8-105
PROBLEM 8–30B
Depreciation Calculation:
Straight Line:
Company A ($64,000 − $6,000) 5 = $11,600 per year
Double-Declining Balance:
8-106
PROBLEM 8-30B (cont.)
a. Company A – 2016
Revenue $30,000
Depreciation Expense (11,600)
Net Income $18,400
8-107
PROBLEM 8-30B (cont.)
c. Company A Accumulated Depreciation
2016 $11,600
2017 11,600
2018 11,600
8-108
PROBLEM 8-30B (cont.)
d. Company A: Sales (four years) $120,000
Depreciation (four years) (46,400)
Retained Earnings – 2019 $ 73,600
8-109
PROBLEM 8-31B
a.
Metals Exploration Company
General Journal
Date
Account Titles
Debit
Credit
2016
1/1
Coal Mine
900,000
Cash
900,000
7/1
Timber
1,800,000
Land
200,000
Cash
2,000,000
12/31
Depletion Expense (80,000 x $3)
240,000
Coal Mine
240,000
12/31
Depletion Expense (1,000,000 x $.60)
600,000
Timber
600,000
2017
2/1
Silver Mine
850,000
Cash
850,000
8/1
Oil Reserves
875,000
Cash
875,000
12/31
Depletion Expense (68,000 x $3)
204,000
Coal Mine
204,000
12/31
Depletion Expense (1,200,000 x $.60)
720,000
Timber
720,000
12/31
Depletion Expense (9,000 x $28.33)
254,970
Silver Mine
254,970
12/31
Depletion Expense (80,000 x $3.50)
280,000
Oil Reserves
280,000
8-110
PROBLEM 8-31B (cont.)
Cost
$900,000
=
$3.00 per ton
Estimated Tons
300,000
Cost
$2,000,000 – 200,000
=
$.60 per board foot
Estimated Board
Feet
3,000,000
Silver Mine – Depletion
Cost
$850,000
=
$28.33 per ton
Estimated Tons
30,000
Oil Reserves – Depletion
Cost
$875,000
=
$3.50 per barrel
Estimated Barrels
270,000 – 20,000
PROBLEM 8-31B (cont.)
b. Natural Resources
Coal Mine (less depletion) $ 456,0001
Timber (less depletion) 480,0002
Silver Mine (less depletion) 595,0303
8-112
PROBLEM 8-32B
a.
Horizontal Statements Model
Date
Assets
=
Liab.
+
Equity
Net Income
Cash Flows
1/1/16
+−
NA
NA
NA
− IA
12/31/16
−
NA
−
−
NA
5/5/17
−
NA
−
−
− OA
12/31/17
−
NA
−
−
NA
1/1/18
+−
NA
NA
NA
− IA
12/31/18
−
NA
−
−
NA
3/1/19
−
NA
−
−
− OA
12/31/19
−
NA
−
−
NA
1/1/20
+−
NA
NA
NA
− IA
12/31/20
−
NA
−
−
NA
7/1/21*
−
NA
−
−
NA
7/1/21**
+
NA
+
+
+ IA
*To record depreciation for 2021.
8-113
PROBLEM 8-32B (cont.)
c.
Computation of Book Value
Year
Cost
−
Acc. Depr.
=
Book Value
2016
$38,000
−
$7,000
=
$31,000
2017
38,000
−
14,000
=
24,000
2018
42,000
−
22,333
=
19,667
2019
42,000
−
30,666
=
11,334
2020
42,000
−
27,611*
=
14,389
*$30,666 − $9,000 overhaul + $5,945 depreciation expense.
d. Computation of Depreciation Expense for 2021:
$5,945 x 6/12 = $2,973
Book Value at Date of Sale:
12/31/20 $14,389 (see above)
2021 Depreciation (2,973) (1/2 year)
Book Value $11,416
Selling Price $8,500
Less: Book Value (11,416)
Loss on Sale ($ 2,916)
e.
Account Title
Debit
Credit
Cash
8,500
Loss on Sale
2,916
Accumulated Depreciation
30,584
Equipment
42,000
8-114
PROBLEM 8-33B
a. NC = Net Change in Cash
Delta Manufacturing
Statements Model – 2019
Assets
=
Stockholders’ Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
Date
Cash
+
Book Value of Mach.
=
C. Stock
+
Ret. Ear.
Bal.
15,000
+
39,500
=
10,500
+
44,000
NA
−
NA
=
NA
NA
1/2
(8,000)
+
8,000
=
NA
+
NA
NA
−
NA
=
NA
(8,000) IA
8/1
(1,250)
+
NA
=
NA
+
(1,250)
NA
−
1,250
=
(1,250)
(1,250) OA
10/2
(800)
+
NA
=
NA
+
(800)
NA
−
800
=
(800)
(800) OA
12/31
NA
+
(9,000)
=
NA
+
(9,000)
NA
−
9,000
=
(9,000)
NA
Bal.
4,950
+
38,500
=
10,500
+
32,950
-0-
−
11,050
=
(11,050)
(10,050) NC
*Depreciation Calculation: ($62,000 + $8,000) − $22,500 = $47,500; ($47,500 − $2,500) 5 = $9,000
8-8
PROBLEM 8-33B (cont.)
b.
Delta Manufacturing
General Journal
Date
Account Titles
Debit
Credit
1/2/19
Machinery
8,000
Cash
8,000
8/1/19
Maintenance Expense
1,250
Cash
1,250
10/2/19
Maintenance Expense
800
Cash
800
12/31/19
Depreciation Expense
9,000
Accumulated Depreciation
9,000
8-9
PROBLEM 8-34B
a. Acquisition Price $1,500,000
Less: FV of Assets Acquired
8-10
PROBLEM 8-35B
a. Any permanent impairment will be written off in the year the
8-11
1. Long-term operational assets are those assets that are used by a
2. Tangible assets are those assets that have a physical existence. Some
3. Specifically identifiable intangible assets are those assets that are
4. Depreciation is the systematic allocation of the cost of property, plant
5. Natural resources are assets that are produced by nature. Some
6. Land is not a depreciable asset because land has an infinite life. Land
8-12
resources are purchased together, the cost of each must be accounted
7. Amortization is the systematic allocation of the cost of intangible
8. The historical cost concept requires that long-term operational assets
be recorded at the amount paid for them. This is the amount that will
be shown on the balance sheet as long as the asset is owned. As time
9. The cost of a building includes the amount paid for the building plus
10. A basket purchase of assets is the purchase of a group of assets for a
single purchase price. For example, building, land and equipment
could be purchased for one price, $80,000. When a group of assets are
11. The life cycle of a long-term operational asset simply describes the
12. Straight-line depreciation. This method allocates an equal amount of
8-13
value would produce a depreciation expense of $1,000 per year. This
method is appropriate when the usefulness of an asset is consistent
over the asset’s life.
Units-of–production depreciation. When this method of depreciation
.25)]. The amount of depreciation expense will decrease each year of
13. Recognition of depreciation expense reduces total assets; while
the asset account containing the asset that is being depreciated is not
14. The recognition of depreciation expense does not affect cash flows.
8-14
asset is purchased, when an improvement is made to the asset, and
15. Total assets will be lower at the end of the first year of the asset’s life
if MalMax chooses the double-declining balance method of computing
16. When the total cost of an asset is expensed in the year acquired, total
expense will be overstated and net income will be understated.
17. Salvage value is the estimated value of a plant asset at the end
18. Accumulated depreciation is a contra asset account. As the cost of a
19. Book value of an asset is its historical cost less any accumulated
20. Recording the depreciation recognized in the contra asset account
allows the total cost of the asset and the total amount expensed to be
21. Book value is computed as the cost of an asset less the accumulated
8-15
accumulated depreciation is only an allocation of the cost based on
22. The method of depreciation chosen should represent as closely
as possible the pattern of usage of that piece of equipment. For
23. MACRS, Modified Accelerated Cost Recovery System, is the
prescribed method to be used for tax purposes. Under MACRS, useful
24. The method required for tax purposes, MACRS, does not necessarily
reflect the use of the asset. The recovery period and method is set by
25. Deferred income taxes are taxes that will be paid in future years that
26. When an asset is purchased and put into service, an estimate is
made of the expected useful life of the asset. However, as the asset is
8-16
arise, it is necessary to revise the estimated useful life of the asset and,
consequently, the amount of depreciation expense per period. The
27. When an expenditure improves the quality of an asset, this
improvement is accounted for as if a new asset is purchased; the
equipment account is debited. The improvement is depreciated over
28. When a long-term operational asset is sold for a gain, total assets and
equity increase by the amount of the gain. The gain is the amount the
29. Depletion is the process of systematically allocating the cost of
natural resources to expense based on estimated production of the
8-17
30. Some of the most common intangible assets include patents,
31. One major difference between U.S. GAAP and IFRS for long-term
operational assets is that U.S. GAAP requires the use of historical
cost for its long-term assets, but under IFRS a company has two
32. If two companies in the same industry have the same asset with the
same cost and each makes a different estimate of useful life or
salvage value, and/or uses a different depreciation method, the
depreciation expense will be of differing amounts. More depreciation