: 7, 8, 9, 10
Ex. 10–2
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. 10–3
Initial cost of land ($25,000 + $300,000) ....................
Plus: Legal fees ..........................................................
Delinquent taxes ...............................................
Demolition of building ......................................
Less salvage of materials...........................................
Cost of land .................................................................
$325,000
$ 2,100
14,000
9,000
25,100
$350,100
3,500
$346,600
Ex. 10–4
Capital expenditures: 1, 2, 3, 4, 5, 8, 10
Revenue expenditures: 6, 7, 9
Ex. 10–5
Capital expenditures: 1, 2, 3, 4, 6, 10
Revenue expenditures: 5, 7, 8, 9
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Ex. 10–6
Feb.
4 Accumulated Depreciation—Delivery Truck ....
Cash................................................................
4,300
6 Delivery Truck .....................................................
Cash................................................................
1,900
Sept. 10 Repairs and Maintenance Expense ...................
Cash................................................................
60
May
4,300
1,900
60
Ex. 10–7
a. No. The $7,500,000 represents the original cost of the equipment. Its replacement cost, which may be more or less than $7,500,000, is not reported in the
financial statements.
b. No. The $6,175,000 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. 10–8
(a) 25% (1/4), (b) 12.5% (1/8), (c) 10% (1/10), (d) 6.25% (1/16), (e) 4% (1/25), (f) 2.5%
(1/40), (g) 2% (1/50)
Ex. 10–9
$6,625 [($120,000 – $14,000)/16]
Ex. 10–10
$ 185 ,000 − $ 37,000
= $3.70 depreciation per hour
40,000 hours
140 hours at $3.70 = $518 depreciation for February
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Ex. 10–11
a.
Depreciation per Rate per Mile:
Truck #1
($75,000 – $15,000)/200,000 = $0.30
Truck #2
($38,000 – $3,000)/200,000 = $0.175
Truck #3
($72,900 – $9,900)/300,000 = $0.21
Truck #4
($90,000 – $20,000)/250,000 = $0.28
Truck No.
Rate per Mile
Credit to
Accumulated
Depreciation
Miles Operated
1
30.0 cents
19,500
2
17.5
36,000
3
21.0
25,000
4
28.0
26,000
Total .............................................................................................
$ 5,850
6,300
2,100*
7,280
$21,530
*Mileage depreciation of $5,250 (21 cents × 25,000) is limited to $2,100, which
reduces the book value of the truck to $9,900, its residual value.
b. Depreciation Expense—Trucks ....................................
Accumulated Depreciation—Trucks.......................
Truck depreciation.
21,530
Ex. 10–12
First Year
a. 4% of $80,000 = $3,200
Second Year
4% of $80,000 = $3,200
or
($80,000/25) = $3,200
b. 8% of $80,000 = $6,400
or
($80,000/25) = $3,200
8% of ($80,000 – $6,400) = $5,888
Ex. 10–13
a.
6 1/4% of ($344,000 – $50,000) = $18,375 or [($344,000 – $50,000)/16]
b. Year 1: 12.5% of $344,000 = $43,000
Year 2: 12.5% of ($344,000 – $43,000) = $37,625
587
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21,530
Ex. 10–14
a.
Year 1: 9/12 × [($64,000 – $4,000)/8] = $5,625
Year 2: ($64,000 – $4,000)/8 = $7,500
b. Year 1: 9/12 × 25% of $64,000 = $12,000
Year 2: 25% of ($64,000 – $12,000) = $13,000
Ex. 10–15
a. $16,250 [($900,000 – $250,000)/40]
b. $510,000 [$900,000 – ($16,250 × 24 yrs.)]
c.
$30,000 [($510,000 – $240,000)/9 yrs.]
Ex. 10–16
a.
June 30 Carpet............................................................
Cash .........................................................
15,000
b. Dec. 31 Depreciation Expense..................................
Accumulated Depreciation.....................
Carpet depreciation
[($15,000/12 years) × 1/2].
625
15,000
625
Ex. 10–17
a.
Cost of equipment ....................................................................
Accumulated depreciation at December 31, 2012
(4 years at $21,250* per year) .............................................
Book value at December 31, 2010 ...........................................
*($380,000 – $40,000)/16 = $21,250
$380,000
85,000
$295,000
b. (1) Depreciation Expense—Equipment ......................
Accumulated Depreciation—Equipment .........
Truck depreciation ($21,250 × 6/12 = $10,625).
10,625
(2) Cash .........................................................................
Accumulated Depreciation—Equipment...............
Loss on Sale of Equipment....................................
Equipment ..........................................................
*($85,000 + $10,625 = $95,625)
270,000
95,625*
14,375
10,625
588
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380,000
Ex. 10–18
a.
2009 depreciation expense: $40,000 [($425,000 – $65,000)/9]
2010 depreciation expense: $40,000
2011 depreciation expense: $40,000
b. $305,000 [$425,000 – ($40,000 × 3)]
c.
Cash................................................................................
Accumulated Depreciation—Equipment .....................
Loss on Disposal of Fixed Assets ...............................
Equipment.................................................................
290,000
120,000
15,000
d. Cash................................................................................
Accumulated Depreciation—Equipment .....................
Equipment.................................................................
Gain on Sale of Equipment......................................
310,000
120,000
425,000
425,000
5,000
Ex. 10–19
a.
$15,000,000/120,000,000 tons = $0.125 depletion per ton
24,000,000 × $0.125 = $3,000,000 depletion expense
b. Depletion Expense.........................................................
Accumulated Depletion ...........................................
Depletion of mineral deposit.
3,000,000
3,000,000
Ex. 10–20
a.
($300,000/12) + ($72,000/9) = $33,000 total patent expense
b. Amortization Expense—Patents ..................................
Patents ......................................................................
Amortized patent rights ($25,000 + $8,000).
33,000
589
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33,000
Ex. 10–21
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
$ 955
1,932
115
1,665
$4,667
1,713
$2,954
$ 810
1,491
122
1,324
$3,747
1,292
$2,455
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 $920 million ($4,667 – $3,747) of additional fixed assets, which was offset by the additional depreciation expense
of $421 million ($1,713 – $1,292) 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.
Ex. 10–22
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.
590
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Ex. 10–23
a.
Fixed Asset Turnover Ratio =
Revenue
Average Book Value of Fixed Assets
Fixed Asset Turnover Ratio =
$107,808
($91,466 + $86,546)/2
Fixed Asset Turnover Ratio = 1.21
b. Verizon earns $1.21 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 asset turnover ratio is
slightly lower at 1.10. Thus, Verizon is using its fixed assets slightly more
efficiently than the industry as a whole.
Ex. 10–24
a.
Best Buy: 12.04 ($45,015/$3,740)
RadioShack: 13.54 ($4,225/$312)
b. RadioShack’s fixed asset turnover ratio of 13.54 is higher than Best Buy’s
fixed asset turnover ratio of 12.04. Thus, RadioShack is generating $1.50
($13.54 – $12.04) more revenue for each dollar of fixed assets than is Best
Buy. On this basis, RadioShack is managing its fixed assets slightly more
efficiently than is Best Buy.
Appendix Ex. 10–25
a.
Price (fair market value) of new equipment ...............................
Trade-in allowance of old equipment .........................................
Cash paid on the date of exchange ............................................
$400,000
175,000
$225,000
b.
Price (fair market value) of new equipment ..............
Less assets given up in exchange:
Book value of old equipment..............................
Cash paid on the exchange ................................
Gain on exchange of equipment................................
$400,000
$160,000
225,000
385,000
$ 15,000
591
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Appendix Ex. 10–26
a.
Price (fair market value) of new equipment ...............................
Trade-in allowance of old equipment .........................................
Cash paid on the date of exchange ............................................
b. Price (fair market value) of new equipment ................
Less assets given up in exchange:
Book value of old equipment................................
Cash paid on the exchange ..................................
Loss on exchange of equipment..................................
$400,000
175,000
$225,000
$400,000
$185,000
225,000
410,000
$ 10,000
Appendix Ex. 10–27
a.
Depreciation Expense—Equipment .............................
Accumulated Depreciation—Equipment ................
Equipment depreciation ($18,000 × 3/12).
4,500
b. Accumulated Depreciation—Equipment .....................
Equipment ......................................................................
Loss on Exchange of Fixed Assets..............................
Equipment.................................................................
Cash ..........................................................................
220,500
350,000
9,500
4,500
280,000
300,000
Appendix Ex. 10–28
a.
Depreciation Expense—Trucks ....................................
Accumulated Depreciation—Trucks.......................
Truck depreciation ($7,500 × 6/12).
3,750
b. Accumulated Depreciation—Trucks ............................
Trucks.............................................................................
Trucks .......................................................................
Cash ..........................................................................
Gain on Exchange of Fixed Assets ........................
45,750
80,000
3,750
592
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60,000
65,000
750
PROBLEMS
Prob. 10–1A
1.
Item
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
Land
$ 3,000
350,000
18,000
5,000
(3,000)*
12,000
Land
Improvements
Building
$
Other
Accounts
4,200
17,500
44,000
$(750,000)*
5,500
$15,000
9,000
1,000
2,500
(6,000)*
2.
$402,500
$25,000
800,000
37,500
(350)*
$885,350
*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.
4. Since Land Improvements are depreciated, depreciation expense of $1,750
($17,500 × 1/20 × 2) would be overstated and net income would be understated by $1,750 on the income statement. On the balance sheet, Land would
be understated by $17,500, Land Improvements would be overstated by
$15,750 ($17,500 – $1,750), and Owner’s Capital would be understated by
$1,750.
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Prob. 10–2A
1.
Year
2010
2011
2012
Total
Depreciation Expense
a. Straightb. Units-ofLine
Production
Method
Method
$31,250
31,250
31,250
$93,750
$35,625
31,500
26,625
$93,750
c. DoubleDeclining-Balance
Method
$67,500
22,500
3,750
$93,750
Calculations:
Straight-line method:
($101,250 – $7,500)/3 = $31,250 each year
Units-of-production method:
($101,250 – $7,500)/25,000 hours = $3.75 per hour
2010: 9,500 hours @ $3.75 = $35,625
2011: 8,400 hours @ $3.75 = $31,500
2012: 7,100 hours @ $3.75 = $26,625
Double-declining-balance method:
2010: $101,250 × 2/3 = $67,500
2011: ($101,250 – $67,500) × 2/3 = $22,500
2012: ($101,250 – $67,500 – $22,500 – $7,500*) = $3,750
*Book value should not be reduced below the residual value of $7,500.
2.
The double-declining-balance method yields the most depreciation expense
in 2010 of $67,500.
3.
All three depreciation methods yield the same total depreciation over the
three-year life of the equipment of $93,750, which is the cost of the equipment
of $101,250 less the residual value of $7,500.
594
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Prob. 10–3A
a.
Straight-line method:
2010:
[($135,000 – $6,000)/3] × 1/2 ...........................................
$21,500
2011:
($135,000 – $6,000)/3.......................................................
43,000
2012:
($135,000 – $6,000)/3.......................................................
43,000
2013:
[($135,000 – $6,000)/3] × 1/2 ...........................................
21,500
b. Units-of-production method:
2010:
1,500 hours @ $10.75* ....................................................
$16,125
2011:
3,500 hours @ $10.75 .....................................................
37,625
2012:
5,000 hours @ $10.75 .....................................................
53,750
2013:
2,000 hours @ $10.75 .....................................................
21,500
*($135,000 – $6,000)/12,000 hours = $10.75 per hour
c.
Double-declining-balance method:
2010:
$135,000 × 2/3 × 1/2.........................................................
$45,000
2011:
($135,000 – $45,000) × 2/3 ..............................................
60,000
2012:
($135,000 – $45,000 – $60,000) × 2/3..............................
20,000
2013:
($135,000 – $45,000 – $60,000 – $20,000 – $6,000*) .....
4,000
*Book value should not be reduced below $6,000, the residual value.
595
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Prob. 10–4A
1.
Accumulated
Depreciation,
End of Year
Book Value,
End of Year
a.
1
$144,000*
2
144,000
3
144,000
4
144,000
5
144,000
*[($787,500 – $67,500)/5]
$144,000
288,000
432,000
576,000
720,000
$643,500
499,500
355,500
211,500
67,500
b. 1 $315,000 [$787,500 × (1/5) × 2]
2 189,000 [$472,500 × (1/5) × 2]
3 113,400 [$283,500 × (1/5) × 2]
4
68,040 [$170,100 × (1/5) × 2]
5
34,560* [$787,500 – $685,440 – $67,500]
$315,000
504,000
617,400
685,440
720,000
$472,500
283,500
170,100
102,060
67,500
Year
Depreciation
Expense
*Book value should not be reduced below $67,500, the residual value.
2.
3.
Cash................................................................................
Accumulated Depreciation—Equipment .....................
Equipment.................................................................
Gain on Sale of Equipment......................................
*($115,000 – $102,060)
115,000
685,440
Cash................................................................................
Accumulated Depreciation—Equipment .....................
Loss on Sale of Equipment...........................................
Equipment.................................................................
*($102,060 – $98,900)
98,900
685,440
3,160*
787,500
12,940*
596
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accessible website, in whole or in part.
787,500
Prob. 10–5A
2010
Jan.
9 Delivery Equipment ......................................................
Cash .........................................................................
30,000
17 Truck Repair Expense..................................................
Cash .........................................................................
400
31 Depreciation Expense—Delivery Equipment .............
Accumulated Depreciation—Delivery Equipment
Delivery equipment depreciation.
[$30,000 × (1/4 × 2)]
15,000
2 Delivery Equipment ......................................................
Cash .........................................................................
48,000
1 Depreciation Expense—Delivery Equipment .............
Accumulated Depreciation—Delivery Equipment
Delivery equipment depreciation.
[$30,000 – $15,000 × (1/4 × 2) × 7/12]
4,375
1 Accumulated Depreciation—Delivery Equipment .....
Cash...............................................................................
Delivery Equipment.................................................
Gain on Sale of Delivery Equipment......................
19,375
12,500
Sept. 23 Truck Repair Expense..................................................
Cash .........................................................................
325
Mar.
Dec.
2011
Jan.
Aug.
Dec.
31 Depreciation Expense—Delivery Equipment .............
Accumulated Depreciation—Delivery Equipment
Delivery equipment depreciation.
[$48,000 × (1/5 × 2)]
30,000
400
15,000
48,000
4,375
30,000
1,875
325
19,200
597
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accessible website, in whole or in part.
19,200
Prob. 10–5A
2012
July
Oct.
Dec.
(Concluded)
1 Delivery Equipment ......................................................
Cash .........................................................................
52,000
2 Depreciation Expense—Delivery Equipment .............
Accumulated Depreciation—Delivery Equipment
Delivery equipment depreciation.
[$48,000 – $19,200 × (1/5 × 2) × 9/12]
8,640
2 Cash...............................................................................
Accumulated Depreciation—Delivery Equipment .....
Loss on Sale of Delivery Equipment...........................
Delivery Equipment.................................................
17,000
27,840
3,160
31 Depreciation Expense—Delivery Equipment .............
Accumulated Depreciation—Delivery Equipment
Delivery equipment depreciation.
[$52,000 × (1/8 × 2) × 1/2]
6,500
52,000
8,640
48,000
598
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accessible website, in whole or in part.
6,500
Prob. 10–6A
1.
a. $864,000/3,600,000 board feet = $0.24 per board foot; 1,500,000 board feet
× $0.24 per board foot = $360,000
b. Loss on impairment of goodwill, $4,000,000
c. $1,170,000/12 years = $97,500; 3/4 of $97,500 = $73,125
2.
a. Depletion Expense ...................................................
Accumulated Depletion ......................................
Depletion of timber rights.
360,000
b. Loss on Impairment of Goodwill.............................
Goodwill...............................................................
4,000,000
360,000
4,000,000
c. Amortization Expense—Patents .............................
73,125*
Patents.................................................................
Patent amortization.
*($1,170,000/12 years) = $97,500; $97,500 × 3/4 = $73,125
599
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accessible website, in whole or in part.
73,125*
Prob. 10–1B
1.
Item
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
Land
$ 5,000
540,000
2,500
15,000
Land
Improvements
Building
Other
Accounts
$ 36,000
10,000
(4,000)*
20,000
6,000
$(750,000)*
9,000
3,000
2,000
$12,000
14,500
45,000
(3,000)*
2.
$597,500
$26,500
800,000
(1,000)*
$886,000
*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.
4.
Since Land Improvements are depreciated, depreciation expense of $2,900
($14,500 × 1/10 × 2) would be understated and net income would be overstated by $2,900 on the income statement. On the balance sheet, Land would
be overstated by $14,500, Land Improvements would be understated by
$11,600 ($14,500 – $2,900), and Owner’s Capital would be overstated by
$2,900.
600
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accessible website, in whole or in part.
Prob. 10–2B
1.
Year
2011
2012
2013
2014
Total
Depreciation Expense
a. Straightb. Units-ofLine
Production
Method
Method
$100,000
100,000
100,000
100000
$400,000
$120,000
160,000
100,000
20,000
$400,000
c. DoubleDeclining-Balance
Method
$225,000
112,500
56,250
6,250*
$400,000
Calculations:
Straight-line method:
($450,000 – $50,000)/4 = $100,000 each year
Units-of-production method:
($450,000 – $50,000)/10,000 hours = $40 per hour
2011: 3,000 hours @ $40 = $120,000
2012: 4,000 hours @ $40 = $160,000
2013: 2,500 hours @ $40 = $100,000
2014: 500 hours @ $40 = $20,000
Double-declining-balance method:
2011: $450,000 × 50% = $225,000
2012: ($450,000 – $225,000) × 50% = $112,500
2013: ($450,000 – $225,000 – $112,500) × 50% = $56,250
2014: ($450,000 – $225,000 – $112,500 – $56,250 – $50,000*) = $6,250
*Book value should not be reduced below the residual value of $50,000.
2.
The double-declining-balance method yields the most depreciation expense
in 2011 of $225,000.
3.
All three depreciation methods yield the same total depreciation over the
four-year life of the equipment of $400,000, which is the cost of the equipment
of $450,000 less the residual value of $50,000.
601
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accessible website, in whole or in part.
Prob. 10–3B
a.
Straight-line method:
2010: [($72,000 – $2,700)/3] × 9/12 .............................................
2011: ($72,000 – $2,700)/3...........................................................
2012: ($72,000 – $2,700)/3...........................................................
2013: [($72,000 – $2,700)/3] × 3/12 .............................................
$17,325
23,100
23,100
5,775
b. Units-of-production method:
2010: 2,400 hours @ $7.70* ........................................................
2011: 4,000 hours @ $7.70..........................................................
2012: 2,000 hours @ $7.70..........................................................
2013: 600 hours @ $7.70..........................................................
$18,480
30,800
15,400
4,620
*($72,000 – $2,700)/9,000 hours = $7.70 per hour
c.
Double-declining-balance method:
2010: $72,000 × 2/3 × 9/12 ...........................................................
2011: ($72,000 – $36,000) × 2/3...................................................
2012: ($72,000 – $36,000 – $24,000) × 2/3..................................
2013: ($72,000 – $36,000 – $24,000 – $8,000 – $2,700*)............
*Book value should not be reduced below $2,700, the residual value.
602
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accessible website, in whole or in part.
$36,000
24,000
8,000
1,300
Prob. 10–4B
1.
Accumulated
Depreciation,
End of Year
Book Value,
End of Year
1
$16,650*
2
16,650
3
16,650
4
16,650
*[($72,000 – $5,400)/4]
$16,650
33,300
49,950
66,600
$55,350
38,700
22,050
5,400
b.
$36,000
54,000
63,000
66,600
$36,000
18,000
9,000
5,400
Year
Depreciation
Expense
a.
1
2
3
4
$36,000 [$72,000 × (1/4) × 2]
18,000 [$36,000 × (1/4) × 2]
9,000 [$18,000 × (1/4) × 2]
3,600* [$72,000 – $63,000 – $5,400]
*Book value should not be reduced below $5,400, the residual value.
2.
3.
Cash................................................................................
Accumulated Depreciation—Equipment .....................
Equipment.................................................................
Gain on Sale of Equipment......................................
*($13,750 – $9,000)
13,750
63,000
Cash................................................................................
Accumulated Depreciation—Equipment .....................
Loss on Sale of Equipment...........................................
Equipment.................................................................
*($9,000 – $3,700)
3,700
63,000
5,300*
72,000
4,750*
603
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accessible website, in whole or in part.
72,000
Prob. 10–5B
2010
Jan.
Feb.
Dec.
2011
Jan.
Mar.
Apr.
Dec.
4 Delivery Equipment ......................................................
Cash .........................................................................
54,000
24 Truck Repair Expense..................................................
Cash .........................................................................
275
31 Depreciation Expense—Delivery Equipment .............
Accumulated Depreciation—Delivery Equipment
Delivery equipment depreciation.
[$54,000 × (1/8 × 2)]
13,500
3 Delivery Equipment ......................................................
Cash .........................................................................
60,000
7 Truck Repair Expense..................................................
Cash .........................................................................
300
30 Depreciation Expense—Delivery Equipment .............
Accum. Depreciation—Delivery Equipment..........
Delivery equipment depreciation.
[$54,000 – $13,500 × (1/8 × 2) × 4/12]
3,375
30 Accum. Depreciation—Delivery Equipment ...............
Cash...............................................................................
Loss on Sale of Delivery Equipment...........................
Delivery Equipment.................................................
16,875
35,000
2,125
31 Depreciation Expense—Delivery Equipment .............
Accum. Depreciation—Delivery Equipment..........
Delivery equipment depreciation.
[($60,000 × (1/10 × 2)]
12,000
54,000
275
13,500
60,000
300
3,375
54,000
604
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accessible website, in whole or in part.
12,000
Prob. 10–5B
2012
July
Oct.
Dec.
(Concluded)
1 Delivery Equipment .............................................
Cash ................................................................
64,000
7 Depreciation Expense—Delivery Equipment ....
Accum. Depreciation—Delivery Equipment.
Delivery equipment depreciation.
[$60,000 – $12,000 × (1/10 × 2) × 9/12]
7,200
7 Cash......................................................................
Accum. Depreciation—Delivery Equipment ......
Delivery Equipment........................................
Gain on Sale of Delivery Equipment.............
45,000
19,200
31 Depreciation Expense—Delivery Equipment ....
Accum. Depreciation—Delivery Equipment.
Delivery equipment depreciation.
[$64,000 × (1/10 × 2) × 6/12]
6,400
64,000
7,200
60,000
4,200
605
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accessible website, in whole or in part.
6,400
Prob. 10–6B
1.
a. Loss on impairment of goodwill, $1,800,000
b. $900,000/10 years = $90,000; 1/2 of $90,000 = $45,000
c. $1,560,000/12,000,000 board feet = $0.13 per board foot; 3,200,000 board
feet × $0.13 per board foot = $416,000
2.
a. Loss on Impairment of Goodwill.............................
Goodwill...............................................................
1,800,000
b. Amortization Expense—Patents .............................
Patents.................................................................
Patent amortization.
45,000
c. Depletion Expense ...................................................
Accumulated Depletion ......................................
Depletion of timber rights.
416,000
1,800,000
45,000
606
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accessible website, in whole or in part.
416,000
CASES & PROJECTS
CP 10–1
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 Rosa Salinas to use Zebra
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 Rosa’s clients to call her during regular working hours. Such calls may interrupt or interfere with Rosa’s ability to carry out her assigned duties for Zebra Consulting Co.
CP 10–2
You should explain to Jay and Cora 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 Jay and Cora 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.
607
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accessible website, in whole or in part.
CP 10–3
1.
a. Straight-line method:
2010: ($500,000/5) × 1/2 .......................................................................
2011: ($500,000/5) ................................................................................
2012: ($500,000/5) ................................................................................
2013: ($500,000/5) ................................................................................
2014: ($500,000/5) ................................................................................
2015: ($500,000/5) × 1/2 .......................................................................
$ 50,000
100,000
100,000
100,000
100,000
50,000
b. MACRS:
2010: ($500,000 × 20%)........................................................................
2011: ($500,000 × 32%)........................................................................
2012: ($500,000 × 19.2%).....................................................................
2013: ($500,000 × 11.5%).....................................................................
2014: ($500,000 × 11.5%).....................................................................
2015: ($500,000 × 5.8%).......................................................................
608
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accessible website, in whole or in part.
$100,000
160,000
96,000
57,500
57,500
29,000
CP 10–3
(Continued)
2.
a. Straight-line method:
Year
2010
2011
2012
2013
2014
2015
Income before depreciation..........
$900,000
$900,000
$900,000
$900,000
$900,000
$900,000
Depreciation expense ...................
50,000
100,000
100,000
100,000
100,000
50,000
Income before income tax ............
$850,000
$800,000
$800,000
$800,000
$800,000
$850,000
Income tax......................................
340,000
320,000
320,000
320,000
320,000
340,000
Net income .....................................
$510,000
$480,000
$480,000
$480,000
$480,000
$510,000
b. MACRS:
Year
2010
2011
2012
2013
2014
2015
Income before depreciation..........
$900,000
$900,000
$900,000
$900,000
$900,000
$900,000
Depreciation expense ...................
100,000
160,000
96,000
57,500
57,500
29,000
Income before income tax ............
$800,000
$740,000
$804,000
$842,500
$842,500
$871,000
Income tax......................................
320,000
296,000
321,600
337,000
337,000
348,400
Net income .....................................
$480,000
$444,000
$482,400
$505,500
$505,500
$522,600
609
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accessible website, in whole or in part.
CP 10–3
3.
(Concluded)
For financial reporting purposes, Paul 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, Paul should consider selecting
the method that will minimize taxes. Based on 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 2010 the income tax
expense using MACRS is $320,000, which is $20,000 ($340,000 – $320,000)
less than the income tax expense using the straight-line depreciation of
$340,000. Atlas 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.
CP 10–4
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. You may
wish to divide the class into three groups to report back on patents, copyrights,
and trademarks separately.
The following is some information on patents, copyrights, and trademarks that
you may find helpful in your discussions.
Patents
A patent is requested by filing a written application at the relevant patent office.
The person or company filing the application is referred to as “the applicant.” The
applicant may be the inventor or its assignee. The application contains a description of how to make and use the invention that must provide sufficient detail for a
person skilled in the art (i.e., the relevant area of technology) to make and use the
invention. In some countries, there are requirements for providing specific information such as the usefulness of the invention, the best mode of performing the
invention known to the inventor, or the technical problem or problems solved by
the invention. Drawings illustrating the invention may also be provided.
610
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accessible website, in whole or in part.
CP 10–4
(Concluded)
The application also includes one or more claims, although it is not always a requirement to submit these when first filing the application. The claims set out
what the applicant is seeking to protect in that they define what the patent owner
has a right to exclude others from making, using, or selling, as the case may be.
In other words, the claims define what a patent covers or the “scope of protection.”
After filing, an application is often referred to as “patent pending.” While this term
does not confer legal protection, and a patent cannot be enforced until granted, it
serves to provide warning to potential infringers that if the patent is issued, they
may be liable for damages.
Source: http://en.wikipedia.org/wiki/Patent#Application_and_prosecution.
Copyright
While copyright in the United States automatically attaches upon the creation of
an original work of authorship, registration with the Copyright Office puts a copyright holder in a better position if litigation arises over the copyright. A copyright
holder desiring to register his or her copyright should do the following:
1.
Obtain and complete appropriate form.
2.
Prepare clear rendition of material being submitted for copyright.
3.
Send both documents to the U.S. Copyright Office in Washington, D.C.
Source: http://en.wikipedia.org/wiki/United_States_copyright_law#Procedural_issues.
Trademark
The law considers a trademark to be a form of property. Proprietary rights in
relation to a trademark may be established through actual use in the marketplace,
or through registration of the mark with the trademarks office (or “trademarks
registry”) of a particular jurisdiction. In some jurisdictions, trademark rights can
be established through either or both means. Certain jurisdictions generally do
not recognize trademarks rights arising through use. In the United States, the
only way to qualify for a federally registered trademark is to first use the
trademark in commerce.[5] If trademark owners do not hold registrations for their
marks in such jurisdictions, the extent to which they will be able to enforce their
rights through trademark infringement proceedings will therefore be limited. In
cases of dispute, this disparity of rights is often referred to as “first to file” as
opposed to “first to use.” Other countries such as Germany offer a limited
amount of common law rights for unregistered marks where to gain protection,
the goods or services must occupy a highly significant position in the
marketplace—where this could be 40% or more market share for sales in the
particular class of goods or services.
Source: http://en.wikipedia.org/wiki/Trademark#Maintaining_rights.
611
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accessible website, in whole or in part.
CP 10–5
a.
Fixed Asset Turnover =
Wal-Mart:
Revenue
Average Book Value of Fixed Assets
$405,607
= 4.21
$96,335
Occidental Petroleum:
$15,403
= 0.47
$32,856
Comcast Corporation:
$34,256
= 1.43
$24,034
b. The fixed asset turnover measures the amount of revenue earned per dollar of
fixed assets. Wal-Mart earns $4.21 of revenue for every dollar of fixed assets,
while Occidental earns $0.47 and Comcast Corporation earns $1.43 in revenue for every dollar of fixed assets. Occidental 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 Occidental 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 Occidental, 31.2%; Comcast, 14.3%; and Wal-Mart,
5.4%. Thus, the difference between the fixed asset turnovers seems reasonable. Generally, companies with very low fixed asset turnovers, such as gas
and oil exploration and production (Occidental) and cable communications
(Comcast), 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.
612
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accessible website, in whole or in part.