Problems
(20-30 min.) P 7-66A
Req. 1
ITEM
LAND
LAND
IMPROVEMENTS
SALES
BUILDING
GARAGE
BUILDING
FURNITURE
(a)
$283,500
$ 76,500
(b)
8,800
(c)
$ 31,100
(d)
600
(e)
5,500
(f)
1,000
(g)
$ 300
(h)
(k)
6,700*
(n)
7,300
(o)
(p)
(q)
800
Totals
$298,400
$102,400
$600,000
$112,000
$80,400
Computations:
(a) Land: $315,000 / $400,000 × $360,000 = $283,500
Garage building: $ 85,000 / $400,000 × $360,000 = $76,500
(continued) P 7-66A
Req. 2
Journal
ACCOUNT TITLES
DEBIT
CREDIT
Dec.
31
Depreciation Expense — Land
Improvements ($102,400 / 15 × 9/12) ………..
5,120*
Accumulated Depreciation —
Land Improvements …………………………
5,120
31
Accumulated Depreciation —
Sales Building …………………………………
31
Depreciation Expense — Garage
Building ($112,000 / 30 × 9/12) …………………
2,800
Accumulated Depreciation —
Garage Building ………………………………
2,800
($80,400 / 12 × 9/12) ………………………………..
Accumulated Depreciation —
Furniture …………………………………………
(continued) P 7-66A
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. Because virtually all businesses use plant assets, a manager
needs to understand how those assets’ costs and depreciation
amounts are determined. Depreciation affects net income. Managers
(15 min.) P 7-67A
Req. 1
Journal
ACCOUNT TITLES
DEBIT
CREDIT
Equipment …………………………………………………………..
105,000
Cash …………………………………………………………….
105,000
Depreciation Expense — Buildings ………………………
30,750
Accumulated Depreciation — Buildings ………….
30,750*
Accumulated Depreciation — Equipment ………..
Req. 2
BALANCE SHEET
Property, plant, and equipment:
Land ………………………………………………………….
$141,000
Buildings …………………………..………………………
$ 702,000
Less: Accumulated depreciation
($340,000 + $30,750) ……………………….
(370,750)
331,250
Equipment ($407,000 + $105,000) ………………..
Total property, plant, and equipment ……………….
(25-35 min.) P 7-68A
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Jan.
3
Equipment (new) ………………………………..
183,000
Accumulated Depreciation —
Equipment …………………………………………
61,000
Equipment (old) ………………………………
136,000
Cash ………………………………………………
107,000
Gain on Trade-in of Equipment
[$76,000 – ($136,000 − $61,000)] ………
1,000
June
30
Depreciation Expense — Building
Accumulated Depreciation —
Building ………………………………………..
June
30
Cash ………………………………………………….
140,000
Note Receivable ………………………………….
350,250
Accumulated Depreciation —
Building ($160,000 + $4,750) ……………….
164,750
Building …………………………………………
655,000
Oct.
31
Land ($50,250 / $335,000 × $310,000) ………..
46,500
Building ($284,750 / $335,000 × $310,000) …
263,500
Cash ………………………………………………
310,000
Dec.
31
Depreciation Expense —
Accumulated Depreciation —
Equipment …………………………………….
73,200
Dec.
31
Depreciation Expense — Building
[($263,500 − $52,700) / 40 X 2/12] ………..
(30-40 min.) P 7-69A
Req. 1
Straight-Line Depreciation Schedule
Depreciation for the Year
DATE
ASSET
COST
DEPRECIATION
RATE ×
DEPRECIABLE
COST =
DEPRECIATION
EXPENSE
ACCUMULATED
DEPRECIATION
ASSET BOOK
VALUE
1-03–2016
$317,500
$317,500
12–31–2016
1/5
$282,000
$56,400
$ 56,400
261,100
12–31–2017
1/5
282,000
56,400
112,800
204,700
12–31–2018
1/5
282,000
56,400
169,200
148,300
12–31–2020
1/5
282,000
56,400
282,000
(continued) P 7-69A
Req. 1
Units-of-Production Depreciation Schedule
Depreciation for the Year
DATE
ASSET
COST
DEPRECIATION
PER DOCUMENT x
NUMBER OF
DOCUMENTS=
DEPRECIATION
EXPENSE
ACCUMULATED
DEPRECIATION
ASSET BOOK
VALUE
1-03–2016
$317,500
$317,500
12–31–2016
$2.82
25,000
$70,500
$ 70,500
247,000
12–31–2017
2.82
22,500
63,450
133,950
183,550
12–31–2018
2.82
20,000
56,400
190,350
127,150
12–31–2020
2.82
42,300
282,000
35,500
Total documents
(continued) P 7-69A
Req. 1
Double-Declining-Balance Depreciation Schedule
Depreciation for the Year
DATE
ASSET
COST
DDB RATE ×
ASSET BOOK
VALUE =
DEPRECIATION
EXPENSE
ACCUMULATED
DEPRECIATION
ASSET BOOK
VALUE
1-03–2016
$317,500
$317,500
12–31–2016
.40*
$317,500
$127,000
$127,000
190,500
12–31–2017
.40
190,500
76,200
203,200
114,300
12–31–2018
.40
114,300
45,720
248,920
68,580
12–31–2020
282,000
35,500
(continued) P 7-69A
Req. 2
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).
Req. 3
DEPRECIATION METHOD
THAT IN THE EARLY
YEARS
MAXIMIZES
REPORTED
INCOME
MINIMIZES
INCOME TAX
PAYMENTS
Net income for first year:
SL
DDB
Net cash provided by operations before income
tax
$155,000
$155,000
Depreciation expense
56,400
127,000
Income before income tax
98,600
28,000
Income tax expense (40%)
39,440
11,200
Net income
$ 59,160
$ 16,800
Net income advantage of SL over DDB $42,360
Cash flow analysis for first year:
(20-25 min.) P 7-70A
Req. 1
Millions
Cost of plant assets ……………………………..
$4,836
Less: Accumulated depreciation ……………
(2,121)
Book value, net …………………………………….
$2,715
Req. 2
Evidences of the purchase of plant assets and goodwill:
1. Property, plant, and equipment increased on the balance sheet.
Req. 3
Property, Plant, and Equipment
Accumulated Depreciation
3/31/15 Bal.
4,194
Cost of
Accum. depr.
3/31/15 Bal.
1,726
Purchased
assets sold
of assets sold
Depr. during
during 2016
720
in 2016
78
in 2016
64
2016
459
3/31/16 Bal.
4,836
3/31/16 Bal.
2,121
Goodwill
3/31/15 Bal.
Purchased
during 2016
38*
3/31/16 Bal.
(continued) P 7-70A
Req. 4
2016
Cash ……………………………………………….
145
Accumulated Depreciation—Property,
Plant and Equipment ……………………….
64
(20-30 min.) P 7-71A
Req. 1
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Iron Ore Rights ………………………………………
2,200,000
Cash …………………………………………………
2,200,000
Iron Ore Rights ………………………………………
61,000
Cash …………………………………………………
61,000
Iron Ore Rights ………………………………………
71,000
Cash …………………………………………………
71,000
Iron Ore Rights ………………………………………
Note Payable …………………………………….
Iron Ore Inventory ………………………………….
390,600*
Iron Ore Rights ………………………………….
390,600
Accounts Receivable (24,400 × $31) ………..
756,400
Sales Revenue …………………………………..
756,400
Cost of Iron Ore Sold (24,400 × $12.40) ……
302,560
Iron Ore Inventory ……………………………..
302,560
Cash …………………………………………………
242,000
Income Tax Expense (see Req. 2) ……………
Income Tax Payable …………………………..
(continued) P 7-71A
Req. 2
Southwestern Energy Company
Income Statement — Iron Ore Operations
Year 1
Sales revenue ………………………………………
$756,400
Cost of iron ore sold …………………………….
$302,560
Other operating expenses …………………….
242,000
544,560
Income before tax ………………………………..
Net income ………………………………………….
Req. 3
Iron ore inventory ($390,600 − $302,560) ……………………
$ 88,040
Iron ore rights ($2,356,000 − $390,600) ………………………
1,965,400
Income taxes payable ………………………………………………
Note payable …………………………………………………………..
(30-40 min.) P 7-72A
Req. 1
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:
Billions
Cash received from sale of asset …………………………
$ 0.3
Book value of asset sold:
Cost ………………………………………………………………
Less: Accumulated depreciation ……………………..
Gain (Loss) on sale ……………………………………………..
Req. 2
Balance sheet at December 31, 2016:
Property, plant, and equipment ($4.7 + $1.8 − $1.0) ………………
$ 5.5
Less: Accumulated depreciation ($2.8 + $1.3 − $.4) ………………
(3.7)
Property, plant, and equipment, net (book value) …………………
$ 1.8
Req. 3
Statement of cash flows for 2016:
Cash flows from operating activities:
Net income ($26.9 − $21.5) ………………………………………………
$ 5.4
Reconciliation of net income to
net cash provided by operations:
Depreciation expense ………………………………………………
1.3
Purchases of property, plant, and equipment ……………………….
(1.8)
Sales of property, plant, and equipment ……………………………….
0.3
(20-30 min.) P 7-73A
Req. 1
Dec. 31, 2015 Dec. 31, 2014
Net income
$ 2,430
$2,250
÷ Net revenue
÷ $75,000
÷ $62,000
= Net profit
margin ratio
= 3.24%
= 3.63%
Req. 2
Dec. 31, 2015 Dec. 31, 2014
Sales
÷ Average total assets
= Asset turnover
Req. 3
Dec. 31, 2015 Dec. 31, 2014
Net income
$ 2,430
$2,250
÷ Average total assets
÷ $57,850
÷ $42,850
= Return on assets
= 4.20%
= 5.25%
Req. 4
The following contributed to the decrease in ROA during the most
recent year.
(20-30 min.) P 7-74A
Req. 1
(amounts in millions)
Property & Equipment
Accumulated Depreciation
12/31/15 Bal.
24,220
X =
Cost of
Accum. depr.
= X
12/31/15 Bal.
15,210
Purchased
assets sold
of assets sold
Depr. during
during 2016
2,820
in 2016
in 2016
2016
1,145
12/31/16 Bal.
26,430
12/31/16 Bal.
16,045
Req. 2
Cost
$610
– Acc. Depr.
–310
= Book value of assets sold
$300
Sales price
$ 43
Book value
= Loss on sale
$(257)
(continued) P 7-74A
Req. 3
Cash ………………………………………………………………………………
43
Accumulated Depreciation – Prop. & Equipment ……………….
310
Loss on the Sale of Prop. & Equipment …………………………….
257
Property & Equipment …………………………………………………
610
Req. 4
Property & Equipment, net
12/31/15 Bal.
9,010
300
Book value, assets sold
Purchases
2,820
1,145
Depreciation
12/31/16 Bal.
10,385
(20-30 min.) P 7-75B
Req. 1
ITEM
LAND
LAND
IMPROVEMENTS
SALES
BUILDING
GARAGE
FURNITURE
(a)
$283,500
$ 76,500
(b)
8,100
(c)
$ 31,900
(d)
700
1,100
(g)
$ 500
(h)
26,050
31,650
(k)
(n)
7,000
(o)
3,700
31,450
1,850
(p)
$79,800
(q)
2,600
Totals
$297,400
$102,600
$580,000
$110,000
$82,400
Computations:
(a) Land: $315,000 / $400,000 × $360,000 = $283,500
Garage: $85,000 / $400,000 × $360,000 = $76,500
(continued) P 7-75B
Req. 2
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Dec.
31
Depreciation Expense — Land
Improvements ($102,600 / 25 × 9/12) …………
3,078*
Accumulated Depreciation —
Land Improvements …………………………….
3,078
Depreciation Expense —Sales
Building ($580,000 / 50 × 9/12) ………………….
8,700
Accumulated Depreciation —
Sales Building …………………………………….
8,700
31
Depreciation Expense — Garage
($110,000 / 50 × 9/12) …………………………..…..
Accumulated Depreciation —
Garage ……………………………………………….
31
Depreciation Expense — Furniture
($82,400 / 12 × 9/12) …………………………………
5,150
Accumulated Depreciation —
Furniture …………………………………………….
5,150
(continued) P 7-75B
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. Because virtually all businesses use plant assets, a manager
needs to understand how those assets’ costs and depreciation are
determined. Depreciation affects net income. Managers need to