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E6.14.
(continued)
c.
The depreciation method used should not affect the decision to sell the truck because the
E6.15.
a.
Today 2 years
$ 9,000
b.
Today 20 years
c.
Today 20 years
d.
Today 10 years
$24,000 per year
E6.16.
The present value factor for a single amount for 5 periods, at a discount rate of 16% in
0.4632. Thus, $100,000 * 0.4632 = $46,320 present value.
b.
The number of periods now becomes 20 (5 years * 4 quarters per year), and the rate
becomes 4% (16% / 4 quarters per year). The present value factor for 20 periods at 4%
E6.17.
a.
Yes, because of the above-average ROI of 15%, I could afford to invest $150,000 more
than $600,000 and still earn a 12% ROI—which is the rate I’d expect to earn from an
E6.18.
a.
Goodwill is the difference between the amount invested in the company (the cost of the
E6.18.
(continued)
c.
ROI = Operating income / Assets (Cost of existing net assets + goodwill)
E6.19.
Assets Liabilities Net Income
b.
Sold land that had originally cost Land Gain on
$27,000 for $42,000 in cash. - 27,000 Sale of
Cash Land
cost of developing and registering + 18,000
a trademark. Cash
- 18,000
f.
Recognized the periodic amortization Trademark Amortization
on the trademark (in e above) using a - 450 Expense
E6.20.
Assets Liabilities Net Income
b.
Sold land that had originally cost $117,000 Land Loss on
for $102,600 in cash. - 117,000 Sale of
Cash Land
made to extend the useful life of production - 28,800
equipment. Equipment
+ 28,800
f.
Expensed $14,100 of cash expenditures Cash Maintenance
incurred for routine maintenance of - 14,100 Expense
E6.20.
(continued)
Assets Liabilities Net Income
h.
Purchased a business for $2,800,000 in Cash Long-Term
P6.21.
a.
Repair cost capitalized in error = $20,000.
Depreciation expense in current year on above amount:
To be depreciated $40,000
Remaining life 8 years
Depreciation expense in current year $ 5,000
b.
ROI for current year based on original data:
ROI for current year based on corrected data:
Year-end assets originally reported …………......................... $1,600,000
c.
In subsequent years, depreciation expense will be too high, net income will be too low,
and average assets will be too high. Thus, ROI will be too low.
P6.22.
a.
ROI = Net operating income / Average assets
= $1,500,000 / $10,000,000 = 15.0%
b.
Net operating income would increase to $1,680,000 (original net operating income of
$1,500,000, increased by the $200,000 not expensed and decreased by $20,000 for the
depreciation on the new amount added to the asset for one year). Average assets would
c.
There are several reasons why a company may prefer to treat an expenditure as an
expense immediately rather than capitalizing the expenditure.
ROI will be lower in 2016 if the expenditure is expensed rather than capitalized
(15.0% in part a as opposed to 16.7% in part b). However, if the $200,000 is
expensed in 2016, ROI will be higher in 2017 and subsequent years (net operating
d.
In 2017 and subsequent years, ROI will be lower because net operating income (in the
P6.23.
a.
Estimated useful life……………………………………………………… 5 years
1. Straight-line depreciation:
Annual depreciation expense = $114,000 / 5 = $22,800 per year
2. Double-declining-balance depreciation:
Straight-line rate = 1 / 5 = 20%. Double-declining rate = 20% * 2 = 40%
At End of Year .
Net Book Value Depreciation Accumulated Net Book
Year at Beginning of Year Expense Depreciation Value
1 $132,000 $132,000 * 40% = $52,800 $52,800 $79,200
2 79,200 79,200 * 40% = 31,680 84,480 47,520
b.
One-half of the first year's depreciation expense should be recorded.
c.
12/31/17 (after 1.5 years): Accumulated Net
Cost Depreciation Book Value
P6.24.
a. and
b.
Estimated useful life………………………………………………….. 4 years
Cost of machine ……………………………………………………… $180,000
Estimated salvage value……………………………………………… (20,000)
Amount to be depreciated……………………………………………. $160,000
a. Straight-line depreciation method:
Annual depreciation expense = $160,000 / 4 = $40,000 per year
b. Double-declining-balance method:
Straight-line rate = 1 / 4 = 25%. Double-declining rate = 25% * 2 = 50%
At End of Year .
Net Book Value Depreciation Accumulated Net Book
Year at Beginning of Year # Expense Depreciation Value
P6.25.
Estimated useful life…………………………………………………….. 4 years
Cost of machine…………………………………………………………. $480,000
Estimated salvage value…………………………………………………. (80,000)
Amount to be depreciated……………………………………………….. $400,000
a.
Net Book Value Net Book Value Depreciation Accumulated
Year at Beginning of Year at End of Year Expense Depreciation
2016 $480,000 $392,000 $ 88,000 $ 88,000
b.
Net Book Value Net Book Value Depreciation Accumulated
Year at Beginning of Year at End of Year Expense Depreciation
2016 $480,000 $240,000 $240,000 $240,000
2017 240,000 120,000 120,000 360,000
2018 120,000 80,000 40,000 400,000
2019 80,000 80,000 0 400,000
c.
Net Book Value Net Book Value Depreciation Accumulated
Year at Beginning of Year at End of Year Expense Depreciation
2016 $480,000 $380,000 $100,000 $100,000
2017 380,000 280,000 100,000 200,000
P6.26.
a.
Solution approach: The amounts shown in the T-accounts represent the depreciation
expense recorded for each year of the asset’s useful life (not the balance of the
Accumulated Depreciation account as of the dates shown). Thus, patterns can be
determined directly from the numbers provided, without the necessity of making any
calculations.
The 200% declining-balance method is being used. Using this method for an asset
with a 5-year useful life results in an annual depreciation rate of 40% of the asset’s net
book value (20% straight-line rate * 2). The following schedule is not required to
solve this problem.
At End of Year .
Net Book Value Depreciation Accumulated Net Book
Year at Beginning of Year Expense Depreciation Value
2016 $2,400,000 $2,400,000 * 40% = $960,000 $ 960,000 $1,440,000
2017 1,440,000 1,440,000 * 40% = 576,000 1,536,000 864,000
b.
c.
The units-of-production method is being used because the depreciation expense
amounts do not demonstrate a clear pattern. These amounts can be verified based on the
The straight-line method is being used because an equal amount of depreciation expense
d.
The 150% declining-balance method is being used. Using this method for an asset with
a 5-year useful life results in an annual depreciation rate of 30% of the asset’s net book
value (20% straight-line rate * 1.5). The following schedule is not required to solve this
problem but may be helpful in explaining the answer.
