CHAPTER 10 FIXED ASSETS AND INTANGIBLE ASSETS Content... · DISCUSSION QUESTIONS. ... × 12.5%]...

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1. a. Property, plant, and equipment or Fixed assetsb. 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. $1,100,000

4. Capital expenditures include the cost of acquiring fixed assets and the cost of improving an asset. These costs are recorded by increasing (debiting) a 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. 12 years

7. a. Nob. 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 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. It is used for depreciation for fixed assets acquired after 1986.

9. 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.

10. 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.

CHAPTER 10FIXED ASSETS AND INTANGIBLE ASSETS

DISCUSSION QUESTIONS

CHAPTER 10 Fixed Assets and Intangible Assets


PE 10–1A

7 Delivery Truck 1,675Cash 1,675

7 Repairs and Maintenance Expense 40Cash 40

PE 10–1B

14 Accumulated Depreciation—Delivery Van 2,300Cash 2,300

14 Delivery Van 450Cash 450

PE 10–2Aa. $295,000 ($340,000 – $45,000)b. 10.0% = (1 ÷ 10)c. $29,500 ($295,000 × 10.0%), or ($295,000 ÷ 10 years)

PE 10–2Ba. $1,150,000 ($1,450,000 – $300,000)b. 10% = (1 ÷ 10)c. $115,000 ($1,150,000 × 10%), or ($1,150,000 ÷ 10 years)

PE 10–3Aa. $390,000 ($420,000 – $30,000)b. $15.60 per hour ($390,000 ÷ 25,000 hours)c. $28,860 (1,850 hours × $15.60)

PE 10–3Ba. $57,000 ($69,000 – $12,000)b. $0.19 per mile ($57,000 ÷ 300,000 miles)c. $14,630 (77,000 miles × $0.19)

PRACTICE EXERCISES

Aug.

Feb.



PE 10–4Aa. 20.0% = [(1 ÷ 10) × 2]b. $35,000 ($175,000 × 20.0%)

PE 10–4Ba. 5% = [(1 ÷ 40) × 2]b. $68,750 ($1,375,000 × 5%)

PE 10–5Aa. $5,500 [($82,000 – $16,000) ÷ 12]b. $43,500 [$82,000 – ($5,500 × 7)]c. $5,250 [($43,500 – $12,000) ÷ 6]

PE 10–5Ba. $10,350 [($180,000 – $14,400) ÷ 16]b. $76,500 [$180,000 – ($10,350 × 10)]c. $8,250 [($76,500 – $10,500) ÷ 8]

PE 10–6Aa. $28,000 [($465,000 – $45,000) ÷ 15]

b. $6,000 loss {$235,000 – [$465,000 – ($28,000 × 8)]}

c. Cash 235,000Accumulated Depreciation—Equipment 224,000Loss on Sale of Equipment 6,000

Equipment 465,000



PE 10–6Ba. $75,000 = $600,000 × [(1 ÷ 16) × 2)] = $600,000 × 12.5%

b. $20,625 gain, computed as follows:

Cost…………………………………………… $600,000Less: First-year depreciation……………… (75,000)

Second-year depreciation………… (65,625) [($600,000 – $75,000) × 12.5%]Book value at end of second year………… $459,375

Gain on sale ($480,000 – $459,375) = $20,625

c. Cash 480,000Accumulated Depreciation—Equipment 140,625

Equipment 600,000Gain on Sale of Equipment 20,625

PE 10–7Aa. $0.30 per ton = $127,500,000 ÷ 425,000,000 tons

b. $12,600,000 = 42,000,000 tons × $0.30 per ton

c. Dec. 31 Depletion Expense 12,600,000Accumulated Depletion 12,600,000

Depletion of mineral deposit.

PE 10–7Ba. $1.04 per ton = $494,000,000 ÷ 475,000,000 tons

b. $32,760,000 = 31,500,000 tons × $1.04 per ton

c. Dec. 31 Depletion Expense 32,760,000Accumulated Depletion 32,760,000



PE 10–8A

a. Dec. 31 Loss from Impaired Goodwill 4,000,000Goodwill 4,000,000

Impaired goodwill.

b. Dec. 31 Amortization Expense—Patents 25,000Patents 25,000

Amortized patent rights[($900,000 ÷ 15) × 5 ÷ 12].

PE 10–8B

a. Dec. 31 Loss from Impaired Goodwill 6,000,000Goodwill 6,000,000

Impaired goodwill.

b. Dec. 31 Amortization Expense—Patents 93,750Patents 93,750

Amortized patent rights[($1,500,000 ÷ 12) × 9 ÷ 12].

PE 10–9A

a. Fixed Asset Turnover:

Sales………………………………Fixed assets:

Beginning of year……………End of year……………………

Average fixed assets……………

Fixed asset turnover……………

b. The decrease in the fixed asset turnover ratio from 3.2 to 2.9 indicates an unfavorable trend in the efficiency of using fixed assets to generate sales.

$1,600,000 $1,450,000$2,200,000 $1,600,000

($5,510,000 ÷ $1,900,000) ($4,880,000 ÷ $1,525,000)

[($1,600,000 + $2,200,000) ÷ 2] [($1,450,000 + $1,600,000) ÷ 2]

2.9 3.2

2016 2015

$5,510,000 $4,880,000

$1,900,000 $1,525,000




PE 10–9Ba. Fixed Asset Turnover:

Revenue………………………… Fixed assets:

Beginning of year………… End of year…………………

Average fixed assets…………

Fixed asset turnover…………

b. The increase in the fixed asset turnover ratio from 1.8 to 2.4 indicates a favorabletrend in the efficiency of using fixed assets to generate sales.

($1,668,000 ÷ $695,000) ($1,125,000 ÷ $625,000)

[($580,000 + $670,000) ÷ 2]

$ 720,000 $ 670,000$ 695,000 $ 625,000

2.4 1.8

2016 2015$1,668,000 $1,125,000

$ 670,000 $ 580,000

[($670,000 + $720,000) ÷ 2]



Ex. 10–1a. New printing press: 1, 2, 3, 5, 6b. Used printing press: 7, 8, 9, 11

Ex. 10–2a. 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 ($75,000 + $90,000)………………………… $165,000Plus: Legal fees………………………………………………… $ 2,500

Delinquent taxes………………………………………… 22,400Demolition of building………………………………… 14,500 39,400

$204,400Less salvage of materials……………………………………… 7,500Cost of land………………………………………………………… $196,900

Ex. 10–4Capital expenditures: 3, 4, 5, 6, 7, 9, 10Revenue expenditures: 1, 2, 8

Ex. 10–5Capital expenditures: 2, 3, 4, 8, 9, 10Revenue expenditures: 1, 5, 6, 7

EXERCISES



Ex. 10–6

Mar. 20 Accumulated Depreciation—Delivery Truck 1,890Cash 1,890

June 11 Delivery Truck 1,350Cash 1,350

Nov. 30 Repairs and Maintenance Expense 55Cash 55

Ex. 10–7a. No. The $44,500,000 represents the original cost of the equipment. Its

replacement cost, which may be more or less than $44,500,000, is not reported in the financial statements.

b. No. The $29,800,000 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$2,600 [($48,000 – $9,000) ÷ 15]

Ex. 10–10

156 hours at $4.50 = $702 depreciation for February

$180,000 – $18,00036,000 hours

= $4.50 depreciation per hour



Ex. 10–11a. Depreciation Rate per Mile:

Truck #1 ($80,000 – $15,000) ÷ 250,000 = $0.26Truck #2 ($54,000 – $6,000) ÷ 300,000 = $0.16Truck #3 ($72,900 – $10,900) ÷ 200,000 = $0.31Truck #4 ($90,000 – $22,800) ÷ 240,000 = $0.28

Miles Operated21,00033,5008,000

22,500Total………………………………………………………………

* Mileage depreciation of $2,480 (31 cents × 8,000) is limited to $1,860, which reducesthe book value of the truck to $10,900, its residual value.

b. Depreciation Expense—Trucks 18,980Accumulated Depreciation—Trucks 18,980

Truck depreciation.

Ex. 10–12

a.

b.

Ex. 10–13a. 5% of ($75,000 – $10,000) = $3,250 or [($75,000 – $10,000) ÷ 20]

b. Year 1: 10% of $75,000 = $7,500Year 2: 10% of ($75,000 – $7,500) = $6,750

Accumulated

6,300

Truck No.123

$0.260.160.310.28

$18,980

First Year4% of $120,000 = $4,800

Credit to

$ 5,4605,3601,860

4

Rate per Mile Depreciation

8% of $120,000 = $9,600

Second Year4% of $120,000 = $4,800

or$120,000 ÷ 25 = $4,800

8% of ($120,000 – $9,600) = $8,832

or$120,000 ÷ 25 = $4,800

*



Ex. 10–14a. Year 1: 9 ÷ 12 × [($40,000 – $8,000) ÷ 8] = $3,000

Year 2: ($40,000 – $8,000) ÷ 8 = $4,000

b. Year 1: 9 ÷ 12 × 25% of $40,000 = $7,500Year 2: 25% of ($40,000 – $7,500) = $8,125

Ex. 10–15a. $23,750 [($1,200,000 – $250,000) ÷ 40] or [($1,200,000 – $250,000) × 2.5%]b. $535,000 [$1,200,000 – ($23,750 × 28 yrs.)]c. $35,500 [($535,000 – $180,000) ÷ 10 yrs.]

Ex. 10–16

a. Apr. 30 Carpet 18,000Cash 18,000

b. Dec. 31 Depreciation Expense 800Accumulated Depreciation—Carpet 800

Carpet depreciation[($18,000 ÷ 15 years) × 8 ÷ 12].

Ex. 10–17a. Cost of equipment…………………………………………………………………… $140,000

Accumulated depreciation at December 31, 2016(4 years at $8,250* per year)……………………………………………………… 33,000

Book value at December 31, 2016………………………………………………… $107,000

* ($140,000 – $8,000) ÷ 16 = $8,250

b. (1) Depreciation Expense—Equipment 4,125Accumulated Depreciation—Equipment 4,125

Equipment depreciation($8,250 × 6 ÷ 12 = $4,125).

(2) Cash 96,700Accumulated Depreciation—Equipment* 37,125Loss on Sale of Equipment 6,175

Equipment 140,000

* $33,000 + $4,125 = $37,125



Ex. 10–18a. 2013 depreciation expense: $22,500 [($425,000 – $65,000) ÷ 16]

2014 depreciation expense: $22,5002015 depreciation expense: $22,500

b. $357,500 [$425,000 – ($22,500 × 3)]

c. Cash 340,000Accumulated Depreciation—Equipment 67,500Loss on Sale of Equipment 17,500

Equipment 425,000

d. Cash 372,500Accumulated Depreciation—Equipment 67,500

Equipment 425,000Gain on Sale of Equipment 15,000

Ex. 10–19a. $42,000,000 ÷ 20,000,000 tons = $2.10 depletion per ton

1,850,000 tons × $2.10 = $3,885,000 depletion expense

b. Depletion Expense 3,885,000Accumulated Depletion 3,885,000


Ex. 10–20a. ($882,000 ÷ 9) + ($45,000 ÷ 6) = $105,500 total patent expense

b. Amortization Expense—Patents 105,500Patents 105,500

Amortized patent rights ($98,000 + $7,500).



Ex. 10–21a. Property, Plant, and Equipment (in millions):

Current PrecedingYear Year

Land and buildings………………………………………………… $ 2,439 $ 2,059Machinery, equipment, and internal-use software…………… 15,743 6,926Office furniture and equipment………………………………… 241 184Other fixed assets related to leases…………………………… 3,464 2,599

$21,887 $11,768Less accumulated depreciation and amortization…………… 6,435 3,991Book value…………………………………………………………… $15,452 $ 7,777

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 $10,119 million ($21,887 – $11,768) of additional fixed assets, which was offset by theadditional depreciation expense of $2,444 million ($6,435 – $3,991) taken during the current year.

b. We would expect Apple’s book value of fixed assets to increase during theyear as its sales increase. Although additional depreciation expense willreduce the book value, most companies, such as Apple, invest in new assetsin an amount that is at least equal to the depreciation expense. However,during periods of economic downturn, companies purchase fewer fixedassets, and the book value of their fixed assets may decline.

Ex. 10–221. 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. 10–23

= 1.31

b. Verizon earns $1.31 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 more efficiently than the industry as a whole.

Ex. 10–24

a. Best Buy: 13.90 ($50,705 ÷ $3,647)

RadioShack: 16.70 ($4,258 ÷ $255)

b. RadioShack’s fixed asset turnover ratio of 16.70 is higher than Best Buy’s fixed asset turnover ratio of 13.90. Thus, RadioShack is generating $2.80 ($16.70 – $13.90) more revenue for each dollar of fixed assets than is Best Buy. On this basis, RadioShack is managing its fixed assets more efficiently than is Best Buy.

Ex. 10–25

a. Price (fair market value) of new equipment……………………… $275,000

Trade-in allowance of old equipment…………………………… 90,000

Cash paid on the date of exchange……………………………… $185,000

b. Fair market value (trade-in allowance) of old equipment…… $ 90,000

Less book value of old equipment………………………………… 68,000

Gain on exchange of equipment…………………………………… $ 22,000

or

Price (fair market value) of new equipment……………………… $275,000

Less assets given up in exchange:Book value of old equipment…………………………………… $ 68,000

Cash paid on the exchange…………………………………… 185,000 253,000

Gain on exchange of equipment…………………………………… $ 22,000

a.

Fixed Asset Turnover Ratio =

RevenueAverage Book Value of Fixed Assets

=Fixed Asset Turnover Ratio

Fixed Asset Turnover Ratio

$115,846($88,642 + $88,434) ÷ 2



Ex. 10–26

a. Price (fair market value) of new equipment……………………… $275,000

Trade-in allowance of old equipment…………………………… 90,000

Cash paid on the date of exchange……………………………… $185,000

b. Fair market value (trade-in allowance) of old equipment…… $ 90,000

Less book value of old equipment………………………………… 108,500

Loss on exchange of equipment………………………………… $ (18,500)

or

Price (fair market value) of new equipment……………………… $275,000

Less assets given up in exchange:Book value of old equipment……………………………………$108,500

Cash paid on the exchange…………………………………… 185,000 293,500

Loss on exchange of equipment………………………………… $ (18,500)

Ex. 10–27

a. Depreciation Expense—Equipment 6,000Accumulated Depreciation—Equipment 6,000

Equipment depreciation ($12,000 × 6 ÷ 12).

b. Accumulated Depreciation—Equipment 126,000Equipment 220,000Loss on Exchange of Equipment 9,000

Equipment 180,000Cash 175,000

Ex. 10–28

a. Depreciation Expense—Trucks 5,250Accumulated Depreciation—Trucks 5,250

Truck depreciation ($7,000 × 9 ÷ 12).

b. Accumulated Depreciation—Trucks 40,250Trucks 75,000

Trucks 56,000Cash 51,000Gain on Exchange of Trucks 8,250




Prob. 10–1A1. Land Other

Item Land Improvements Building Accountsa. $ 2,500b. 340,000c. 15,500d. 5,000e.* (4,000)f. 29,000g. $ 60,000h. 6,000i. 12,000j.* $(900,000)k. 5,500l. $32,000m. 11,000n. 2,000o. 2,500p.* (7,500)q. 800,000r. 34,500s.* (500)

2. $400,000 $45,000 $900,000* Receipt.

3. Because 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. Because Land Improvements are depreciated, depreciation expense of $1,200 ($12,000 × 1 ÷ 20 × 2) would be overstated, and net income would be understated by $1,200 on the income statement. On the balance sheet, Land would be understated by $12,000, Land Improvements would be overstated by $10,800 ($12,000 – $1,200), and Owner’s Capital would be understated by $1,200.

PROBLEMS



Prob. 10–2A1.

a. Straight- b. Units-of- c. Double-Line Output Declining-Balance

Year Method Method Method2014 $28,000 $37,380 $60,0002015 28,000 29,820 20,0002016 28,000 16,800 4,000Total $84,000 $84,000 $84,000

Calculations:Straight-line method:

($90,000 – $6,000) ÷ 3 = $28,000 each year

Units-of-output method:($90,000 – $6,000) ÷ 20,000 hours = $4.20 per hour

2014: 8,900 hours × $4.20 = $37,3802015: 7,100 hours × $4.20 = $29,8202016: 4,000 hours × $4.20 = $16,800

Double-declining-balance method:2014: $90,000 × 2 ÷ 3 = $60,0002015: ($90,000 – $60,000) × 2 ÷ 3 = $20,0002016: ($90,000 – $60,000 – $20,000 – $6,000*) = $4,000

* Book value should not be reduced below the residual value of $6,000.

2. The double-declining-balance method yields the most depreciation expense in 2014 of $60,000.

3. Over the three-year life of the equipment, all three depreciation methods yieldthe same total depreciation, $84,000, which is the cost of the equipment of $90,000 less the residual value of $6,000.

Depreciation Expense



Prob. 10–3Aa. Straight-line method:

2014: [($270,000 – $9,000) ÷ 3] × 9 ÷ 12…………………………………… $65,2502015: ($270,000 – $9,000) ÷ 3………………………………………………… 87,0002016: ($270,000 – $9,000) ÷ 3………………………………………………… 87,0002017: [($270,000 – $9,000) ÷ 3] × 3 ÷ 12…………………………………… 21,750

b. Units-of-output method:2014: 7,500 hours × $14.50*………………………………………………… $108,7502015: 5,500 hours × $14.50………………………………………………… 79,7502016: 4,000 hours × $14.50………………………………………………… 58,0002017: 1,000 hours × $14.50………………………………………………… 14,500

* ($270,000 – $9,000) ÷ 18,000 hours = $14.50 per hour

c. Double-declining-balance method:2014: $270,000 × 2 ÷ 3 × 9 ÷ 12…………...………………………………… $135,0002015: ($270,000 – $135,000) × 2 ÷ 3………………………………………… 90,0002016: ($270,000 – $135,000 – $90,000) × 2 ÷ 3…………………………… 30,0002017: ($270,000 – $135,000 – $90,000 – $30,000 – $9,000*)…………… 6,000

* Book value should not be reduced below $9,000, the residual value.



Prob. 10–4A1.

Depreciation Book Value,Year Expense End of Year

a. 1…………………………………………… $142,000 $658,0002…………………………………………… 142,000 516,0003…………………………………………… 142,000 374,0004…………………………………………… 142,000 232,0005…………………………………………… 142,000 90,000

* [($800,000 – $90,000) ÷ 5]

b. 1 [$800,000 × (1 ÷ 5) × 2]…………… $320,000 $480,0002 [$480,000 × (1 ÷ 5) × 2]…………… 192,000 288,0003 [$288,000 × (1 ÷ 5) × 2]…………… 115,200 172,8004 [$172,800 × (1 ÷ 5) × 2]…………… 69,120 103,6805 ($800,000 – $696,320 – $90,000)… 13,680 90,000


2. CashAccumulated Depreciation—Equipment

EquipmentGain on Sale of Equipment*

* $135,000 – $103,680

3. CashAccumulated Depreciation—EquipmentLoss on Sale of Equipment*

Equipment

* $103,680 – $88,750

31,320

$320,000

627,200512,000

$142,000284,000426,000

Accumulated

568,000710,000

696,320800,000

135,000

696,320710,000

Depreciation,End of Year

800,000

88,750696,32014,930

*

*



Prob. 10–5A

2014 Jan. 4 Delivery Truck 28,000

Cash 28,000

Nov. 2 Truck Repair Expense 675Cash 675

Dec. 31 Depreciation Expense—Delivery Truck 14,000Accum. Depreciation—Delivery Truck 14,000

Delivery truck depreciation[$28,000 × (1 ÷ 4 × 2)].


Cash 48,000

Apr. 1 Depreciation Expense—Delivery Truck 1,750Accum. Depreciation—Delivery Truck 1,750

Delivery truck depreciation[($28,000 – $14,000) × (1 ÷ 4 × 2) × 3 ÷ 12].

1 Accum. Depreciation—Delivery Truck 15,750Cash 15,000

Delivery Truck 28,000Gain on Sale of Delivery Truck 2,750

June 11 Truck Repair Expense 450Cash 450





Prob. 10–5A (Concluded)

2016 July 1 Delivery Truck 54,000

Cash 54,000

Oct. 2 Depreciation Expense—Delivery Truck 8,640Accum. Depreciation—Delivery Truck 8,640


2 Cash 16,750Accum. Depreciation—Delivery Truck 27,840Loss on Sale of Delivery Truck 3,410

Delivery Truck 48,000


Delivery truck depreciation[$54,000 × (1 ÷ 8 × 2) × 1 ÷ 2].



Prob. 10–6A1. a. $1,600,000 ÷ 5,000,000 board feet = $0.32 per board foot;

1,100,000 board feet × $0.32 per board foot = $352,000

b. Loss from impaired goodwill, $3,750,000

c. $6,600,000 ÷ 12 years = $550,000;3/4 of $550,000 = $412,500

2. a. Depletion Expense 352,000Accumulated Depletion 352,000

Depletion of timber rights.

b. Loss from Impaired Goodwill 3,750,000Goodwill 3,750,000

Impaired goodwill.

c. Amortization Expense—Patents 412,500Patents 412,500

Patent amortization.



Prob. 10–1B1. Land Other

Item Land Improvements Building Accountsa. $ 3,600b. 780,000c. 23,400d. 15,000e. $ 75,000f. 10,000g.* (3,400)h. 18,000i. 8,400j.* $(800,000)k. 13,400l. 3,000m. 2,000n. $14,000o. 21,600p. 40,000q.* (4,500)r. 800,000s.* (1,400)

2. $860,000 $35,600 $922,000* Receipt.

3. Because 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. Because Land Improvements are depreciated, depreciation expense of $4,320 ($21,600 × 1 ÷ 10 × 2) would be understated, and net income would be overstated by $4,320 on the income statement. On the balance sheet, Land would be overstated by $21,600, Land Improvements would be understated by $17,280 ($21,600 – $4,320), and Owner’s Capital would be overstated by $4,320.



Prob. 10–2B1.

a. Straight- b. Units-of- c. Double-Line Output Declining-Balance

Year Method Method Method2015 $ 71,250 $102,600 $160,0002016 71,250 91,200 80,0002017 71,250 62,700 40,0002018 71,250 28,500 5,000Total $285,000 $285,000 $285,000

Calculations:Straight-line method:

($320,000 – $35,000) ÷ 4 = $71,250 each year

Units-of-output method:($320,000 – $35,000) ÷ 20,000 hours = $14.25 per hour

2015: 7,200 hours × $14.25 = $102,6002016: 6,400 hours × $14.25 = $91,2002017: 4,400 hours × $14.25 = $62,7002018: 2,000 hours × $14.25 = $28,500

Double-declining-balance method:2015: $320,000 × [(1 ÷ 4) × 2] = $160,0002016: ($320,000 – $160,000) × [(1 ÷ 4) × 2] = $80,0002017: ($320,000 – $160,000 – $80,000) × [(1 ÷ 4) × 2] = $40,0002018: ($320,000 – $160,000 – $80,000 – $40,000 – $35,000*) = $5,000

* Book value should not be reduced below the residual value of $35,000.

2. The double-declining-balance method yields the most depreciation expense in 2015 of $160,000.

3. Over the four-year life of the equipment, all three depreciation methods yield the same total depreciation, $285,000, which is the cost of the equipment of $320,000 less the residual value of $35,000.

Depreciation Expense



Prob. 10–3Ba. Straight-line method:

2014: [($108,000 – $7,200) ÷ 3] × 3 ÷ 12………………………………… $ 8,4002015: [($108,000 – $7,200) ÷ 3]…………………………………………… 33,6002016: [($108,000 – $7,200) ÷ 3]…………………………………………… 33,6002017: [($108,000 – $7,200) ÷ 3] × 9 ÷ 12………………………………… 25,200

b. Units-of-output method:2014: 1,350 hours × $8.40*………………………………………………… $11,3402015: 4,200 hours × $8.40………………………………………………… 35,2802016: 3,650 hours × $8.40………………………………………………… 30,6602017: 2,800 hours × $8.40………………………………………………… 23,520

* ($108,000 – $7,200) ÷ 12,000 hours = $8.40 per hour

c. Double-declining-balance method:2014: $108,000 × 2 ÷ 3 × 3 ÷ 12…………...……………………………… $18,0002015: ($108,000 – $18,000) × 2 ÷ 3……………………………………… 60,0002016: ($108,000 – $18,000 – $60,000) × 2 ÷ 3…………………………… 20,0002017: ($108,000 – $18,000 – $60,000 – $20,000 – $7,200*)…………… 2,800




Prob. 10–4B1.

Depreciation Book Value,Year Expense End of Year

a. 1…………………………………………… $25,625 $84,3752…………………………………………… 25,625 58,7503…………………………………………… 25,625 33,1254…………………………………………… 25,625 7,500

* [($110,000 – $7,500) ÷ 4]

b. 1 [$110,000 × (1 ÷ 4) × 2]……………… $55,000 $55,0002 [$55,000 × (1 ÷ 4) × 2]………………… 27,500 27,5003 [$27,500 × (1 ÷ 4) × 2]………………… 13,750 13,7504 ($110,000 – $96,250 – $7,500)……… 6,250 7,500


2. CashAccumulated Depreciation—Equipment

EquipmentGain on Sale of Equipment*

* $18,000 – $13,750

3. CashAccumulated Depreciation—EquipmentLoss on Sale of Equipment*

Equipment

* $13,750 – $10,500

102,500

$ 55,000

96,25082,500

$ 25,62551,25076,875

Accumulated

102,500

4,250

96,250110,000

18,000

Depreciation,End of Year

110,000

10,50096,2503,250

*

*


Prob. 10–5B


Cash 24,000

Mar. 7 Truck Repair Expense 900Cash 900




Cash 50,000

Feb. 28 Truck Repair Expense 250Cash 250

Apr. 30 Depreciation Expense—Delivery Truck 2,000Accum. Depreciation—Delivery Truck 2,000


30 Accum. Depreciation—Delivery Truck 14,000Cash 9,500Loss on Sale of Delivery Truck 500

Delivery Truck 24,000






Prob. 10–5B (Concluded)

2016 Sept. 1 Delivery Truck 58,500

Cash 58,500

4 Depreciation Expense—Delivery Truck 6,250Accum. Depreciation—Delivery Truck 6,250


4 Cash 36,000Accum. Depreciation—Delivery Truck 18,750

Delivery Truck 50,000Gain on Sale of Delivery Truck 4,750


Delivery truck depreciation[$58,500 × (1 ÷ 10 × 2) × 4 ÷ 12].



Prob. 10–6B1. a. Loss from impaired goodwill, $3,400,000

b. $4,800,000 ÷ 8 years = $600,000;1 ÷ 4 of $600,000 = $150,000

c. $2,975,000 ÷ 12,500,000 board feet = $0.238 per board foot;4,150,000 board feet × $0.238 per board foot = $987,700

2. a. Loss from Impaired Goodwill 3,400,000Goodwill 3,400,000

Impaired goodwill.

b. Amortization Expense—Patents 150,000Patents 150,000

Patent amortization.

c. Depletion Expense 987,700Accumulated Depletion 987,700

Depletion of timber rights.



CP 10–1It 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 Dave Elliott to use Lyric Consulting Co.’s computers and laser printers to service his part-time accounting business, even on an after-hours basis. In addition, it is improper for Dave’s clients to call him during regular working hours. Such calls may interrupt or interfere with Dave’s ability to carry out his assigned duties for Lyric Consulting Co.

CP 10–2You should explain to Nolan and Stacy 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 because 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 Nolan and Stacy 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.

CASES & PROJECTS



CP 10–31. a. Straight-line method:

2014: ($400,000 ÷ 5) × 1 ÷ 2…………………………………………… $40,0002015: ($400,000 ÷ 5)…………………………………………………… 80,0002016: ($400,000 ÷ 5)…………………………………………………… 80,0002017: ($400,000 ÷ 5)…………………………………………………… 80,0002018: ($400,000 ÷ 5)…………………………………………………… 80,0002019: ($400,000 ÷ 5) × 1 ÷ 2…………………………………………… 40,000

b. MACRS:2014: ($400,000 × 20%)………………………………………………… $ 80,0002015: ($400,000 × 32%)………………………………………………… 128,0002016: ($400,000 × 19.2%)……………………………………………… 76,8002017: ($400,000 × 11.5%)……………………………………………… 46,0002018: ($400,000 × 11.5%)……………………………………………… 46,0002019: ($400,000 × 5.8%)………………………………………………… 23,200



CP 10–3 (Continued)

2. a. Straight-line method:2014 2015 2016 2017 2018 2019

Income before depreciation…………… $750,000 $750,000 $750,000 $750,000 $750,000 $750,000Depreciation expense…………………… 40,000 80,000 80,000 80,000 80,000 40,000Income before income tax……………… $710,000 $670,000 $670,000 $670,000 $670,000 $710,000Income tax………………………………… 284,000 268,000 268,000 268,000 268,000 284,000Net income………………………………… $426,000 $402,000 $402,000 $402,000 $402,000 $426,000

b. MACRS:2014 2015 2016 2017 2018 2019

Income before depreciation…………… $750,000 $750,000 $750,000 $750,000 $750,000 $750,000Depreciation expense…………………… 80,000 128,000 76,800 46,000 46,000 23,200Income before income tax……………… $670,000 $622,000 $673,200 $704,000 $704,000 $726,800Income tax………………………………… 268,000 248,800 269,280 281,600 281,600 290,720Net income………………………………… $402,000 $373,200 $403,920 $422,400 $422,400 $436,080

Year

Year



CP 10–3 (Concluded)3. For financial reporting purposes, Tim 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 discussedin Chapter 3. However, for income tax purposes, Tim 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 2014 the income tax expense using MACRS is $268,000, which is $16,000 ($284,000 – $268,000) less than the income tax expense using the straight-line depreciation of $284,000. TuttleConstruction 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 10–4Note 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.

PatentsA 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.



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.

CopyrightWhile 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.

TrademarkThe 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 marketplaceor 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. 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.



CP 10–5

$446,950$110,101

$24,172$48,874

$62,570$27,396

b. The fixed asset turnover measures the amount of revenue earned per dollar of fixed assets. Walmart earns $4.06 of revenue for every dollar of fixed assets, while Occidental earns $0.49, and Comcast Corporation earns $2.28 in revenue for every dollar of fixed assets. Occidental and Comcast require more fixed assets to operate their businesses than does Walmart, for a given level of revenue volume.

Does this mean that Walmart is a better company? Not necessarily. Revenue is not the same as earnings. More likely, Walmart has a smaller profit margin than do Occidental and Comcast. Although not required by the exercise, the income from operations before interest and taxes as a percentage of sales (operating margin) for the three companies is Occidental, 31.1%; Comcast, 22.6%; and Walmart, 6.0%. 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 assetturnover 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.

= 2.28

= 0.49Occidental Petroleum:

Comcast Corporation:

RevenueAverage Book Value of Fixed Assets=Fixed Asset Turnover Ratioa.

Walmart: = 4.06

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