Solutions 9-20
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–375
–375
IncSt → RE
$3,000 X .25 X 6/12 = $375.
9-21 Solutions
9.28 a. continued.
Accumulated Depreciation …………………………………. 1,875
Equipment ……………………………………………………. 2,200
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,875
–325
IncSt → RE
–2,200
$3,000 X .25 X 2.5 = $1,875. $3,200 + $3,000 – $4,000 =
$2,200. $800 selling price – $1,125 carrying value =
$325 loss.
b. Accumulated Depreciation …………………………………. 5,000
Truck …………………………………………………………… 5,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+5,000
–5,000
c. Depreciation Expense ……………………………………….. 60
Accumulated Depreciation ……………………………… 60
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–60
–60
IncSt → RE
$1,200 X .10 X 6/12 = $60.
Accumulated Depreciation …………………………………. 270
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+270
+270
IncSt → RE
$1,200 X .10 X 27/12 = $270.
9.29 (Moon Macrosystems; recording transactions involving tangible and intangible
assets.)
a. Office Equipment ………………………………………………. 400,000
9-23 Solutions
9.29 continued.
e. Depreciation Expense [($400,000 + $20,000 –
$38,000 – $38,000 – $56,000)/12]……………………. 24,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–24,000
–24,000
IncSt → RE
f. Depreciation Expense ……………………………………….. 24,000
Accumulated Depreciation ……………………………… 24,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–24,000
–24,000
IncSt → RE
Cash ……………………………………………………………….. 260,000
Accumulated Depreciation ($38,000 + $38,000 +
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+260,000
–36,000
IncSt → RE
+124,000
–420,000
9.30 (American Airlines; effect on net income of changes in estimates for
depreciable assets.)
Reconciliation of Plant Data:
Airplanes Cost …………………………………………………………… $ 2,500,000,000
Less Salvage Value (10%) …………………………………….. 250,000,000
Depreciable Basis ………………………………………………… $ 2,250,000,000
Solutions 9-24
9.30 continued.
New Depreciation Charge:
Net Carrying Value …………………………………………………….. $ 1,600,000,000
Less Salvage Value (12% of Cost) ………………………….. 300,000,000
Depreciation Basis ……………………………………………….. $ 1,300,000,000
Divided by 10 (= 14 – 4) Years Equals Revised Yearly
9.31 (Recognizing and measuring impairment losses.)
a. The loss occurs because of an adverse action by a governmental entity.
The undiscounted cash flows of $50 million are less than the carrying
Loss from Impairment ……………………………………….. 28
Accumulated Depreciation …………………………………. 20
Solutions 9-26
b. The undiscounted cash flows of $70 million exceed the carrying value of
9.31 continued.
c. The loss arises because the accumulated costs significantly exceed the
amount originally anticipated. The carrying value of the building of $25
Solutions 9-28
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–2
–2
IncSt → RE
9-29 Solutions
9.31 continued.
e. The loss occurs because of a significant change in the business climate for
Chicken Franchisees. One might question whether this loss is temporary
or permanent. Evidence from previous similar events (for example,
Franchise Rights …………………………………………… 7
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–7
–7
IncSt → RE
This entry assumes that Chicken Franchisees does not use an
Accumulated Amortization account.
9.32 (Pfizer; expensing versus capitalizing research and development costs.)
(Amounts in Millions)
Year 1 Year 2 Year 3 Year 4
a. Expense Costs as Incurred
Other Income ………………… $ 30 $ 30 $ 30 $ 30
Solutions 9-30
9.32 continued.
Year 1 Year 2 Year 3 Year 4
b. Capitalize and Amortize Over
3 Years (Including Year of
Occurrence)
Other Income ………………… $ 30 $ 30 $ 30 $ 30
Additional Income from
c. The expensing policy leads to higher expenses and lower income before
income taxes, in the first two years. After that, the two policies are the
same. When the firm ceases to spend on R&D, the policy of expensing
9-31 Solutions
d. The pre-tax income under the two policies will continue to be the same if
Solutions 9-32
9.33 (General Mills; interpreting disclosures regarding long-lived assets.)
(Amounts in Millions)
a. General Mills purchased software for its internal use from a software
developer. General Mills expects to receive future benefits from using the
c. Average Total Life: .5($5,806 – $54 – $252 + $6,096 – $61 – $276)/$421
d. Yes. The accumulated depreciation account increased by $273 (= $3,082
e. General Mills has grown heavily by corporate acquisitions. Intangibles
f. Yes. The amount for brands and goodwill increased. Because firms
g. Patents have a 20-year legal life and, therefore, have a finite life.
h. General Mills must expect the brand names to have an indefinite life. The
9-33 Solutions
i. General Mills shows amounts in its Construction in Progress account.
Solutions 9-34
9.34 (Amgen, Inc.; interpreting disclosures regarding long-lived assets.) (Amounts
in Millions)
a. No. Firms do not commence recognizing depreciation until they put an
b. Average Total Life: .5($7,321 – $294 – $958 + $8,688 – $398 –
c. Yes. Accumulated depreciation experienced a net increase of $484 (=
d. Amgen is in an industry subject to technological change. Thus, any
technology-based intangible likely has a finite life and is, therefore, subject
young age of the biotechnology industry, the extent to which core
technologies will last is uncertain. Amgen could probably make a stronger
e. Average Total Life: .5($4,950 + $5,219)/$370 = 13.7 years.
9-35 Solutions
f. It appears that Amgen made no corporate acquisition during 2007
because the acquisition cost of Core Technology and Trade Name
Solutions 9-36
9.34 continued.
g. Goodwill likely includes technologies that are not separately identifiable,
h. Amgen shows amounts in its Construction in Progress account. Thus,
9.35 (Hewlett-Packard Company; interpreting disclosures regarding long-lived
assets.) (Amounts in Millions)
a. Average Total Life: .5($15,024 – $534 + $16,411 – $464)/$1,922 = 7.9
b. Yes. The Accumulated Depreciation account increased $452 (= $8,613 –
c. Customer Contracts have a specific term and, therefore, have a finite life.
Core Technology likely involves technologies related to the design of
computer hardware and software in general and is not product specific.
d. Average Remaining Total Life: .5($4,612 + $6,122)/$783 = 6.9 years.
9-37 Solutions
e. At the time of the acquisition, the Compaq name was highly recognizable.
Solutions 9-38
9.36 (Ross Laboratories; valuation of brand name.) (Dollar amounts in millions.)
Part a. Part b.
(1) Operating Margin ………………………………………….. $ 600.0 $ 600.0
(2) Pre-Tax Profit Generated by Brand ………………….. $ 550.0 $ 500.0
Multiply by After-Tax Capitalization Factor ………… 17.0 8.0