FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 1(Cont…)
Depreciation Accumulated Asset book
Expense Depreciation value
1/04/14 317,500$ $ 317,500
12/31/16 $2.82 25,000 $ 70,500 $ 70,500 247,000
12/31/17 2.82 22,500 63,450 133,950 183,550
Depreciation Accumulated Asset book
Expense Depreciation value
1/04/14 317,500$ $317,500
12/31/16 0.4* $317,500 $127,000 $127,000 190,500
Double-Declining-Balance Depreciation Schedule
Depreciation for the Year
Date
Asset Cost
DDB Rate
x
Asset Book
Value
=
Units-of-Production Depreciation Schedule
Depreciation for the Year
Date
Asset Cost
Depreciation
Per Document
x
Number of
Documents
=
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 61 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req.2
Req.3
SL DDB
155,000$ 155,000$
DEPRECIATION METHOD
THAT IN THE EARLY YEARS
MINIMIZES
INCOME TAX
PAYMENTS
MAXIMIZES
REPORTED
INCOME
The depreciation method that maximizes reported income in the first year of the computer’s life is
the straight-line method. Straight-line produces the lowest depreciation for that year ($56,400).
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 62 of 98
155,000$ 155,000$
Depreciation expense
Cash flow analysis for first year:
Cash provided by operations before
income tax
Income tax expense (40%)
Income before income tax
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P7-70A
(20-25 min.)
Requirements
Solution:
Req. 1
Millions
Cost of plant assets 4,836$
Req. 2
1Property, plant, and equipment increased on the balance sheet.
Req. 3
Evidences of the purchase of plant assets and goodwill:
1. How much was Sweet Stores’ cost of plant assets at March 31, 2016? How
much was the book value of plant assets? Show computations.
2. The financial statements give three evidences that Sweet Stores purchased
plant assets and goodwill during fiscal year 2016. What are they?
3. Prepare T-accounts for Property, Plant, and Equipment; Accumulated
Depreciation; and Goodwill. Then fill in the T-accounts with information from the
comparative balance sheets and cash flow statements. Label each increase or
decrease and give its dollar amount.
4. Prepare the journal entry for the sale of property, plant, and equipment in 2016.
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 63 of 98
Less: Accumulated depreciation (2,121)
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
3/31/2015 Bal. 515
Goodwill
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 64 of 98
3/31/2016 Bal. 553
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P7-71A
(20-30 min.)
Requirements
Solution:
Req. 1
Iron Ore Rights 2,200,000
Cash 2,200,000
1. Record all of Southwestern Energy’s transactions for the year. Round depletion per
unit to the closest cent.
2. Prepare the company’s single-step income statement for its iron ore operations for
the first year. Evaluate the profitability of the company’s operations.
3. What balances should appear from these transactions on Southwestern Energy’s
balance sheet at the end of its first year of operations?
Journal
DATE
ACCOUNTS TITLES
DEBIT
CREDIT
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 65 of 98
Iron Ore Rights 61,000
Cash 61,000
Iron Ore Rights 71,000
Cash 71,000
Iron Ore Rights 24,000
Note Payable 24,000
Iron Ore Inventory 390,600*
Iron Ore Rights 390,600
Sales Revenue 756,400
Operating Expenses 242,000
Cash 242,000
Income Tax Expense (see Req. 2) 52,960
Income Tax Payable 52,960
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2
Sales revenue 756,400$
Cost of Iron Ore Rights sold 302,560$
Year 1
Income Statement — Iron Ore Operations
Mid Pacific Energy Company
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 66 of 98
Req. 3
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P7-72A
(30-40 min.)
Requirements
Solution:
Req. 1
Cash received from sale of asset $0.3
Book value of asset sold:
Cost 1.0$
1. Explain how to determine whether Chesapeake Energy had a gain or loss on the
sale of old plant assets during the year. What was the amount of the gain or loss, if
any?
2. Show how Chesapeake Energy would report property, plant, and equipment on
the balance sheet at December 31, 2016, after all the year’s activity. What was the
book value of property, plant, and equipment?
3. Show how Chesapeake Energy would report its operating activities and investing
activities on its statement of cash flows for 2016 Ignore gains and losses.
Billions
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:
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 67 of 98
Req. 2
Req. 3
Cash flows from operating activities:
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P7-73A
(20-30 min.)
Requirements
Solution:
Req. 1
Net income 2,430$ 2,250$
1. Compute net profit margin ratio for Shopper’s World for the years ended
December 31, 2015, and December 31, 2014.
2. Compute asset turnover for Shopper’s World for the years ended December
31, 2015, and December 31, 2014.
3. Compute return on assets for Shopper’s World for the years ended
December 31, 2015, and December 31, 2014.
4. What factors contributed to the change in return on assets during the year?
December 31, 2015
December 31, 2014
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 68 of 98
Req. 2
Req. 3
Net income 2,430$ 2,250$
December 31, 2015
December 31, 2014
December 31, 2015
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P7-74A
(20-30 min.)
Requirements
Solution:
Req. 1
12/31/15 Bal. 24,220 X = Cost of
Purchased assets sold
Req. 2
Cost 610$
– Acc. Depr. (310)
1. Draw T-accounts for Property and Equipment and Accumulated Depreciation. Enter
information as presented and solve for the unknown in each account. (Hint: Recall the
types of transactions that make each of the two accounts increase and decrease. You
are
solving for the cost of property and equipment sold and the accumulated depreciation
on
those assets.)
2. Based on your calculations in requirement 1, calculate the book value of assets sold
during 2016. What is the difference between the sales price and the book value?
3. Prepare the journal entry for the sale of property and equipment during 2016.
Describe the effect of this transaction on the financial statements. Compare the sales
price and the book value in the journal entry, and compare this to the difference you
Property & Equipment
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 69 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 3
43
Loss on the Sale of Prop. & Equipment
Req. 4
12/31/15 Bal. 9,010 300 Book value, assets sold
Cash
Property & Equipment, net
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 70 of 98
There is a loss because the sales price (proceeds) is less than the book value.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P7-75B
(20-30 min.)
Requirements
Solution:
Req. 1
(a) 283,500$
(b) 8,100
1. Show how to account for each of Royale House’s costs by listing the cost under the
correct account. Determine the total cost of each asset.
2. All construction was complete and the assets were placed in service on April 2.
Record
depreciation for the year ended December 31. Round to the nearest dollar.
3. How will what you learned in this problem help you manage a business?
65,625$
ITEM
LAND
LAND
IMPROVEMENTS
SALES
BUILDING
GARAGE
FURNITURE
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 71 of 98
(c)
(e) 5,100
(h)
(k)
(n)
(o)
(p)
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2
Dec. 31 Depreciation Expense — Land
Improvements ($102,600 / 25 × 9/12
3,078*
Req. 3
This problem shows how to determine the cost of a plant asset. It also
demonstrates the computation of depreciation for a variety of plant assets.
Journal
DATE
ACCOUNTS TITLES
DEBIT
CREDIT
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 72 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P7-76B
(15 min.)
Requirements
Solution:
Req. 1
Equipment 109,000
Cash 109,000
Req. 2
BALANCE SHEET
Property, plant, and equipment:
Land 145,000$
Buildings
700,000$
Equipment ($401,000 + $109,000)
510,000$
Less: Accumulated Depreciation
1. Journalize Donatello Lake Resort’s plant asset purchase and depreciation
transactions for 2017.
2. Report plant assets on the December 31, 2017, balance sheet.
Journal
ACCOUNTS TITLES
DEBIT
CREDIT
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 73 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P7-77B
(25-35 min.)
Requirement
Solution:
Jan. 3 Equipment (new) 177,000
Accumulated Depreciation — Equipment 61,000
Equipment (old) 131,000
30 Cash 125,000
Note Receivable 360,000
Accumulated Depreciation —
Building ($150,000 + $5,000) 155,000
Building 640,000
Building
[$236,600 / ($127,400 + $236,600) × $350,000] 227,500
Cash 350,000
Equipment ($177,000 × 2/8) 44,250
Accumulated Depreciation — Equipment 44,250
[($227,500 − (20% × $227,500)) / 40 × 2/12] 758
Accumulated Depreciation — Building 758
1. Record the transactions in Tucker, Inc.’s journal.
Journal
DATE
ACCOUNTS TITLES
DEBIT
CREDIT
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 74 of 98
Cash 101,000
Gain on Trade-in of Equipment 6,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P7-78B
(30-40 min.)
Requirements
Solution:
Req. 1
Depreciation Accumulated Asset book
Expense Depreciation value
01/02/16 295,000$ 295,000$
12/31/16 1/5 265,000$ 53,000$ 53,000$ 242,000
1. For each of the generally accepted depreciation methods, prepare a depreciation schedule showing asset
cost, depreciation expense, accumulated depreciation, and asset book value.
2. Smythe reports to stockholders and creditors in the financial statements using the depreciation method that
maximizes reported income in the early years of asset use. For income tax purposes, the company uses the
depreciation method that minimizes income tax payments in those early years. Consider the first year Smythe
Co. uses the computer. Identify the depreciation methods that meet Smythe’s objectives, assuming the income
tax authorities permit the use of any of the methods.
3. Net cash provided by operations before income tax is $157,000 for the computer’s first year. The income tax
rate is 40%. For the two depreciation methods identified in requirement 2, compare the net income and net cash
provided by operations (cash flow). Show which method gives the net income advantage and which method
gives the cash flow advantage.
Straight-Line Depreciation Schedule
Depreciation for the Year
Date
Asset Cost
Depreciation
Rate
x
Depreciable
Cost
=
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 75 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Depreciation Accumulated Asset book
Expense Depreciation value
01/02/16 295,000$ 295,000$
12/31/16 $1.06 55,000 $ 58,300 $ 58,300 236,700
Depreciation Accumulated Asset book
Expense Depreciation value
01/02/16 295,000$ 295,000$
12/31/16 0.4* 295,000$ $118,000 118,000$ 177,000
Req.2
Double-Declining-Balance Depreciation Schedule
Depreciation for the Year
Date
Asset Cost
DDB Rate
x
Asset Book
Value
=
Units-of-Production Depreciation Schedule
Depreciation for the Year
Date
Asset Cost
Depreciation
Per Document
x
Number of
Documents
=
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 76 of 98
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req.3
SL DDB
157,000$ 157,000$
Cash provided by operations before income tax
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 ($53,000). The
DEPRECIATION METHOD
THAT IN THE EARLY YEARS
MAXIMIZES
REPORTED
INCOME
MINIMIZES
INCOME TAX
PAYMENTS
Net income for first year:
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 77 of 98
157,000$ 157,000$
income tax
Cash flow analysis for first year:
Cash provided by operations before
Income before income tax
Income tax expense (40%)
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P7-79B
(20-25 min.)
Requirements
Solution:
Req. 1
Req. 3
04/30/15 Bal. 4,198 Cost of
1. How much was Hometown Sales’s cost of plant assets at April 30, 2016? How
much was the book value of plant assets? Show computations.
2. The financial statements give three pieces of evidence that Hometown Sales
purchased plant assets and goodwill during fiscal year 2016. What are they?
3. Prepare T-accounts for Property, Plant, and Equipment; Accumulated Depreciation;
and Goodwill. Then fill in the T-accounts with information from the comparative
balance sheets and cash flow statements. Label each increase or decrease and give
its dollar amount.
4. Prepare the journal entry for the sale of property, plant, and equipment in 2016.
Property, Plant, and Equipment
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 78 of 98
Req. 2
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
04/30/15 Bal. 510
Purchased
Goodwill
Chapter 7: Plant Assets, Natural Resources, and Intangibles Page 79 of 98
during 2016 49*
04/30/16 Bal. 559
Accumulated Depreciation 66