PRACTICE EXERCISES
PE 9–1A
Sept. 30 Delivery Truck .....................................................
Cash................................................................
1,425
30 Repairs and Maintenance Expense ...................
Cash................................................................
35
1,425
35
PE 9–1B
June
9 Accumulated Depreciation—Delivery Van........
Cash................................................................
1,300
9 Delivery Van ........................................................
Cash................................................................
600
PE 9–2A
a. $245,000 ($275,000 – $30,000)
b. 10% = (1/10)
c. $24,500 ($245,000 × 10%), or ($245,000/10 years)
PE 9–2B
a. $920,000 ($980,000 – $60,000)
b. 5% = (1/20)
c. $46,000 ($920,000 × 5%), or ($920,000/20 years)
PE 9–3A
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)
1,300
600
PE 9–3B
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 9–4A
a. 25% = [(1/8) × 2]
b. $47,500 ($190,000 × 25%)
PE 9–4B
a. 4% = [(1/50) × 2]
b. $32,800 ($820,000 × 4%)
PE 9–5A
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 9–5B
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 9–6A
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
PE 9–6B
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 9–7A
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 9–7B
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.
PE 9–8A
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 9–8B
a.
Dec. 31
b. Dec. 31
1,200,000
18,000
PE 9–9A
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.
PE 9–9B
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.
EXERCISES
Ex. 9–1
a. New printing press: 1, 2, 3, 4, 5
b. Used printing press: 7, 8, 9, 10
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 + $300,000) ....................
Plus: Legal fees ..........................................................
Delinquent taxes ...............................................
Demolition of building ......................................
Less salvage of materials ...........................................
Cost of land .................................................................
Ex. 9–4
Capital expenditures: 1, 2, 3, 4, 5, 8, 10
Revenue expenditures: 6, 7, 9
Ex. 9–5
Capital expenditures: 1, 2, 3, 4, 6, 10
Revenue expenditures: 5, 7, 8, 9
$325,000
$ 2,100
14,000
9,000
25,100
$350,100
3,500
$346,600
Ex. 9–6
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. 9–7
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. 9–8
(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. 9–9
$6,625 [($120,000 – $14,000)/16]
Ex. 9–10
$185,000  $37,000
= $3.70 depreciation per hour
40,000 hours
140 hours at $3.70 = $518 depreciation for February
Ex. 9–11
a. Depreciation per Rate per Mile:
Truck #1
Truck #2
Truck #3
Truck #4
($75,000 – $15,000)/200,000 = $0.30
($38,000 – $3,000)/200,000 = $0.175
($72,900 – $9,900)/300,000 = $0.21
($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. 9–12
a.
First Year
4% of $80,000 = $3,200
Second Year
4% of $80,000 = $3,200
or
b.
or
($80,000/25) = $3,200
($80,000/25) = $3,200
8% of $80,000 = $6,400
8% of ($80,000 – $6,400) = $5,888
Ex. 9–13
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
21,530
Ex. 9–14
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. 9–15
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. 9–16
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. 9–17
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
380,000
Ex. 9–18
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. 9–19
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. 9–20
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
33,000
Ex. 9–21
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. 9–22
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.
Ex. 9–23
a. Fixed Asset Turnover Ratio =
Fixed Asset Turnover Ratio =
Revenue
Average Book Value of Fixed Assets
$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. 9–24
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. 9–25
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
Appendix Ex. 9–26
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. 9–27
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. 9–28
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
60,000
65,000
750