338 Chapter 11
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Accounts
Cash
Contributed
Capital
Retained
Earnings
Proof:
Year
Beginning
Book Value
Rate
Depreciation
Expense
Ending Book
Value
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Accounts
Cash
Patent
Amortization Expense
Other
Contributed
Retained
B. Straight-line depreciation expense (year 1)
= $26,000 [($152,000 − $22,000) ÷ 5]
Accumulated Depreciation
Depreciation Expense
Investing Activities 339
P11-17 A.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Accounts
Cash
Contributed
Capital
Retained
Earnings
B.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Accounts
Cash
Contributed
Capital
Retained
Earnings
C.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
D. Mechanically, goodwill is the amount paid over and above the market
obtain the extra profits.
E.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
Cash
Accumulated Depreciation
Depreciation Expense
P11-18 A.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
July 1, 2004
Cash
–800,000
Equipment
800,000
Depreciation Expense
–75,000
–150,000
Depreciation Expense
–150,000
Depreciation Expense
Depreciation Expense
–75,000
June 30, 2007
Cash
311,000
Equipment
–800,000
Accumulated
Depreciation
450,000
Loss on Asset Sale
–39,000
C. Effect on pretax income for 2004–2007:
Total depreciation expense ($75,000 + $150,000
Investing Activities 341
Accrual and cash flow measurements usually produce the same results
when all effects of a series of related transactions are considered. The life
of a plant asset is a good example of these relationships. Cash flow and
P11-19 Asset valuation by financial institutions has been a major accounting is-
sue in recent years. Traditional accounting rules permitted banks to re-
port loans and other assets at historical cost. Nonperforming loans were
On the other hand, if the bank’s valuation of $43 million is a fair repre-
sentation of the present value of the expected cash flows the bank ex-
pects to receive from the loans, the amount may not be misleading. A rel-
evant issue is whether the loan loss reserve is sufficient to cover the
losses the bank should expect from nonperforming loans. If the bank
342 Chapter 11
P11-20 A.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
Jan. 1
Cash
–24,000
B.
Question
Solution
1.
In which section of the bal-
ance sheet will this in-
vestment be reported? Be
specific.
Long-term investment section.
2.
What amount will be re-
ported on the balance
sheet for this investment?
Show your work.
$31,680; Cost of $24,000 plus $9,120
earned on investment minus $1,440
received via dividends.
3.
What amount of income
come statement related to
not income but a partial return of
ized holding gain or loss?
Explain.
ignored. This is reasonable since
there is no expectation that the in-
vestment will be sold any time
soon.
Investment Income
Dec. 31
Cash
Investing Activities 343
P11-21
The Book Wermz
Depreciation Schedule
April–December 2008
Asset Buildings Store Equipment Transportation Equipment Total
Cost 2,200,000.00 1,000,000.00 275,000.00
Salvage 100,000.00 50,000.00 75,000.00
Life (months) 360 60 36
Method Straight-Line Declining-Balance Straight-Line Declining-Balance Straight-Line Units-of-Production Straight-Line Accelerated
Month Miles Expense
1 $ 5,833.33 $ 12,222.22 $ 15,833.33 $ 33,333.33 $ 5,555.56 1,500 $ 3,333.33 $ 27,222.22 $ 48,888.88
2 5,833.33 12,154.32 15,833.33 32,222.22 5,555.56 1,800 4,000.00 27,222.22 48,376.54
Total Accelerated $417,436.50
344 Chapter 11
If the life of the buildings was 380 months and the life of the equipment was 72 months:
Asset Buildings Store Equipment Transportation Equipment Total
Method Straight-Line Declining-Balance Straight-Line Declining-Balance Straight-Line Units-of-Production Straight-Line Accelerated
Month Miles Expense
1 $ 5,526.32 $ 11,578.95 $ 13,194.44 $ 27,777.78 $ 5,555.56 1,500 $ 3,333.33 $ 24,276.32 $ 42,690.06
Total Accelerated $372,881.91
Total Straight-line 218,486.88
Investing Activities 345
P11-22 A. Routine maintenance is an expense that should be recorded in the
B.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Accounts
Cash
Contributed
Capital
Retained
Earnings
SGA Expenses
Investment in Fixed Assets
C.
CMI Com World
Statement of Income
For the Year Ended 12/31/07
(In thousands)
Revenues $ 43,000
condition of the company.
P11-23
1
2
3
4
5
6
7
8
9
10
11
12
346 Chapter 11
CASES
C11-1 Financial statement effects of a purchase:
On January 1, Swenson would record an increase in plant assets and
long-term liabilities of $2 million. The assets would be depreciated as fol-
lows:
Year
Book Value at
Beginning of Year
Depreciation
Expense
Book Value at
End of Year
1
$2,000,000
$ 500,000
$1,500,000
The interest expense would be computed as follows:
(a)
Year
(b)
Beginning
Principal
(c)
Interest
at 10%
(d)
Repayment
of Principal
(c + d)
Total Cash
Payment
(b − d)
End-of-Year
Principal
1
$2,000,000
$200,000
$ 500,000
$ 700,000
$1,500,000
2
1,500,000
650,000
1,000,000
3
1,000,000
600,000
4
$500,000
$2,500,000
Summary of effects on income statement:
1. Depreciation expense each year of $500,000. Total over four years =
Summary of effects on the balance sheet:
Summary of effects on the statement of cash flows:
1. Under the indirect format, the depreciation expense is added to net in-
2
3
4
Total
Investing Activities 347
3. The borrowing of $2 million from the bank is reported in the first year
Financial statement effects of a lease:
On January 1, Swenson would capitalize the lease at the present value of
Year
Book Value at
Beginning of Year
Depreciation
Expense
Book Value at
End of Year
1
$2,012,867
$ 503,217
$1,509,650
2
3
4
The lease payment schedule would be computed as follows:
(a)
Year
(b)
Beginning
Lease
Principal
(c)
Effective
Interest
(B × 10%)
(d)
Lease
Payment
(Given)
(e)
(d − c)
Reduction
of Lease
Principal
(f)
(b − e)
End-of-Year
Lease
Principal
1
$2,012,867
$201,287
$ 635,000
$ 433,713
$1,579,154
2
1,102,069
3
4
Totals
$527,133
Summary of effects on income statement:
1. Depreciation expense each year of $503,217. Total over four years =
348 Chapter 11
Summary of effects on the balance sheet:
1. The assets are reported at book value (capitalized cost of $2,012,867
Summary of effects on the statement of cash flows:
1. Under the indirect format, the depreciation expense is added to net in-
come as part of computing cash provided by operations.
2. The portion of the lease payment that is repayment of principal is re-
Overall, the lease would result in $40,000 more in cash outflow than the
purchase over the four-year period. The present value of this difference is
C11-2 A. The primary method for depreciating buildings and equipment is the
straight-line method. Accelerated methods are generally used for in-
come tax purposes. Useful lives range from three to 50 years (Note 1–
Investing Activities 349
B. Cost of plant assets is reported in Note 5 (in millions):
Net plant assets $ 3,111
C. Marketable equitable securities are reported in the “Other Assets”
D. Plant assets at end of fiscal year 2003 reported
on the balance sheet (in millions) $2,980
Purchase of plant assets (statement of cash flows) 628