Financial Accounting, 9/e 8-41
P8–8.
Req. 1
Date
Assets
Liabilities
Stockholders’ Equity
a.
Jan. 1
Patent
Cash
+28,000
–28,000
b.
Jan. 1
Assets (not detailed)
Goodwill
Cash
+154,000
+10,000
–164,000
Machine B
+5,000
(1)
($25,000 – $5,000) x 1/5 = 4,000
(2)
Accumulated depreciation to Dec. 31 of prior year ……
$16,000
Add: Depreciation expense for current year ……………..
4,000
Total accumulated depreciation ………………………….
$20,000
(3)
Cash proceeds of disposition…………………………………
$6,000
Net book value of Machine A ($25,000 – $20,000) ……
5,000
Gain on disposal of long-lived asset ……………………
$1,000
Req. 2 December 31 depreciation and amortization for the current year:
a.
Patent: $28,000 7 years = $4,000 amortization expense.
c.
Leasehold improvements: No amortization since constructed on December 31.
expense was recorded prior to the sale. No additional depreciation is necessary.
Leasehold improvements
Cash
d.
Cash
Repairs and
e.
Accumulated depreciation,
Depreciation
Machine A
Accumulated depreciation,
Cash
P8–9.
Req. 1
January 5 of the current year:
Cash purchase price …………………………………………………….
$750,000
Less market value of identifiable assets:
Accounts receivable…………………………………….
Inventory………………………………………………….
Fixed assets ……………………………………………………..
Other assets ……………………………………………………..
Difference (Goodwill) …………………………………………………….
Req. 2
December 31 of the current year:
a.
Depreciation expense on fixed assets acquired: ($208,000 – $0) x 1/10 years =
$20,800.
Accumulated depreciation (+XA, -A) . . . . 20,800
Goodwill has an indefinite life and is not amortized.
Financial Accounting, 9/e 8-43
P8–10.
Req. 1
a.
Patent amortization for one year, $55,900 13 years = $4,300.
Req. 2
Net Book Value on December 31, 2018:
Item
Date Acquired
Book Value
Computations
Book Value
Dec. 31, 2018
a.
Patent ……………………..
Jan. 1, 2017
$55,900 – ($4,300 x 2)
$ 47,300
b.
Copyright …………………
Jan. 1, 2017
c.
Franchise …………………
Jan. 1, 2017
d.
License ……………………
Jan. 1, 2016
e.
Goodwill …………………..
Jan. 1, 2014
$40,000 (not amortized)
Total book value………..
Req. 3
The book value of the copyright on January 2, 2019 ($18,000) exceeds the expected
future cash flows ($17,000). Therefore, the asset is impaired.
Franchise amortization for one year, $14,400 10 years = $1,440.
P8–11.
Req. 1
(a) Cost of press ………………………………………………………………………………
$400,000
Residual value …………………………………………………………………………….
50,000
Amount to depreciate over 20 years ……………………………………………….
$350,000
(b) Cost of press ………………………………………………………………………………
$400,000
Less: Accumulated depreciation for 6 years ($17,500 x 6 years) ………..
105,000
Net book (carrying) value at end of the prior year …………………………….
$295,000
Req. 2
Cost of press ……………………………………………………………………………………
$400,000
Accumulated depreciation at end of prior year (from Req. 1) …………………..
105,000
Less: Revised residual value ………………………………………………………………
73,000
Remaining balance to depreciate ………………………………………………………..
$222,000
Depreciation for current year [$222,000 (25 years – 6 years = 19 years)] *
Req. 3
December 31 of the current year—Adjusting entry:
Depreciation expense (+E, −SE) ……………………………………….
11,684
Accumulated depreciation (+XA, −A) ………………………………
11,684
Financial Accounting, 9/e 8-45
ALTERNATE PROBLEMS
AP8–1.
Req. 1
Long-lived assets are tangible and intangible resources owned by a business and used
in its operations over several years. Tangible assets (such as property, plant, and
Req. 2
On June 1:
Equipment (+A) ……………………………………………………….
(1)
61,500
Cash (−A) ……………………………………………………………….
1,500
Common stock (+SE) ………………………………………………..
(2)
4,000
Additional paid-in capital (+SE) …………………………………..
(3)
8,000
Note payable (+L) …………………………………………………….
(4)
Interest expense (+E, −SE) …………………………..………………
Computations:
(1) Equipment: $60,000 invoice + $1,500 installation
(2) Common stock: $2 par value x 2,000 shares
AP8–1. (continued)
Req. 3
Date
Assets
Liabilities
Stockholders’ Equity
June 1
Equipment
Cash
+61,500
-1,500
Note payable
+48,000
Common stock
Additional paid-in
capital
+4,000
+8,000
Sept 1
Cash
–49,440
Note payable
–48,000
Interest expense
–1,440
Req. 4
Cost of the machinery includes installation costs. Freight should not be included
because it was paid by the vendor. The $1,440 interest is not a part of the cost of the
Financial Accounting, 9/e 8-47
AP8–2.
Req. 1
Building
Accum.
Deprec.
Deprec.
Expense
Repairs
Expense
Cash
Balance January 1
$330,000
$82,500
Depreciation
16,500
(1)$16,500
NE
Balance prior to
expenditures
330,000
99,000
16,500
(1) $330,000 cost 20 years = $16,500 per year
Req. 2
Book Value of Building on December 31 of the sixth year:
Building cost ($330,000 + $17,000 + $70,000) ………………….
$417,000
Less: Accumulated depreciation ($82,500 + $16,500) ……….
Net book (carrying) value ……………………………………………
Req. 3
Depreciation is a noncash expense. Unlike most expenses, no cash payment is made
when the expense is recognized. The cash outflow occurred when the related asset
$417,000
AP8–3.
Req. 1
Cost of each machine:
Machine
A
B
C
Total
Purchase price ………………………………
$12,200
$32,500
$21,700
$66,400
Installation costs …………………………….
Renovation costs …………………………...
Total cost …………………………………..
$14,400
$35,000
$24,400
$73,800
Req. 2
Computation of year 1 depreciation expense for each machine:
Machine
Method
Computation
A
Straight-line
($14,400 − $1,000) x 1/8 = $1,675
B
Units-of-production
($35,000 − $2,000) 33,000 hours = $1.00
$1.00 x 7,000 hours = $7,000
C
Double-declining-balance
($24,400 − $0) x 2/5 = $9,760
Financial Accounting, 9/e 8-49
AP8–4.
Req. 1
Depreciation expense of $560 million recorded in the current year is inferred from the
activities affecting the Accumulated Depreciation account:
Req. 2
Recording depreciation at the end of the period increases expenses (and thus
decreases net income and stockholders’ equity) and decreases the net book value of
the property and equipment accounts. Failing to record depreciation creates the
opposite effects.
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
Net
Income
Overstated
NE
Overstated
NE
Understated
Overstated
Ratio
Computation
Effect on Ratio of Failing to
Record Depreciation
Expense
Earnings
per share
Net income
Number of shares of stock
outstanding
O
NE
Net income will be overstated
with no change in the
denominator → Overstated
Fixed asset
turnover
Sales
Average net fixed asset balance
NE
½O
Numerator does not change;
however, the denominator is
overstated → Understated
8-50 Solutions Manual
AP8–5.
Req. 1
a. Machine A – Sold on January 1:
(2)
To record disposal:
Cash (+A) ………………………………………………………………..
6,750
Accumulated depreciation, Machine A (−XA, +A) …………..
17,600
Machine A (−A) …………………………………………………..
24,000
b. Machine B – Sold on December 31:
(1)
To record depreciation expense for the current year:
Depreciation expense (+E, −SE) …………………………………
575
Accumulated depreciation, Machine B (+XA, −A) …….
($16,500 – $5,000) x 1/20 years = $575.
(2)
To record disposal:
Cash (+A) ………………………………………………………………..
2,000
Note receivable (+A)………………………………………………….
6,000
Machine B (−A) …………………………………………………..
c. Machine C – Disposal on January 1:
(1)
Depreciation expense in the current year – none recorded
because disposal date was January 1.
(2)
To record disposal:
Accumulated depreciation, Machine C (−XA, +A) …………
48,000
Loss on disposal of machine (+Loss, −SE) …………………..
11,200
Machine C (−A) ………………………………………………….
59,200
Req. 2
Machine A – January 1: Disposal of a long-lived asset with the price above net book
value, resulting in a gain.
Depreciation expense in the current year – none recorded
because disposal date was January 1.
Financial Accounting, 9/e 8-51
Req. 1
Assets
Liabilities
Stockholders’ Equity
Jan. 1 (a)
License
Cash
+7,200
–7,200
Dec. 31 (d1)
Accumulated
depreciation,
Machine A(2)
–4,500
Depreciation
expense
–4,500
Cash
Equipment
Computations:
(1)
Purchase price …………………………………………………….
$120,000
Less: Market value of net assets ($115,000 – $24,000)
91,000
Goodwill ……………………………………………………………..
$ 29,000
Computations for Machine A:
(2)
Depreciation expense for the current year:
($21,500 – $3,500) x 1/4
$4,500
(3)
Accumulated depreciation to Jan. 1 of the current year
Add: Depreciation expense for current year (above) ….
Total accumulated depreciation ………………………….
(4)
Cash proceeds from disposition ……………………………..
$6,000
Net book value of Machine A ($21,500 – $18,000) …….
Gain on disposal of long-lived asset …………………….
AP8–6. (continued)
Req. 2 Depreciation and amortization expense for the current year:
a.
License: $7,200 4 years = $1,800
b.
Leasehold improvements:
Amortization for the current year: $17,800 x 1/5 = $3,560
c.
Goodwill: No amortization since it has an indefinite life.
d.
Machine A:
Machine A was sold on December 31 of the current year.
Depreciation expense was computed up to the date of
disposal. No additional depreciation is necessary.
This transaction involved an ordinary repair and
maintenance expenditure and not an intangible or capitalized
asset.
Machine B:
($18,000 – $2,000) x 1/4 = $4,000 depreciation expense for the current year
Financial Accounting, 9/e 8-53
AP8–7.
Req. 1
a.
Goodwill is not amortized since it has an indefinite life.
b.
Patent amortization for one year, $18,600 10 years = $1,860.
Req. 2
Net book value on January 1, 2019:
Item
Date Acquired
Book Value
Computations
Net Book Value
Jan. 1, 2019
a.
Goodwill …………………..
Jan. 1, 2014
$75,000 (not amortized)
$ 75,000
b.
Patent ……………………..
Jan. 1, 2016
$18,600 – ($1,860 x 3)
13,020
c.
Copyright …………………
Jan. 1, 2016
$24,750 – ($825 x 3)
22,275
d.
Franchise …………………
Jan. 1, 2016
$19,200 – ($1,600 x 3)
14,400
e.
License ……………………
Jan. 1, 2015
9,300
Total net book value …..
Req. 3
The net book value of the franchise on January 1, 2019 ($14,400) is greater than the
expected future cash flows ($13,500). The asset is impaired.
d.
Franchise amortization for one year, $19,200 12 years = $1,600.
CONTINUING PROBLEM
CON8-1
Req. 1
January 1, Year 1:
Debit
Credit
Equipment (+A)*………………………………………..
75,300
Prepaid insurance (+A) ……………………………….
800
Cash (-A)……………………………………………
76,100
Req. 2
Straight-Line Method: (Cost – Residual Value) x 1/ Useful Life
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net Book
Value
1
($75,300 – $3,300) x 1/3
$24,000
$24,000
$51,300
2
($75,300 – $3,300) x 1/3
3
($75,300 – $3,300) x 1/3
Req. 3
Double-Declining-Balance Method:
(Cost – Accumulated Depreciation) x 2/ Useful Life
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net Book
Value
1
($75,300 – $0) x 2/3
$50,200
$50,200
$25,100
2
($75,300 – $50,200) x 2/3
Req. 4
Financial Accounting, 9/e 8-55
Units-of-Production Method:
[(Cost – Residual Value) / Total Estimated Production] x Actual Production
($75,300 – $3,300) / 24,000 hours = $3.00 per hour depreciation rate
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net Book
Value
1
$3.00 per hour x 8,000 hours
$24,000
$24,000
$51,300
Req. 5
December 31, Year 2:
Debit
Credit
(1) Record Depreciation Expense:
Depreciation expense (+E, –SE)……………
24,000
Accumulated depreciation (+XA, –A) …..
24,000
Cash (+A)……………………………………..
22,500
Accumulated depreciation (-XA, +A)……….
48,000
Loss on disposal of equipment (+E, –SE)….
Equipment (-A)…………………………….
75,300
2
$3.00 per hour x 7,400 hours
3
$3.00 per hour x 8,600 hours
COMPREHENSIVE PROBLEM (Chapters 6, 7, and 8)
COMP8-1.
Case A
Req. 1 (in millions)
Allowance for uncollectible accounts (−XA, +A) 1 ………….
2
Accounts receivable (−A) ……………………………………..
2
Req. 2
Cash collections for 2014 2 were $6,117 million.
Accounts
Receivable
–
Allowance for
Uncollectible Accounts
Net
= Realizable
Value
3 Beg.
2 End.
1 Beg. allowance $3 + Bad debt expense $1 – Write-offs ? = End. Allowance $2
Write-offs = $2
2 Beg. accounts receivable $61 + Sales $6,121 – Write-offs $2 – Collections ? =
End. accounts receivable $63
Collections = $6,117
Req. 3
Net Income
÷
Net Sales
= Net Profit Margin
2014
$703
$6,121
.1149 or 11.49%
2013
2012
COMP8-1. (continued)