(continued) P 7-70B
Req. 2
The depreciation method that maximizes reported income in the first
year of the computer’s life is the straight-line method, which produces
Req. 3
DEPRECIATION METHOD THAT
IN THE EARLY YEARS
MAXIMIZES
REPORTED
INCOME
MINIMIZES
INCOME TAX
PAYMENTS
Net income for first year:
SL
DDB
Cash provided by operations
before income tax
$158,000
$158,000
Depreciation expense
50,400
110,800
Income before income tax
107,600
47,200
Income tax expense (32%)
34,432
15,104
Net income
$ 73,168
$ 32,096
Net income advantage of SL over DDB $41,072
Cash flow analysis for first year:
Cash provided by operations before
income tax
$158,000
$158,000
Income tax paid
(34,432)
(15,104)
Cash provided by operations
(cash flow)
$123,568
$142,896
Cash flow advantage of DDB over SL $19,328
(20-25 min.) P 7-71B
Req. 1
Millions
$ 5,638
(2,124)
$ 3,514
Req. 2
Evidences of the purchase of plant assets and goodwill:
1. Property, plant, and equipment increased on the balance sheet.
Req. 3
Property, Plant, and Equipment
Accumulated Depreciation
2/28/13 Bal.
4,992
Cost of
Accum. depr.
2/28/13 Bal.
1,729
Purchased
assets sold
of assets sold
Depr. during
during 2014
923
in 2014
277
in 2014
166
2014
561
2/28/14 Bal.
5,638
2/28/14 Bal.
2,124
2/28/13 Bal.
610
Purchased
during 2014
47*
2/28/14 Bal.
657
(20-30 min.) P 7-72B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Iron Ore ……………………………………………..
2,750,000
Cash……………………………………………..
2,750,000
Iron Ore ……………………………………………..
67,000
Cash……………………………………………..
67,000
Iron Ore …………………………………………….
78,500
Cash……………………………………………..
78,500
Iron Ore …………………………………………….
38,550
Note Payable …………………………………
38,550
Iron Ore Inventory ………………………………
580,125*
Iron Ore ………………………………………..
580,125
Accounts Receivable (38,000 × $37) …….
1,406,000
Sales Revenue ………………………………
1,406,000
Cost of Iron Ore Sold (38,000 x $13.65) ..
518,700
Iron Ore Inventory………………………….
518,700
Operating Expenses …………………………..
412,000
Cash……………………………………………..
412,000
Income Tax Expense (see Req. 2)………..
166,355
Income Tax Payable ………………………
166,355
*$2,750,000 + $67,000 + $78,500 + $38,550 = $2,934,050;
$2,934,050 / 215,000 = $13.65 x 42,500 = $580,125
(continued) P 7-72B
Req. 2
Central Atlantic Energy Company
Income Statement — Iron Ore Mine Project
Year 1
Sales revenue ………………………………………
$1,406,000
Cost of iron ore sold …………………………….
$518,700
Operating expenses ……………………………..
412,000
930,700
Income before tax ………………………………..
475,300
Income tax expense (35%) ……………………
166,355
Net income ………………………………………….
$ 308,945
The Iron Ore Mine project was very profitable. Net income of $308,945 on
sales of $1,406,000 (22%) is outstanding.
Req. 3
Iron ore inventory ($580,125 – $518,700)..
$ 61,425
Iron ore ($2,934,050 – $580,125) ……………
2,353,925
Accounts receivable …………………………….
1,406,000
Income tax payable ………………………………
166,355
Note payable ……………………………………….
38,550
(30-40 min.) P 7-73B
Req. 1
To determine the gain or loss on the sale of a plant asset, compare the
cash received to the asset’s book value, as follows:
Billions
Cash received from sale of asset ………………………….
$ 0.7
Book value of asset sold:
Cost ……………………………………………………………….
$ 1.1
Less: Accumulated depreciation ……………………..
(0.8)
( 0.3)
Gain (Loss) on sale ……………………………………………..
$ 0.4
Req. 2
Balance sheet at December 31, 2014:
Property, plant, and equipment ($4.2 + $1.8 − $1.1) …………..
$ 4.9
Less: Accumulated depreciation ($2.7 + $1.6 − $0.8) …………
(3.5)
Property, plant, and equipment, net (book value) ………………
$ 1.4
Req. 3
Statement of cash flows for 2014:
Cash flows from operating activities:
Net income ($26.2 − $22.0) …………………………………………..
$4.2
Reconciliation of net income to
net cash provided by operations:
Depreciation ………………………………………………………
1.6
Cash flows from investing activities:
Purchases of property, plant, and equipment …………………….
$(1.8)
Sales of property, plant, and equipment …………………………...
0.7
(20-30 min.) P 7-74B
Req. 1
Feb. 2, 2013 Jan. 28, 2012
Net income
$ 986
$ 1,167
÷ Net revenue
÷ $19,279
÷ $18,804
= Net profit
margin ratio
= 5.11%
= 6.21%
Req. 2
Feb. 2, 2013 Jan. 28, 2012
Sales (net revenue)
$19,279
$18,804
÷ Average total assets
÷ $14,027
÷ $13,856
= Asset turnover
= 1.37
= 1.36
Req. 3
Feb. 2, 2013 Jan. 28, 2012
Net income
$ 986
$ 1,167
÷ Average total assets
÷ $14,027
÷ $13,856
= Return on assets
7.03%
8.42%
Req. 4
All of the following contributed to the decrease in ROA during the most
recent year:
(20-30 min.) P 7-75B
Req. 1
(Amounts in millions)
Property & Equipment
Accumulated Depreciation
12/31/13 Bal.
32,009
X =
Cost of
Accum. depr.
= X
12/31/13 Bal.
22,065
Purchased
assets sold
of assets sold
Depr. during
during 2014
3,518
in 2014
in 2014
2014
2,149
12/31/14 Bal.
34,075
12/31/14 Bal.
23,312
X = $1,452, cost of P & Eq. sold
X = $902, accumulated depreciation on
P & Eq. sold
Req. 2
Cost
$1,452
– Acc. Depr.
–902
= Book value of assets sold
$ 550
Book value
= Loss on sale
(continued) P 7-75B
Req. 3
Cash ………………………………………………………………………………
71
Accumulated Depreciation – Prop. & Equipment ……………….
902
Loss on the Sale of Prop. & Equipment …………………………….
479
Property & Equipment …………………………………………………
1,452
Assets decrease, liabilities unaffected, and stockholders’ equity
decreases; revenues unaffected, expenses (losses) increase, and net
income decreases.
The total book value of $550 ($1,452 − $902) is $479 more than the sales
price of $71. This is the same calculation as in Req. 2.
Req. 4
Property & Equipment, net
12/31/13 Bal.
9,944
550
Book value, assets sold
Purchases
3,518
2,149
Depreciation
12/31/14 Bal.
10,763
Challenge Exercises and Problem
(15-20 min.) E 7-76
Millions
Net income under straight-line depreciation ………….
$64
Difference in depreciation for 2015 (year 2 of 8):
Straight line depreciation, as reported ………………
$30
DDB depreciation for year 2 (see below) ……………
45
Increase in depreciation expense ……………………..
15
Decrease in net income ………………………………………..
(15)
Net income Kerusi can expect for 2015
if the company uses DDB depreciation ……………..
$49
DDB depreciation by year:
Millions
Year
1
$240 × 2/8 ……………………………………………………
$60
2
($240 − $60) × 2/8 …………………………………………
45
(15-25 min.) E 7-77
1
2
3
4
1.
Total current assets
2.
Equipment, net
€15.0 U*
€10.0 U**
€5.0 U
Correct
3.
Net income
€15.0 U*
€5.0 O
€5.0 O
€5.0 O
_____
U = Understated
O = Overstated
(20-30 min.) P 7-78
(All amounts in millions)
Req.1
Property and Equipment
Bal 5/31/2011 (BS) 33,686
Capital expenditures (SCF) 4,007
134 Impairment (note)
1,395 Original cost of plant and
equipment sold (plug)
Bal.5/31/2012 (BS) 36,164
Accumulated Depreciation
Acc. Depr. on assets sold 1,327
(plug)
18,143 Bal. 5/31/2011 (BS)
2,100 Depr. exp.(note)
18,916 Bal 5/31/2012 (BS)
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Property and Equipment …………………..
4,007
Cash ……………………………………………
4,007
Depreciation Expense ………………………
2,100
Accumulated Depreciation ……………
2,100
Loss on Impairment of Prop & Equip …
134
Property and Equipment ………………
134
Cash (SCF) ………………………………………
74
Accumulated Depreciation ………………..
1,327
Gain on Sale of Prop & Equip …….
6
Property and Equipment ……………
1,395
Decision Cases
(30-45 min.) Decision Case 1
Req. 1
La Petite France Bakery and Burgers Ahoy!
Income Statements
For the Year Ended December 31
ACCOUNT TITLE
La Petite France
(FIFO and SL)
Burgers Ahoy!
(LIFO and DDB)
Sales revenue……………………
$350,000
$350,000
Cost of goods sold……………..
128,000*
149,000*
Gross margin………………….…
222,000
201,000
Operating expenses………….…
$50,000
$50,000
Depreciation expense
La Petite (SL):
[($150,000 − $20,000) / 10].
13,000
Burgers (DDB):
($150,000 × 1/10 × 2)……...
30,000
Total expenses…………………..
63,000
80,000
Income before tax…………….…
159,000
121,000
Income tax expense (40%)…….
63,600
48,400
Net income……………………….
$ 95,400
$ 72,600