FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-1
(5 min.)
Solution:
Req. 1
Req. 2
Cost = $ 4,048,650 thousand
Book value = $ 2,194,687 thousand
1. What are Red Rock’s largest two categories of property and equipment as of
September 30, 2016? Describe in general terms the types of expenditures included in
these categories.
2. What was Red Rock’s gross cost of property and equipment at September 30, 2016?
What was the book value of property and equipment on this date? Why is book value
less than cost?
Red Rock reported Buildings and leasehold improvements of $2,219,767 (thousand)
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 1 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-2
(5 min.)
Solution:
Land ($330,000 × .15*) 49,500
Building ($330,000 × .25) 82,500
Journalize the lump-sum purchase of the three assets for a total cost of $330,000.
The business signs a note payable for this amount.
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 2 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-3
(5 min.)
Solution:
1. E
2. C
Identify each of the following items as either a capital expenditure (C),
expense on the income statement (E), or neither (N):
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 3 of 98
3. E
4. C
5. N
6. C
7. C
8. C
9. C
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-4
(10- 15 min.)
Solution:
Req. 1
10,400,000$
10,400,000$
12,480,000$
[($56,700,000 − $22,680,000) × 40%]
Units-of-production $10.40/mile* × 1,200,000 miles
Straight-line ($56,700,000 − $4,700,000) / 5 years
Req. 2
56,700,000$
Book value, Year 1
Depreciation
56,700,000$
Units-of-
Production
Cost
Straight-line ($56,700,000 − $4,700,000) / 5 years
Double-
Declining-
Balance
Straight-
Line
56,700,000$
1. Compute QuickAir’s depreciation for the first two years on the plane using the
following methods:
a. Straight-line
b. Units-of-production (round depreciation per mile to the closest cent)
c. Double-declining-balance
2. Show the airplane’s book value at the end of the first year under each depreciation
method.
First-year depreciation:
Second-year depreciation:
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 4 of 98
22,680,000$
Units-of-production $10.40/mile* × 775,000 miles
Double-declining-balance ($56,700,000 × 40%)
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-5
(10 min.)
Solution:
Req. 1
Req. 2
22,680,000$
DDB depreciation
1. Which depreciation method offers the tax advantage for the first year? Describe the
nature of the tax advantage.
2. How much income tax will QuickAir save for the first year of the airplane’s use
under the method you just selected as compared with using the straight-line
depreciation method? The income tax rate is 35%. Ignore any earnings from investing
the extra cash.
Double-declining-balance (DDB) depreciation offers the tax advantage for the first
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 5 of 98
12,280,000$
Straight-line depreciation
Income tax rate
Excess depreciation tax deduction
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-6
(5-10 min.)
Requirements
Solution:
$25,000 / 4 years = $6,250 / year, straight-line depreciation
2015 6,250$
6,250$
18,750$
Using the straight-line method of depreciation, calculate the
following amounts
for the car for each of the four years of its expected life:
a. Depreciation expense
b. Accumulated depreciation balance
c. Book value
Depreciation
Expense
Accumulated
Depreciation
Book Value
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 6 of 98
2016 6,250 12,500 12,500
2017 6,250 18,750 6,250
2018 6,250 25,000 -0-
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-7
(5-10 min.)
Requirements
Solution:
$25,000 / 200,000 miles = $.125 / mile, units-of-production depreciation
Using the units-of-production method of depreciation (with miles as the
production unit), calculate the following amounts for the car for each of the
four years of its expected life (do not round here; use three decimal places for
the depreciation cost per mile)
a. Depreciation expense
b. Accumulated depreciation balance
c. Book value
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 7 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-8
(5-10 min.)
Requirements
Solution:
Rate for double-declining-balance depreciation for 4 years = 2/4 or 50%
Using the double-declining-balance method of depreciation, calculate the
following amounts for the car for each of the four years of its expected life:
a. Depreciation expense
b. Accumulated depreciation balance
c. Book value
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 8 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-9
(5-10 min.)
Requirements
Solution:
Using the straight-line method of depreciation, calculate the
following amounts
for the car for each of the four years of its expected life:
a. Depreciation expense
b. Accumulated depreciation balance
c. Book value
($13,000 — $1,000) / 4 years = $3,000 / year, straight-line
depreciation
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 9 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-10
(5-10 min.)
Requirements
Solution:
($13,000 — $1,000) / 120,000 miles = $.10 / mile, units-of-production
Using the units-of-production method of depreciation (with miles as the
production unit), calculate the following amounts for the van for each of the
four years of its expected life:
a. Depreciation expense
b. Accumulated depreciation balance
c. Book value
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 10 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-11
(5-10 min.)
Requirements
Solution:
Rate for double-declining-balance depreciation for 4 years = 2/4 or 50%
$ 13,000
2015 0.50 6,500$
6,500$
6,500
Using the double-declining-balance method of depreciation, calculate the
following amounts for the van for each of the four years of its expected life:
a. Depreciation expense
b. Accumulated depreciation balance
c. Book value
Rate
Depreciation
Expense
Accumulated
Book Value
Depreciation
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 11 of 98
2016 0.50 3,250 9,750 3,250
2017 0.50 1,625 11,375 1,625
2018 0.50 625* 12,000 1,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-12
(5-10 min.)
Solution:
First-year depreciation (for a partial year):
Units-of-production (€42,500,000 − €5,200,000) /
b.
Compute LuxAir’s depreciation on the plane for the year ended December 31, 2015,
using the following methods:
a. Straight-line
b. Units-of-production
c. Double-declining-balance
Which method would produce the highest net income for 2015? Which method
produces the lowest net income?
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 12 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-13
(10 min.)
Solution:
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
Record Happy Times’ depreciation on the concession stand for year four by the
straight-line method.
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 13 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-14
(5-10 min.)
Solution:
Req. 1
($920,000 − $70,000) / 5 years × 2 = $340,000
$ 250,000
1. Calculate the gain or loss on the sale of the machinery.
2. Record the sale of the machine on January 1, 2017.
Sale price of machinery
Loss on sale of machinery:
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 14 of 98
Req. 2
Loss on Sale of Machinery
Accumulated Depreciation – Machinery
Cash
Book value of machinery:
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-15
(5-10 min.)
Solution:
Req. 1
Req. 2
1. Which depreciation method is similar to the depletion method that BB
Petroleum and other oil companies use to compute their annual depletion
expense for the oil removed from the ground?
2. Suppose the company removed 1,000 million barrels of oil during 2017.
Record this event. Show amounts in billions.
3. Assume that, of the amount removed in (2), the company sold 900 million
barrels. Make the cost of sales entry.
Units-of-production depreciation method is similar to the method used to
calculate
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 15 of 98
Req. 3
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-16
(5-10 min.)
Requirements
Solution:
Req. 1
Cost of goodwill purchased:
Purchase price paid for Healthy Snacks, Inc. 5.8$
Market value of Healthy Snacks’ net assets:
Req. 2
1. Compute the cost of the goodwill purchased by Crunchies.
2. Explain how Crunchies will account for goodwill in future years.
Millions
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 16 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-17
(5-10 min.)
Solution:
Asset
For each of the following scenarios, indicate whether a long-term asset has been
impaired (Y for yes and N for no) and, if so, the amount of the loss that should be
recorded.
80,000$
Y
100,000$
140,000$
180,000$
Amount
of Loss
Impaired?
(Y or N)
Fair
Value
Estimated
Future Cash
Flows
Book
Value
a. Equipment
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 17 of 98
b. Trademark
320,000$
21,000$
Y
31,000$
N
460,000$
375,000$
N
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-18
(5 min.)
Solution:
What is Amici’s return on assets in 2016?
(Dollar amounts in millions)
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 18 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-19
(5 min.)
Solution:
Compute return on assets (ROA) for 2016 and 2015. Using the DuPont
model, identify the components and state whether each improved or
worsened from 2015 to 2016.
Net profit margin ratio
X
Total asset turnover
=
ROA
DuPont Analysis
(Net income/Net sales)
X
(Net sales/Average
total assets)
=
(Net income/Average
total assets)
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 19 of 98
X
=
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.
X
=
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S7-20
(5 min.)
Solution:
Millions
Cash flows from investing activities:
Purchase of other companies (13.0)$
Show what Northwest would report for cash flows from investing activities
on its statement of cash flows for 2016. Report a total amount for net
cash provided by (used in) investing activities.
For the Year Ended December 31, 2016
Statement of Cash Flows
Northwest Satellite Systems, Inc.
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 20 of 98