Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-41
P8–9.
Req. 1
January 5, 2010:
Cash purchase price …………………………………………………….
$500,000
Less market value of identifiable assets:
Req. 2
December 31, 2010:
a.
Depreciation expense on fixed assets acquired: ($50,000 – $0) x 1/10 years = $5,000.
Accumulated depreciation (+XA, -A) . . . . 5,000
b.
Goodwill has an indefinite life and is not amortized.
Accounts receivable…………………………………….
Inventory………………………………………………….
Fixed assets ……………………………………………………..
Other assets ……………………………………………………..
Difference (Goodwill) …………………………………………………….
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
P8–10.
Req. 1
a.
Patent amortization for one year, $55,900 13 years = $4,300.
b.
Copyright amortization for one year, $22,500 10 years = $2,250.
Franchise amortization for one year, $14,400 10 years = $1,440.
d.
License amortization for one year, $14,000 5 years = $2,800.
Req. 2
Net Book Value on December 31, 2012:
Item
Date Acquired
Book Value
Computations
Book Value
Dec. 31, 2012
a.
Patent ……………………..
Jan. 1, 2011
$55,900 – ($4,300 x 2)
$ 47,300
b.
Copyright …………………
Jan. 1, 2011
c.
Franchise …………………
Jan. 1, 2011
d.
License ……………………
Jan. 1, 2010
Total book value………..
Req. 3
The book value of the copyright on January 1, 2013 ($18,000) exceeds the expected
future cash flows ($17,000). Therefore, the asset is impaired.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-43
P8–11.
Req. 1
(a) Cost of press ………………………………………………………………………………
$400,000
Residual value ……………………………………………………….……………………
50,000
Amount to depreciate over 20 years ……………………………………………….
$350,000
Req. 2
Cost of press ……………………………………………………………………………………
$400,000
Accumulated depreciation at end of 2010 (from Req. 1) …………………………
105,000
Less: Revised residual value ………………………………………………………………
73,000
Remaining balance to depreciate ………………………………………………………..
$222,000
Remaining life
Req. 3
December 31, 2011—Adjusting entry:
(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 2010 ………………………………………..
$295,000
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-44
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, 2012:
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
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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
+4,000
+8,000
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
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-46
AP8–2.
Req. 1
Building
Accum.
Deprec.
Deprec.
Expense
Repairs
Expense
Cash
Balance 1/1/2013
$330,000
$82,500
Depreciation
for 2013
16,500
(1)$16,500
NE
Balance prior to
expenditures
330,000
99,000
16,500
a.
NE
NE
NE
+$5,000
−$5,000
b.
+ 17,000
NE
NE
NE
−17,000
(1) $330,000 cost 20 years = $16,500 per year
Req. 2
Book Value of Building on Dec. 31, 2013:
Req. 3
Depreciation is a noncash expense. Unlike most expenses, no cash payment is made
c.
+ 70,000
NE
NE
NE
−70,000
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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 …………………………………..
$13,600
$35,000
$24,400
$73,000
Req. 2
Computation of year 1 depreciation expense for each machine:
Machine
Method
Computation
A
Straight-line
($13,600 − $1,000) x 1/8 = $1,575
C
Depreciation expense ($1,575 + $7,000 + $9,760) (+E, −SE)….
18,335
Accumulated depreciation, Machine A (+XA, −A)………
1,575
Accumulated depreciation, Machine B (+XA, −A)………
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-48
AP8–4.
Req. 1
Depreciation expense of $643 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.
Ratio
Computation
Effect on Ratio of Failing to
Record Depreciation Expense
Earnings per
share
Net income
Number of shares of stock
outstanding
Net income will be overstated
with no change in the
denominator → Overstated
Fixed asset
turnover
Sales
Average net fixed asset balance
Numerator does not change;
however, the denominator is
overstated → Understated
accumulated depreciation affects
only long-lived assets on the
balance sheet → No effect
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
AP8–5.
Req. 1
a. Machine A – Sold on Jan. 1, 2011:
Depreciation expense in 2011 – none recorded because disposal
date was Jan. 1, 2011.
(2)
To record disposal:
Cash (+A) ………………………………………………………………..
6,750
17,600
Machine A (−A) …………………………………………………..
24,000
(1)
To record depreciation expense for 2011:
Accumulated depreciation, Machine B (+XA, −A) …….
($16,500 – $5,000) x 1/10 years = $1,150.
(2)
To record disposal:
Cash (+A) ………………………………………………………………..
2,000
Note receivable (+A)………………………………………………….
5,000
(1)
Depreciation expense in 2011 – none recorded because disposal
date was Jan. 1, 2011.
(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, 2011: Disposal of a long-lived asset with the price above net
book value, resulting in a gain.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
AP8–6.
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
Dec. 31 (d2)
Cash
Equipment
Accumulated
depreciation,
Machine A(3)
+6,000
–21,500
+18,000
Gain on
disposal of
long–lived
asset(4)
+2,500
Computations for Acquisition:
(1)
Purchase price …………………………………………………….
$120,000
Less: Market value of net assets ($115,000 – $24,000)
91,000
Goodwill ……………………………………………………………..
Computations for Machine A:
(2)
Depreciation expense for 2012:
($21,500 – $3,500) x 1/4
$4,500
(3)
Accumulated depreciation to Jan. 1, 2012 ……………….
$13,500
Add: Depreciation expense for 2012 (above) ……………
Total accumulated depreciation ………………………….
$18,000
(4)
Cash proceeds from disposition ……………………………..
$6,000
Net book value of Machine A ($21,500 – $18,000) …….
Gain on disposal of long-lived asset …………………….
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-51
AP8–6. (continued)
Req. 2 December 31, 2012 depreciation and amortization expense:
a.
License: $7,200 4 years = $1,800
b.
Leasehold improvements:
Amortize over shorter of:
c.
Goodwill: No amortization since it has an indefinite life.
d.
Machine A:
Machine A was sold on December 31, 2012. Depreciation
expense was computed up to the date of disposal. No
additional depreciation is necessary.
This transaction involved a revenue expenditure and not an
intangible or capitalized asset.
Machine B:
($18,000 – $2,000) x 1/4 = $4,000 depreciation expense for 2012
Amortization for 2012: $17,800 x 1/5 = $3,560
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-52
AP8–7.
Req. 1
a.
Patent amortization for one year, $18,600 10 years = $1,860.
b.
Copyright amortization for one year, $24,750 30 years = $825.
Req. 2
Net book value on January 1, 2015:
Item
Date Acquired
Book Value
Computations
Net Book Value
Jan. 1, 2015
a.
Patent ……………………..
Jan. 1, 2012
$18,600 – ($1,860 x 3)
$ 13,020
b.
Copyright …………………
Jan. 1, 2012
$24,750 – ($825 x 3)
22,275
c.
Franchise …………………
Jan. 1, 2012
$19,200 – ($1,600 x 3)
14,400
d.
License ……………………
Jan. 1, 2011
9,300
Total net book value …..
$133,995
Req. 3
The net book value of the franchise on January 2, 2015 ($14,400) is greater than the
expected future cash flows ($13,500). The asset is impaired.
Franchise amortization for one year, $19,200 12 years = $1,600.
d.
License amortization for one year, $21,700 7 years = $3,100.
Goodwill is not amortized since it has an indefinite life.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-53
COMPREHENSIVE PROBLEM (Chapters 6, 7, and 8)
COMP8-1.
Case A
Req. 1 (in millions)
Allowance for uncollectible accounts (−XA, +A) 1 ………….
12
Accounts receivable (−A) ……………………………………..
12
Req. 2
Cash collections for 2008 2 were $5,711 million.
Accounts Receivable
–
Allowance for
Uncollectible Accounts
= Net Realizable Value
Beg. 558
20 Beg.
538
Req. 3
Net Income
÷
Net Sales
= Net Profit Margin
2006
510
4,700
10.85%
2007
497
5,695
2008
Sales 5,710
5 Bad debt
Write-offs ?
End. 545
13 End.
532
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-54
COMP8-1. (continued)
Case B
Req. 1
The company should record bad debt expense of $13,900 for 2011.
Accounts Receivable
–
Allowance for Uncollectible
Accounts
Net
= Realizable Value
1,500
Unadj. bal.
End. 620,000
Case C
Req. 1
The company should record bad debt expense of $481,350 for 2012.
Accounts Receivable
–
Allowance for Uncollectible
Accounts
Net
= Realizable Value
9,200 Unadj. bal.
Bad debt
481,350 expense
End. 5,840,000
490,550 End.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
COMP8-1. (continued)
Case D
Req. 1
11/13 Purch
500
@
$21 = $10,500
11/4 Purch
300
@
$19 = $ 5,700
Beg.
100
@
$18 = $ 1,800
Beginning
Purchases
Available for sale
Ending
a. FIFO
Cost of ending inventory:
Layer → 200 units x $21 = $4,200
Cost of goods sold:
Layers →(100 x $18) + (300 x $19) + (300 x $21) =
$1,800 + $5,700 + $6,300 = $13,800
OR
b. LIFO
Cost of ending inventory:
Layers → (100 units x $18) + (100 units x $19)
$1,800 + $1,900 = $3,700