6-1
2016: ($47,000 − $30,080) x (2 x .20) = 6,768
*Since the total depreciable cost is $40,000 ($47,000 − $7,000), the total depreciation taken
b. Units-of-Production
(Cost − Salvage) Estimated Production = Depr. Cost per Unit
Annual Depreciation = Depr. Cost per Unit x Actual Annual Units
2014: $.02 x 560,000 = $11,200
2015: $.02 x 490,000 = 9,800
*The total depreciable cost is $40,000 ($47,000 − $7,000). The depreciation taken in 2018
EXERCISE 6-10 (cont.)
c. Calculation of Book Value
Double-Declining Balance
Cost $47,000
Less: Accumulated Depr. (40,000)
Book Value $ 7,000
Units-of-Production
Calculation of Gain
Units-of-
6-2
DDB Production
EXERCISE 6-11
a. Calculation of Depreciation:
Van Cost $35,000
Sales Tax & Title Fees 1,500
2014 Depreciation: $7,500
2015 Depreciation: $7,500
b. Cost $36,500
EXERCISE 6–12
a. Historical Cost $50,000
Less: Accumulated Depreciation (41,000)
Book Value $ 9,000
c. Net income would increase by $1,000, the amount of the gain, in the year of the sale.
d. Total assets would increase by $1,000, the amount of the gain. Cash would increase by
EXERCISE 6-13
Liken Enterprises
2015 Accounting Equation
6-3
Assets
=
Stockholders’ Equity
Event
Cash
Land
=
Common
Stock
+
Retained
Earnings
a.1
+22,500
(20,000)
=
2,500
b.1
+18,500
(20,000)
=
(1,500)
a. 1) See above.
b. (1) See above.
(2) Loss of $1,500 ($18,500 sales price
EXERCISE 6-14
Depreciation
Expense
2014: $72,500 − $12,500 = $60,000; $60,000 3 = $20,000
2016:
Cost $72,500
*revised salvage
**revised remaining life
2017: (Same as year 2016) $15,000EXERCISE 6-15
Shredding Machine:
Book value would still be $6,000; the $1,900 repair cost will be expensed.
Building:
6-4
EXERCISE 6–16
a.
Assets
=
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
Cash
+
Book Value of
Forklift
=
C. Stock
+
Ret. Ear.
15,000
+
80,000
=
45,000
+
50,000
NA
−
NA
=
NA
NA
( 9,000)
+
=
NA
+
(9,000)
NA
−
9,000
=
(9,000)
(9,000) OA
b.
Assets
=
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
Cash
+
Book Value of
Forklift
=
C. Stock
+
Ret. Ear.
15,000
+
80,000
=
45,000
+
50,000
NA
−
NA
=
NA
NA
( 9,000)
+
9,000
=
NA
+
NA
NA
−
NA
=
NA
(9,000) IA
c.
Assets
=
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
Cash
+
Book Value of Forklift
=
C. Stock
+
Ret. Ear.
15,000
+
80,000
=
45,000
+
50,000
NA
−
NA
=
NA
NA
( 9,000)
+
9,000
=
NA
+
NA
NA
−
NA
=
NA
(9,000) IA
EXERCISE 6-17
a. $22,000 2 = $11,000 additional depreciation expense for 2014 and 2015.
c. $-0- cash outflow from operating activities in 2014, $-0- cash outflow from operating
activities in 2015 (cash outflow in 2014 is from investing activities).
EXERCISE 6–18
6-5
b.
Depletion Calculation:
Year 2 $.67 x 450,000 = $301,500
Tishomingo Sand and Gravel
Statements Model
Assets
=
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
Cash
+
Sand Res.
=
C. Stock
+
Ret. Ear.
900,000
+
NA
=
900,000
+
NA
NA
−
NA
=
NA
NA
(800,000)
+
800,000
=
NA
+
NA
NA
−
NA
=
NA
(800,000) IA
Depletion for Year 1
NA
+
(435,500)
=
NA
+
(435,500)
NA
−
435,500
=
(435,500)
NA
Depletion for Year 2
NA
+
(301,500)
=
NA
+
(301,500)
NA
−
301,500
=
(301,500)
NA
EXERCISE 6–19
a. Patent $48,000 5 = $9,600 per year
The goodwill is not amortized.
b.
Pacart Manufacturing
Statements Model
Assets
=
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
Cash
+
Patent
+
Goodwill
=
94,000
+
NA
+
NA
=
94,000
NA
−
NA
=
NA
NA
Acq.
(83,000)
+
48,000
+
35,000
=
NA
NA
−
NA
=
NA
(83,000) IA
Pat.
NA
+
(9,600)
+
NA
=
(9,600)
NA
−
9,600
=
(9,600)
NA
6-6
EXERCISE 6-20
a. Acquisition Price:
Cash Paid $275,000
Liabilities Assumed 10,000
Total 285,000
b.
Yeates Supply Co.
Statements Model
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
Cash
+
Assets
+
Goodwill
=
+
450,000
+
NA
+
NA
=
NA
+
450,000
NA
−
NA
=
NA
NA
Acq.
(275,000)
+
265,000
+
20,000
=
10,000
+
NA
NA
−
NA
=
NA
(275,000) IA
6-7
EXERCISE 6-21
a. Depreciation expense as a percentage of sales:
b. Property, plant and equipment as a percentage of total assets:
c. Company 2 appears to be CSX since one would expect a rail transportation
d. The return on assets ratio (ROA) helps analysts evaluate how efficiently a company
is using its assets. This ratio is computed as: net income ÷ total assets. Although this ratio
Company 1: $57,198 ÷ $1,549,464 = 3.7%
Based on the comparative ROA’s, Company 2, CSX, seems to be managing its assets
more efficiently than American Greetings.
SOLUTIONS TO PROBLEMS – CHAPTER 6
PROBLEM 6-22
Office Equipment:
List Price $50,000
Discount ($50,000 x 1%) (500)
Basket Purchase:
Allocation is based on relative market values:
6-8
Asset
Fair Market
Value
Percent of
FMV
Purchase
Price
Allocated
Costs
Office Furniture
$48,000
60%
x
$70,000
=
$42,000
Copier
12,000
15%
x
70,000
=
10,500
Computers &
Printers
20,000
25%
x
70,000
=
17,500
Total
$80,000
100%
=
$70,000
Land and Building:
Land
Purchase Price $100,000
Demolition of Barn 7,000
Building
Construction Costs $310,00PROBLEM 6-23
a. Straight-line
Cost $25,000
Delivery Cost 500
Total 25,500
b. Units-of-Production
$25,500 − $1,500
1,000,000 = $.024 Per Copy
6-9
c. Double-Declining Balance
Accum. Depreciation Annual
(Cost − at Beginning of Period) x (2 x SL Rate) = Depreciation
Depreciation Calculation:
Straight Line:
Double-Declining Balance:
Company B
2014 ($64,000 − -0-) x (2 x .20) = $25,600
2015 ($64,000 − $25,600) x .4 = 15,360
Units-of-Production:
Company C Depr. Rate: $64,000 − $4,000
200,000 = $.30 per hour
*Limited to remaining depreciable cost: [$64,000 – ($56,700 + $4,000)].
6-10
PROBLEM 6-24 (cont.)
a. Company A – 2014
Revenue $30,000
Depreciation Expense (12,000)
Net Income $18,000
Company C – 2016
Revenue $30,000
Depreciation Expense (12,000)
Net Income $18,000
PROBLEM 6-24 (cont.)
c. Company A Accumulated Depreciation
2014 $12,000
Cost $64,000
6-11
Company B Accumulated Depreciation
2014 $25,600
Cost $64,000
Accumulated Depreciation (50,176)
Book Value $13,824
Company C Accumulated Depreciation
2014 $15,000
d. Company A: Sales (four years) $120,000
Retained Earnings – 2017 $ 72,000
Company B: Sales (four years) $120,000
Company C: Sales (four years) $120,000
Depreciation (four years) (56,700)
Retained Earnings – 2017 $ 63,300
e. The cash flow from operating activities will be the same for each company if income
tax is not considered. Depreciation expense is not a cash flow item.