205
CHAPTER 7
FIXED ASSETS, NATURAL RESOURCES,
AND INTANGIBLE ASSETS
CLASS DISCUSSION QUESTIONS
1. Fixed assets have the following
characteristics:
(a) They exist physically and, thus, are tan-
gible assets.
(b) They are owned and used by the com-
pany in its normal operations.
(c) They are not offered for sale as part of
normal operations.
4. $475,000
5. Ordinarily not; if the book values closely
approximate the market values of fixed as-
sets, it is coincidental. Depreciation does not
measure a decline in the market value of a
fixed asset. Instead, depreciation is an allo-
cation of a fixed asset’s cost to expense
over the asset’s useful life. Thus, the book
value of a fixed asset (cost less accumulat-
ed depreciation) usually does not agree with
9. Capital expenditures include the cost of ac-
quiring fixed assets and the cost of improv-
ing an asset. These costs are recorded by
increasing the fixed asset account. Capital
expenditures also include the costs of ex-
traordinary repairs, which are recorded by
decreasing the asset’s accumulated depre-
ciation account. Revenue expenditures are
recorded as expenses that benefit only the
current period and are incurred for normal
maintenance and repairs of fixed assets.
10. Capital expenditure
11. a. Capital expenditure
b. Revenue expenditure (Note: Changing oil
b. An accelerated depreciation method
reduces income tax payable to the IRS in
the earlier periods of an asset’s life.
Thus, cash is freed up in the earlier peri-
ods to be used for other business
purposes.
c. MACRS is a modified form of accelerat-
ed depreciation provided by the Internal
Revenue Code. It is used in computing
depreciation for tax purposes. To simpli–
discarded.
14. Depletion is determined by multiplying the
quantity extracted and sold during the period
by the depletion rate. The depletion rate is
computed by dividing the cost of the mineral
deposit by its estimated size.
206
EXERCISES
E7–1
a. New printing press: 1, 2, 3, 5, 6
b. Used printing press: 7, 8, 9, 11
E7–2
E7–3
Initial cost of land ($100,000 + $187,500) ……………… $287,500
Plus: Legal fees …………………………………………………. $3,000
Delinquent taxes ………………………………………. 2,050
E7–4
a. No. The $8,300,000 represents the original cost of the equipment. Its replace-
ment cost, which may be more or less than $8,300,000, is not reported in the
financial statements.
E7–5
(a) 25% (1/4); (b) 12.5% (1/8); (c) 10% (1/10); (d) 5% (1/20); (e) 4% (1/25); (f) 2.5%
(1/40); (g) 2% (1/50)
207
E7–6
$2,500 = ($45,000 – $7,500) ÷ 15 years
E7–7
E7–8
a. 5% of ($160,000 – $4,500) = $7,775, or [($160,000 – $4,500) ÷ 20 years]
b. Year 1: 10% of $160,000 = $16,000
Year 2: 10% of ($160,000 – $16,000) = $14,400
E7–9
E7–10
Capital expenditures: 3, 4, 5, 6, 7, 9, 10
Revenue expenditures: 1, 2, 8
E7–11
208
E7–12
a.
Year 2 Year 1
Vehicles ……………………………………….. $ 7,542 $ 6,762
Aircraft …………………………………………. 15,801 15,772
b. A comparison of Years 1 and 2 reveals that each category of asset except
land increased during Year 2. UPS expanded its operations during Year 2 by
$1,469 ($40,620 – $39,151) with purchases of property, plant, and equipment.
209
E7–13
a.
Cost of equipment ………………………………………………………….. $ 560,000
Accumulated depreciation at December 31, 20Y7
(5 years at $26,000* per year) ……………………………………… (130,000)
Book value at December 31, 20Y7 …………………………………… $ 430,000
*($560,000 – $40,000) ÷ 20 = $26,000
b. 1. Update Depreciation
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Acc. Depr.— Retained
–
g
y
(
)
(
)
y
r
(
)
2. Sale of Equipment
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Acc.
Depr.— Retained
Cash +Equip.
–
Equip. = Earnin
g
s
Jul
y
1. 400,000
(
560,000
143,000*
(
17,000
Statement of Cash Flows Income Statement
July 1. Investing 400,000 July 1. Loss on disposal
of fixed assets
(
17,000
*$130,000 + $13,000
E7–14
a. 20Y1 depreciation expense: $25,000 [($140,000 – $15,000) ÷ 5 years]
210
E7–14, Concluded
c.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Acc.
Dep
r
.— Retained
–
g
(
)
(
)
(
)
d.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Acc.
Dep
r
.— Retained
Cash + Equip.
–
Equip. = Earnin
g
s
Jan. 2. 71,000
(
140,000
75,000 6,000
Statement of Cash Flows Income Statement
Investing 71,000 Gain on disposal
of fixed assets
6,000
E7–15
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
–
Acc. Retained
(
)
211
E7–16
a. ($1,500,000 ÷ 8 years) + ($252,000 ÷ 7 years) = $187,500 + $36,000 = $223,500
total patent amortization expense
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Retained
Patents = Earnin
g
s
E7–17
a. $8,000,000. The goodwill is not amortized; thus, the book value of goodwill
has remained unchanged since originally recognized on January 1, 20Y3.
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Retained
Goodwill = Earnings
20Y9
(5,700,000)* (5,700,000)
212
E7–18
a. Property, Plant, and Equipment (in millions):
Year 2 Year 1
Land and buildings ……………………………………………. $16,216 $13,587
Machinery, equipment, and internal-use software .. 65,982 54,210
Leasehold improvements …………………………………… 8,205 7,279
$90,403 $75,076
Less accumulated depreciation and amortization .. (49,099) (41,293)
Book value ………………………………………………………… $41,304 $33,783
A comparison of the book values of Years 1 and 2 indicates they increased. A
comparison of the total cost and accumulated depreciation reveals that Apple
E7–19
1. Fixed assets should be reported at cost and not replacement cost.
2. Land does not depreciate.
213
PROBLEMS
P7–1
1.
Land Other
Item Land Improvements Building Accounts
a. $ 80,000
b. $ 30,000
c. 10,000
d. $ 25,000
e. 400,000
f. $ 5,000
s. 10,500
2. $ 473,500 $ 37,000 $ 876,250
*Receipt
3. Since land used as a plant site does not lose its ability to provide services, it
214
P7–2
Depreciation Expense
a. Straight- b. Double-
Line Declining-Balance
Year Method Method
20Y4 $ 45,250 $ 95,000
20Y5 45,250 47,500
20Y6 45,250 23,750
20Y7 45,250 14,750*
Total $181,000 $ 181,000
Calculations:
Straight-line method:
P7–3
a. Straight-line method:
20Y5: [($16,200 – $900) ÷ 3] × 1/2 ……………………………………….. $ 2,550
20Y6: ($16,200 – $900) ÷ 3 ………………………………………………….. 5,100
20Y7: ($16,200 – $900) ÷ 3 ………………………………………………….. 5,100
20Y8: [($16,200 – $900) ÷ 3] × 1/2 ……………………………………….. 2,550
215
1.
Accumulated
Depreciation Depreciation, Book Value,
Year Expense End of Year End of Year
a. 1 $32,500* $ 32,500 $ 107,500
2 32,500 65,000 75,000
3 32,500 97,500 42,500
4 32,500 130,000 10,000
2.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Acc.
Dep
r
.— Retained
Cash + Equip.
–
Equip. = Earnin
g
s
23,300
(
140,000
122,500 5,800*
Statement of Cash Flows Income Statement
Investing 23,300 Gain on disposal
of equipment
5,800
*[$23,300 – ($140,000 – $122,500)]
3.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Acc.
Dep
r
.— Retained
Cash + Equip. – Equip. = Earnings
(
)