Brief Learning
Exercises Objectives
B. Ex. 9.1 Cost of plant assets 9-1, 9-2
B. Ex. 9.2 Straight-line depreciation 9-3
B. Ex. 9.3 9-3
B. Ex. 9.4 Declining-balance depreciation 9-3 Analysis
B. Ex. 9.5 9-3, 9-4
B. Ex. 9.6 Disposal of plant asset 9-3, 9-5 Analysis
B. Ex. 9.7 Disposal of plant asset 9-3, 9-5 Analysis
B. Ex. 9.8 Goodwill 9-6
B. Ex. 9.9 Natural resources 9-7
B. Ex. 9.10 Alternative depreciation methods 9-4
9.1 Depreciation 9-2, 9-3
9.2 Ca
p
ital vs. revenue ex
p
enditure 9-1, 9-2
9.3 De
p
reciation for
p
artial
y
ears 9-3
9.4 Accelerated vs. Straight-line 9-3
9.5 Real World: H.J. Heinz Com
p
an
y
9-3
De
p
reciation disclosures
9.6 9-3
9.7 Accounting for trade-ins 9-5
9.8 Estimating goodwill 9-6
9.9 Real World: Food Lion, Inc. 9-5, 9-8
Impaired assets
9.10 Ethics: Let the Buyer Beware 9-1, 9-6
9.11 Natural resources 9-7
9.12 Annual re
p
ort
p
resentations 9-6, 9-8
9.13 Units-of-output method 9-4
9.14 Units-of-output depreciation 9-4
9.15 Real World: Home Depot, Inc. 9-1, 9-3
Straight-line and declining-balance
depreciation
Analysis, communication
Analysis
Straight-line and units of output
depreciation Analysis
Analysis, communication,
judgment
Skills
Analysis
Analysis, communication
Analysis
TopicExercises
CHAPTER 9
PLANT AND INTANGIBLE ASSETS
Skills
Learning
Objectives
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Topic
Analysis
Analysis
Analysis
Analysis
Communication, judgment
Communication, judgment
Revision of depreciation estimates
Communication, judgment
Analysis
Analysis
Analysis
Analysis
Analysis, communication,
Communication, research
Analysis
Analysis, communication,
Problems
Sets A, B Topic
9.1 A,B Cost determination and depreciation 9-1–9-3
9.2 A,B Straight-line vs. accelerated 9-3, 9-5
methods
9.3 A,B Alternative depreciation issues 9-1–3, 9-5
9.4 A,B Disposal of plant assets 9-5
9.5 A,B Intangible assets 9-6
9.6 A,B Accounting for goodwill 9-6
9.7 A,B Alternative Depreciation Methods 9-4
9.8 A,B 9-2, 9-3, 9-5
9.1 Issues involving useful lives 9-3
9.2 Departures from GAAP 9-1
9.3 9-3, 9-4
Depreciation policy disclosures
9.4 9-2
9.5 9-2
Researching R&D expenditures
(Internet)
*Supplemental Topic, “Other Depreciation Methods.”
Communication, judgment
Analysis, communication,
judgment
Analysis, communication
Analysis
Learning
Objectives Skills
Analysis, communication,
judgment
Analysis, communication
Communication, research,
technology
Communication, judgment
Analysis, communication
Depreciation and disposal of Plant
and Intangible assets Analysis
Communication, judgment
Communication, judgment
Communication, judgmentCapitalization vs. expense (Ethics,
fraud & corporate governance)
Critical Thinking Cases
Real World: Pharmaceutical
companies of student’s choice
Real World: International Paper
Company
DESCRIPTIONS OF PROBLEMS AND
CRITICAL THINKING CASE
S
Problems (Sets A and B)
9.1 A,B
9.2 A,B
9.3 A,B
9.4 A,B
9.5 A,B
9.6 A,B
Students are asked to compute estimated goodwill using an earnings
multiplier approach and a capitalization of excess earnings approach.
In addition, they must distinguish between the accounting treatment
of purchased goodwill versus the accounting treatment of internally
generated goodwill.
Below are brief descriptions of each problem and case. These descriptions are accompanied by the
estimated time (in minutes) required for completion and by a difficulty rating. The time estimates
assume use of the partially filled-in working papers.
Hamlet College/Smithfield Hotel 25 Easy
25 Medium
45 Medium
50 StrongHills Hardware/Davidson, DDS.
After determining the cost of a depreciable asset, students are
required to prepare depreciation schedules under straight-line and
accelerated methods. They must also (1) discuss the use of straight-
line for financial purposes and accelerated depreciation for income
taxes, (2) interpret the meaning of an asset’s book value, and (3)
compute the gain or loss resulting from the disposal of a depreciable
asset.
Hitchcock Developers/Blake Construction
Students are required to distinguish between capital and revenue
expenditures and compute depreciation expense.
Swanson & Hiller, Inc./R & R, Inc.
Students must prepare depreciation schedules using both straight-line
and accelerated methods. They must also evaluate income and cash
flow issues as they relate to depreciation and the disposal of assets.
25 Medium
20 Medium
Numerous asset disposal transactions are presented for which
students must compute appropriate gains or losses. In addition,
students are asked to discuss how gains and losses on the disposal of
plant assets are reported in the income statement, and how the
reporting of realized gains and losses differs from the reporting of
unrealized gains and losses as illustrated in Chapter 7.
Reddick Corporation/Delta Products Corporation
Various transactions must be evaluated in order to determine which
result in the recording of an intangible asset and which are treated as
expenses of the current period.
Kivi Service Stations/Jell Stores
Problems (continued)
9.7 A,B
9.8 A,B
Critical Thinking Cases
Are Useful Lives “Flexible”? 20 Strong
Departures from GAAP—Are They Ethical? 20 Strong
Ca
p
italization vs. Ex
p
ense 30 Medium
Ethics
Fraud & Cor
orate Governance
R&D in the Pharmaceutical Industry No time estimate
Internet Medium
____________
*Supplemental Topic, “Other Depreciation Methods.”
30 Medium
30 Medium
Students must calculate depreciation for the first two years of an
asset’s life by three depreciation methods: straight-line, double
declining-balance, and units of output. They are asked to prepare the
balance sheet presentation of the asset by the DDB method and
briefly discuss why the amount of depreciation expense for the units
of output method cannot be calculated until the period has ended and
the number of miles driven is known.
Students are asked to calculate depreciation on two long-lived assets
by different depreciation/amortization methods and then to prepare
the balance-sheet section for plant assets at the end of the first and
second years the assets are owned. One of the assets is sold in the
second year and the amount of the gain or loss on the same must be
calculated.
Rothchild, Inc./Rodgers Company
A look into the responsibilities of management accountants. Do they
do as they are told, or is there more to it?
The owner of a closely held business asks the company’s accountant
to prepare financial statements that depart from GAAP, and these
statements will be presented to lenders. Is there a problem?
the financial disclosures of a well-known corporation.
Students are asked to explore the management’s motivation for
capitalizing vs. expensing costs and think about steps that could be
taken to prevent employees from doing things that are inconsistent
with company policy and code of professional ethics.
An Internet research problem that requires students to research R&D
expenditures in the pharmaceutical industry.
Thaxton, Inc./Haywood, Inc.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
2.
3.
4.
5.
7.
8
A capital expenditure is one that is material in amount and will benefit several accounting
If a capital expenditure (acquisition of an asset) is erroneously treated as a revenue expenditure
(an expense), expenses of the current year will be overstated and net income, therefore, will be
Coca-Cola’s trademark name was not purchased from another company, but rather was
There are three basic “accountable events” in the life of a depreciable asset: (1) acquisition, (2)
allocation of the acquisition cost to expense, and (3) disposal. The second event, allocation of
(a) Freight charges, (b) sales taxes on the machine, and (d) wages of employees for time spent
in installing and testing the machine before it was placed in service.
Yes, depreciation of the building should be continued regardless of rising market value. The
building will render useful services for only a limited number of years and its cost must be
recognized as expense of those years regardless of fluctuations in market value.
An accelerated depreciation method is one that recognizes greater amounts of depreciation
10.
is applied to the asset’s undepreciated cost. The “fixed-percentage” is a percentage of the
straight-line depreciation rate. This percentage is said to be “fixed” because it does not change
over the life of the asset. The declining balance is the asset’s undepreciated cost (or book value),
which gets lower every year.
The declining-balance method is most widely used in income tax returns.
The balance of the Accumulated Depreciation account does not consist of cash. It is an account
with a credit balance showing how much of the original cost of a company’s plant assets has
B.Ex. 9.1 Equipment cost:
$30,000
750
Year 2
$2,000
SOLUTIONS TO BRIEF EXERCISES
Purchase price
Delivery
Straight-line depreciation:
same as above
B.Ex. 9.4
$21,500
B.Ex. 9.5
Double-declining balance depreciation:
150% declining-balance depreciation:
($40,000 – $5,000)/5 years = $7,000
$86,000 x 25% =
Straight-line depreciation:
B.Ex. 9.7 $8,300
B.Ex. 9.8
B.Ex. 9.9
B.Ex. 9.10
Yr. 1
Selling price of equipment
Book value of equipment sold:
Cost basis for determining depreciation expense under both methods:
Goodwill is recorded at $25,000, the actual amount by which the purchase price
Cost per ton of mineral to be extracted:
($2,500,000)/10,000 tons = $250 per ton
$30,500 – $6,500 = $24,000
Units of Output method of depreciation:
Ex. 9.1 a.
Ex. 9.2 a.
b.
SOLUTIONS TO EXERCISES
Two primary factors have caused the truck to depreciate: (1) physical
deterioration and (2) obsolescence. The miles driven during the past six years have
caused wear and tear on all of the truck’s major components, including its engine,
transmission, brakes, and tires. As these components deteriorate, their fair values,
Capital expenditure
Revenue expenditure