Chapter 7
Plant Assets, Natural Resources, &
Intangibles
Short Exercises
(5 min.) S 7-1
1. Whole Foods Market, Inc., reported Buildings and leasehold
improvements of $2,219,763 (thousand) and Fixtures and equipment of
(Student responses may vary)
(5 min) S 7-2
Land ($320,000 × .32*) ……………………………….
102,400
Building ($320,000 × .65) …………………………...
208,000
Equipment ($320,000 × .03) ………………………..
9,600
Note Payable ………………………………………
320,000
*Supporting computations:
Current
Market
Value
Percent of Total
Land …………………………...
$112,000
$112,000 / $350,000
=
32.0%
Building ………………………
227,500
$227,500 / $350,000
=
65.0%
Equipment …………………..
10,500
$ 10,500 / $350,000
=
3.0%
Total …………………………...
$350,000
100.0%
(5 min.) S 7-3
1. C
2. C
(10-15 min.) S 7-4
1. First-year depreciation:
Straight-line ($52,400,000 − $6,400,000) / 5 years ………….
$ 9,200,000
Units-of-production $6.30/mile* × 835,000 miles …………..
$ 5,260,500
Double-declining-balance ($52,400,000 × 40%) …………….
$20,960,000
Straight-line ($52,400,000 − $6,400,000) / 5 years ………….
$ 9,200,000
Units-of-production $6.30/mile*× 1,650,000 miles …………
$10,395,000
Double-declining-balance
[($52,400,000 − $20,960,000) × 40%] …………………………
$12,576,000
*[($52,400,000 − $6,400,000) / 7,300,000 miles] = $6.30/mile
2. Book value:
Straight-
Line
Units-of–
Production
Double-
Declining-
Balance
Cost …………………………...
$52,400,000
$52,400,000
$52,400,000
Less: Accumulated
Depreciation …………….
(9,200,000)
(5,260,500)
(20,960,000)
Book value, Year 1 ……….
$43,200,000
$47,139,500
$31,440,000
(10 min.) S 7-5
1. Double-declining-balance (DDB) depreciation offers the tax
advantage for the first year of an asset’s use. Because DDB’s first-
2.
DDB depreciation ……………………………………………..
$20,960,000
Straight-line depreciation ………………………………….
(9,200,000)
Excess depreciation tax deduction ……………………
$11,760,000
Income tax rate…………………………………………………
× .36
Income tax savings for first year ……………………….
$ 4,233,600
(5-10 min.) S 7-6
First-year depreciation (for a partial year):
a. Straight-line (€41,000,000 − €5,200,000) / 4 years
× 3/12 ……………………………………………………………..
€2,237,500
b. Units-of–production (€41,000,000 − €5,200,000) /
5,200,000 miles × 390,000 miles) or
€2,683,200 if depreciation per unit is rounded …..
€2,685,000
c. Double-declining-balance (€41,000,000 × 2/4
× 3/12) …………………………………………………………….
€5,125,000
SL depreciation produces the highest net income (lowest depreciation).
DDB depreciation produces the lowest net income (highest
depreciation).
(10 min.) S 7-7
Depreciation Expense — Concession Stand ………………..
36,000
Accumulated Depreciation — Concession Stand ….
36,000
Depreciation for years 1-6:
(5-10 min.) S 7-9
1.
Units-of-production depreciation method is similar to the method
used to calculate depletion.
Billions
2.
Oil Inventory ($17* × .8) ………………………………………
13.6
Oil Reserves …………………………………………………
13.6
*$17 = $204 / 12
Billions
3.
Cost of Oil Sold ($17 × .3) …………………………………..
5.1
Oil Inventory …………………………………………………
5.1
(5-10 min.) S 7-10
Req. 1
Cost of goodwill purchased:
Millions
Purchase price paid for Super Snacks, Inc.
$5.2
Market value of Super Snacks’ net assets:
Market value of Super Snacks’ assets
$ 9.0
Less: Super Snacks’ liabilities
(7.1)
Market value of Super Snacks’ net assets
1.9
Cost of goodwill
$3.3
Req. 2
In future years Handy Snacks, Inc. will determine whether its goodwill
(5 min.) S 7-11
(Dollar amounts in millions)
Return on assets
=
Net income
÷
Average total assets
18%
=
$15
÷
$83
(5 min.) S 7-12
DuPont Analysis
Net profit margin
ratio
X
Total asset turnover
=
ROA
(Net income/Net
sales)
X
(Net sales/Average
total assets)
=
(Net income/Average
total assets)
2014
$37,500
X
$500,000
=
15.0%
$500,000
$250,000
.075
X
2.0
=
15.0%
2013
$33,600
X
$450,000
=
14.0%
$450,000
$240,000
.0747
X
1.875
=
14.0%
(5 min.) S 7-13
Richardson Satellite Systems, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from investing activities:
Millions
Purchase of other companies ………………………………………
$(8.0)
Capital expenditures ……………………………………………………
(4.2)
Proceeds from sale of North American operations ………..
6.4
Net cash (used for) investing activities …………………….
$(5.8)
(5 min.) S 7-14
Asset
Book
Value
Estimated
Future
Cash
Flows
Fair
Value
Impaired?
(Y or N)
Amount
of Loss
a. Equipment
$160,000
$120,000
$100,000
Y
$60,000
b. Trademark
$320,000
$420,000
$380,000
N
—
c. Land
$56,000
$30,000
$28,000
Y
$28,000
d. Factory
building
$3 million
$3 million
$2 million
N
—
Exercises
(5-10 min.) E 7-15A
(10-15 min.) E 7-16A
Allocation of cost to individual machines:
Machine
Appraised
Value
Percentage of Total
Appraised (Market) Value
Total
Cost
Cost of
Each
Machine
1
$ 62,000
$62,000 / $202,000
=
.307
$164,000 × .307
=
$ 50,348
2
48,000
48,000 / 202,000
=
.238
164,000 × .238
=
39,032
3
92,000
92,000 / 202,000
=
.455
164,000 × .455
=
74,620
Totals
$202,000
1.00
$164,000
(5-10 min.) E 7-17A
(a) Purchase price
(b) Transportation and insurance
(c) Sales tax
(d) Installation
Capital Expenditure
Capital Expenditure
Capital Expenditure
Capital Expenditure
(e) Training of personnel
(f) Reinforcement to platform
(g) Income tax
Capital Expenditure
Capital Expenditure
Immediate Expense
(h) Major overhaul
(i) Ordinary recurring repairs
Capital Expenditure
Immediate Expense
(j) Lubrication before machine is placed in
service
Capital Expenditure
(k) Periodic lubrication
Immediate Expense
(15 min.) E 7-18A
Req. 1
Journal
ACCOUNT TITLES
DEBIT
CREDIT
a.
Land …………………………………………………………..
273,000
Cash ……………………………………………………..
273,000
b.
Building
($1,300 + $15,300 + $745,000 + $36,200) ………..
797,800
Note Payable ………………………………………….
745,000
Cash ($1,300 + $15,300 + $36,200) ……………
52,800
c.
Depreciation Expense – Building …………………
6,650
Accumulated Depreciation – Building
($797,800 − $332,300) / 35 × 6/12 ……………..
6,650
Req. 2
BALANCE SHEET
Plant assets:
Land ……………………………………………………..
$273,000
Building …………………………………………………
$797,800
Less Accumulated depreciation………………
(6,650)
Building, net …………………………..……………..
791,150
Req. 3
INCOME STATEMENT
Expense:
Depreciation expense …………………………….
$ 6,650
(15-20 min.) E 7-19A
Req. 1
Year
Straight-Line
Units–of–
Production
Double-Declining-
Balance
2014
$ 6,525
$10,795
$14,300
2015
6,525
8,670
7,150
2016
6,525
5,015
3,575
2017
6,525
1,620
1,075
$26,100
$26,100
$26,100
_____
Computations:
Straight–line: ($28,600 − $2,500) ÷ 4 = $6,525 per year.
Units–of–production: ($28,600 − $2,500) ÷ 154,000 miles = $.17 per mile;
2014
63,500
×
$.17
=
$10,795
2015
51,000
×
.17
=
8,670
2016
29,500
×
.17
=
5,015
2017
$26,100 − $10,795 − $8,670 − $5,015
=
1,620*
*Total depreciation cannot exceed $26,100, therefore the last year is limited,
due to rounding differences.
Double-declining-balance — Twice the straight-line rate: 1/4 × 2 = 50%
2014
$28,600 × .50
=
$14,300
2015
($28,600 − $14,300) × .50
=
7,150
2016
($14,300 − $7,150) x .50
=
3,575
2017
($26,100 max. deprec. − $14,300 − $7,150 − $3,575)
=
1,075
Req. 2
(continued) E 7-19A
Req. 3
For income tax purposes, the double-declining-balance method is best
(15 min.) E 7-20A
INCOME STATEMENT
Expenses:
Depreciation expense — Building
[($53,000 + $103,000 + $66,000) − $56,000] / 25 ………..
$ 6,640
Depreciation expense — Furniture and Fixtures
($59,000 × 2/5) ……………………………………………………….
23,600
Supplies expense
($9,600 − $1,500) ……………………………………………………
8,100
BALANCE SHEET
Current assets:
Supplies ………………………………………………………………….
$ 1,500
Plant assets:
Building ($53,000 + $103,000 + $66,000)…
$222,000
Less: Accumulated depreciation………….
(6,640)
$215,360
Furniture and fixtures………………………..
59,000
Less: Accumulated depreciation………….
(23,600)
35,400
STATEMENT OF CASH FLOWS
Cash flows from investing activities:
Purchase of buildings ($53,000* + $66,000) ………………..
$(119,000)
Purchase of furniture and fixtures …………………………….
(59,000)
_____
*Does not include the $103,000 note payable because Sunrise Bakery
paid no cash on the note.
(10-15 min.) E 7-21A
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Year
20
Depreciation Expense – Building ($425,000 ÷ 40)
10,625
Accumulated Depreciation — Building ……
10,625
Year
21
Depreciation Expense – Building …………………
18,500*
Accumulated Depreciation — Building ……
18,500
(15-20 min.) E 7-22A
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
2015
Depreciation for 9 months:
Sept.
30
Depreciation Expense – Fixtures …………
1,746*
Accumulated Depreciation —
Fixtures ……………………………………..
1,746
Sale of fixtures:
30
Cash ………………………………………………….
3,300
Accumulated Depreciation —
Fixtures ($3,880 + $1,746)………………….
5,626
Loss on Sale of Fixtures …………………….
774**
Fixtures ………………………………………..
9,700
_____
*2014 depreciation: $9,700 × 2/5 = $3,880
2015 depreciation: ($9,700 − $3,880) × 2/5 × 9/12 = $1,746
**Loss on sale of fixtures:
Sale price of old fixtures ………………………………….
$ 3,300
Book value of old fixtures:
Cost ……………………………………………………………
$9,700
Less: Accumulated depreciation ($3,880 +
$1,746) …………………………..……………………….
(5,626)
(4,074)
Loss on sale ……………………………………………………
$ (774)
(10-15 min.) E 7-23A
Cost of old truck ……………………………………………………
$360,000
Less: Accumulated depreciation:
($360,000 − $50,000) ×
75 + 108 + 135 + 99
(129,270)*
1,000
_______
Book value of old truck …………………………………………
$230,730
_____
aAlternate solution setup for accumulated depreciation:
($360,000 − $50,000)
=
$.31 per mile
1,000,000 miles
75,000 + 108,000 + 135,000 + 99,000 = 417,000 miles driven
Accumulated depreciation
=
417,000 miles × $.31
=
$129,270
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
2017
Truck – Freightliner …………………………..…….
240,000
Accumulated Depreciation – Mack Truck ….
129,270
Loss on Disposal of Mack Truck ………………
10,730
Truck – Mack ……………………………………….
360,000
Cash ……………………………………………………
20,000
(10-15 min.) E 7-24A
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
(a)
Purchase of mineral assets:
Mineral Asset …………………………………
625,000
Cash …………………………………………
625,000
(b)
Payment of fees and other costs:
Mineral Asset ($810 + $2,000) ………….
2,810
Cash …………………………………………
2,810
Mineral Asset …………………………………
55,390
Cash …………………………………………
55,390
(c)
Depletion for the first year
Mineral Asset Inventory…………………..
131,040*
Mineral Asset …………………………….
131,040
(d)
Sale of ore
Cost of Mineral Asset Sold ………………
120,120**
Mineral Asset Inventory ……………..
120,120
_____
*$625,000 + $810 + $2,000 + $55,390 = $683,200
(10-15 min.) E 7-25A
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Req.
1
(a)
Purchase of patent:
Patents ……………………………………………
1,500,000
Cash ……………………………………………
1,500,000
(b)
Amortization for each year:
Amortization Expense — Patents
($1,500,000 ÷ 15) ………………………….
100,000
Patents ……………………………………..
100,000
Req.
2
Impairment of patent in year 10:
Impairment Loss on Patents …………….
500,000**
Patents ………………………………………
500,000
Yes, the asset is impaired because its net book value ($500,000*) is
greater than the estimated future cash flows ($400,000).
_____
*Asset remaining book value: $1,500,000 − ($100,000 × 10) = $500,000
**Impairment loss: $500,000 [$500,000 (book value) − $0 (fair value)]
(5-10 min.) E 7-26A
Req. 1
Cost of goodwill purchased:
Millions
Purchase price paid for BaySide.com …………………..
$30
Market value of BaySide’s net assets:
Market value of BaySide’s assets ($18 + $31). ……
$49
Less: BaySide’s liabilities ………………………………..
(35)
Market value of BaySide’s net assets ……………….
14
Cost of goodwill ………………………………………………….
$16
Req. 2
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Current Assets …………………………………………
18
Long-Term Assets ……………………………………
31
Goodwill ………………………………………………….
16
Liabilities …………………………………………..
35
Cash ………………………………………………….
30
Req. 3
Hughes Co. will determine whether its goodwill has been impaired in