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 =
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.
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 (matching)
principle is applied. As a long-lived asset is used, revenues are earned over a
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, 10/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
c. The double-declining-balance method of depreciation is a form of accelerated
depreciation, causing a higher amount of depreciation expense to be matched
early years of their useful life than in the later years.
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 exists because of the company’s good reputation, location, customer
appeal, outstanding management team, and/or other favorable attributes. 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
Financial Accounting, 10/e 8-5
ANSWERS TO MULTIPLE CHOICE
1. a
2. a
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Comprehensive
Problems
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
60
2
20
3
3
15
3
25
3
25
3
20
4
4
20
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20
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15
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5
20
5
25
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20
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10
6
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15
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30
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15
7
7
15
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20
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25
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15
8
8
15
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30
8
15
9
9
20
9
15
9
*
10
20
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, 10/e 8-7
MINI-EXERCISES
M8–1.
Asset
Nature
Cost
Allocation Concept
(1)
Tractors
E
DR
(2)
Land in use
L
NO
(3)
DP
(4)
Warehouse
B
(5)
DR
(6)
(7)
Production plant
B
DR
(8)
(9)
DP
Land held for sale
NO
M8–2.
Young’s ratio is higher than Southwest’s 2017 ratio of 1.19, indicating that Young may
be more efficient in its use of fixed assets.
M8–3.
(1) C
(2) E
M8–4.
Machinery (original cost) $31,000
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
M8–6.
Machinery (original cost) $26,000
Accumulated depreciation at end of third year
M8–7.
Impairment
Loss
Cost – Fair Value
a. Machine
Y
$6,000
$15,500 -$ 9,500
exceed book value
c. Factory building
Y
d. Building
N
M8–8.
Store fixtures (original cost) $6,500
Accumulated depreciation at end of tenth year
Depreciation expense per year =
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
M8–10.
Garrett Company
Excerpts from Statement of Cash Flows
For the Current Year Ended December 31
Cash flows from operating activities:
Cash flows from investing activities:
Financial Accounting, 10/e 8-11
EXERCISES
E8–1.
Hasbro, Inc.
Excerpts from Balance Sheet
(in millions)
ASSETS
Current Assets:
Cash and cash equivalents
$ 1,581
Accounts receivable (net of allowance for doubtful accounts, $31)
Inventories
433
Prepaid expenses and other current assets
Total current assets
3,634
Property, Plant, and Equipment:
Machinery, equipment, and software
405
Buildings and improvements
194
Tools, dies, and molds
Land and improvements
Property, plant, and equipment (at cost)
Less: Accumulated depreciation
Property, plant, and equipment (net)
Other Assets:
Goodwill
573
Other intangibles (net of accumulated amortization, $905)
217
Other noncurrent assets
Total other assets
Total Assets
E8–2.
Req. 1
Fixed asset turnover ratio: ($ in millions)
Net Sales [(beginning net fixed assets + ending net fixed assets) 2]
2015
2016
2017
Computation of denominator:
2015
($20,642 + $22,471) 2
= $21,556.50
($22,471 + $27,010) 2
($27,010 + $33,783) 2
= $30,396.50
Req. 2
Apple’s fixed asset turnover ratio decreased each year from 2015 to 2017. 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
Financial Accounting, 10/e 8-13
E8–3
Req. 1
Building (+A) ……………………………………………………….
406,000
Land (+A) …………………………………………………………………..
Req. 2
Straight-line depreciation computation for the building:
Req. 3
Computation of the book value of the property at the end of year 2:
E8–4.
Req. 1
Date
Assets
Liabilities
Stockholders’ Equity
January
1
No effect (no
exchange)
No effect
No effect
January
2
Cash
Short term
Interest
Cash
–6,000
Short term
note payable
+15,000
Req. 2
Acquisition cost of the machine:
Cash paid $ 6,000
Req. 3
Depreciation for year 1: ($24,500 cost – $3,000 residual value) x 1/10
Req. 4
On July 1, $750 ($15,000 x 10% x 6/12) is paid and is recorded as interest expense.
Req. 5
Equipment (cost) …………………………………………………………………………..
$24,500
Net book value at end of year 2 ………………………………………………………
Financial Accounting, 10/e 8-15
E8–5.
Req. 1
Date
Assets
Liabilities
Stockholders’ Equity
January
1
Cash
–38,160
Short term
note payable
Interest
Cash
–12,800
Short term
note payable
+36,000
Req. 2
Acquisition cost of the van:
Req. 3
Depreciation for year 1: ($49,500 cost – $4,500 residual value) x 1/5
$ 9,000
Req. 4
On September 30, $2,160 ($36,000 x 8% x 9/12) is paid and is recorded as interest
Req. 5
Equipment (cost) …………………………………………………………………………..
$49,500
Net book value at end of year 2 ………………………………………………………
$31,500
E8–6.
Req. 1
Adjusting entry for 2018:
Remaining life 4 years
Req. 2 (beginning of 2019)
Estimated life 8 years
Req. 3 (during 2019):
Equipment (+A) ………………………………………………………
42,000
(Improvements incurred and capitalized.)
(Ordinary repairs incurred.)
Financial Accounting, 10/e 8-17
E8–7.
Req. 1
Adjusting entry for 2019:
Remaining life 7 years
Req. 2 (beginning of 2020)
Estimated life 15 years
Req. 3 (during 2020):
Equipment (+A) ……………………………………………………….
13,000
(Improvements incurred and capitalized.)
(Ordinary repairs incurred.)
E8–8.
Date
Assets
Liabilities
Stockholders’ Equity
1. 2019*
Accumulated
depreciation (+XA)
–7,200
Depreciation
expense (+E)
–7,200
expense (+E)
E8–9.
Req. 1
a. Straight-line:
Year
(C – RV) x 1/UL
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$152,000
1
($152,000 – $8,000) x 1/4
$36,000
$ 36,000
116,000
80,000
44,000
4
8,000
b. Units-of-production: ($152,000 – $8,000) 16,000 = $9.00 per hour of output
Year
(C – RV)/UL x Actual
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$152,000
1
$9.00 x 5,500 hours
$49,500
$ 49,500
102,500
68,300
39,500
4
$9.00 x 3,500 hours
8,000
c. Double-declining-balance: Stop depreciation when Book Value = RV
Year
(C – AD) x 2/UL
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$152,000
1
($152,000 – $0) x 2/4
$76,000
$ 76,000
76,000
38,000
3
19,000
4
9,500
Financial Accounting, 10/e 8-19
E8–9. (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
E8–10.
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
$950,000
1
($950,000 – $50,000) x 1/5
$180,000
$180,000
770,000
2
($950,000 – $50,000) x 1/5
360,000
590,000
4
($950,000 – $50,000) x 1/5
720,000
230,000
5
($950,000 – $50,000) x 1/5
900,000
b. Units-of-production: ($950,000 – $50,000) 300,000 = $3.00 per unit of output
Year
(C – RV)/UL x Actual
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
3
$3.00 x 50,000 units
150,000
561,000
c. Double-declining-balance: Stop depreciation when Book Value = RV
Year
(C – AD) x 2/UL
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
4
($950,000 – $744,800) x 2/5
5
($950,000 – $826,880) x 2/5
876,128
73,872