Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources
COMP8-1. (continued)
Case D (continued)
Req. 3
For valuation purposes, ending inventory is to be reported at the lower of cost
Since replacement cost (market) is lower than FIFO cost, Stewart should
report the $3,900 on the balance sheet at the end of the month. The $300
difference will increase cost of goods sold, which will reduce net income for
the month.
Case E
Req. 1 Partial depreciation schedules:
2014
40,000
20,000
5,000
45,000
15,000
residual value
2016
Fully depreciated
0
45,000
15,000
b. Factory equipment using units-of-production method
(Cost – Residual Value) / Total estimated production =Depreciation rate
2014
$9.00/hour x 8,000 hours
2015
$9.00/hour x 9,200 hours
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources
Financial Accounting, 8/e 8-57
COMP8-1. (continued)
Case E
Req. 2
Cash (+A) ……………………………………………………………………
700,000
Fair value → $190,000
Impairment loss $ 74,000 reported on the income statement
CP8–1.
1. The company spent $100,135,000 on property and equipment in the 2011 year
(this information is disclosed on the Statement of Cash Flows).
3. The original cost of furniture, fixtures, and equipment held by the company at the
end of the most recent reporting year was $656,337,000 (disclosed in Note 7).
4. Current depreciation and amortization expense is $143,156,000 (disclosed on the
Statement of Cash Flows; note that the amount reported on the Income Statement
5. (in thousands)
Fixed asset
=
Net Sales
=
$3,159,818
=
5.16
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources
CP8–2.
2. Accumulated depreciation and amortization was $616,787,000. This is disclosed in
Note 5.
4. The original cost of the leasehold improvements was $676,644,000. This is
disclosed in Note 5.
5. Depreciation and amortization expense was $108,112,000. This is disclosed on the
Statement of Cash Flows.
6. (in thousands)
Fixed asset
=
Net Sales
=
$2,473,801
=
3.89
CP8–3.
1.
% of total assets
29.8%
46.2%
($582,162 / $1,950,802)
($684,979 / $1,483,708)
CP8–3. (continued)
2.
American Eagle
Outfitters
Urban
Outfitters
Percent of gross
3.
Turnover
5.16
3.89
$3,159,818/
$2,473,801/
4.
Industry
Average
American Eagle
Outfitters
Urban
Outfitters
Fixed Asset
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources
FINANCIAL REPORTING AND ANALYSIS CASES
CP8–4.
Req. 1
Depreciable assets:
Buildings and improvements ….
$ 3,227,340
Fleet and equipment …………….
Computer hardware and software
2,275,007
897,712
Accumulated depreciation ……..
Average age
8.65 years
CP8–5.
Req. 1
The cost of the property, plant, and equipment at the end of the current year is $3,911
million computed as follows:
Cost – accumulated depreciation = Net book value
? – $1,178 million (from the notes) = $2,733 million (from the balance sheet)
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources
CP8–6.
Consider the kinds of transactions that make Property, Plant, and Equipment and
Accumulated Depreciation change during a period:
(in millions)
Property, Plant, and Equipment
Accumulated Depreciation
CP8–7.
Req. 1
The interest coverage ratio is a measure of the ability of a company to meet its
obligatory interest payments from current operations. A company with a large coverage
ratio has a greater ability to meet its interest obligations than a company with a small
ratio (other things being equal).
Req. 2
CP8–8.
Req. 1
Amounts in millions of
Q1 Year 1
(March 31)
Q2 Year 1
(June 30)
Q3 Year 1
(September 30)
Q4 Year 1
(December 31)
Q1 Year 2
(March 31)
With
Without
With
Without
With
Without
With
Without
With
Without
calculated as:
Q1: $37,843 = $38,614 – $771 (Q1)
Q2: $34,651 = $35,982 – $771 (Q1) – $560 (Q2)
Q3: $36,077 = $38,151 – $771 (Q1) – $560 (Q2) – $743 (Q3)
Q4: $35,794 = $38,809 – $771 (Q1) – $560 (Q2) – $743 (Q3) – $941 (Q4)
Q1Y2: $35,322 = $39,155 – $771 (Q1) – $560 (Q2) – $743 (Q3) – $941 (Q4) – $818
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources
CP8-8. (continued)
Req. 2
Q2 Yr 1
Q3 Yr 1
Q4 Yr 1
Q1 Yr 2
Fixed Asset
=
consistent with the drop in operating income between Q3 and Q4 of Year 1. However,
the trends between operating income and fixed asset turnover are not entirely
consistent because operating income shows a big increase from Q2 to Q3 in Year 1 and
a small increase between Q4 of Year 1 and Q1 of Year 2 at a time when the fixed asset
CP8-8. (continued)
Req. 3
Looking back, there are a number of questions that might have been raised:
• Why you? It’s unusual that the CFO chose someone who doesn’t have
experience with transactions of that magnitude.
prepaid equipment deals had exceeded a year, when a normal prepayment was
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources
CP8-8. (continued)
Req. 4
As a staff person, you can’t doubt or mistrust every assignment you are given. If you
did, you’d likely find yourself out of a job. So, instead, you need to be able to tell the
difference between routine/ordinary requests and unusual requests. When you are
confronted with unusual requests, attempt to understand and evaluate the reasons for
oversight committee.
Req. 5
Clearly, the investors in WorldCom (or World-Con, as it was being called) were
devastated by the news. In the days following the announcement that the company
would restate its 2001 and 2002 financial results, WorldCom’s stock price lost about
90% of its value. Ultimately, stockholders would lose all that they had invested, when
funded by your parents’ investments had it not been for the WorldCom fraud.
WorldCom’s creditors also were severely harmed. Soon after the company’s true
financial condition became known, WorldCom filed for bankruptcy protection. This legal
maneuver gave the company time to restructure its operations and propose new
financing arrangements that would keep the company alive. Existing creditors
situation was even worse because WorldCom’s external auditors had been Arthur
Andersen—the same firm that had failed to detect and report the Enron fraud just one
year earlier. Just as Andersen was bracing for a whirlwind of Enron-related lawsuits,
WorldCom’s problems were discovered and that was the end of Arthur Andersen.
These are just three of the groups directly affected by WorldCom’s fraud. Countless
CP8–9.
Req. 1
a. Cash flows: Because cash was paid for interest, cash decreases (-). However, the
amount of interest expense that was capitalized caused expenses to be lower and
net income to be higher.
b. Fixed asset turnover ratio is lower (-) because the denominator is higher due to
CP8–10. Due to the nature of this project, responses will vary.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources
Financial Accounting, 8/e 8-69
CONTINUING CASE
CC8-1
Req. 1
January 1, 2014:
Debit
Credit
Equipment (+A)*………………………………………..
75,300
Prepaid insurance (+A) ……………………………….
800
Cash (-A)……………………………………………
76,100
Year
Computation
Expense
Depreciation
Value
2014
($75,300 – $3,300) x 1/3
$24,000
$24,000
$51,300
2015
($75,300 – $3,300) x 1/3
24,000
48,000
27,300
2016
($75,300 – $3,300) x 1/3
24,000
72,000
3,300
Req. 3
Double-Declining-Balance Method:
Year
Computation
Expense
Depreciation
Value
2014
($75,300 – $0) x 2/3
$50,200
$50,200
$25,100
2015
($75,300 – $50,200) x 2/3
66,933
8,367
2016
($75,300 – $66,933) x 2/3
5,578
5,067
72,511
72,000
2,800
3,300
The computed amount of depreciation expense in 2016 reduces the net book value
below residual value. Therefore, the amount was recomputed.
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net Book
Value
2014
$3.00 per hour x 8,000 hours
$24,000
$24,000
$51,300
2015
$3.00 per hour x 7,400 hours
22,200
46,200
29,100
2016
$3.00 per hour x 8,600 hours
25,800
72,000
3,300
Req. 5
(1) Record Depreciation Expense:
Depreciation expense (+E, –SE)……………
Accumulated depreciation (+XA, –A) …..
(2) Record the Disposal:
Cash (+A)……………………………………..
22,500
Accumulated depreciation (-XA, +A)……….
Loss on disposal of equipment (+E, –SE)….