CHAPTER 9 Long-Term Assets: Fixed and Intangible
9-16
Prob. 9–4A
1.
Depreciation
Expense
Accumulated
Depreciation,
Book Value,
Year
End of Year
End of Year
a.
$142,000
$658,000
284,000
516,000
426,000
374,000
568,000
232,000
710,000
90,000
b.
1
[$800,000 (100% ÷ 5) 2] ……….. $320,000
$320,000
$480,000
2
[$480,000 (100% ÷ 5) 2] ……….. 192,000
512,000
288,000
3
[$288,000 (100% ÷ 5) 2] ……….. 115,200
627,200
172,800
4
[$172,800 (100% ÷ 5) 2] ……….. 69,120
696,320
103,680
5
[$800,000 – $696,320 – $90,000) … 13,680
710,000
90,000
Note: Book value should not be reduced below $90,000, the residual value.
2.
Mar.
4
Cash
135,000
Accumulated Depreciation—Equipment
696,320
Equipment
800,000
Gain on Sale of Equipment
31,320
Gain on sale of equipment = $135,000 – ($800,000 – $696,320) = $31,320
3.
Mar.
4
Cash
88,750
Accumulated Depreciation—Equipment
696,320
Loss on Sale of Equipment
14,930
Equipment
800,000
CHAPTER 9 Long-Term Assets: Fixed and Intangible
9-17
Prob. 9–5A
Year 1
Jan.
4
Delivery Truck
26,000
Cash
26,000
Nov.
2
Truck Repair and Maintenance Expense
825
Cash
825
Dec.
31
Depreciation Expense—Delivery Truck
13,000
Accum. Depreciation—Delivery Truck
13,000
Delivery truck depreciation
[$26,000 (100% ÷ 4 2)].
Year 2
Jan.
6
Delivery Truck
60,000
Cash
60,000
Apr.
1
Depreciation Expense—Delivery Truck
1,625
Accum. Depreciation—Delivery Truck
1,625
Delivery truck depreciation
[($26,000 – $13,000) (100% ÷ 4 2) 3 ÷ 12].
1
Accum. Depreciation—Delivery Truck
14,625
Cash
14,000
Delivery Truck
26,000
Gain on Sale of Delivery Truck
2,625
June
11
Truck Repair and Maintenance Expense
280
Cash
280
Dec.
31
Depreciation Expense—Delivery Truck
24,000
Accum. Depreciation—Delivery Truck
24,000
Delivery truck depreciation
[$60,000 (100% ÷ 5 2)].
CHAPTER 9 Long-Term Assets: Fixed and Intangible
Prob. 9–5A (Concluded)
Year 3
July
1
Delivery Truck
65,000
Cash
65,000
Oct.
2
Depreciation Expense—Delivery Truck
10,800
Accum. Depreciation—Delivery Truck
10,800
Delivery truck depreciation
[($60,000 – $24,000) (100% ÷ 5 2) 9 ÷ 12].
2
Cash
19,520
Accum. Depreciation—Delivery Truck
34,800
Loss on Sale of Delivery Truck
5,680
Delivery Truck
60,000
Dec.
31
Depreciation Expense—Delivery Truck
8,125
Accum. Depreciation—Delivery Truck
8,125
Delivery truck depreciation
[$65,000 (100% ÷ 8 2) 1 ÷ 2].
Prob. 9–6A
1. a. $1,600,000 ÷ 5,000,000 board feet = $0.32 per board foot;
2.
a.
Dec.
31
Depletion Expense
352,000
Accumulated Depletion
352,000
Depletion of timber rights.
Dec.
Amortization Expense—Patents
412,500
Patents
412,500
Patent amortization.
CHAPTER 9 Long-Term Assets: Fixed and Intangible
9-19
Prob. 9–1B
1.
Item
Land
Land
Improvements
Building
Other
Accounts
a.
$ 3,600
b.
780,000
c.
23,400
d.
15,000
e.
$ 75,000
f.
10,000
g.
(3,400)*
h.
18,000
i.
8,400
j.
$(800,000)*
k.
13,400
l.
3,000
m.
2,000
n.
$14,000
o.
21,600
p.
40,000
q.
(4,500)*
r.
800,000
s.
(1,400)*
2.
$860,000
$35,600
$922,000
* Receipt.
3. Land used as a plant site does not lose its ability to provide services; thus, it is not
4. Because land improvements are depreciated, depreciation expense of $4,320 ($21,600
1 ÷ 10 2) would be understated, and net income would be overstated by $4,320 on
CHAPTER 9 Long-Term Assets: Fixed and Intangible
9-20
Prob. 9–2B
1.
Depreciation Expense
Year
a. Straight-
Line
Method
b. Units-of–
Activity
Method
c. Double-
Declining-Balance
Method
Year 1
$ 71,250
$102,600
$160,000
Year 2
71,250
91,200
80,000
Year 3
71,250
62,700
40,000
Year 4
71,250
28,500
5,000
Total
$285,000
$285,000
$285,000
Units-of–activity method:
($320,000 – $35,000) ÷ 20,000 hours = $14.25 per hour
3. Over the four-year life of the equipment, all three depreciation methods yield the same
CHAPTER 9 Long-Term Assets: Fixed and Intangible
9-21
Prob. 9–3B
a. Straight-line method:
Year 1: [($108,000 – $7,200) ÷ 3] 3 ÷ 12 …………………………………… $ 8,400
b. Units-of-activity method:
Activity rate = ($108,000 – $7,200) ÷ 12,000 hours = $8.40 per hour
c. Double-declining-balance method:
CHAPTER 9 Long-Term Assets: Fixed and Intangible
9-22
Prob. 9–4B
1.
Year
Depreciation
Expense
Accumulated
Depreciation,
End of Year
Book Value,
End of Year
a.
1 ………………………………………………………
$ 25,625
$ 25,625
$ 84,375
2 ………………………………………………………
25,625
51,250
58,750
3 ………………………………………………………
25,625
76,875
33,125
4 ………………………………………………………
25,625
102,500
7,500
Yearly depreciation = [($110,000 – $7,500) – 4] = $25,625
b.
1 [$110,000 (100% ÷ 4) 2] ……………
$ 55,000
$ 55,000
$ 55,000
2 [$55,000 (100% ÷ 4) 2] ……………..
27,500
82,500
27,500
3 [$27,500 (100% ÷ 4) 2] ……………..
13,750
96,250
13,750
4 ($110,000 – $96,250 – $7,500) ……….
6,250
102,500
7,500
Note: Book value should not be reduced below $7,500, the residual value.
2.
Sept.
6
Cash
18,000
Accumulated Depreciation—Equipment
96,250
Equipment
110,000
Gain on Sale of Equipment
4,250
Gain on sale of equipment = $18,000 – ($110,000 – $96,250) = $4,250
3.
Sept.
6
Cash
10,500
Accumulated Depreciation—Equipment
96,250
Loss on Sale of Equipment
3,250
Equipment
110,000
Loss on sale of equipment = $10,500 – ($110,000 – $96,250) = $(3,250)
CHAPTER 9 Long-Term Assets: Fixed and Intangible
Prob. 9–5B
Year 1
Jan.
8
Delivery Truck
24,000
Cash
24,000
Mar.
7
Truck Repair and Maintenance Expense
900
Cash
900
Dec.
31
Depreciation Expense—Delivery Truck
12,000
Accum. Depreciation—Delivery Truck
12,000
Delivery truck depreciation
[$24,000 (100% ÷ 4 2)].
Jan.
9
Delivery Truck
50,000
Cash
Truck Repair and Maintenance Expense
250
Cash
Apr.
Depreciation Expense—Delivery Truck
Accum. Depreciation—Delivery Truck
Delivery truck depreciation
[($24,000 – $12,000) (100% ÷ 4 2) 4 ÷ 12].
Accum. Depreciation—Delivery Truck
14,000
Cash
Loss on Sale of Delivery Truck
500
Delivery Truck
Depreciation Expense—Delivery Truck
12,500
Accum. Depreciation—Delivery Truck
Delivery truck depreciation
[$50,000 (100% ÷ 8 2)].
CHAPTER 9 Long-Term Assets: Fixed and Intangible
9-24
Prob. 9–5B (Concluded)
Year 3
Sept.
1
Delivery Truck
58,500
Cash
58,500
4
Depreciation Expense—Delivery Truck
6,250
Accum. Depreciation—Delivery Truck
6,250
Delivery truck depreciation
[($50,000 – $12,500) (100% ÷ 8 2) 8 ÷ 12].
4
Cash
36,000
Accum. Depreciation—Delivery Truck
18,750
Delivery Truck
50,000
Gain on Sale of Delivery Truck
4,750
Dec.
31
Depreciation Expense—Delivery Truck
3,900
Accum. Depreciation—Delivery Truck
3,900
Delivery truck depreciation
[$58,500 (100% ÷ 10 2) 4 ÷ 12].
Prob. 9–6B
1. a. Loss from impaired goodwill, $3,400,000
2.
a.
Dec.
31
Loss from Impaired Goodwill
3,400,000
Goodwill
3,400,000
Impaired goodwill.
b.
Dec.
31
Amortization Expense—Patents
150,000
Patents
150,000
Patent amortization.
c.
Dec.
31
Depletion Expense
987,700
Accumulated Depletion
987,700
Depletion of timber rights.
CHAPTER 9 Long-Term Assets: Fixed and Intangible
9-25
MAKE A DECISION
MAD 9–1
a.
AssetsFixed of ValueBook Average
Sales
Ratio Turnover Asset Fixed =
41.7
$212
$8,830
:Netflix
5.3
$25,476
$135,987
:Amazon
=
=
b. Netflix is more efficient than Amazon in generating revenue from fixed assets. Netflix’s
c. The difference in their fixed asset turnover ratios reflects the difference in their core
businesses. Netflix is mostly an Internet streaming and DVD rental company. These
MAD 9–2
a.
AssetsFixed of ValueBook Average
Sales
Ratio Turnover Asset Fixed =
$5,931 =
CHAPTER 9 Long-Term Assets: Fixed and Intangible
9-26
MAD 9–2 (Concluded)
b. Delta Air Lines has the largest fixed asset turnover ratio and, thus, is more efficient in
improved scheduling, maintenance, and operating procedures.
MAD 9–3
a.
AssetsFixed of ValueBook Average
Sales
Ratio Turnover Asset Fixed =
2 $83,541) ($84,751
$125,980 =
+
b. Verizon earns $1.50 revenue for every dollar of fixed assets. Telecommunications requires
MAD 9–4
a.
AssetsFixed of ValueBook Average
Sales
Ratio Turnover Asset Fixed =
3.3
$18,576
$60,906
:UPS
2.2
$22,580
$50,365
:FedEx
=
=
b. The ratios show that UPS is 50% more efficient at using its fixed assets than FedEx
CHAPTER 9 Long-Term Assets: Fixed and Intangible
MAD 9–4 (Concluded)
c. The fixed asset turnover is a measure of how efficiently revenue is generated from
underlying fixed assets. In the case of UPS, the fixed assets represent all fixed assets
MAD 9–5
a.
AssetsFixed of ValueBook Average
Sales
Ratio Turnover Asset Fixed =
$80,403 =
CHAPTER 9 Long-Term Assets: Fixed and Intangible
TAKE IT FURTHER
TIF 9–1
1. Estimates of the factors determining depreciation expense create a unique financial
reporting challenge. Because the useful life and residual value are estimates, there
is no “correct” amount. The company must use judgment along with historical data to
2. In this case, both Mike and James appear to be acting unethically. The original useful life
and residual value estimates were based on good faith estimates. By changing these
TIF 9–2
A sample solution based on McDonald’s Form 10-K for the fiscal year ended December 31,
2016, follows:
1. a. Depreciation is determined on a straight-line basis. The following estimated useful
lives are used: buildings—up to 40 years; leasehold improvements—the lesser of
useful lives or lease terms; equipment—3 to 12 years.
2. No. Book value is the difference between the fixed asset account and its related
accumulated depreciation account.
9-29
TIF 9–3
To: Chief Financial Officer, Godwin Co.
From: IMA Student
Re: Financial Statement Effects of Modifications to Trucks 1 and 2
TIF 9-4
You should explain to Nolan and Stacy that it is acceptable to maintain two sets of records for
tax and financial reporting purposes. This can happen when a company uses one method for
financial statement purposes, such as straight-line depreciation, and another method for tax
purposes, such as MACRS depreciation. This should not be surprising because the methods