Chapter 7
Plant Assets, Natural Resources, &
Intangibles
Ethics Check
(5-10 min.) EC 7-1
a. Integrity
b. Due care
c. Objectivity and independence
d. Integrity
Short Exercises
(5 min.) S 7-1
1. Red Rock reported Buildings and leasehold improvements of
$2,219,767 (thousand) and Fixtures and equipment of $1,674,089
(thousand) at September 30, 2016. Included in these categories are
2.
Cost = $4,048,650 thousand
Book value = $2,194,687 thousand
(5 min) S 7-2
Land ($330,000 × .15*) ……………………………….
49,500
Building ($330,000 × .25) …………………………...
82,500
Equipment ($330,000 × .60) ………………………..
198,000
Note Payable ………………………………………
330,000
*Supporting computations:
Current
Market
Value
Percent of Total
$ 54,000
$ 54,000 / $360,000
=
15.0%
$ 90,000 / $360,000
=
25.0%
$216,000 / $360,000
=
60.0%
$360,000
(5 min.) S 7-3
1. E
2. C
(10-15 min.) S 7-4
1. First-year depreciation:
Straight-line ($56,700,000 − $4,700,000) / 5 years ………….
$ 10,400,000
Double-declining-balance ($56,700,000 × 40%) …………….
Second-year depreciation:
Straight-line ($56,700,000 − $4,700,000) / 5 years ………….
$10,400,000
$12,480,000
$13,608,000
2. Book value:
Straight-
Line
Units-of–
Production
Double-
Declining-
Balance
Cost …………………………...
$56,700,000
$56,700,000
$56,700,000
Less: Accumulated
Depreciation ……………
(10,400,000)
(8,060,000)
(10 min.) S 7-5
1. Double-declining-balance (DDB) depreciation offers the tax
advantage for the first year of an asset’s use. Because DDB’s first–
year depreciation is greater than first-year depreciation under other
2.
DDB depreciation ……………………………………………..
$22,680,000
Straight-line depreciation ………………………………….
Income tax rate …………………………………………………
× .35
Income tax savings for first year ……………………….
(5-10 min.) S7-6
$25,000 / 4 years = $6,250 / year, straight-line depreciation
Depreciation Accumulated Book
Expense Depreciation Value
2015: $6,250 $ 6,250 $18,750
(5-10 min.) S 7-7
$25,000 / 200,000 miles = $.125 / mile, units-of-production depreciation
Depreciation Accumulated Book
Miles Expense Depreciation Value
2015: 60,000 $7,500 $ 7,500 $17,500
2016: 65,000 8,125 15,625 9,375
(5-10 min.) S 7-8
Rate for double-declining-balance depreciation for 4 years = 2/4 or 50%
Depreciation Accumulated Book
Rate Expense Depreciation Value
$25,000
2015: .50 $12,500 $12,500 12,500
2016: .50 6,250 18,750 6,250
(5-10 min.) S 7-9
($13,000 — $1,000) / 4 years = $3,000 / year, straight-line depreciation
Depreciation Accumulated Book
Expense Depreciation Value
2015: $3,000 $ 3,000 $10,000
(5-10 min.) S 7-10
($13,000 — $1,000) / 120,000 miles = $.10 / mile, units-of-production
depreciation
Depreciation Accumulated Book
Miles Expense Depreciation Value
2015: 35,000 $3,500 $ 3,500 $9,500
(5-10 min.) S 7-11
Rate for double-declining-balance depreciation for 4 years = 2/4 or 50%
Depreciation Accumulated Book
Rate Expense Depreciation Value
$13,000
2015: .50 $6,500 $ 6,500 6,500
2016: .50 3,250 9,750 3,250
(5-10 min.) S 7-12
First-year depreciation (for a partial year):
a. Straight-line (€42,500,000 − €5,200,000) / 5 years
× 3/12 ……………………………………………………………..
€1,865,000
b. Units-of–production (€42,500,000 − €5,200,000) /
€2,611,000
c. Double-declining-balance (€42,500,000 × 2/5
× 3/12) …………………………………………………………….
€4,250,000
(10 min.) S 7-13
Depreciation Expense — Concession Stand ………………..
63,000
Accumulated Depreciation — Concession Stand ….
63,000
Depreciation for years 1-3:
$180,000 / 10 years = $18,000 per year
=
(5-10 min.) S 7-14
1. ($920,000 − $70,000) / 5 years × 2 = $340,000
Loss on sale of machinery:
Sale price of machinery …………………………………..
$ 250,000
Book value of machinery:
Cost ……………………………………………………………
$920,000
Loss on sale ……………………………………………………
2.
2017
Jan. 1
Cash ………………………………………….
250,000
Accumulated Depreciation –
Machinery ………………………………….
340,000
Loss on Sale of Machinery ………….
(5-10 min.) S 7-15
1.
Units-of-production depreciation method is similar to the method
used to calculate depletion.
Billions
Oil Reserves …………………………………………………
*$13 = $208 / 16
Billions
3.
Cost of Oil Sold ($13 × .9) …………………………………..
11.7
Oil Inventory …………………………………………………
11.7
(5-10 min.) S 7-16
Req. 1
Cost of goodwill purchased:
Millions
Purchase price paid for Healthy Snacks, Inc.
$5.8
Market value of Healthy Snacks’ net assets:
Market value of Healthy Snacks’ assets
$ 7.0
Less: Healthy Snacks’ liabilities
(6.0)
Req. 2
In future years Crunchies, Inc. will determine whether its goodwill has
been impaired. If the goodwill’s value has not been impaired, there is
nothing to record. But if goodwill’s value has been impaired,
Crunchies, Inc. will record a loss and write down the book value of the
goodwill.
(5–10 min.) S 7-17
Asset
Book
Value
Estimated
Future
Cash
Flows
Fair
Value
Impaired?
(Y or N)
Amount
of Loss
a. Equipment
$180,000
$140,000
$100,000
Y
$80,000
b. Trademark
$320,000
$460,000
$375,000
N
c. Land
Y
$31,000
(5 min.) S7–18
(Dollar amounts in millions)
(5 min.) S 7-19
DuPont Analysis
Net profit margin
ratio
X
Total asset turnover
=
ROA
(Net income/Net
sales)
X
(Net sales/Average
total assets)
=
(Net income/Average
total assets)
2016
$46,800
X
$560,000
=
18.1%
$560,000
$33,000
$430,000
$430,000
$220,000
$260,000
The net profit margin ratio improved slightly over 2015, and the asset
turnover improved from 2015 to 2016; these improvements caused the
ROA to increase.
(5 min.) S 7-20
Northwest Satellite Systems, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash flows from investing activities:
Millions
Purchase of other companies ………………………………………
$(13.0)
Capital expenditures ……………………………………………………
Proceeds from sale of North American operations ………..
Net cash (used in) investing activities ………………………
$(12.9)
Exercises
(5-10 min.) E 7-21A
Land: $150,000 + $170,000 + $3,000 + $4,500 + $7,000 = $334,500
(10-15 min.) E 7-22A
Allocation of cost to individual machines:
Machine
Appraised
Value
Percentage of Total
Appraised (Market) Value
Total
Cost
Cost of
Each
Machine
1
$ 73,100
$73,100 / $215,000
=
.340
$209,000 × .340
=
$ 71,060
2
=
.560
=
3
=
=
Totals
(5-10 min.) E 7-23A
(a) Major overhaul
(b) Periodic lubrication
Capital Expenditure
Immediate Expense
(15 min.) E 7-24A
Req. 1
Journal
ACCOUNT TITLES
DEBIT
CREDIT
a.
Land …………………………………………………………..
485,000
Cash ……………………………………………………..
485,000
Building
($1,400 + $15,320 + $690,000 + $28,300) ………..
735,020
Note Payable ………………………………………….
Cash ($1,400 + $15,320 + $28,300) ……………
c.
Req. 2
BALANCE SHEET
Plant assets:
Land ……………………………………………………..
$485,000
Building …………………………………………………
Less Accumulated depreciation………………
Building, net ………………………………………….
Req. 3
INCOME STATEMENT
Expense:
Depreciation expense …………………………….
(15-20 min.) E 7-25A
Req. 1
Year
Straight-Line
Units–of–
Production
Double-Declining-
Balance
2016
$ 4,450
$ 7,000
$ 9,600
2017
4,450
5,125
4,800
2018
$17,800
_____
Computations:
Straight–line: ($19,200 − $1,400) ÷ 4 = $4,450 per year.
Units–of-production: ($19,200 − $1,400) ÷ 71,200 miles = $.25 per mile:
2016
28,000
×
$.25
=
$7,000
2017
20,500
×
.25
=
5,125
2018
18,500
×
.25
=
2019
4,200 × .25
=
1,050*
Double-declining-balance — Twice the straight-line rate: 1/4 × 2 = 50%
2016
$19,200 × .50
=
$9,600
2017
($19,200 − $9,600) × .50
=
4,800
2018
($9,600 − $4,800) x .50
=
2,400
2019
($17,800 max. deprec. − $9,600 − $4,800 − $2,400)
=
(continued) E 7-25A
Req. 2
The units-of production method tracks the wear and tear on the van
most closely.
Req. 3
For income tax purposes, the double-declining-balance method is best
because it provides the most depreciation and, thus, the largest tax
(15 min.) E 7-26A
INCOME STATEMENT
Expenses:
Depreciation expense — Building
[($55,000 + $108,000 + $66,000) − $59,000] / 25 ………..
$ 6,800
Depreciation expense — Furniture and Fixtures
($9,000 − $1,500) ……………………………………………………
BALANCE SHEET
Current assets:
Supplies …………………………..……………………………………..
$ 1,500
Plant assets:
Building ($55,000 + $108,000 + $66,000)…
$229,000
Less: Accumulated depreciation………….
$222,200
STATEMENT OF CASH FLOWS
Cash flows from investing activities:
Purchase of buildings ($55,000* + $66,000) ………………..
$(121,000)
Purchase of furniture and fixtures …………………………….
(10-15 min.) E 7-27A
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Year
20
Depreciation Expense – Building ($355,000 ÷ 40)
8,875
Accumulated Depreciation — Building ……
8,875
Year
21
Depreciation Expense – Building …………………
18,000*
Accumulated Depreciation — Building ……
18,000
_____
*Computations:
Depreciable cost: $445,000 − $90,000 = $355,000
Depreciation through year 20: = $355,000 / 40 = $8,875 x 20 = $177,500
Asset’s remaining depreciable book value:
(10 min.) E 7-28A
1. ($920,000 – $70,000) / 8 years = $106,250 per year
2. The journal entry on January 1, 2019 to record the sale:
Cash ……………………………………………………….
400,000
Accumulated Depreciation – Machine …………………………..
425,000
(15-20 min.) E 7-29A
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
2017
Depreciation for 8 months:
Aug.
31
Depreciation Expense – Fixtures …………
1,312*
Accumulated Depreciation —
Fixtures ……………………………………….
Sale of fixtures:
31
Cash ………………………………………………….
2,200
Accumulated Depreciation —
4,592
Loss on Sale of Fixtures …………………….
Fixtures ………………………………………..
_____
*2016 depreciation: $8,200 × 2/5 = $3,280
**Loss on sale of fixtures:
Sale price of old fixtures ………………………………….
$ 2,200
Book value of old fixtures:
Cost ……………………………………………………………
Loss on sale ……………………………………………………