Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
Chapter 08
Reporting and Interpreting Property,
Plant, and Equipment; Natural
Resources; and Intangibles
ANSWERS TO QUESTIONS
1. Long-lived assets are noncurrent assets, which a business retains beyond one
year, not for sale, but for use in the course of normal operations. Long-lived assets
2. The fixed asset turnover ratio =
Net sales
3. Long-lived assets are classified as follows:
(1) Tangible long-lived assets—assets that are tangible (i.e., have physical
substance) and long-lived (i.e., beyond one year); they are acquired for use in
(2) Intangible long-lived assets—assets held by the business because of the
special valuable rights that they confer; they have no physical substance.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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4. When a long-lived asset is acquired, it is recorded in the accounts in conformity
5. In measuring and reporting long-lived assets, the matching principle is applied. As
a long-lived asset is used, revenues are earned over a period of time. Over that
6. a. Capital expenditures—expenditures of resources (i.e., assets given up or debt
incurred) for a service or asset that will help earn revenue for periods beyond
the current accounting period. Capital expenditures should be debited to
appropriate asset accounts and then allocated to those future periods in which
revenues will be earned and against which the expenditures will be matched.
7. Depreciation—allocation of the cost of a tangible long-lived asset over its useful life.
Depreciation refers to allocation of the costs of such items as plant and equipment,
buildings, and furniture.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8. To compute depreciation, the three values that must be known or estimated are:
Cost—the actual total expenditures incurred in acquiring the asset in conformity
with the cost principle.
9. The estimated useful life and estimated residual value of a long-lived asset when
used for depreciation purposes relate to the current owner-user and not to all
10. a. The straight-line method of depreciation causes an equal amount of
depreciation expense to be apportioned to, or matched with, the revenues of
each period. It is especially appropriate for tangible long-lived assets that are
used at an approximately uniform level from period to period.
b. The units–of-production method of depreciation causes a depreciation expense
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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11. The cost of an addition to an existing long-lived asset should be depreciated over
12. Asset impairment—when events or changes in circumstances cause the book value
13. When equipment is sold, the Equipment account is credited for the asset’s historical
cost. Its related Accumulated Depreciation account is debited for the amount
14. An intangible asset is acquired and held by the business for use in operations and
not for sale. Intangible assets are acquired because of the special rights they confer
on ownership. They have no physical substance but represent valuable rights that
15. Goodwill represents an intangible asset that exists because of the good reputation,
customer appeal, and general acceptance of a business. Goodwill has value
16. Depreciation expense is a noncash expense. That is, each period when
depreciation is recorded, no cash payment is made. (The cash outflow associated
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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ANSWERS TO MULTIPLE CHOICE
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Comprehensive
Problem
Cases and
Projects
No.
Time
No.
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No.
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No.
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No.
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* Due to the nature of this project, it is very difficult to estimate the amount of time
students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
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Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-7
MINI-EXERCISES
M8–1.
Asset
Nature
Cost
Allocation Concept
(1)
Tractors
E
DR
(2)
Land in use
L
NO
M8–2.
Kramer’s fixed asset turnover ratio is
= Net sales
[(Beginning net fixed asset balance + Ending net fixed asset balance) 2]
M8–3.
(1) C
(2) R
(3)
DP
(4)
Warehouse
B
(5)
DR
(6)
(7)
Production plant
B
DR
(8)
(9)
DP
Land held for sale
NO
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
M8–4.
Machinery (original cost) $31,000
M8–5.
Machinery (original cost) $45,000
Accumulated depreciation at end of first year:
Depreciation expense = ($45,000 – $0 acc. depr.) x 2 / 4 = $22,500 22,500
M8–6.
Machinery (original cost) $21,000
Accumulated depreciation at end of third year
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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M8–7.
Impairment
Loss
Cost – Fair Value
a. Machine
Y
$6,000
$15,500 -$ 9,500
b. Copyright
N
—
Estimated cash flows
exceed book value
M8–8.
Store fixtures (original cost) $6,000
Accumulated depreciation at end of tenth year
Depreciation expense =
($6,000 cost – $800 residual value) x 1/13 = $400
M8–9.
Elizabeth Pie Company’s management may choose to accept the offer of $5,000,000 as
this amount is more than the $4,800,000 market value of separately identifiable assets
and liabilities ($4,500,000 market value of recorded assets and liabilities and $300,000
c. Factory building
Y
d. Building
N
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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M8–10.
Wexler Company
Excerpts from Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities:
Net income
$ 13,000
Add back: Depreciation expense
Cash flows from investing activities:
Purchase of equipment
Sale of land
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
EXERCISES
E8–1.
Hasbro, Inc.
Excerpts from Balance Sheet
(in millions)
ASSETS
Current Assets
Cash and cash equivalents
$ 630
Accounts receivable (net of allowance for doubtful accounts, $32)
Inventories
300
Prepaid expenses and other current assets
Total current assets
Property, Plant, and Equipment
Machinery and equipment
413
Buildings and improvements
196
Land and improvements
7
Property, plant, and equipment (at cost)
616
Less: Accumulated depreciation
403
Total property, plant, and equipment (net)
213
Other Assets
Goodwill
Other intangibles (net of accumulated amortization, $800)
568
Other noncurrent assets
Total other assets
Total Assets
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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E8–2.
Req. 1
Fixed asset turnover ratio: (in millions)
Sales [(beginning net fixed assets + ending net fixed assets) 2]
2007
2008
2009
$24,006 $1,556.5
$32,479 $2,393.0
$36,537 $2,704.5
2009
($2,954 + $2,455) 2
= $2,704.5
Req. 2
Apple’s fixed asset turnover ratio fell each year from 2007 to 2009. This suggests that
Apple’s management became less efficient at utilizing its long-lived assets over time.
2007
($1,281 + $1,832) 2
= $1,556.5
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
E8–3
Req. 1
Building (+A) ……………………………………………………….
97,000
Land (+A) …………………………………………………………………..
113,000
Cash (−A) ……………………………………………………….
210,000
Req. 2
Straight-line depreciation computation:
Req. 3
Computation of the book value of the property at the end of year 2:
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E8–4.
Req. 1
Date
Assets
Liabilities
Stockholders’ Equity
January
1
No effect
No effect
No effect
January
2
Cash
Equipment
–6,000
+21,000
Short term
note payable
+15,000
+1,000
Cash
Short term
Interest
* $15,000 principal x .10 interest rate x 6/12 of a year = $750 interest
Req. 2
Acquisition cost of the machine:
Cash paid $ 6,000
Req. 3
Depreciation for 2012: ($24,500 cost – $4,000 residual value) x 1/10
$ 2,050
Req. 4
Req. 5
Equipment (cost) …………………………………………………………………………..
$24,500
Net book value at end of 2013 ………………………………………………………..
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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E8–5.
Req. 1
Adjusting entry for 2010:
Req. 2 ( beginning of 2011)
Estimated life 15 years
Req. 3 (during 2011):
Repair and maintenance expense (+E, −SE) ………………..
1,000
E8–6.
Date
Assets
Liabilities
Stockholders’ Equity
1. 2010*
Accumulated
depreciation
–6,000
Depreciation
expense
–6,000
6,000
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
E8–7.
Req. 1
a. Straight-line:
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$10,000
1
($10,000 – $1,000) x 1/4
$2,250
$2,250
7,750
2
3
($10,000 – $1,000) x 1/4
4
($10,000 – $1,000) x 1/4
1,000
b. Units-of-production: ($10,000 – $1,000) 9,000 = $1.00 per hour of output
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$10,000
1
$1.00 x 3,600 hours
$3,600
$3,600
6,400
2
$1.00 x 2,700 hours
3,700
3
1,900
4
$1.00 x 900 hours
1,000
c. Double-declining-balance:
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$10,000
1
($10,000 – $0) x 2/4
$5,000
$5,000
5,000
2
($10,000 – $5,000) x 2/4
2,500
3
($10,000 – $7,500) x 2/4
1,250
4
625
Req. 2
If the machine is used evenly throughout its life and its efficiency (economic value in
use) is expected to decline steadily each period over its life, then straight-line
depreciation would be preferable. If the machine is used at a consistent rate but the
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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E8–8.
Req. 1
a. Straight-line:
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$580,000
1
($580,000 – $60,000) x 1/5
$104,000
$104,000
476,000
b. Units-of-production: ($580,000 – $60,000) 260,000 = $2.00 per unit of output
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$580,000
1
$2.00 x 73,000 units
$146,000
$146,000
434,000
2
3
4
$2.00 x 53,000 units
106,000
144,000
5
c. Double-declining-balance:
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$580,000
1
($580,000 – 0) x 2/5
$232,000
$232,000
348,000
4
2
3
($580,000 – $60,000) x 1/5
268,000
4
($580,000 – $60,000) x 1/5
164,000
5
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
E8–8. (continued)
Req. 2
If the machine is used evenly throughout its life and its efficiency (economic value in
E8–9.
Management of General Motors Corporation probably anticipated that the pre-2001
property and equipment would be more productive or efficient in the earlier part of their
E8–10.
Straight-line depreciation (SL) is a simple method to use and understand. Managers
often prefer SL because it results in lower depreciation expense and higher net income
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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E8–11.
Req. 1
Depreciation Expense
Book Value at End of
Method of Depreciation
Year 1
Year 2
Year 1
Year 2
Straight-line ……………………..
$22,500
$22,500
$73,500
$51,000
Year 2:
($96,000 – $48,000) x 50% = $24,000
Req. 2
Req. 3
Depreciation is a noncash expense; that is, no cash is paid when depreciation is
recognized. Ignoring income tax implications, all methods have the same impact on
Req. 4
The machine acquisition would decrease cash provided by investing activities by the
purchase cost of $96,000. As a noncash expense, the annual depreciation should have
Double-declining-balance …..
Year 1:
43,000 x $.75
Year 2:
45,000 x $.75
Year 1:
$96,000 x 50% = $48,000
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
E8–12.
Req. 1
Property, Plant, and Equipment
Beg. Bal
33,611
1,040
Property sold
Capital expenditures
2,636
109
Write-offs
End. Bal.
35,098
Accumulated Depreciation
Property sold
Beg. Bal.
Depreciation expense
End. Bal.
Disposal of property and equipment:
Req. 2
Amount of property and equipment written off as impaired during the year:
Beginning balance
$33,611
+ Capital expenditures during year
– Cost of property sold during year
– Impairment loss during year
Ending balance
$35,098