Investing Activities 323
New building = $229,600 per year
For the new building, the total cost must be determined. It is the
sum of the costs given in the problem plus interest on the one-
C. If the firm purchases the existing building and land, there would be
an outflow in the investing section for the cost of the building and
D. The difference that the controller wishes to recognize as a Gain on
P11-5 A.
Straight-Line Depreciation
Year
Beginning
Book Value
Depreciation
Expense
Accumulated
Depreciation
Ending
Book Value
1
$124,000
$ 24,000*
$ 24,000
$100,000
2
76,000
3
52,000
4
28,000
5
324 Chapter 11
Double-Declining-Balance Depreciation
Year
Beginning
Book Value
(BBV)
Accumulated
Depreciation
Ending
Book Value
1
$124,000
$ 49,600
$74,400
B.
Units-of-Production Depreciation
Year
Beginning
Book Value
Depreciation
Expense*
Accumulated
Depreciation
Ending
Book Value
1
$124,000
$ 24,000
$ 24,000
$100,000
2
76,000
3
52,000
4
28,000
5
Total
$120,000
C. Using the answers from parts A and B, the book value at the time of
the sale must be calculated for each depreciation method. For the
straight-line and double-declining-balance methods, one-half of the
2
44,640
3
26,784
4
16,070
5
Total
$120,000
Investing Activities 325
Straight-
Line
Units-of–
Production
Original cost
$124,000
$124,000
Year 1 depreciation
(24,000)
(24,000)
The straight-line method yields a loss on sale, while the double-
declining-balance and units-of-production methods show a gain on
D.
Straight-
line
Double-
Declining-
Balance
Units-of–
Production
Income statement:
Statement of cash flows:
Year 2 depreciation
(24,000)
(29,760)
(28,000)
(24,000)
(17,856)
(32,000)
$ 40,000
$ 21,427
$ 24,000
Selling price
$ 25,000
$ 25,000
$ 25,000
40,000
21,427
24,000
Gain (loss) on sale
$ (15,000)
$ 3,573
$ 1,000
326 Chapter 11
B.
Straight-Line Method
Double-Declining-Balance
Method
Year
Depreciation
Expense
End-of-Year
Book Value
Depreciation
Expense
End-of-Year
Book Value
0
468,975
468,975
1
397,479
156,325
312,650
2
325,983
104,217
208,433
3
138,955
4
182,991
5
111,495
6
C.
Income statements:
Straight-line depreciation
All years are
the same
Income before depreciation and taxes
Depreciation
Income before taxes
Income taxes (35%)
Net income
D.
Income statements:
Double-declining-
balance
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Income before
depreciation and taxes
$160,000
$160,000
$160,000
$160,000
$160,000
$160,000
Depreciation
Income before taxes
3,675
Income taxes (35%)
1,286
Net income
2,389
E. A very different pattern of net income is reported over the six years
depending on which depreciation method is used. Because double–
Investing Activities 327
P11-7 A.
Straight-Line Depreciation
Year
Beginning
Book Value
Depreciation
Expense
Accumulated
Depreciation
Ending
Book Value
1
$600,000
$112,000
$112,000
488,000
2
376,000
3
264,000
4
152,000
5
Total
$560,000
Double-Declining-Balance Depreciation
Year
Beginning
Book Value
Ending
Book Value
1
$600,000
$360,000
2
3
4
77,760
5
Total
The double-declining-balance depreciation schedule is based on
these computations:
($600,000 × 2/5 = $240,000)
328 Chapter 11
C. Double-declining-balance method
Straight-
Line
Double-
Declining-
Balance
Units-of–
Production
Net income before depreci-
ation and taxes
$3,600,000
$3,600,000
$3,600,000
Depreciation expense
Income before tax
$3,488,000
$3,360,000
$3,432,000
Income tax (30%)
Net income
$2,441,600
$2,352,000
$2,402,400
D. Straight-line method (see schedule above)
E. This is an example of moral hazard. The CEO must make a decision
on behalf of the stockholders, but the interests of the CEO and the
P11-8 A.
Straight-Line Depreciation
Year
Beginning
Book Value
Depreciation
Expense
Accumulated
Depreciation
Ending
Book Value
1
$1,200,000
$ 280,000
$ 280,000
$920,000
2
3
4
Total
Investing Activities 329
Double-Declining-Balance Depreciation
Year
Beginning
Book Value
Ending
Book Value
$1,200,000
$600,000
Double-declining-balance depreciation schedule is based on these
Units-of-production rate = ($1,200,000 – $80,000) ÷ 2,000,000 units =
C. Double-declining-balance method
Straight-
Line
Double-
Declining-
Balance
Units-of–
Production
$7,200,000
Depreciation expense
Income before tax
$6,920,000
$6,600,000
$6,976,000
Income tax (35%)
Income before depreciation
D. Units-of-production method (see part C solution)
Total
330 Chapter 11
P11-9 A. First year depletion = $2,400,000 Cost of mine $40,000,000
*Student responses will vary. One reasonable approach is as
follows. If the machinery can be used only for this mine, it is
reasonable to base depreciation on the output of the mine;
that is, use units-of-production depreciation, rather than
Part A Part B
Revenue ($120 × 30,000 tons) $3,600,000 $3,600,000
D. Second year depletion = $1,649,000
Cost of mine $ 40,000,000
First year depletion 2,400,000
Investing Activities 331
E. Book value of mine = $35,951,000 Cost $40,000,000
P11-10 A. Available-for-sale: Because these are investments in equity securi-
B.
2006
Milton
Holmes
Total
Year-end market value
$3,100,000
$2,800,000
$5,900,000
For year-end 2006, Keelson would report $5,900,000 in long-term in-
vestments and $290,000 in net unrealized holding loss.
2007
Milton
Balthasar
Total
Year-end market value
$3,350,000
$1,940,000
$5,290,000
For year-end 2007, Keelson would report $5,290,000 in long-term in-
C. Effect on income in 2006:
Dividends received from Milton $500,000
332 Chapter 11
P11-11 A. 1. Short-term investments (at market value):
2. Long-term investments (at market value):
3. Stockholders’ equity:
Net unrealized holding gain $2,210
Proof:
Market
Cost
Gain (Loss)
Harbor
$41,000
$37,500
$ 3,500
Regency
Hilton
Paxton
(1,210)
Net unrealized holding gain
C. Companies hold assets because of the future economic benefits that
can be derived from them. In the case of buildings and equipment,
P11-12 A. $101,815. The price of the bonds would be computed as the present
Investing Activities 333
B.
1
2
3
4
5
6
Period
Present Value
at Beginning
of Period
Interest
Revenue
(Column 2 ×
4%)
Cash
Interest
Received
Amort. of
Premium
(Column 4 −
Column 3)
Value at End
of Period
C.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
2007
Apr. 1
Cash
−101,815
Investment in Bonds
101,815
Sept. 30
Cash
4,500
Investment in Bonds
Interest Revenue
2008
Mar. 31
Cash
4,500
Investment in Bonds
Interest Revenue
Sept. 30
Cash
4,500
Investment in Bonds
Interest Revenue
2009
Mar. 31
Cash
4,500
Investment in Bonds
Interest Revenue
Mar. 31
Cash
100,000
Investment in Bonds
D. Interest Cash
Year Revenue Flows
2007 $ 4,073 $ −101,815
1
2
3
4
334 Chapter 11
E. When considering a completed transformation cycle, accrual basis
P11-13
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Part
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
A
Cash
–10,000
Long-Term Investments
10,000
B
Cash
500
Interest Revenue
C
No entry necessary
D
Long-Term Investments
E
Cash
–10,445
Long-Term Investments
10,445
Cash
500
Interest Revenue
G
No entry necessary
H
Long-Term Investments
37
Unrealized Holding Gain2*
37*
1 A portion of the premium must be amortized. Cash interest received equals $500
Investing Activities 335
I. The carrying values to be reported on the balance sheet at the end of
year one in parts C, D, G, and H would be:
Part
Original
Cost
Amortization
of Premium
Market Value
Adjustment
Carrying Value
(Book Value) at
End of Year 1
H
10,445
− $82
+ $37
10,400
J. Amortization table
1
2
3
4
5
6
Year
Present
Value at
Beginning
of Year
Interest
Revenue
(Column 2
× Interest
Rate)
Cash
Received
Amortization
of Premium
(Column 3 −
Column 4)
Value at
End of Year
(Column 2 −
Column 5)
1
$10,445
$ 418
$ 500
−82
$10,363
2
10,363
−85
4
10,189
−92
$2,056
$2,500
*Ignore the $1 rounding error.
P11-14 A.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
Jan. 1
Cash
–283,439
Long-Term Investment
283,439
Long-Term Investment
Investment Income
C
D
10,000
G
10,445
− $82
10,363
336 Chapter 11
B.
If the bonds are?
Held-to–
Maturity
Securities
Trading
Securities
Available-
for-Sale
Securities
Accounting method to be used
Amortized
cost
Mark to
market
Mark to
market
Amount of unrealized holding gain (loss) to
be reported on income statement
none
$(1,749)3
none
P11-15 A.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
Aug. 22
Cash
–160,800
160,800*
Amount of unrealized holding gain (loss) to
be reported on balance sheet
none
none
Balance of investment account on balance
sheet at end of first year
Investing Activities 337
B.
If the total number of Radius common
shares outstanding totals
1 million1
80,0002
30,0003
Accounting method to be used
Mark to
market
Equity method
Consolidation
method
Amount of unrealized holding gain
1 A small investment (2% of outstanding shares) that does not create sig-
nificant influence or control.
C.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
Jan. 23
Cash
171,400
Realized Holding Gain
P11-16 A.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
1.
Mining Site
−660,000
Cost of Goods Sold
statement
Amount of unrealized holding gain
sheet
balance sheet
determinable