P6.27.
b.
be $90,000, as was determined in part a. This is calculated as follows:
1. The cost of the asset is the net book value plus the accumulated depreciation, or
$180,000 + $240,000 = $420,000.
2. The straight-line method is being used because the annual depreciation expense would
3. At December 31, 2017, the accumulated depreciation of $240,000 represents 2 years and
8 months of depreciation expense ($240,000 / $90,000 = 2.667 years), so the acquisition
date of the equipment must have been on or near May 1, 2015.
c.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Cash Loss on Sale
+141,600 of Equipment
Equipment –38,400
–420,000
Accumulated (A decrease in a
Depreciation contra-asset account
P6.28.
a.
Depreciation expense for 2017 is the increase in the amount of accumulated depreciation
from the beginning balance sheet to the ending balance sheet, or $243,000 ($850,500 –
$607,500).
b.
1. The cost of the asset is the net book value plus the accumulated depreciation, or
$1,093,500 + $850,500 = $1,944,000.
3. At December 31, 2017, the accumulated depreciation of $850,500 represents 3.5
P6.28.
(continued)
c.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Cash Gain on Sale
+120,000 of Equipment
Equipment + 10,650
– 194,400
P6.29.
a.
If any of the four criteria listed in the text for capitalizing a lease are met, the lease should
be accounted for as a capital lease rather than an operating lease.
1. Maybe. The problem does not state that ownership of the computer system is
3. Yes. The 75% test is met because the lease term of 4 years is 100% of the economic life
of the computer system.
b.
Annual lease payments (paid at the end of each year)……………………… $14,000
Present value factor (Table 6-5, 4 periods, 14% discount rate)…………….. x 2.9137
P6.29.
(continued)
c.
Annual lease payment…………………………………………………….. $14,000
Beginning balance, capital lease liability…………………………………. $40,790
Interest rate………………………………………………………………… x 14%
Interest expense (for first year of lease term)……………………………… (5,711)
Payment of principal (reduction of capital lease liability)………………… $ 8,289
Dr. Interest Expense……………………………………………….. 5,711
d.
In addition to the $5,711 of Interest Expense on the capital lease liability, Depreciation
Expense of $10,198 ($40,790 / 4 years) on the equipment should also be recognized in
e.
As discussed and illustrated in the text, the economic effect of a long-term capital lease is
not any different than the purchase of an asset with borrowed funds. In substance, the
P6.30.
a.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Trucks Notes Payable
+84,600 +84,600
P6.30.
(continued)
b.
Annual lease payments (paid at the end of each year)…………………. $18,300
Present value factor (Table 6-5, 6 periods, 8% discount rate)…………. x 4.6229
Present value of lease payments (amount to be capitalized)…………… $84,599.07
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Trucks Capital
c.
Annual lease payment ……………………………………………………… $18,300
Beginning balance, capital lease liability…………………………………… $84,600
Interest rate………………………………………………………………….. x 8%
Interest expense (for first year of lease term)………………………………. (6,768)
Payment of principal (reduction of capital lease liability)…………………. $11,532
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Cash Capital Interest
d.
In addition to the $6,768 of Interest Expense on the capital lease liability, Depreciation
Expense of $14,100 ($84,600 / 6 years) on the truck should also be recognized in the
e.
The annual payments would be $84,600 / 4.6229 (the present value factor for an annuity
P6.31.
a.
The cost of the machine at the beginning of the lease is the present value of the lease
payments discounted at the interest rate the lessor would charge. The $4,500 annual lease
P6.31.
(continued)
b.
The difference between the total amount paid and the present value of the lease payments
P6.32.
a.
Today 9 years
b.
Today 20 years
$135,000
c.
Today 12 years
$2,700,000
d.
Today 7 years
$450,000
e.
1.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Machine Notes Payable
+540,000 +360,000
Cash
–180,000
P6.32.
(continued)
e.
2. ($540,000 purchase price – $180,000 cash payment) = $360,000 note payable.
Today 4 years
$ ? payments per year
C6.33.
4. Solution approach: Interest expense is recorded at the end of each year based on the
8% interest rate multiplied by the outstanding principal balance on the note payable.
Interest expense decreases over the life of the loan because the outstanding principal
balance is reduced by each payment.
It should be possible for most students to find the note disclosures concerning:
1) the depreciation method(s) used by their focus company, 2) a listing of physical
properties and their locations, 3) ranges of estimated useful lives used for property,
plant, and equipment, often broken down by category, 4) a statement concerning the
C6.34.
a.
Straight-line depreciation is used for financial reporting purposes because depreciation
expense will be lower than under any of the accelerated depreciation methods.
Accelerated depreciation using the MACRS is probably used for tax purposes to
minimize taxes payable. (page 38)
b.
Depreciation and amortization expense for 2014 (page 36) .………. $ 305 million
Total cost of plant assets (page 72)…………….…………………… 5,519 million
Ratio ($305 / $5,519)……………………………………………. 5.5% (rounded)
c.
Since Campbell uses the straight-line depreciation method, the average useful life =
d.
Decrease in retained earnings = Amount of accumulated depreciation * 25%
C6.35.
a.
b.
Mr. Gerrard is referring to the time value of money concept. By allowing several
accounts receivable balances to become long overdue, the company has, in effect, made
interest-free loans to its customers for indefinite periods of time. If these same accounts
Gerrard Construction Co.’s accounts receivable are being poorly and grossly inefficiently
managed. As the ultimate responsibility for the stewardship of all of a company’s assets
rests with top management, it is inappropriate for Mr. Gerrard to shift the blame to his
daughter, Anna, who he describes as being “too nice to people.” In general, the accounts
receivable need to be professionally managed.
Invoices for all outstanding accounts should be sent out on a monthly basis, rather
than quarterly.
c.
Initial efforts should be made to collect the long past due accounts receivable balances,
and then a more detailed analysis should be made of those accounts that remain on the
aging schedule to determine which specific accounts should be written off immediately.
The Allowance for Bad Debts account should be adjusted to reflect the company’s best
estimate of the total amount of uncollectible accounts receivable, including those