Financial Accounting, 10/e 8-21
E8–10. (continued)
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
E8–11.
Req. 1
C = Cost, RV = Residual Value, UL = Useful Life, AD = Accumulated Depreciation
a. Straight-line:
Year
(C – RV) x 1/UL
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
4
($45,000 – $5,000) x 1/4
40,000
b. Units-of-production: ($45,000 – $5,000) 400,000 = $0.10 per unit of output
Year
(C – RV)/UL x Actual
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
3
$0.10 x 110,000 units
11,000
32,000
13,000
4
40,000
c. Double-declining-balance:
Year
(C – AD) x 2/UL
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
3
4
2,812
E8–11. (continued)
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
E8–12.
The management of Kindred Healthcare, Inc., stated that it extended its estimated
useful life based on a review of the actual usage of the technology and equipment.
However, Kindred Healthcare also recognized a $14 million boost to its income due to
E8–13.
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
in the earlier years of an asset’s life when compared with accelerated methods.
E8–14.
Req. 1
Depreciation Expense for
Net 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
Units-of-production ……………
32,250
33,750
63,750
30,000
Double-declining-balance …..
48,000
24,000
48,000
24,000
Year 1:
43,000 x $.75
Year 2:
45,000 x $.75
Year 1:
$96,000 x 50% = $48,000
Year 2:
($96,000 – $48,000) x 50% = $24,000
Req. 2
The double-declining-balance method would result in the lowest EPS for Year 1
because it produced the highest depreciation expense and therefore the lowest net
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
(a) The machine acquisition would decrease cash provided by investing activities by the
purchase cost of $96,000.
(b) Using the indirect method of determining cash from operating activities, reported net
income is adjusted for noncash expenses and revenues and any gains and losses
associated with selling long-lived assets which are investing activities, not operating
Financial Accounting, 10/e 8-25
E8–15.
Req. 1
Property and Equipment
Beg. Bal
43,674
600
Property sold
Capital expenditures
5,652
0
Impairment write-offs
End. Bal.
48,726
Property sold
Beg. Bal.
2,282
Depreciation expense
End. Bal.
Req. 2
Amount of property and equipment written off as impaired during the year:
Beginning balance
$43,674
+ Capital expenditures during year
– Cost of property sold during year
– Impairment loss during year
Ending balance
$48,726
Additional disclosure: In Note 3 of the 2017 10-K confirms this finding:
E8–16.
Req. 1a
Cash (+A) ……………………………………………………………………
12,000
Accumulated depreciation (−XA, +A) ………………………………
23,000
Delivery truck (−A) …………………………………………………
35,000
Sale of an asset at book value; the result is no loss or gain.
Cash (+A) ………………………………………………………………….
12,400
Accumulated depreciation (−XA, +A) …………………………….
23,000
35,000
Sale of an asset above book value; the result is a gain.
Req. 1c
Cash (+A) ……………………………………………………………………
11,500
Accumulated depreciation (−XA, +A) ………………………………
23,000
Loss on sale of long-lived asset (+E, −SE) ……………………….
Sale of an asset below book value; the result is a loss.
Req. 2 Summarization of the effects of the disposal:
1. The loss or gain on disposal of a long-lived asset is the difference between the
disposal price and the book value at date of disposal.
Financial Accounting, 10/e 8-27
E8–17.
Req. 1a
Cash (+A) ……………………………………………………………………
300,000
Sale of an asset at book value; the result is no loss or gain.
Req. 1b
Cash (+A) ………………………………………………………………….
900,000
Gain on sale of long-lived asset (+R, +SE) ………………….
Sale of an asset above book value; the result is a gain.
Req. 1c
Cash (+A) ……………………………………………………………………
100,000
Sale of an asset below book value; the result is a loss.
Req. 2 Summarization of the effects of the disposal:
1. The loss or gain on disposal of a long-lived asset is the difference between the
disposal price and the book value at date of disposal.
2. When the disposal price is the same as the book value there is no loss or gain;
E8–18.
Req. 1
Depreciation expense per year:
$6,000 accumulated depreciation 3 years of usage = $2,000 per year
Req. 2
December 31:
Depreciation expense (+E, −SE) ………………………………
2,000
Accumulated depreciation ($6,000 + $2,000) (−XA, +A )
Loss on disposal of truck (+E, −SE) ………………………….
Req. 3
There would be a $4,000 loss on the disposal of the truck equal to the difference
between the loss assuming no insurance coverage ($17,000 above) and the
insurance payment received ($13,000).
E8–19.
Req. 1
Computation of acquisition cost of the deposit in 2020:
Req. 2
Computation of depletion for 2020:
Req. 3
Computation of net book value of the deposit after the developmental work:
Financial Accounting, 10/e 8-29
E8–20.
Req. 1
Amortization on December 31, 2019 (straight-line method with no residual value):
Technology: $70,000 x 1/4 = $17,500 amortization expense
Req. 2
Income statement for 2019:
Operating expenses:
Amortization expense ($17,500 + $400)
$17,900
Balance sheet at December 31, 2019:
Intangibles:
E8–21.
Req. 1
Amortization on December 31, 2020 (straight-line method with no residual value):
Req. 2
Income statement for 2020
Operating expenses:
Amortization expense ($1,450 + $3,000)
$4,450
Intangibles:
Financial Accounting, 10/e 8-31
E8–22.
Req. 1 (January 1):
Leasehold improvements (+A) ……………………………………….
325,000
Cash (−A) ……………………………………………………………..
325,000
Leasehold improvements (−A) ………………………………….
($325,000 x 1/10 year lease = $32,500)
the life of the improvement or the lease term.
E8–23.
December 31, 2020:
Adjusting entry for 2020 depreciation:
Computations for change in estimates:
($75,400 net book value – $12,000 residual value) x 1/7 = $9,057
E8–24.
Req. 1
Equipment (+A) ……………………………………………………….
15,500
Cash (−A)………………………………………………………….
15,500
Req. 2
Age of Machine A at December 31 of the prior year:
Req. 3
Depreciation expense (for the current year) (+E, −SE) ….
4,800
Accumulated depreciation, machinery (+XA, −A) ……
4,800
Computations for change in estimates:
Net book value
Annual depreciation:
Req. 4
Requirement (1) assumed that the major renovation and improvement cost was a
capital expenditure rather than a repair expense. Because a capital expenditure benefits
Financial Accounting, 10/e 8-33
E8–25.
Req. 1
Depreciation expense prior to the change in estimates:
Req. 2
Depreciation expense after the change in estimates:
Step 1 – Age of the asset: $78,000 accumulated depreciation $6,000 annual expense
= 13 years of depreciation to date.
The building has been depreciated over 13 years as of the beginning of the
year.
Req. 3
The depreciation expense increases by $7,500 each year for the next 17 years.
Therefore, net income will be lower by $7,500 (ignoring taxes) each year; this in turn will
PROBLEMS
P8–1.
Req. 1
Long-lived assets are tangible and intangible resources owned by a business and used
Req. 2
January 2 purchase:
Equipment (+A) ……………………………………………………….
85,000
2,000
5,000
Equipment (+A) ……………………………………………………….
Computations:
(1) Common stock: $1 par value x 2,000 shares
Financial Accounting, 10/e 8-35
P8–1. (continued)
Req. 3
Date
Assets
Liabilities
Stockholders’ Equity
Jan. 2
Equipment
+85,000
Note payable
+60,000
Common stock
+2,000
Req. 4
Cost of the machinery is $87,400, which includes the invoice price plus installation
P8–2.
Req. 1
Building
Accum.
Deprec.
Deprec.
Expense
Repairs
Expense
Cash
Balance January 1
$950,000
$475,000
Depreciation
47,500
$47,500*
NE
Balance December 31
Balance prior to
Req. 2
Net Book Value of Building on December 31 of the current year:
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
Financial Accounting, 10/e 8-37
P8–3.
Req. 1
Cost of each machine:
Machine
A
B
C
Total
Purchase price ………………………………
$11,000
$30,000
$8,000
$49,000
Installation costs …………………………….
Renovation costs …………………………...
Total cost …………………………………..
$56,000
Req. 2
Computation of depreciation at the end of Year 1 for each machine:
Machine
Method
Computation
A
Straight-line
($14,000 − $1,000) x 1/5 = $2,600
C
($10,000 −$0) x 2/4 = $5,000
Adjusting entry:
Depreciation expense ($2,600 + $2,400 + $5,000) (+E, −SE)….
10,000
Accumulated depreciation, Machine A (+XA, −A)………
Accumulated depreciation, Machine B (+XA, −A)………
Accumulated depreciation, Machine C (+XA, −A)………
P8–4.
Req. 1
Depreciation expense of $429 recorded in the current year is inferred from the
activities affecting the Accumulated Depreciation account:
Accumulated Depreciation (in millions)
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
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
Financial Accounting, 10/e 8-39
P8–5.
Req. 1
a. Straight-line:
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$106,000
b. Units-of-production: ($106,000 – $2,000) 200,000 = $0.52 per unit of output
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$106,000
c. Double-declining-balance:
Year
Computation
Depreciation
Expense*
Accumulated
Depreciation
Net
Book Value
At acquisition
$106,000
Req. 2
Cash flow—For tax purposes, the declining-balance (DB) method usually is viewed as
preferable because an earlier tax deduction is preferable to a later tax deduction. DB
Fixed asset turnover—The DB method would be most favorable for fixed asset turnover.
Because this depreciation method yields the highest amount of depreciation expense, it
yields the lowest level of net fixed assets and thus the highest fixed asset turnover
during the early years. In later years, this effect would reverse.
P8–5. (continued)
Req. 2 (continued)
Recommendation to Ford Motor Company’s management:
Companies may choose a different method for tax purposes than for financial reporting