CHAPTER 9
SOLUTIONS TO EXERCISES—SET B
EXERCISE 9-1B
(a) Cost of land
Cash paid …………………………………………………………. $ 90,000
Net cost of removing warehouse ($8,200 – $2,000) … 6,200
(b) The architect’s fee ($7,000) should be debited to the building account.
EXERCISE 9-2B
2. Equipment
4. Land
6. Land Improvements
8. Land
EXERCISE 9-3B
(a) Cost of land
Cash paid …………………………………………………………. $110,000
Net cost of removing warehouse ($4,000 – $2,000) … 2,000
(b) The architect’s fee ($10,000) should be debited to the building
EXERCISE 9-4B
1. True.
2. True.
4. True.
6. True.
8. True.
10. False. Three factors affect the computation of depreciation: cost, useful
life, and salvage value (also called residual value).
EXERCISE 9-5B
$120,000 – $8,000
Straight–linemethod: = $14,000peryear.
8
EXERCISE 9-6B
(a) Type of Asset
Building Warehouse
Book value, 1/1/14 …………………………... $728,000 $92,400
(b) Dec. 31 Depreciation Expense ……………………….. 16,200
EXERCISE 9-7B
(a) Loss on Disposal of Plant Assets ……………………… 46,000
Accumulated Depreciation—Equipment ……………… 22,000
Equipment…………………………………………………. 68,000
(c) Accumulated Depreciation—Equipment ……………. 22,000
EXERCISE 9-8B
Jan. 1 Accumulated Depreciation—Equipment ……….. 78,000
Equipment ……………………………………………… 78,000
June 30 Depreciation Expense ………………………………….. 5,000
Accum. Depreciation—Equipment
($30,000 X 1/3 X 6/12) ……………………………. 5,000
Dec. 31 Depreciation Expense ………………………………….. 5,000
Accumulated Depreciation—Equipment
[($30,000 – $5,000) X 1/5] ………………………. 5,000
EXERCISE 9-9B
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
EXERCISE 9-9B (Continued)
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 9-10B
(a)
$37,953
Asset turnover = = 1.53
($24,000 + $25,633) ÷ 2
EXERCISE 9-11B
(a)
Without new products
With new products
Return on assets
$700,000
= .14
$1,800,000
= .12
$5,000,000
$15,000,000
Profit margin
= .07
$1,800,000
= .09
$10,000,000
$5,000,000
$15,000,000
(b) The return on assets declined from 14% to 12%. This means that the
company is not generating as much income from each dollar invested
in assets. It is common for companies to try to maximize their return on
EXERCISE 9-12B
(a)
($ in millions)
1. Return on assets
$300.2
= 6.9%
($4,450.6 + $4,254.3) ÷ 2
2. Asset turnover
= 3.3 times
($4,450.6 + $4,254.3) ÷ 2
(b) Profit Margin X Asset Turnover = Return on Assets
(c) Asset turnover and profit margin vary considerably across industries.
Therefore, when you have a diverse group of businesses from several
EXERCISE 9-13B
Dec. 31 Amortization Expense ………………………………. 20,000
Copyright ($200,000 X 1/10) ………………… 20,000
EXERCISE 9-14B
(a) 1/2/14 Patent …………………………..……………………. 250,000
Cash …………………………………………….. 250,000
4/1/14 Goodwill …………………………………………….. 450,000
Cash …………………………………………….. 450,000
(b) Amortization Expense……………………………………… 85,000
Patent ($250,000 ÷ 5) …………………………………. 50,000
Franchise [($630,000 ÷ 9) X 6/12] ……………….. 35,000
EXERCISE 9-15B
Ta’lon Communications Inc.’s change of accounting policy to amortize
broadcast rights will probably increase its reported income. Prior to the
EXERCISE 9-16B
(a) A company should depreciate its buildings because depreciation is
necessary in order to allocate the cost of the buildings to the periods
in which they are in use. This allows the cost of the buildings to be
matched against the revenues generated each year in accordance with
the expense recognition principle.
(d) Typical company or product trade names are:
Clothes—Gap, Gitano, Dockers, Calvin Klein, Chaus, Guess.
Perfume—Passion, Ruffles, Chanel No. 5, Diamonds.
Cars—TransAm, Nova, Prelude, Coupe DeVille, Eclipse.
EXERCISE 9-17B
Net Income
10-year life
15-year life
$74,000
$113,000*
Calculation of net cash provided by operating activities:
Net income $ 74,000 $113,000
*EXERCISE 9-18B
(a) Depreciation cost per unit is $.70 per mile [($120,000 – $8,000) ÷ 160,000].
(b) Computation End of Year
Annual
Units of Depreciation Depreciation Accumulated Book
Years Activity X Cost/Unit = Expense Depreciation Value
2014 40,000 $.70 $28,000 $ 28,000 $92,000
*EXERCISE 9-19B
(a) Declining-balance method:
2014 depreciation = $120,000 X 25%* X 3/12 = $7,500
(b) Units-of-activity method:
$120,000 $8,000 $1.40 per hour (rounded)
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