(15 min.) P7–76B
Req. 1
Journal
ACCOUNT TITLES
DEBIT
CREDIT
Equipment ………………………………………………………….
109,000
Cash ………………………………………………………………
109,000
Depreciation Expense — Buildings ……………………..
30,800*
Accumulated Depreciation — Buildings …………..
30,800
Depreciation Expense — Equipment ……………………
38,900**
Accumulated Depreciation — Equipment …………
38,900
Req. 2
BALANCE SHEET
Property, plant, and equipment:
Land ……………………………………………………….
$ 145,000
Buildings ………………………………………………..
$700,000
Less: Accumulated Depreciation
($348,000 + $30,800) ……………………….
Less: Accumulated Depreciation
Total property, plant, and equipment …………….
(25-35 min.) P 7-77B
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Jan.
3
Equipment (new) …………………………………………
177,000
Accumulated Depreciation —
Equipment …………………………………………………
61,000
Equipment (old) ………………………………………
131,000
Cash ………………………………………………………
101,000
Gain on Trade-in of Equipment ………………..
6,000
[$76,000 − ($131,000 − $61,000)]
June
30
Depreciation Expense — Building
Accumulated Depreciation —
Building…………………………………………………
30
Cash ………………………………………………………….
Note Receivable ………………………………………….
Accumulated Depreciation —
Building ($150,000 + $5,000) ……………………….
Building …………………………………………………
640,000
Oct.
31
Land [$127,400 / ($127,400 + $236,600) × $350,000] …
122,500
Building
[$236,600 / ($127,400 + $236,600) × $350,000] ……..
227,500
Cash ………………………………………………………
350,000
Dec.
31
Depreciation Expense —
Equipment ($177,000 × 2/8) ………………………….
44,250
Accumulated Depreciation —
Equipment ……………………………………………..
44,250
31
Depreciation Expense — Buildings
(30-40 min.) P 7-78B
Req. 1
Straight-Line Depreciation Schedule
Depreciation for the Year
DATE
ASSET
COST
DEPRECIATION
RATE
DEPRECIABLE
COST =
DEPRECIATION
EXPENSE
ACCUMULATED
DEPRECIATION
ASSET BOOK
VALUE
1-02–2016
$295,000
$295,000
12–31–2016
1/5
$265,000
$53,000
$ 53,000
242,000
12–31–2017
1/5
265,000
53,000
106,000
189,000
12–31–2018
1/5
265,000
53,000
159,000
136,000
12–31–2019
1/5
265,000
53,000
212,000
12–31–2020
1/5
265,000
53,000
265,000
(continued) P 7-78B
Req. 1
Units-of-Production Depreciation Schedule
Depreciation for the Year
DATE
ASSET
COST
DEPRECIATION
PER DOCUMENT
NUMBER OF
DOCUMENTS =
DEPRECIATION
EXPENSE
ACCUMULATED
DEPRECIATION
ASSET BOOK
VALUE
1-02–2016
$295,000
$295,000
12–31–2016
$1.06
55,000
$58,300
$ 58,300
236,700
12–31–2017
1.06
52,500
55,650
113,950
181,050
12–31–2018
1.06
50,000
53,000
166,950
128,050
12–31–2019
1.06
47,500
50,350
217,300
12–31–2020
1.06
45,000
47,700
265,000
(continued) P 7-78B
Req. 1
Double-Declining-Balance Depreciation Schedule
Depreciation for the Year
DATE
ASSET
COST
DDB RATE
ASSET BOOK
VALUE =
DEPRECIATION
EXPENSE
ACCUMULATED
DEPRECIATION
ASSET BOOK
VALUE
1-02–2016
$295,000
$295,000
12–31–2016
.40*
$295,000
$118,000
$ 118,000
177,000
12–31–2017
.40
177,000
70,800
188,800
106,200
12–31–2018
.40
106,200
42,480
231,280
63,720
12–31–2019
.40
63,720
25,488
256,768
38,232
12–31–2020
38,232
265,000
30,000
(continued) P 7-78B
Req. 2
The depreciation method that maximizes reported income in the first
year of the computer’s life is the straight-line method, which produces
the lowest depreciation for that year ($53,000). The method that
maximizes cash flow by minimizing income tax payments in the first
year is the double-declining-balance method (or MACRS depreciation
when used for tax purposes) which produces the highest depreciation
amount for that year ($118,000).
Req. 3
DEPRECIATION METHOD THAT
IN THE EARLY YEARS
MAXIMIZES
REPORTED
INCOME
MINIMIZES
INCOME TAX
PAYMENTS
Net income for first year:
SL
DDB
Net cash provided by operations
before income tax
$157,000
$157,000
Depreciation expense
Income before income tax
Income tax expense (40%)
Net income
Net cash provided by operations before
income tax
$157,000
Income tax paid
Net cash provided by operations
(20-25 min.) P 7-79B
Req. 1
Millions
Cost of plant assets ………………………………
$ 4,833
Less: Accumulated depreciation ……………
(2,121)
Book value of plant assets …………………….
$ 2,712
Req. 2
Evidences of the purchase of plant assets and goodwill:
1. Property, plant, and equipment increased on the balance sheet.
2. Goodwill increased on the balance sheet.
3. Statement of cash flows reports “Additions to property, plant and
equipment.”
Req. 3
Property, Plant, and Equipment
Accumulated Depreciation
4/30/15 Bal.
4,198
Cost of
Accum. depr.
4/30/15 Bal.
1,725
Purchased
Depr. during
4/30/16 Bal.
4,833
4/30/16 Bal.
2,121
4/30/15 Bal.
Purchased
4/30/16 Bal.
(continued) P 7-79B
Req. 4
2016
Cash ……………………………………………….
135
Accumulated Depreciation—Property,
Plant & Equipment …………………………..
66
(20-30 min.) P 7-80B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Iron Ore Rights …………………………………..
2,900,000
Cash……………………………………………..
2,900,000
Iron Ore Rights …………………………………..
Cash……………………………………………..
Iron Ore Rights …………………………………..
Cash……………………………………………..
Iron Ore Rights …………………………………..
Note Payable …………………………………
Iron Ore Inventory ………………………………
Accounts Receivable (27,500 × $38) …….
1,045,000
Sales Revenue ………………………………
1,045,000
Cost of Iron Ore Sold (27,500 x $13.71) ..
377,025
Iron Ore Inventory………………………….
377,025
Operating Expenses …………………………..
256,000
Cash……………………………………………..
256,000
Income Tax Expense (see Req. 2)………..
164,790
Income Tax Payable ………………………
164,790
(continued) P 7-80B
Req. 2
Northeastern Energy Company
Income Statement — Iron Ore Mine Project
Year 1
Sales revenue ………………………………………
$1,045,000
Cost of iron ore sold …………………………….
$377,025
Operating expenses ……………………………..
256,000
633,025
Income before tax ………………………………..
411,975
Income tax expense (40%) ……………………
164,790
Net income ………………………………………….
$ 247,185
Req. 3
Iron ore inventory ($479,850 – $377,025)..
$ 102,825
Iron ore rights ($3,084,750 – $479,850) …..
2,604,900
(30-40 min.) P 7-81B
Req. 1
To determine the gain or loss on the sale of a plant asset, compare the
cash received to the asset’s book value, as follows:
Billions
Cash received from sale of asset ………………………….
$ 0.9
Book value of asset sold:
Cost ……………………………………………………….………
Gain (Loss) on sale ……………………………………………..
$ 0.4
Req. 2
Balance sheet at December 31, 2016:
Property, plant, and equipment ($4.7 + $2.1 − $1.5) …………..
$ 5.3
Less: Accumulated depreciation ($2.9 + $1.0 − $1.0) …………
Property, plant, and equipment, net (book value) ………………
Req. 3
Statement of cash flows for 2016:
Cash flows from operating activities:
Net income ($26.8 − $22.0) …………………………………………..
$4.8
Reconciliation of net income to
net cash provided by operations:
Purchases of property, plant, and equipment …………………….
$(2.1)
Sales of property, plant, and equipment …………………………...
0.9
(20-30 min.) P 7-82B
Req. 1
Feb. 28, 2015 Feb. 28, 2014
Net income
$ 2,430
$ 2,250
Req. 2
Feb. 28, 2015 Feb. 28, 2014
Sales (net revenue)
$75,000
$62,000
÷ $41,600
= 1.30
Req. 3
Feb. 28, 2015 Feb. 28, 2014
Net income
$2,430
$ 2,250
÷ $41,600
Req. 4
All of the following contributed to the decrease in ROA during the most
recent year:
(20-30 min.) P 7-83B
Req. 1
(Amounts in millions)
Property & Equipment
Accumulated Depreciation
12/31/15 Bal.
21,350
X =
Cost of
Accum. depr.
= X
12/31/15 Bal.
17,530
Purchased
assets sold
of assets sold
Depr. during
during 2016
in 2016
in 2016
18,395
Req. 2
Cost
$640
– Acc. Depr.
Sales price
$ 56
Book value
= Loss on sale
(continued) P 7-83B
Req. 3
Cash ………………………………………………………………………………
56
Accumulated Depreciation – Prop. & Equipment ……………….
280
Loss on the Sale of Prop. & Equipment …………………………….
304
Property & Equipment …………………………………………………
640
Req. 4
Property & Equipment, net
12/31/15 Bal.
3,820
360
Book value, assets sold
Purchases
1,145
Depreciation
12/31/16 Bal.
Challenge Exercises and Problem
(15-20 min.) E 7-84
Millions
Net income under straight-line depreciation ………….
$62
Difference in depreciation for 2017 (year 2 of 8):
Straight line depreciation, as reported ………………
DDB depreciation for year 2 (see below) ……………
Decrease in net income …………………………..……………
Net income Yentun can expect for 2017
DDB depreciation by year: