Financial Reporting and Analysis (6th Ed.)
Chapter 10 Solutions
Long-Lived Assets and Depreciation
Problems
Problems
P10-1. Computing depreciation expense – SL, DDB, SYD, and UP (LO
10-7)
(AICPA adapted)
The table below shows the amount of depreciation expense in 2017
under each method. Computations are shown below the schedule.
Straight-line
Requirement 1 – Straight-line:
Total cost Salvage value
Estimated useful life
=
Depreciation in 2017
[Book value = total cost – accumulated depreciation]
Requirement 3 – Sum-of-years’ digits: Depreciation in 2016
Requirement 4 – Units of production:
Depreciation = depreciation cost per unit x number of units
P10-2. Recording lump-sum purchases (LO 10-2)
Requirement 1:
Cost of land and building:
Land:
FMV of land/FMV of land and building
$6,300,000/$17,500,000 = 36%
Requirement 2:
Depreciation is not recorded on land. Thus, the higher the amount
P10-3. Determining asset cost when purchased with a note (LO 10-2)
At a discount rate of 10%, the present value of the note is:
Since this is more than the cash price of $250,000, Cayman should
pay cash.
At a discount rate of 13%, the present value of the note is:
In this case, since the present value of the note is less than the
cash price of $250,000, Cayman should issue the note to the seller
rather than paying cash.
P10-4. Allocating acquisition costs among asset accounts and
interest capitalization (LO 10-2)
Relative assessed values of the land and building at the time of
purchase:
Initial allocation of cost:
Allocation of subsequent costs:
Land:
Warehouse:
Department store:
Land improvements:
The $725,000 would be recorded in the land improvements account
rather than the land account because the parking lot, lighting,
P10-5. Exchanging assets (LO 10-9)
Requirement 1:
Hoyle’s entry to record the exchange:
Requirement 2:
Patterson’s entry to record the exchange:
P10-6. Capitalizing or expensing various costs (LO 10-2)
Requirement 1:
1) Since the new engines increase the future service potential of
2) Since there is no increase in useful life, future service potential,
or efficiency, the amount should be charged to expense in the
3) Since the repairs are routine (i.e., recurring), the amount should
4) The noise abatement equipment is mandated and is, thus, an
5) Since the new systems increase the future service potential of
6) Again, some might argue that this is another gray area. Since the
objective of the expenditure is to increase business, it might warrant
7) Since the overhauls increase the efficiency of the engines, the
Requirement 2:
Perhaps the easiest way for a firm like Fly-by-Night to use some of
the above expenditures to manage earnings upward is to capitalize
a portion of those that might otherwise be treated as expenses of
the period. Other ways Fly-by-Night could manage earnings is to
P10-7. Determining asset impairment (LO 10-5)
Requirement 1:
Book value:
Requirement 2:
Yes, the asset is impaired.
Impairment loss to be reported in the income statement:
Requirement 3:
The balance sheet amount at the end of year 4 is $9,500,000, the
P10-8. Determining asset impairment (LO 10-5)
Requirement 1:
Assets should be tested for impairment whenever events or
circumstances indicate that the asset’s carrying value might be
impaired. In this case, due to the economic downturn and concerns
Requirement 2:
depreciation
The equipment is impaired since its undiscounted net future cash
flow is below its carrying value.
An asset’s impairment is measured by reference to its fair value.
Requirement 3:
Requirement 4:
The company might revise the asset’s estimated useful life or its
Requirement 5:
Under U.S. GAAP, impairment losses cannot be reversed.
P10-9. Determining asset impairment under IFRS (LO 10-5, LO 10-10)
Requirement 2:
The following impairment test indicates that Yachting in Paradise’s
yacht is impaired:
Book value:
IFRS dictates than an asset should not be carried at more than
its recoverable value, defined as the higher of an asset’s fair
value less costs to sell and its value in use. The latter is defined
The yacht is impaired since its recoverable value is below its
carrying value.
An asset’s impairment is measured by reference to its recoverable
value (see requirement 2).
Requirement 3:
Requirement 4:
Under IFRS, if the estimates used to determine an asset’s
recoverable value have changed, a previously recognized
impairment loss shall be reversed, but the reversal shall not yield a
Requirement 5:
See the answer in requirement 4, noting that the carrying value in
early 2019 after reversing any impairment loss cannot exceed $8.6
million).
P10-10. Accounting for computer software costs (LO 10-4)
Requirement 1:
Until the technological feasibility of the product is proven, all costs
are expensed as R&D. After technological feasibility is proven, the
costs are supposed to be capitalized up to the point the product is
Requirement 2:
This amount cannot be determined from the information given.
While we can determine the costs incurred after technological
feasibility has been shown (see Requirement 3), we cannot know
how much IBM expended up to the point that technological
feasibility was reached on the various projects.
Requirement 3:
Requirement 4:
X = $3,058, where X is the gross amount of software-related costs
that were written off in Year 2. (The offsetting DR was to
accumulated amortization.) So:
Y = $3,541, where Y is the credit to accumulated amortization. The
Requirement 5:
Total capitalized software at the end of Year 2/software
amortization for Year 2:
Requirement 6:
Earnings can be managed by judicious selection of the point in
time when technological feasibility has been reached. For
example, a firm that wants to
boost income in a given year would declare that technological