Problem 7-3B (LO 7-2)
1.
Purchase price
$5,600,000
Less:
Goodwill
2.
Credit
Accounts Receivable (at fair value)
Buildings (at fair value)
Accounts Payable (at fair value)
Problem 7-4B (LO 7-3)
1. Expense
2. Capitalize
3. Capitalize
4. Expense
5. Expense
6. Capitalize
current year.
Problem 7-5B (LO 7-4)
Requirement 1 Straight-line
Cheetah Copy
Calculation
End of Year Amounts
Year
Depreciable
Cost*
X
Depreciation
Rate
=
Depreciation
Expense
Accumulated
Depreciation
Book
Value**
1
$105,000
0.25
$26,250
26,250
$113,750
2
105,000
0.25
26,250
52,500
87,500
3
105,000
0.25
26,250
78,750
61,250
26,250
Requirement 2 Double-declining-balance
Cheetah Copy
Calculation
End of Year Amounts
Year
Beginning
Book Value
X
Depreciation
Rate*
=
Depreciation
Expense
Accumulated
Depreciation
Book
Value**
1
$140,000
0.50
$70,000
70,000
$70,000
2
70,000
0.50
35,000
105,000
35,000
3
35,000
0.50
0***
105,000
35,000
Requirement 3 Activity-based
Cheetah Copy
Calculation
End of Year Amounts
Year
Hours
Used
X
Depreciation
Rate*
=
Depreciation
Expense
Accumulated
Depreciation
Book
Value**
1
3,000
$13.125
$39,375
39,375
$100,625
2
2,000
65,625
3
2,000
91,875
4
2,000
*** Amount needed to reduce book value to residual value.
* $105,000 / 8,000 hours = $13.125/hour
Problem 7-6B (LO 7-5)
Requirement 1
a. Goodwill is not amortized.
Debit
Credit
b. Amortization Expense
5,500*
Patents
5,500
Franchises
Requirement 2
Lettuce Express
Balance Sheet
December 31, 2018
(Intangible Assets section)
Intangible Assets
Goodwill
$160,000
Problem 7-7B (LO 7-4, 7-5)
Requirement 1
Debit
Credit
Depreciation Expense
71,680*
Accumulated Depreciation
71,680
Depreciation Expense
15,000*
Accumulated Depreciation
15,000
Requirement 2
Debit
Credit
Amortization Expense
25,000*
Patent
Requirement 3
Togo’s Sandwich Shop
December 31, 2018
Cost
Accumulated
Depreciation
Book
Value
Land
$ 85,000
–
$ 85,000
Building
Equipment
Patent
Problem 7-8B (LO 7-6)
Requirement 1
Requirement 2
Cost of the oven
Less: Accumulated depreciation
(127,500)
Requirement 3
Sale amount
$341,000
Less:
Cost of the oven
$455,000
Less: Accumulated depreciation
(127,500)
Gain
Requirement 4
Debit
Credit
Cash
341,000
Accumulated Depreciation
127,500
Equipment
Problem 7-9B (LO 7-7)
Requirement 1
Papa’s Pizza
Net
Income
÷
Average
Total Assets
=
Return
on Assets
$2,223
÷
($14,998 + $15,465)/2
=
14.6%
÷
Average
Total Assets
=
÷
($14,998 + $15,465)/2
=
Requirement 2
Pizza Prince
Net
Income
÷
Average
Total Assets
=
Return
on Assets
$129
÷
($919 + $1,157)/2
=
12.4%
Net
Income
÷
=
$129
÷
=
Average
$1,835
÷
($919 + $1,157)/2
=
Requirement 3
Papa’s Pizza has a higher profit margin than Pizza Prince (9.2% vs. 7.0%), while
Problem 7-10B (LO 7-7)
Requirement 1
Cars Only
Net
Income
÷
Average
Total Assets
=
Return
on Assets
$500,000
÷
$1,700,000
=
29.4%
÷
Average
Total Assets
=
÷
$1,700,000
=
Requirement 2
Cars and Boats
Net
Income
÷
Average
Total Assets
=
Return
on Assets
$700,000
÷
$1,900,000
=
36.8%
÷
Average
Total Assets
=
÷
$1,900,000
=
Requirement 3
Go forward with the expansion plans to include the sale of recreational boats. The
ADDITIONAL PERSPECTIVES
Continuing Problem: Great Adventures
AP7-1
Requirement 1
Purchase price
$12,000
Painting and new logo
3,000
Deluxe roof rack and trailer hitch
$17,000
Requirement 2
Annual insurance of $1,800 is expensed as incurred over the period from July 1, 2019
Requirement 3
Great Adventures
Calculation
End of Year Amounts
Year
Allocation
Base*
X
Depreciation
Rate
=
Depreciation
Expense
Accumulated
Depreciation
Book
Value**
1
$12,500
0.20×1/2
$1,250
1,250
$15,750
2
12,500
0.20
2,500
3,750
13,250
3
12,500
0.20
2,500
6,250
10,750
5
12,500
5,750
6
12,500
1,250
Total
Requirement 4
July 1, 2021
Debit
Credit
Cash
10,000
Accumulated Depreciation
5,000
Loss
2,000
Financial Analysis: American Eagle
AP7-2
Requirement 1
The straight-line method is used. The estimated useful lives are as follows:
Buildings 25 years
Requirement 2
The cost of property and equipment is $1,684,709,000 and the book value is
$694,856,000. Book value is the same as “Property and equipment, net”. Depreciation
Requirement 3
The store leases generally have initial terms of ten years. The future minimum lease
Financial Analysis: The Buckle
AP7-3
Requirement 1
Buckle uses a combination of accelerated and straight–line depreciation methods. The
estimated useful lives are as follows:
Requirement 2
Requirement 3
The most common term for the leases is ten years. The future minimum rental
Comparative Analysis: American Eagle vs. The Buckle
AP7-4
Requirement 1
American Eagle ($ in thousands)
Net
Income
÷
Average
Total Assets
=
Return
on Assets
$80,322
÷
($1,694,164 + $1,696,908)/2
=
4.7%
÷
=
÷
=
Requirement 2
Buckle ($ in thousands)
÷
Average
Total Assets
=
Return
on Assets
÷
($546,293 + $542,993)/2
=
29.8%
÷
=
÷
Average
Total Assets
=
÷
=
Requirement 3
Buckle has a higher return on assets, profit margin, and asset turnover compared with
Ethics
AP7-5
Requirement 1
A company could increase earnings by changing from double-declining-balance to
straight-line in the early years of an asset’s life. Double-declining-balance
Requirement 2
A company could increase earnings by lengthening the estimated service lives of
depreciable assets. For example, General Motors reported an increase in income due
Requirement 3
A company could increase earnings by increasing the estimated residual value of
Internet Research
AP7-6
This case provides an opportunity for students to learn how to locate annual reports
Written Communication
AP7-7
The dictionary definition of depreciation is a decrease in value of an asset. The
accounting concept of depreciation is different. Depreciation in accounting is the
Earnings Management
AP7-8
Requirement 1
Adjusting the estimated service lives of depreciable assets from 10 years to six years
Requirement 2
Reducing the estimated residual values to zero will also increase depreciation expense
Requirement 3
In addition to heading off additional government regulations, Energy Resources might
have additional incentives to report lower profits in the current “record-breaking
performance” period. One incentive is income smoothing. By managing earnings