Chapter 06 – Accounting for Long-Term Operational Assets
6-1
Demonstration Problem 6-1: Work Paper, Scenario 2
Double-Declining-Balance Depreciation
Income Statements
2014
2015
2016
2017
2018
Rent Revenue
$13,200
$8,200
$4,200
$3,200
$ -0-
Depreciation Expense
Operating Income
Gain on Sale
of Automobile
Net Income
$ 3,200
$3,200
$3,200
$3,200
$ 300
Balance Sheets
Assets
Cash
Automobile
Accumulated Dep.
Total Assets
Stockholders’ Equity
Common Stock
$21,000
$21,000
$21,000
$21,000
$21,000
Retained Earnings
Total Stockholders’ Equity
$24,200
$27,400
$30,600
$33,800
$34,100
Statements of Cash Flows
Operating Activities
Inflow from Customer
Investing Activities
Outflow for Automobile
Inflow from Sale of Auto
Financing Activities
Inflow from Stock Issue
Net Change in Cash
$14,200
$ 8,200
$ 4,200
$ 3,200
$ 4,300
Beginning Cash Balance
Ending Cash Balance
Demonstration Problem 6-1: Work Paper, Scenario 3
Units-of-Production Depreciation
Chapter 06 – Accounting for Long-Term Operational Assets
Income Statements
2014
2015
2016
2017
2018
Rent Revenue
$8,000
$4,800
$9,600
$6,400
$ -0-
Depreciation Expense
Operating Income
Gain on Sale
of Automobile
Net Income
$3,200
$3,200
$3,200
$3,200
$300
Balance Sheets
Assets
Cash
Automobile
Accumulated Dep.
Total Assets
Stockholders’ Equity
Common Stock
$21,000
$21,000
$21,000
$21,000
$21,000
Retained Earnings
Total Stockholders’ Equity
$24,200
$27,400
$30,600
$33,800
$34,100
Statements of Cash Flows
Operating Activities
Inflow from Customer
Investing Activities
Outflow for Automobile
Inflow from Sale of Auto
Financing Activities
Inflow from Stock Issue
Net Change in Cash
$ 9,000
$ 4,800
$ 9,600
$ 6,400
$ 4,300
Beginning Cash Balance
Ending Cash Balance
Demonstration Problem 6-2: Work Paper
1. Paid $1,000 cash for routine maintenance cost.
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
Cash
+
Equip.
+
(Accum.
Dep.)
=
Ret. Ear.
1,000
+
5,000
+
(2,000)
=
-0-
+
4,000
-0-
–
-0-
=
-0-
-0-
Chapter 06 – Accounting for Long-Term Operational Assets
6-4
c. 40 years.
d. the author’s life plus 50 years.
The following information pertains to the next two questions. Z Company purchased an asset for $24,000 on
January 1, 2014. The asset was expected to have a four-year life and a $4,000 salvage value.
6. The amount of depreciation expense for 2016 using double-declining-balance would be
a. $2,000.
b. $3,000.
c. $6,000.
d. $12,000.
7. Assume that Z Company uses straight-line depreciation. If, on January 1, 2017, Z Company sells the asset
for $10,000, the statement of cash flows would report a
a. $1,000 cash inflow from gain on the sale of the asset in the operating activities section.
b. $10,000 cash inflow from an asset disposal in the investing activities section.
c. $9,000 cash inflow from an asset disposal in the financing activities section.
d. a and c.
8. On January 1, 2014, Fulsom Corporation purchased a machine for $50,000. Fulsom paid shipping expenses
of $500 as well as installation costs of $1,200. Fulsom estimated the machine would have a useful life of ten
years and an estimated salvage value of $3,000. If Fulsom records depreciation using the straight-line
method, depreciation expense for 2015 is
a. $4,870.
b. $5,170.
c. $5,270.
d. $5,570.
9. Hickory Ridge Company purchased land and a building for $920,000. The individual assets were appraised
at the following market values:
Land $614,400
Building $345,600
Recording the land in the accounting records would
a. increase land by $588,800.
b. increase land by $614,400.
c. increase building by $345,600.
d. Both a and c.
10. Penny Lane and Associates purchased a generator on January 1, 2014, for $6,300. The generator was
estimated to have a five-year life and a salvage value of $600. At the beginning of 2016, the company
revised the expected life of the asset to six years and revised the salvage value to $300. Using straight-line
depreciation, the depreciation expense recorded in 2016 would
a. decrease assets and equity by $1,140.
b. decrease assets and equity by $930.
c. decrease assets and equity by $1,005.
d. decrease assets and equity by $1,500.
11. Which of the following statements about goodwill is true?
a. The amount of goodwill is measured by subtracting the fair market value of the assets on the purchase
date from the amount paid for the assets.
b. The amount of goodwill is recorded as an asset.
c. Recording impairment of goodwill reduces the amount of net income.
d. All of the above.
6-5
12. XYZ Company paid cash for a capital expenditure that improved the operating efficiency of one of its assets.
Which of the following reflects how this expenditure affects the company’s financial statements?
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
a.
+ −
NA
NA
NA
NA
NA
− IA
b.
+ −
NA
NA
NA
NA
NA
NA
c.
−
NA
−
NA
+
−
− OA
d.
NA
NA
NA
NA
NA
NA
NA
13. KLM Company experienced an accounting event that affected its financial statements as indicated below:
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
−
NA
−
NA
+
−
− OA
Which of the following events could have caused these effects?
a. recognizing depreciation.
b. paying cash for a capital expenditure.
c. amortizing a patent.
d. none of the above.
Solutions to Quiz Questions
Question
Answer
1
D
2
B
3
B
4
C
5
B
6
A
7
B
8
A
9
A
Chapter 06 – Accounting for Long-Term Operational Assets
6-6
10
B
11
D
12
A
13
D
Summary Outline of a Lesson Plan for Chapter 6
I. Demonstration Problem 6-1 illustrates financial statements for three different
depreciation methods across multiple accounting cycles. Hand out work papers and
have students work along with you as you introduce new depreciation methods. As
students work, walk around the room and make sure that students fully understand one
method before moving on to the next.
II. Demonstration Problem 6-2 introduces accounting for capital expenditures and
maintenance costs incurred after the acquisition date. Draw or display a statements
model. Then show students how maintenance costs and capital expenditures affect
financial statements differently.
III. Introduce accounting for natural resources. Draw the parallel between units-of-
production depreciation and depletion. Use Exercise 6-18 as a demonstration problem.
IV. Introduce accounting for intangible assets. Draw the parallel between straight-line
depreciation and amortization computations. Use Exercise 6-19 as a demonstration
problem.
V. Time considerations and homework assignments. Plan to spend approximately two
hours of class time to cover the material in this chapter: one hour covering depreciation
methods and one hour for related topics. Choose homework assignments from the
following problems: Problem 6-28 (multicycle problem), Problem 6-23 (depreciation
methods), Exercise 6-17 (capital expenditures), Problem 6-30 (depletion), and Problems
6-32 and 6-33 (intangible assets). Eliminate or select substitute problems from the text as
you deem appropriate.