(5-10 min.) E 7-27A
Req. 1
Net profit margin ratio
for the years ended:
January 31, 2013
January 31, 2012
Net earnings
$ 2,010
=
4.12%
$ 1,783
=
3.78%
Net sales
$48,815
$47,220
The net profit margin ratio improved from 2012 to 2013.
Req. 2
Asset turnover for
the years ended:
January 31, 2013
January 31, 2012
Net sales
$48,815
=
1.45
$47,220
=
1.43
Average total assets
$33,699
$33,005
The asset turnover improved slightly from 2012 to 2013.
Req. 3
Return on assets
for the years
ended:
January 31, 2013
January 31, 2012
Net earnings
$ 2,010
=
5.96%
$ 1,783
=
5.40%
Average total
assets
$33,699
$33,005
or
4.12% x 1.45
=
5.97%*
3.78% x 1.43
=
5.41%*
The return on assets improved from 2012 to 2013; the increase in the
net profit margin ratio was mostly responsible for this.
_____
*difference due to rounding
(10 min.) E 7-28A
a.
Sale of building (or disposal of building) ………………………
$740,000
b.
Insurance proceeds from fire (or disposal of building) …..
185,000
c.
Renovation of store (or capital expenditures) ………………..
(203,000)
d.
Purchase of store fixtures (or capital expenditures) ………
(68,000)
(5-10 min.) E 7-29B
(10-15 min.) E 7-30B
Allocation of cost to individual machines:
Machine
Appraised
Value
Percentage of Total
Appraised (Market) Value
Total
Cost
Cost of
Each
Machine
1
$ 68,000
$68,000 / $210,000
=
.324
$175,000 × .324
=
$ 56,700
2
54,000
54,000 / 210,000
=
.257
175,000 × .257
=
44,975
3
88,000
88,000 / 210,000
=
.419
175,000 × .419
=
73,325
Totals
$210,000
1.00
$175,000
Sale price of machine no. 3 ……………………..
$ 88,000
Cost ……………………………………………………….
(73,325)
Gain on sale of machine ………………………….
$ 14,675
(5-10 min.) E 7-31B
(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 7-32B
Req. 1
Journal
ACCOUNT TITLES
DEBIT
CREDIT
a.
Land …………………………………………………………..
315,000
Cash ……………………………………………………..
315,000
b.
Building
($1,700 + $15,700 + $718,000 + $35,900) ………..
771,300
Note Payable ………………………………………….
718,000
Cash ($1,700 + $15,700 + $35,900) ……………
53,300
c.
Depreciation Expense – Building …………………
4,263
Accumulated Depreciation – Building
($771,300 − $323,650) / 35 × 4/12 ……………..
4,263
Req. 2
BALANCE SHEET
Plant assets:
Land ……………………………………………………..
$315,000
Building ………………………………………………..
$771,300
Less: Accumulated depreciation …………….
(4,263)
Building, net ………………………………………….
767,037
Req. 3
INCOME STATEMENT
Expense:
Depreciation expense – Building …………….
$ 4,263
(15-20 min.) E 7-33B
Req. 1
Year
Straight-Line
Units–of–
Production
Double-Declining-
Balance
2014
$ 9,875
$12,350
$21,500
2015
9,875
12,160
10,750
2016
9,875
7,980
5,375
2017
9,875
7,010
1,875
$39,500
$39,500
$39,500
_____
Computations:
Straight–line: ($43,000 − $3,500) ÷ 4 = $9,875 per year.
Units–of–production: ($43,000 − $3,500) ÷ 208,000 miles = $.19 per mile;
2014
65,000
×
$.19
=
$12,350
2015
64,000
×
.19
=
12,160
2016
42,000
×
.19
=
7,980
2017
$39,500 − $12,350 − $12,160 − $7,980
=
7,010*
*Total depreciation cannot exceed $39,500, therefore the last year is limited,
due to rounding differences.
Double-declining-balance — Twice the straight-line rate: 1/4 × 2 = 50%
2014
$43,000 × .50
=
$21,500
2015
($43,000 − $21,500) × .50
=
10,750
2016
($21,500 − $10,750) x .50
=
5,375
2017
($39,500 max. depreciation − $21,500 − $10,750 − $5,375)
=
1,875
Req. 2
(continued) E 7-33B
Req. 3
(15 min.) E 7-34B
INCOME STATEMENT
Expenses:
Depreciation expense — Building
[($158,000 + $65,000) − $50,000] / 25 ………………………..
$ 6,920
Depreciation expense — Furniture and Fixtures
($51,000 × 2/5) …………………………..…………………………...
20,400
Supplies expense
($9,000 − $1,600) …………………………………………………….
7,400
BALANCE SHEET
Current assets:
Supplies …………………………………………………………………….
$ 1,600
Plant assets:
Building ($158,000 + $65,000) …………………..
$223,000
Less: Accumulated depreciation ………………
(6,920)
$216,080
Furniture and fixtures ………………………………
51,000
Less: Accumulated depreciation ………………
(20,400)
30,600
STATEMENT OF CASH FLOWS
Cash flows from investing activities:
Purchase of buildings ($54,000* + $65,000) ……………….
$(119,000)
Purchase of furniture and fixtures…………………………….
(51,000)
_____
*Does not include the $104,000 note payable because Early Risers Café
paid no cash on the note.
(10-15 min.) E 7-35B
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Year
20
Depreciation Expense – Building ($450,000 ÷ 40)
11,250
Accumulated Depreciation — Building ……..
11,250
Year
21
Depreciation Expense – Building …………………
21,500*
Accumulated Depreciation — Building ……..
21,500
*Computations:
Depreciable cost: $540,000 − $90,000 = $450,000
(15-20 min.) E 7-36B
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
2015
Depreciation for 10 months:
Oct.
31
Depreciation Expense – Fixtures …………
1,840*
Accumulated Depreciation —
Fixtures ……………………………………..
1,840
Sale of fixtures:
31
Cash ………………………………………………….
2,700
Accumulated Depreciation —
Fixtures ($3,680 + $1,840) …………………
5,520
Loss on Sale of Fixtures …………………….
980**
Fixtures ………………………………………..
9,200
_____
*2014 depreciation: $9,200 × 2/5 = $3,680
2015 depreciation: ($9,200 − $3,680) × 2/5 × 10/12 = $1,840
**Loss on sale of fixtures:
Sale price of old fixtures ………………………………….
$ 2,700
Book value of old fixtures:
Cost ……………………………………………………………
$9,200
Less: Accumulated depreciation ($3,680 +
$1,840) ……………………………………………………
(5,520)
(3,680)
Loss on sale ……………………………………………………
$ (980)
(10-15 min.) E 7-37B
Cost of old truck …………………………………………………..
$430,000
Less: Accumulated depreciation:
($430,000 − $20,000) ×
81+ 111 + 141 + 75
(167,280)*
1,000
_______
Book value of old truck ………………………………………..
$262,720
_____
*Alternate solution setup for accumulated depreciation:
($430,000 − $20,000)
=
$.41 per mile
1,000,000 miles
81,000 + 111,000 + 141,000 + 75,000 = 408,000 miles driven
Accumulated depreciation
=
408,000 miles × $.41
=
$167,280
Calculation of gain or loss:
Purchase price of Freightliner truck ……….. $280,000
Cash paid for Freightliner truck ……………… (25,000)
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
2017
Truck – Freightliner ……………………….
280,000
Accumulated Depreciation – Mack
Truck ……………………………………….
167,280
Loss on Disposal of Mack Truck……
7,720
Truck – Mack ………………………..
430,000
Cash…………………………………….
25,000
(10-15 min.) E 7-38B
Journal
DATE
ACCOUNT TITLES AND
EXPLANATION
DEBIT
CREDIT
(a)
Purchase of mineral assets:
Mineral Asset………………………………..
628,000
Cash ……………………………………….
628,000
(b)
Payment of fees and other costs:
Mineral Asset ($930 + $2,300) ………..
3,230
Cash ……………………………………….
3,230
Mineral Asset………………………………..
66,820
Cash ……………………………………….
66,820
(c)
Depletion for the year
Mineral Asset Inventory …………………
124,700*
Mineral Asset …………………………..
124,700
(d)
Sales of ore
Cost of Mineral Asset Sold …………….
113,950**
Mineral Asset Inventory ……………
113,950
_____
*$628,000 + $930 + $2,300 + $66,820 = $698,050
$698,050 ÷ 325,000 tons = $2.15 per ton
58,000 tons × $2.15 = $124,700
**53,000 tons x $2.15 = $113,950
(10-15 min.) E 7-39B
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Req.
1
(a)
Purchase of patent:
Patents ……………………………………..
1,200,000
Cash……………………………………..
1,200,000
(b)
Amortization for each year:
Amortization Expense — Patents
($1,200,000 ÷ 12) ………………………..
100,000
Patents …………………………………
100,000
Req.
2
Impairment loss in year 8:
Impairment Loss on Patents ………
400,000
Patents …………………………………
400,000
The asset is impaired because the net book value ($400,000*) is greater
than the estimated future cash flows ($350,000). The amount of the
impairment loss is $400,000 (net book value minus fair value of $-0-).
*Asset remaining book value: $1,200,000 – ($100,000 x 8) = $400,000
(5-10 min.) E 7-40B
Req. 1
Cost of goodwill purchased:
Millions
Purchase price paid for Southwest.com ………………………..
$28
Market value of Southwest’s net assets:
Market value of Southwest’s assets ($14 + $32) ………..
$46
Less: Southwest’s liabilities ……………………………………
(29)
Market value of Southwest’s net assets …………………..
17
Cost of goodwill ………………………………………………………….
$11
Req. 2
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Current Assets ……………………………………………….
14
Long-Term Assets ………………………………………….
32
Goodwill ………………………………………………………..
11
Liabilities …………………………………………………
29
Cash ………………………………………………………..
28
Req. 3
Hurd Co. will determine whether its goodwill has been impaired in
(5-10 min.) E 7-41B
Req. 1
Net profit margin ratio
for the years ended:
January 31, 2013
January 31, 2012
Net earnings
$ 1,116
=
1.36%
$ 70
=
0.09%
Net sales
$82,189
$76,733
The net profit margin ratio improved from 2012 to 2013.
Req. 2
Asset turnover for
the years ended:
January 31, 2013
January 31, 2012
Net sales
$82,189
=
3.50
$76,733
=
3.32
Average total assets
$23,505
$23,126
The asset turnover improved slightly from 2012 to 2013.
Req. 3
Return on assets
for the years
ended:
January 31, 2013
January 31, 2012
Net earnings
$ 1,116
=
4.75%
$ 70
=
0.30%
Average total
assets
$23,505
$23,126
or
1.36% x 3.50
=
4.76%*
0.09% x 3.32
=
0.30%
The return on assets improved from 2012 to 2013; the increase in the
net profit margin ratio was mostly responsible for this.
_____
*difference due to rounding
(10 min.) E 7-42B
a.
Sale of building (or disposal of building) ……………………..
$710,000
b.
Insurance proceeds from fire (or disposal of building) ….
108,000
c.
Renovation of store (or capital expenditures) ……………….
(201,000)
d.
Purchase of store fixtures (or capital expenditures) ……..
(73,000)
Quiz
Q7-43
a
Q7-44
b
Q7-45
c
[$480,000 / ($480,000 + $270,000) × ($3,000,000 +
$1,000,000)] ÷ 15 = $170,667
Q7–46
d
Q7–47
c
DDB [($34,000 × 2/5) = $13,600; ($34,000 − $13,600 ×
2/5)] = $8,160
UOP ($34,000 − $4,000) /100,000 hrs. = $.30 ×
25,000 hrs.) = $7,500
Q7–48
b
($26,000 − $2,000) / 6 × 3 = $12,000;
($26,000 − $12,000) / 7 = $2,000
Q7–49
a
Q7–50
c
Q7-51
b
Q7-52
SL depreciation = $1,175 [($10,200 – $800) / 8]
Book value = $7,850 [$10,200 – ($1,175 x 2)]
Q7-53
d
$1,050 gain = $8,900 (sale price) − $7,850 (book value)
Q7–54
b
($832,000 − $68,800) × (54,000 / 240,000) = $171,720
Q7–55
d
$66 − ($72 − $23) = $17
Q7–56
c
$1,000,000 − $820,000
Q7–57
a
$45,000 / $500,000
Problems
(20-30 min.) P 7-58A
Req. 1
ITEM
LAND
LAND
IMPROVEMENTS
SALES
BUILDING
GARAGE
BUILDING
FURNITURE
(a)
$292,000
$ 73,000
(b)
8,300
(c)
$ 35,400
(d)
300
(e)
5,900
(f)
1,500
(g)
$ 750
(h)
19,200
(i)
516,000
(j)
41,000
(k)
9,600
(l)
6,900*
(m)
52,500
(n)
7,800
(o)
4,500
38,250
2,250
(p)
$83,800
(q)
1,200
Totals
$306,500
$108,600
$583,800
$116,250
$85,000
Computations:
(a) Land: $320,000 / $400,000 × $365,000 = $292,000
_____
*Some accountants would debit this cost to the Land account.
(continued) P 7-58A
Req. 2
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Dec.
31
Depreciation Expense — Land
Improvements ($108,600 / 20 × 9/12) ………..
4,073*
Accumulated Depreciation —
Land Improvements …………………………
4,073
31
Depreciation Expense — Sales Building
($583,800 / 50 × 9/12) ………………………………
8,757
Accumulated Depreciation —
Sales Building …………………………………
8,757
31
Depreciation Expense — Garage
Building ($116,250 / 50 × 9/12) …………………
1,744
Accumulated Depreciation —
Garage Building ………………………………
1,744
31
Depreciation Expense — Furniture
($85,000 / 12 × 9/12) ………………………………..
5,312
Accumulated Depreciation —
Furniture …………………………………………
5,312
____
*$3,814 ($101,700 / 20 × 9/12) if $6,900 (l in Req. 1) is debited to Land.
(continued) P 7-58A
Req. 3
This problem shows how to determine the cost of a plant asset. It also
demonstrates the computation of depreciation for a variety of plant
assets. Because virtually all businesses use plant assets, a manager
(15 min.) P 7-59A
Req. 1
Journal
ACCOUNT TITLES
DEBIT
CREDIT
Equipment …………………………………………………………..
145,000
Cash …………………………………………………………….
145,000
Depreciation Expense — Buildings ………………………
32,600
Accumulated Depreciation — Buildings ………….
32,600*
Depreciation Expense — Equipment …………………….
44,300
Accumulated Depreciation — Equipment ………..
44,300**
*($739,000 − $87,000) / 20
**[($412,000 − $263,000) × 2/10 + ($145,000 × 2/10 × 6/12)]
Req. 2
BALANCE SHEET
Property, plant, and equipment:
Land ………………………………………………………….
$151,000
Buildings …………………………………………………..
$ 739,000
Less: Accumulated Depreciation
($348,000 + $32,600) ……………………….
(380,600)
358,400
Equipment ($412,000 + $145,000) ………………..
$ 557,000
Less: Accumulated Depreciation
($263,000 + $44,300) ……………………….
(307,300)
249,700
Total property, plant, and equipment ……………….
$759,100