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
costs such as original cost of each asset; all costs incurred to bring
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
(5 min.) S 7-3
1. E
2. C
3. E
(10-15 min.) S 7-4
1. First-year depreciation:
Straight-line ($56,700,000 − $4,700,000) / 5 years ………….
$ 10,400,000
Units-of-production $10.40/mile* × 775,000 miles …………
$ 8,060,000
Double-declining-balance ($56,700,000 × 40%) …………….
$22,680,000
Second-year depreciation:
Straight-line ($56,700,000 − $4,700,000) / 5 years ………….
Units-of-production $10.40/mile* × 1,200,000 miles ………
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–
2.
DDB depreciation ……………………………………………..
$22,680,000
Straight-line depreciation ………………………………….
(10,400,000)
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
2016: 6,250 12,500 12,500
(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
2016: 3,000 6,000 7,000
(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
2016: 40,000 4,000 7,500 5,500
(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
SL depreciation produces the highest net income (lowest depreciation).
DDB depreciation produces the lowest net income (highest
depreciation).
(10 min.) S 7-13
Depreciation Expense — Concession Stand ………………..
63,000
Accumulated Depreciation — Concession Stand ….
63,000
Depreciation for years 1-3:
=
(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 ………….
330,000
Machinery ……………………………..
920,000
(5-10 min.) S 7-15
1.
Units-of-production depreciation method is similar to the method
used to calculate depletion.
Oil Reserves …………………………………………………
*$13 = $208 / 16
3.
Cost of Oil Sold ($13 × .9) …………………………………..
Oil Inventory …………………………………………………
(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
$260,000
.084
X
2.154
=
18.1%
$33,000
$430,000
$430,000
$220,000
(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 ……………………………………………………
(11.3)
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
Sale price of machine No. 3 ……………………..
$21,500
Cost ……………………………………………………….
20,900
Gain on sale of machine ………………………….
$ 600
(5-10 min.) E 7-23A
(a) Major overhaul
(b) Periodic lubrication
(c) Purchase price
Capital Expenditure
Immediate Expense
Capital Expenditure
(15 min.) E 7-24A
Req. 1
Journal
ACCOUNT TITLES
DEBIT
CREDIT
a.
Land …………………………………………………………..
485,000
Cash ……………………………………………………..
485,000
b.
Building
($1,400 + $15,320 + $690,000 + $28,300) ………..
735,020
Note Payable ………………………………………….
690,000
Cash ($1,400 + $15,320 + $28,300) ……………
45,020
c.
Req. 2
BALANCE SHEET
Plant assets:
Land ……………………………………………………..
$485,000
Building …………………………………………………
Less Accumulated depreciation………………
Building, net ………………………………………….
Req. 3
INCOME STATEMENT
Expense:
Depreciation expense …………………………….
$ 5,686
(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:
*Or, ($17,800 − $7,000 − $5,125 − $4,625 = $1,050). Total depreciation cannot
exceed $17,800, therefore the last year may be limited, if there are rounding
differences.
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
(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:
$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 …………………………….
(58,000)
(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
$106,250 × 4 = $425,000
Book value = $920,000 – $425,000 = $495,000
2. The journal entry on January 1, 2019 to record the sale:
(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 ……………………………………….
1,312
Sale of fixtures:
Cash ………………………………………………….
Accumulated Depreciation —
Loss on Sale of Fixtures …………………….
Fixtures ………………………………………..
_____
*2016 depreciation: $8,200 × 2/5 = $3,280
2017 depreciation: ($8,200 − $3,280) × 2/5 × 8/12 = $1,312
**Loss on sale of fixtures:
Sale price of old fixtures ………………………………….
$ 2,200
Book value of old fixtures:
Cost ……………………………………………………………
Loss on sale ……………………………………………………