Financial Accounting, 9/e 8-1
Chapter 8
Reporting and Interpreting
Property, Plant, and Equipment;
Intangibles; and Natural Resources
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
[(Beginning net fixed asset balance + Ending net fixed asset balance) 2]
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
the operation of a business and are not intended for resale. They are
(2) Intangible long-lived assets—assets held by the business because of the
special valuable rights that they confer; they have no physical substance.
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 expense recognition principle is
applied. As a long-lived asset is used, revenues are earned over a period of time.
6. Ordinary repairs—expenditures for the normal maintenance and upkeep of
machinery and other tangible long-lived assets that are necessary to keep the
assets in their usual operating conditions. Generally, ordinary repairs are recurring
in nature, involve relatively small amounts at each occurrence and do not extend
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.
Financial Accounting, 9/e 8-3
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
pattern that varies in amount with the rate at which the asset is used
productively each year. For example, if in the current year the asset is used
twice as much as in the prior year, twice as much depreciation expense would
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
of long-lived assets to be higher than their related estimated future cash flows. It is
accounted for by writing down the asset to the asset’s fair value and recording a
loss.
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 exists because of the company’s good reputation, location, customer
appeal outstanding management team, and/or other favorable attribute. Goodwill
16. Depreciation expense is a noncash expense. That is, each period when
depreciation is recorded, no cash payment is made. (The cash outflow associated
with depreciation occurs when the related asset is first acquired.) Since no cash
payment is made for depreciation, the effect of the depreciation expense on net
Financial Accounting, 9/e 8-5
ANSWERS TO MULTIPLE CHOICE
1. a
2. a
3. d
4. b
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Comprehensive
Problem
Cases and
Projects
No.
No.
Time
No.
Time
No.
Time
No.
Time
No.
Time
1
1
10
1
20
1
20
1
60
1
20
2
2
15
2
30
2
30
2
20
3
3
15
3
25
3
25
3
20
4
4
20
4
20
4
20
4
15
5
5
20
5
25
5
20
5
10
6
6
15
6
20
6
30
6
15
7
7
15
7
20
7
25
7
15
8
8
15
8
30
8
15
9
9
20
9
15
9
*
10
10
20
10
25
11
12
20
10
11
20
13
14
10
20
Continuing
Problem
15
20
1
25
16
15
17
15
18
10
19
15
20
20
22
15
23
15
24
20
25
15
* 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
Financial Accounting, 9/e 8-7
MINI-EXERCISES
M8–1.
Asset
Nature
Cost
Allocation Concept
(1)
Tractors
E
DR
(2)
Land in use
L
NO
(3)
Timber tract
NR
DP
(4)
Warehouse
B
DR
M8–2.
Young’s fixed asset turnover ratio is
= Net operating revenues (net sales)
[(Beginning net fixed asset balance + Ending net fixed asset balance) 2]
M8–3.
(1) C
(2) E
(3) N
(4) C
(5)
New engine for old machine
DR
(6)
Operating license
(7)
Production plant
B
DR
(8)
Trademark
(9)
Silver mine
NR
DP
Land held for sale
NO
M8–4.
Machinery (original cost) $31,000
Accumulated depreciation at end of third year
M8–5.
Machinery (original cost) $55,000
Accumulated depreciation at end of first year:
Depreciation expense = ($55,000 – $0 acc. depr.) x 2 / 5 = $22,000 22,000
Net book value at end of first year $33,000
M8–6.
Machinery (original cost) $26,000
Accumulated depreciation at end of third year
Depreciation expense per machine hour
Financial Accounting, 9/e 8-9
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) $6,500
Accumulated depreciation at end of tenth year
Depreciation expense =
($6,500 cost – $800 residual value) x 1/12 = $475
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
for the patent). If so, Giant Bakery would record $200,000 of goodwill on the date of
c. Factory building
Y
d. Building
N
M8–10.
Garrett Company
Excerpts from Statement of Cash Flows
For the Current Year Ended December 31
Cash flows from operating activities:
Net income
$ 18,000
Add back: Depreciation expense
Cash flows from investing activities:
Purchase of equipment
Sale of land
Financial Accounting, 9/e 8-11
EXERCISES
E8–1.
Hasbro, Inc.
Excerpts from Balance Sheet
(in millions)
ASSETS
Current Assets
Cash and cash equivalents
$ 893
Accounts receivable (net of allowance for doubtful accounts, $16)
1,095
Inventories
340
Other Assets
Goodwill
593
Other intangibles (net of accumulated amortization, $798)
325
Other noncurrent assets
658
Total other assets
1,576
Total Assets
$4,532
Prepaid expenses and other current assets
392
Total current assets
Property, Plant, and Equipment
Machinery, equipment, and software
504
Buildings and improvements
234
Land and improvements
Property, plant, and equipment (at cost)
745
Less: Accumulated depreciation
Total property, plant, and equipment (net)
E8–2.
Req. 1
Fixed asset turnover ratio: (in millions)
Net Sales [(beginning net fixed assets + ending net fixed assets) 2]
2012
2013
2014
$156,508 $11,614.50
$170,910 $16,024.50
$182,795 $18,610.50
Req. 2
Apple’s fixed asset turnover ratio decreased each year from 2012 to 2014. The
decrease was due primarily to a larger percentage increase in average net fixed assets
over the three years than the percentage increase in net sales (that is, the denominator
net fixed assets grew faster than the numerator net sales).
Financial Accounting, 9/e 8-13
E8–3
Req. 1
Building (+A) ……………………………………………………….
106,000
Land (+A) …………………………………………………………………..
113,000
Cash (−A) ……………………………………………………….
219,000
Req. 2
Straight-line depreciation computation:
($106,000 cost – $15,000 residual value) x 1/10 = $9,100 depreciation expense per year
Note: Land is not depreciated.
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
Cash
Short term
Interest
Req. 2
Acquisition cost of the machine:
Cash paid $ 6,000
Note payable with supplier 15,000
Freight costs 1,000
Req. 3
Depreciation for year 1: ($24,500 cost – $4,000 residual value) x 1/10
$ 2,050
Req. 4
Equipment (cost) …………………………………………………………………………..
Net book value at end of year 2 ………………………………………………………
Financial Accounting, 9/e 8-15
E8–5.
Req. 1
Date
Assets
Liabilities
Stockholders’ Equity
January
1
Cash
Equipment
–12,800
+48,800
Short term
note payable
+36,000
Req. 2
Acquisition cost of the machine:
Cash paid (including sales tax) $12,800
Req. 3
Depreciation for year 1: ($49,500 cost – $4,500 residual value) x 1/5
$ 9,000
Req. 4
Req. 5
Equipment (cost) …………………………………………………………………………..
$49,500
Less: Accumulated depreciation ($9,000 x 2 years) …………………………
18,000
Net book value at end of year 2 ………………………………………………………
$31,500
Cash
–38,160
Short term
note payable
Interest
E8–6.
Req. 1
Adjusting entry for 2015:
Req. 2 ( beginning of 2016)
Estimated life 10 years
Less: Used life –
$132,000 accumulated depreciation $33,000 annual expense = 4 years
Remaining life 6 years
Req. 3 (during 2016):
(Ordinary repairs incurred.)
Equipment (+A) …………………………..…………………………...
Improvements incurred and capitalized.
Financial Accounting, 9/e 8-17
E8–7.
Req. 1
Req. 2 ( beginning of 2017)
Estimated life 15 years
Less: Used life –
$57,600 accumulated depreciation $7,200 annual expense = 8 years
Remaining life 7 years
Req. 3 (during 2017):
(Ordinary repairs incurred.)
Equipment (+A) …………………………..…………………………...
Improvements incurred and capitalized.
E8–8.
Date
Assets
Liabilities
Stockholders’ Equity
1. 2016*
Accumulated
–7,200
Depreciation
–7,200
Adjusting entry for 2016:
E8–9.
Req. 1
a. Straight-line:
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$9,000
1
($9,000 – $1,000) x 1/4
$2,000
$2,000
7,000
2
3
($9,000 – $1,000) x 1/4
4
($9,000 – $1,000) x 1/4
1,000
b. Units-of-production: ($9,000 – $1,000) 16,000 = $0.50 per hour of output
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$9,000
1
$0.50 x 5,500 hours
$2,750
$2,750
6,250
2
4,350
3
2,750
4
1,750
1,000
c. Double-declining-balance:
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$9,000
1
($9,000 – $0) x 2/4
$4,500
$4,500
4,500
2
($9,000 – $4,500) x 2/4
2,250
3
($9,000 – $6,750) x 2/4
1,125
4
562
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
efficiency is expected to decline faster in the earlier years of its useful life, then an
Too large. Net book value cannot be below residual value.
Financial Accounting, 9/e 8-19
E8–10.
Req. 1
a. Straight-line:
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$950,000
1
($950,000 – $50,000) x 1/5
$180,000
$180,000
770,000
2
($950,000 – $50,000) x 1/5
180,000
360,000
590,000
b. Units-of-production: ($950,000 – $50,000) 300,000 = $3.00 per unit of output
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$950,000
1
$3.00 x 70,000 units
$210,000
$210,000
740,000
2
$3.00 x 67,000 units
201,000
411,000
539,000
3
$3.00 x 50,000 units
561,000
389,000
4
$3.00 x 73,000 units
219,000
780,000
170,000
5
$3.00 x 40,000 units
120,000
900,000
c. Double-declining-balance:
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$950,000
1
($950,000 – 0) x 2/5
$380,000
$380,000
570,000
2
($950,000 – $380,000) x 2/5
228,000
608,000
342,000
3
744,800
4
123,120
5
($950,000 – $826,880) x 2/5
876,128
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
3
($950,000 – $50,000) x 1/5
180,000
540,000
410,000
4
($950,000 – $50,000) x 1/5
720,000
230,000
5
($950,000 – $50,000) x 1/5
180,000
900,000
E8–11.
Req. 1
a. Straight-line:
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$45,000
1
($45,000 – $5,000) x 1/4
$10,000
$10,000
35,000
20,000
3
($45,000 – $5,000) x 1/4
15,000
4
($45,000 – $5,000) x 1/4
b. Units-of-production: ($45,000 – $5,000) 400,000 = $0.10 per unit of output
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$45,000
1
$0.10 x 120,000 units
$12,000
$12,000
33,000
2
$0.10 x 90,000 units
24,000
32,000
4
$0.10 x 80,000 units
c. Double-declining-balance:
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$45,000
1
($45,000 – 0) x 2/4
$22,500
$22,500
22,500
2
($45,000 – $22,500) x 2/4
11,250
33,750
11,250
3
($45,000 – $33,750) x 2/4
39,375
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
efficiency is expected to decline faster in the earlier years of its useful life, then an
accelerated method would be appropriate [such as, double-declining-balance]. If the