9-1 Solutions
CHAPTER 9
LONG-LIVED TANGIBLE AND INTANGIBLE ASSETS
Questions, Exercises, and Problems: Answers and Solutions
9.2 The central concept underlying GAAP for these three items is the ability to
identify and reliably measure expected future benefits. The self-constructed
building has physical substance and the accountant can observe the effect of
Expenditures on software development present an in-between case. The
programming underlying the software is embedded in a computer but the
9.3 The central concept underlying GAAP for these three items is the ability to
identify and reliably measure expected future benefits. Expenditures to
Solutions 9-2
9-3 Solutions
9.3 continued.
9.4 a. Over the life of the project, income is cash-in less cash-out. Capitalizing
and then amortizing interest versus expensing it affects the timing but not
b. The “catch-up” described in the preceding part is indefinitely delayed.
9.5 A long-lived asset with a finite life is expected to provide benefits for a limited
amount of time. Benefits will eventually decline to zero, either because of
physical use, obsolescence, or disposal. Firms depreciate or amortize assets
9.6 PepsiCo must demonstrate that the brand names amortized have a finite life
and those not amortized have an indefinite life. PepsiCo would examine the
Solutions 9-4
9.7 The treatment of this change in depreciable life would depend on the reason
for and the materiality of the change. The change in this case appears
prompted by new governmental regulations imposed on the airline industry. If
9-5 Solutions
9.8 The relevant question to apply generally accepted accounting principles is
whether the expenditure maintained the originally expected useful life or
9.9 Generally accepted accounting principles compares the undiscounted cash
flows from an asset to its carrying value to determine if an impairment loss has
9.10 The cash recoverability criterion requires firms to estimate the expected
9.11 An asset impairment loss that arises during a period results from a decline in
9.12 This statement is not correct. The excess purchase price will affect net
income when the firm recognizes an asset impairment loss. Firms must test
goodwill annually for possible impairment. However, firms may not end up
9.13 (Outback Steakhouse; calculating acquisition costs of long-lived assets.)
Solutions 9-6
9-7 Solutions
9.13 continued.
Land Building
Purchase Price of Land and Building …….. $ 52,000 $ 208,000
Legal Costs Split 20% and 80% ……………. 2,520 10,080
Renovation Costs ………………………………. — 35,900
Property and Liability Insurance Costs
9.14 (Classifying expenditure as asset or expense.)
a. (3) Expense.
d. (1) Noncurrent asset (machine).
h. (1) Noncurrent asset (equipment).
Solutions 9-8
k. (1) Current asset (prepayment).
9-9 Solutions
9.14 continued.
o. (1) Noncurrent asset (copyright).
9.15 (Bolton Company; cost of self-constructed assets.)
Land: $70,000 + $2,000 (14) = $72,000.
Office Building: $20,000 + $13,000 (4) = $33,000.
Site Improvements: $5,000 (12).
the firm earned a profit.
9.16 (Duck Vehicle Manufacturing Company; cost of self-developed product.)
The first four items qualify as research and development costs which the firm
must expense in the year incurred. It might appear that the firm should
capitalize the cost of the prototype because it acquires the prototype from an
Solutions 9-10
9-11 Solutions
9.17 (Bulls Eye Stores; calculating interest capitalized during construction.)
Capitalized Interest on Borrowing Directly Related to Con-
struction: .06 X $2,000,000 ……………………………………………… $ 120,000
9.18 (Nexor; amount of interest capitalized during construction.)
a. Average Construction = ($30,000,000 + $60,000,000)/2 = $45,000,000.
Interest
Relevant Loans Anticipated
b. Interest Expense ………………………………………………. 8,000,000
Interest Payable ……………………………………………. 8,000,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+8,000,000
–8,000,000
IncSt → RE
($25,000,000 X .08) + ($100,000,000 X .06).
Construction in Process …………………………………….. 3,200,000
Interest Expense …………………………………………… 3,200,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+3,200,000
+3,200,000
IncSt → RE
c. Interest Expense ………………………………………………. 8,000,000
Interest Payable ……………………………………………. 8,000,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+8,000,000
–8,000,000
IncSt → RE
($25,000,000 X .08) + ($100,000,000 X .06).
Construction in Process …………………………………….. 7,100,000
Solutions 9-12
Interest Expense …………………………………………… 7,100,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+7,100,000
+7,100,000
IncSt → RE
($25,000,000 X .08) + ($85,000,000 X .06).
9-13 Solutions
9.19 (Alcoa; calculations for various depreciation methods.)
Year 1 Year 2 Year 3
a. Straight-Line (Time) Method………. $ 14,000 $ 14,000 $ 14,000
($88,800 – $4,800)/6 = $14,000.
9.20 (Luck Delivery Company; calculations for various depreciation methods.)
a. Depreciation Charge (Straight-Line)
2008 …………………. $ 6,000 ($30,000/5)
2009 …………………. 6,000
b. Depreciation Charge (Declining-Balance)
2008 …………………. $ 12,000 ($30,000 X .40)
2009 …………………. 7,200 ($18,000 X .40)
c. Depreciation Charge (Sum-of–the-Years‘-Digits)
2008 …………………. $ 10,000 ($30,000 X 5/15)
2009 …………………. 8,000 ($30,000 X 4/15)
d. Tax Depreciation
2008 …………………. $ 6,000 (= $30,000 X .20)
2009 …………………. 9,600 (= $30,000 X .32)
Solutions 9-14
9.21 (Thompson Financial; change in depreciable life and salvage value.)
Carrying Value on January 1, 2008: $10,000,000 – {2 X [($10,000,000 –
9.22 (Florida Manufacturing Corporation; journal entries for revising estimate of
life.)
a. Work-in-Process Inventory …………………………………. 2,400
Accumulated Depreciation ……………………………… 2,400
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+2,400
–2,400
($180,000 – $7,200)/144 = $1,200 per month.
b. Work-in-Process Inventory …………………………………. 14,400
Accumulated Depreciation ……………………………… 14,400
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+14,400
–14,400
12 X $1,200 = $14,400.
c. Depreciation to 1/1/2014 = 62 months X $1,200 = $74,400.
Remaining depreciation = $180,000 – $74,400 – $3,840 = $101,760.
Shareholders’
+11,520
Solutions 9-16
9-17 Solutions
9.22 continued.
d. By March 31, 2019, the machine has been on the new depreciation
schedule for 2014 through 2018 plus 3 months or 63 months altogether.
$134,880.
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+2,880
–2,880
Cash ……………………………………………………………….. 40,000
Accumulated Depreciation …………………………………. 134,880
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+40,000
–5,120
IncSt → RE
+134,880
–180,000
9.23 (Disney World; distinguishing repairs versus betterments.)
Solutions 9-18
9.24 (Wildwood Properties; computing the amount of an impairment loss on
tangible long-lived assets.)
The undiscounted cash flows total $12,400,000 [= ($1,400,000 X 6) +
9.25 (Kieran Corporation; computing the amount of impairment loss.)
Impair-
Undis- ment
counted Loss
Carrying Cash Recog- Fair Amount
Value Flows nized Value of Loss
Land ………………… $ 550,000 $ 575,000 No $ 550,000 $ 0
Buildings ………….. 580,000 600,000 No 580,000 0
After recognizing the impairment losses on the property, plant, and equipment,
the carrying value of Kieran Corporation is $2,430,000 (= $550,000 for land +
$580,000 for buildings + $800,000 for equipment + $500,000 for goodwill).
9.26 (Fedup Express; computing the gain or loss on sale of equipment.)