CHAPTER 9
Reporting and Analyzing Long-Lived Assets
Learning Objectives
1. Explain the accounting for plant asset expenditures.
2. Apply depreciation methods to plant assets.
3. Explain how to account for the disposal of plant assets.
4. Identify the basic issues related to reporting intangible assets.
5. Discuss how long-lived assets are reported and analyzed.
*6. Compute periodic depreciation using the declining-balance method and the units- of-activity
method.
Summary of Questions by Learning Objectives and Bloom’s Taxonomy
Item
LO
BT
Item
LO
BT
Item
LO
BT
LO
BT
LO
BT
Questions
1.
1
C
7.
2
K
13.
5
K
4
K
5
C
2.
1
K
8.
2
C
14.
4
C
4
C
5
C
3.
1
C
9.
2
C
15.
4
C
5
AP
5
C.
4.
1
C
10.
2
C
16.
4
C
5
C
5.
1
C
11.
3
K
17.
4
C
5
C
6.
1
K
12.
3, 5
C
18.
4
C
5
C
Brief Exercises
1.
1
AP
4.
2
AP
7.
3
AP
5
AP
6*
AP
2.
1
AP
5.
2
AN
8.
3
AP
5
AP
6*
AP
3.
1
AP
6.
2
AP
9.
4
AP
5
AP
Do It! Exercises
1.
1
C
2b.
2
AP
4.
4
C
2a.
2
AP
3.
3
AP
5.
5
AP
Exercises
1.
1
C
5.
2
AP
9.
1, 2, 3
AN
4
C
5
AP
2.
1
C
6.
2
AN
10.
1, 2, 3,
4
C
2, 4
5
C
AP
5
AN
3.
1
AP
7.
3
3
AP
AP
11.
4
AN
6*
AP
4.
2
C
8
12.
4
AN
5
AP
6*
AP
Problems: Set A
1.
1
C
3.
3
AP
5.
4, 5
AP
5
AN
2, 6*
AP
2.
2, 3, 5
AP
4.
1, 2, 3,
5
AP
6.
4
AP
2, 6*
AP
*Continuing Cookie Solutions for this chapter are available online.
ASSIGNMENT CLASSIFICATION TABLE
Problem
Number
Description
Difficulty
Level
Time Allotted
(min.)
1A
Determine acquisition costs of land and building.
Simple
20–30
2A
Journalize equipment transactions related to purchase,
sale, retirement, and depreciation.
Moderate
40–50
3A
Journalize entries for disposal of plant assets.
Moderate
20–30
4A
Record property, plant and equipment transactions;
prepare partial balance sheet
Moderate
40–50
5A
Prepare entries to record transactions related to
acquisition and amortization of intangibles; prepare the
intangible assets section and note.
Moderate
30–40
6A
Prepare entries to correct errors in recording and
amortizing intangible assets.
Moderate
15–20
7A
Calculate and comment on return on assets, profit margin,
and asset turnover.
Moderate
15–20
*8A
Compute depreciation under different methods.
Simple
30–40
*9A
Compute depreciation under different methods.
Moderate
30–40
ANSWERS TO QUESTIONS
1. For plant assets, the historical cost principle states that plant assets are recorded at cost, which
consists of all expenditures necessary to acquire the asset and make it ready for its intended
use.
LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting
2. In a cash transaction, cost is equal to the cash paid.
3. When only the land is to be used, all demolition and removal costs of the building less any proceeds
from salvaged materials are necessary expenditures to make the land ready for its intended use.
4. Ordinary repairs are made to maintain the operating efficiency and expected productive life of the
asset. Capital expenditures are additions and improvements made to increase efficiency, pro–
ductive capacity, or expected useful life of the asset. Ordinary repairs are recognized as expenses
when incurred; capital expenditures are generally debited to the plant asset affected.
LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting
5. The potential benefits of leasing are (1) reduced risk of obsolescence (an obvious concern to
Nolan), (2) little or no required down payment, (3) shared tax advantages, (4) assets and liabilities
6. You should explain to the president that depreciation is a process of allocating the cost of a plant
asset to expense over its service (useful) life in a rational and systematic manner. Recognition of
7. (a) Salvage value is the expected cash value of the asset at the end of its useful life.
(b) Salvage value is used in determining depreciable cost in the straight-line method by subtracting
8. (a) Useful life is expressed in years under the straight-line method and in units of activity under
the units-of-activity method.
9. The effects of the three depreciation methods on annual depreciation expense are: Straight–
line—constant amount; units-of-activity—varying amounts; declining-balance—decreasing amounts.
LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting
10. A revision of depreciation is made in current and future years but not retroactively. The rationale
is that continual restatement of prior periods would adversely affect the reader’s confidence in the
11. In a sale of plant assets, the book value of the asset is compared to the proceeds received from
12. The plant asset and related accumulated depreciation should continue to be reported on the
balance sheet without further depreciation or adjustment until the asset is retired. Reporting the
asset and related accumulated depreciation on the balance sheet informs the reader of the
13. Apple depreciates its buildings over the lesser of 30 years or the remaining life of the underlying
building, and its machinery and equipment between 2 to 5 years.
LO 5 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic & Technology AICPA FC: Reporting
& Technology
14. Depreciation and amortization are both concerned with writing off the cost of an asset to expense
15. It is true that successful marketing campaigns often benefit multiple accounting periods in the future,
enhancing the company’s value, and potentially creating goodwill. However, from an accounting
perspective Bruce’s proposal is unacceptable. First of all, accounting standards only allow the
LO 4 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting
16. The intern is not correct. If an intangible asset has a limited life, the cost of the asset should be
amortized over that asset’s useful life (the period of time when operations are benefited by use of
LO 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting
17. The favorable attributes which could result in goodwill include exceptional management, desirable
LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting
18. Goodwill is the value of many favorable attributes that are intertwined in the business enterprise.
LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting
19. Goodwill is recorded only when there is an exchange transaction that involves the purchase of an
entire business. Goodwill is the excess of cost over the fair value of the net assets (assets less
LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting
Questions Chapter 9 (Continued)
20. Research and development costs present several accounting problems. It is sometimes difficult
to assign the costs to specific projects, and there are uncertainties in identifying the extent and
LO 4 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting
21. Campbell Soup Company’s return on assets is computed as follows:
22. The return on assets is closely monitored by management. It is the product of the profit margin
and the asset turnover. At first glance, if this new product line has a lower profit margin, then it
LO 5 BT: AN Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting
23. (a) Grocery stores usually have a high asset turnover and a low profit margin.
24. Since Peyton uses the straight-line depreciation method, its depreciation expense will be lower in
the early years of an asset’s useful life as compared to using an accelerated method. Rogers’
25. Yes, the tax regulations of the IRS allow a company to use a different depreciation method on the
tax return than is used in preparing financial statements. Mesa Corporation uses an accelerated
26. By selecting a higher estimated useful life, Gore Corp. is spreading the plant assets’ cost over a
longer period of time. The depreciation expense reported in each period is lower and net income
27. In the operating activities section of the statement of cash flows, depreciation expense (from
plant assets) and amortization expense (from intangible assets) are added back to net income in
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 9-1
All of the expenditures should be included in the cost of the land. Therefore,
BRIEF EXERCISE 9-2
The cost of the truck is $26,780 (cash price $24,000 + sales taxes $1,080 +
BRIEF EXERCISE 9-3
(a) Maintenance and Repairs Expense …………………… 38
BRIEF EXERCISE 9-4
The depreciable cost is $27,000 ($31,000 – $4,000). With a 4-year useful life,
BRIEF EXERCISE 9-5
It is likely that management requested this accounting treatment to boost
reported net income. Land is not depreciated; thus, by reporting land at
BRIEF EXERCISE 9-6
Book value, 1/1/17 ($36,000 – $13,600) …………………………………….. $22,400
BRIEF EXERCISE 9-7
(a) Accumulated Depreciation—Equipment ……………. 41,000
Equipment …………………………………………………… 41,000
BRIEF EXERCISE 9-8
(a) 7/31/17 Depreciation Expense ………………………… 4,600
Accumulated Depreciation—
Equipment …………………………………. 4,600
(b) 7/31/17 Accumulated Depreciation—Equipment …. 46,600
Cash ………………………………………………….. 21,000
BRIEF EXERCISE 9-9
(a) Amortization Expense ($156,000 ÷ 6) ………………… 26,000
Patents ……………………………………………………… 26,000
BRIEF EXERCISE 9-10
(a)
$4.55
Return on assets = = 15.5%
($28.46 + $30.22)÷2
BRIEF EXERCISE 9-11
NIKE, INC.
Partial Balance Sheet
As of May 31, 2017
(in millions)
Property, plant, and equipment
Land ……………………………………………….. $ 221.6
Buildings ………………………………………… $ 974.0
Machinery and equipment ……………….. 2,094.3
BRIEF EXERCISE 9-12
In the determination of net cash provided by operating activities, add
depreciation expense and amortization expense to net income:
*BRIEF EXERCISE 9-13
The declining-balance rate is 50% (1/4 X 2) and this rate is applied to the
book value at the beginning of the year. The computations are:
Book Value X Rate = Depreciation
*BRIEF EXERCISE 9-14
The depreciation cost per unit is 18 cents per mile computed as follows:
Depreciable cost ($27,500 – $500) ÷ 150,000 = $.18
SOLUTIONS TO DO IT! EXERCISES
DO IT! 9-1
The following four items are expenditures necessary to acquire the truck
and get it ready for use:
Negotiated purchase price ………………………………….. $24,000
DO IT! 9-2a
Depreciation expense =
Cost – Salvage
=
$15,000 – $1,000
= $1,400
Useful life
10 years
DO IT! 9-2b
Original depreciation expense = ($50,000 – $2,000) ÷ 8 years = $6,000
Accumulated depreciation after three years = 3 X $6,000 = $18,000
DO IT! 9-3
(a) Sale of machine for cash at a gain:
Accumulated Depreciation—Equipment ………………… 28,000
(b) Sale of machine for cash at a loss:
Accumulated Depreciation—Equipment ………………… 28,000
DO IT! 9-4
1. Intangible assets
2. Amortization
DO IT! 9-5
SOLUTIONS TO EXERCISES
EXERCISE 9-1
(a) The following points explain the application of the historical cost
principle to plant assets.
1. Under the historical cost principle, the acquisition cost for a plant
2. Cost is measured by the cash paid in a cash transaction, or by the
3. The cash equivalent price is equal to the fair value of the asset
(b) 1. Land 5. Equipment
3. Equipment 7. Prepaid Insurance
EXERCISE 9-2
2. Equipment
4. Land
6. Land Improvements
8. Land
EXERCISE 9-3
(a) Cost of land
Cash paid …………………………………………………………. $80,000
Net cost of removing warehouse ($8,200 – $1,700) … 6,500
(b) The architect’s fee ($9,100) should be debited to the building account.
EXERCISE 9-4
2. True.
4. False. Depreciation applies to three classes of plant assets: land
improvements, building, and equipment.
6. True.
8. True.
9. False. Depreciation expense is reported on the income statement, and
EXERCISE 9-5



$90,000 – $8,000
Straight-line method: = $10,250 per year.
8
EXERCISE 9-6
(a) Type of Asset
Building Warehouse
Cost ……………………………………………….. $700,000 $120,000
Less: Accumulated depreciation ……… 130,000 23,000
(b) Dec. 31 Depreciation Expense ……………………….. 13,375
Accumulated Depreciation—
EXERCISE 9-7
(a) Loss on Disposal of Plant Assets ……………………… 26,000
Accumulated Depreciation—Equipment ……………… 24,000
Equipment…………………………………………………. 50,000
EXERCISE 9-8
Jan. 1 Accumulated Depreciation—Equipment ……….. 62,000
Equipment ……………………………………………… 62,000
June 30 Depreciation Expense ………………………………….. 6,000
Accum. Depreciation—Equipment
Dec. 31 Depreciation Expense ………………………………….. 4,200
Accumulated Depreciation—Equipment
[($25,000 – $4,000) X 1/5] ………………………. 4,200
Exercise 9-9
(a) The amount paid for the equipment is $1, 100
Jan.1 Equipment …………………………………………………… 1,100
Cash ………………………………………………………. 1,100
EXERCISE 9-9 (Continued)
(c) The amount of the gain on disposal is $50 and is derived from the
disposal entry that follows.
EXERCISE 9-10
1. Depreciation is the process of allocating the cost of a long-lived asset
to expense over the asset’s useful life. Because the value of land generally
2. Goodwill is an intangible asset with an indefinite life. According to
generally accepted accounting principles, goodwill is not amortized but
3. This is a violation of the historical cost principle. Because current
market values are subjective and not reliable, they are not used to
EXERCISE 9-11
Dec. 31 Amortization Expense ………………………………. 20,000
EXERCISE 9-12
(a) 1/2/17 Patents ………………………………………………. 280,000
Cash ……………………………………………. 280,000
7/1/17 Franchise …………………………………………… 540,000