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216
P7–5
1. a. Loss on impairment of goodwill, $3,000,000
b. Amorization expense, $920,000 ÷ 8 years = $115,000; ½ of $115,000 =
$57,500
2. a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
R
etained
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
R
etained
Patents =
E
arnin
g
s
Dec. 31.
(
57,500
)
(
57,500
)
Statement of Cash Flows Income Statement
No effect 0 Dec. 31. Amort. exp.—
patents
(
57,500
)
c.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Acc. Retained
217
METRIC-BASED ANALYSES
MBA 7–2
1.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Acc. Depr.— Retained
Equip. = Earnin
g
s
Hi
g
he
r
Lowe
r
Statement of Cash Flows Income Statement
No effect 0 Depr. expense Hi
g
he
r
2.
Liquidity Profitability
Free Cash Flow Asset Turnover
MBA 7–3
Liquidity Profitability
Free Cash Flow Asset Turnover
1. Equipment sold for $23,300 ...... $23,300 Increase
2. Equipment sold for $15,250 ...... $15,250 Increase
218
MBA 7–4
Liquidity Profitability
Free Cash Flow Asset Turnover
1. Goodwill impairment ................. No effect Increase
MBA 7–5
1. Sales (revenue) ................................................. $37,736
Average net property, plant, and equipment
and intangible assets:
$24,763 + $8,109 ......................................... $32,872
Asset turnover:
$37,736 ÷ $32,872 ....................................... 1.15
MBA 7–6
1. Sales (revenue) .................................................. $21,171
Average net property, plant, and equipment
and intangible assets:
$17,792 + $970 ............................................. $18,762
Asset turnover:
($21,171 ÷ $18,762) ...................................... 1.13
219
MBA 7–7
1. Year 2 Year 1
Asset turnover:
($7,015 ÷ $7,295) ................................ 0.96
($6,632 ÷ $6,574) ................................ 1.01
MBA 7–8
1. The asset turnovers are summarized below from highest to lowest.
Asset
Turnover
United ........................................................ 1.15
Southwest ................................................. 1.13
2. As shown above, United has the highest asset turnover followed by South-
west, Delta, and JetBlue. These differences are significant and a review of
220
MBA 7–9
1. Marriott Hilton
Net sales .................................................... $22,894 $9,140
Average net property, plant, and equipment
and intangible assets:
$2,064 + $17,440 ................................. $19,504
2. Marriott’s asset turnover of 1.17 is higher than Hilton’s asset turnover of 0.77.
The reason for this significant difference could be due to how each company
manages its properties. For example, Marriott owns few of its properties; in-
221
CASES
Case 7–1
It is considered unprofessional for employees to use company assets for
personal reasons because such use reduces the useful life of the assets for nor-
mal business purposes. Thus, it is unethical for Rowel Baylon to use Arches
Case 7–2
You should explain to Don and Rita that maintaining two sets of records for
tax and financial reporting purposes is acceptable. This can happen when a
company uses one method for financial statement purposes, such as straight-line
depreciation, and another method for tax purposes, such as MACRS depreciation.
This should not be surprising since the methods for taxes and financial state-
You might note, however, that companies are required in their tax returns to rec-
oncile differences in accounting methods. For example, income reported on the
company’s financial statements must be reconciled with taxable income.
222
Case 7–3
1. a. Straight-line method:
20Y2: ($300,000 ÷ 5) × 1/2 ................................................................... $30,000
20Y3: $300,000 ÷ 5 ............................................................................. 60,000
b. MACRS:
20Y2: $300,000 × 20% ......................................................................... $60,000
20Y3: $300,000 × 32% ......................................................................... 96,000
223
Case 7–3, Continued
2.
a. Straight-line method Year
20Y2 20Y3 20Y4 20Y5 20Y6 20Y7
Income before depreciation .......... $800,000 $800,000 $800,000 $800,000 $800,000 $800,000
Depreciation expense ................... (30,000) (60,000) (60,000) (60,000) (60,000) (30,000)
b. MACRS Year
20Y2 20Y3 20Y4 20Y5 20Y6 20Y7
Income before depreciation .......... $800,000 $800,000 $800,000 $800,000 $800,000 $800,000
Case 7–3, Concluded
3. For financial reporting purposes, Bree should select the method that provides
the net income figure that best represents the results of operations. (Note to
Instructors: The concept of matching revenues and expenses was discussed
in Chapter 3.) However, for income tax purposes, Bree should consider se-
lecting the method that will minimize current taxes. Based on the analyses in
(2), both methods of depreciation will yield the same total amount of taxes over
the useful life of the equipment. MACRS results in fewer taxes paid in the early
Case 7–4
Note to Instructors: The purpose of this activity is to familiarize students with the
considerations in leasing and buying a business asset.
Some considerations on deciding whether to purchase or lease an asset include
the following:
The amount of time the business will be using the asset. If the business
needs the asset for a short time, then leasing may be more advantageous.
How quickly will the asset become obsolete? Leasing may be more advan-
Case 7–4, Concluded
Are there any limitations on use of the leased asset? For example, leased
automobiles often have a mileage limit per year. Miles driven beyond the
limit incur additional charges.
Who has responsibility for maintaining the asset?
Case 7–5
Note to Instructors: The purpose of this activity is to familiarize students with the
procedures involved in acquiring a patent, a copyright, and a trademark. You may
want to divide the class into three groups to report back on patents, copyrights,
and trademarks separately.
The following is some information on patents, copyrights, and trademarks that
you may find helpful in your discussions.
Patent
A patent is requested by filing a written application at the relevant patent office.
The person or company filing the application is referred to as “the applicant.” The
applicant may be the inventor or its assignee. The application contains a descrip-
tion of how to make and use the invention and provides sufficient detail for a per-
son skilled in the art (i.e., the relevant area of technology) to make and use the
226
Case 7–5, Concluded
Copyright
While copyright in the United States automatically attaches upon the creation of
an original work of authorship, registration with the Copyright Office puts a copy-
right holder in a better position if litigation arises over the copyright. A copyright
holder desiring to register his or her copyright should complete the following
three steps:
Trademark
The law considers a trademark to be a form of property. Proprietary rights in rela-
tion to a trademark may be established through actual use in the marketplace or
through registration of the mark with the trademarks office (or “trademarks regis-
try”) of a particular jurisdiction. In some jurisdictions, trademark rights can be
established through either or both means. Certain jurisdictions generally do not
recognize trademark rights arising through use. In the United States, the only way
Case 7–6
Both Kim Jenkins (CEO) and Steve Mueller (CFO) have a responsibility for fair
and accurate reporting of financial results. Steve should remind Kim of this fact.
In addition, Steve should point out they could both put themselves and the com-
pany in legal jeopardy by misstating the goodwill impairment from the shut-down
