Chapter 9
Plant Assets, Natural Resources, and Intangibles
Review Questions
1. Define property, plant, and equipment. Provide some examples.
Property, plant, and equipment are long-lived, tangible assets used in the operation of a business.
2. Plant assets are recorded at historical cost. What does the historical cost of a plant asset include?
3. How do land improvements differ from land?
4. What does the word capitalize mean?
Capitalize means that an asset account was debited (increased) because the company acquired an
asset. Capitalized assets, except for land, are depreciated over their useful lives.
5. What is a lump-sum purchase, and how is it accounted for?
6. What is the difference between a capital expenditure and a revenue expenditure? Give an example
of each.
A capital expenditure is debited to an asset account because it increases the asset’s capacity or
9-2
7. What is depreciation? Define useful life, residual value, and depreciable cost.
Depreciation is the allocation of a plant asset’s cost to expense over its useful life. Depreciation
8. Which depreciation method ignores residual value until the last year of depreciation? Why?
9. How does a business decide which depreciation method is best to use?
A business should match an asset’s expense against the revenue that the asset produces when
10. What is the depreciation method that is used for tax accounting purposes? How is it different than
the methods that are required by GAAP to be used for financial accounting purposes?
11. If a business changes the estimated useful life or estimated residual value of a plant asset, what must
the business do in regard to depreciation expense?
When a company makes an accounting change in estimate, generally accepted accounting principles
12. What financial statement are property, plant, and equipment reported on, and how?
Property, plant and equipment are reported at book value on the balance sheet. Companies may
9-3
13. How is discarding of a plant asset different from selling a plant asset?
14. How is gain or loss determined when disposing of plant assets? What situation constitutes a gain?
What situation constitutes a loss?
Gain or loss is determined by comparing the cash received and the market value of any other assets
15. What is a natural resource? What is the process by which businesses spread the allocation of a
natural resource’s cost over its usage?
16. What is an intangible asset? Provide some examples.
Intangible assets are assets that have no physical form. Instead, these assets convey special rights
17. What is the process by which businesses spread the allocation of an intangible asset’s cost over its
useful life?
18. What is goodwill? Is goodwill amortized? What happens if the value of goodwill has decreased at
the end of the year?
Goodwill is the excess of the cost of an acquired company over the sum of the market values of its
19. What does the asset turnover ratio measure, and how is it calculated?
20A. What does it mean if an exchange of plant assets has commercial substance? Are gains and losses
recorded on the books because of the exchange?
An exchange has commercial substance if the future cash flows change as a result of the
9-5
Short Exercises
S9-1 Determining the cost of an asset
Learning Objective 1
Highland Clothing purchased land, paying $96,000 cash and signing a $300,000 note payable. In
addition, Highland paid delinquent property tax of $1,100, title insurance costing $600, and $4,600 to
level the land and remove an unwanted building. Record the journal entry for purchase of the land.
SOLUTION
Purchase price of land
$ 396,000
Add related costs:
Property taxes in arrears
Title insurance
Removal of building
Total cost of land
$ 402,300
9-6
S9-2 Making a lump-sum asset purchase
Learning Objective 1
Concord Pet Care Clinic paid $210,000 for a group purchase of land, building, and equipment. At the
time of the acquisition, the land had a market value of $110,000, the building $88,000, and the
equipment $22,000. Journalize the lump-sum purchase of the three assets for a total cost of $210,000,
the amount for which the business signed a note payable.
SOLUTION
Asset
Market
Value
Percentage of Total Value
× Total
Purchase
Price
= Assigned
Cost of
Each Asset
Land
$ 110,000
$110,000 / $220,000 = 50%
× $210,000
= $ 105,000
S9-3 Computing first-year depreciation and book value
Learning Objective 2
On January 1, 2018, Air Canadians purchased a used airplane for $37,000,000. Air Canadians expects
the plane to remain useful for five years (4,000,000 miles) and to have a residual value of $5,000,000.
The company expects the plane to be flown 1,400,000 miles during the first year.
Requirements
1. Compute Air Canadians’s first-year depreciation expense on the plane using the following
methods:
a. Straight-line
b. Units-of-production
c. Double-declining-balance
2. Show the airplane’s book value at the end of the first year for all three methods.
Building
× $210,000
Equipment
× $210,000
Total
$ 220,000
Debit
9-7
SOLUTION
Requirement 1
a.
Straight-line
=
(Cost − Residual value) / Useful life
=
($37,000,000 ̶ $5,000,000) / 5 years
=
$6,400,000 per year
Requirement 2
Straight-line
Units-of-production
Double-declining-
balance
Cost
Less: Accumulated Depreciation
Book value
S9-4 Computing second-year depreciation and accumulated depreciation
Learning Objective 2
On January 1, 2018, Advanced Airline purchased a used airplane at a cost of $60,500,000. Advanced
Airline expects the plane to remain useful for eight years (5,000,000 miles) and to have a residual value
of $5,500,000. Advanced Airline expects the plane to be flown 1,100,000 miles the first year and
1,200,000 miles the second year.
Requirements
1. Compute second-year (2019) depreciation expense on the plane using the following methods:
a. Straight-line
b. Units-of-production
c. Double-declining-balance
2. Calculate the balance in Accumulated Depreciation at the end of the second year for all three
methods.
b.
Depreciation per unit
=
(Cost – Residual value) / Useful life in units
($37,000,000 ̶ $5,000,000) / 4,000,000 miles
=
$8 per mile
Units-of-production
=
Depreciation per unit × Current year usage
=
$8 per mile × 1,400,000 miles
=
$11,200,000 for year 1
c.
Double-declining-balance
=
(Cost – Accumulated depreciation) × 2 × (1 / Useful life)
=
($37,000,000 ̶ $0) × 2 × (1/ 5 years)
=
$14,800,000 for year 1
9-8
SOLUTION
Requirement 1
a.
Straight-line
=
(Cost − Residual value) / Useful life
=
($60,500,000 ̶ $5,500,000) / 8 years
Requirement 2
Straight-line
Units-of-
production
Double-declining-
balance
Depreciation Expense – Year 1
$ 6,875,000
$ 12,100,000
$ 15,125,000
Depreciation Expense – Year 2
Total Accumulated Depreciation
$ 25,300,000
$ 26,468,750
S9-5 Calculating partial-year depreciation
Learning Objective 2
On February 28, 2017, Rural Tech Support purchased a copy machine for $53,400. Rural Tech Support
expects the machine to last for six years and have a residual value of $3,000. Compute depreciation
expense on the machine for the year ended December 31, 2017, using the straight-line method.
=
b.
Depreciation per unit
=
(Cost – Residual value) / Useful life in units
($60,500,000 ̶ $5,500,000) / 5,000,000 miles
=
$11 per mile
Units-of-production
=
Depreciation per unit × Current year usage
=
$11 per mile × 1,100,000 miles
=
$12,100,000 in Year 1
=
Depreciation per unit × Current year usage
=
$11 per mile × 1,200,000 miles
=
c.
Double-declining-balance
=
(Cost – Accumulated depreciation) × 2 × (1 / Useful life)
=
($60,500,000 ̶ $0) × 2 × (1/ 8 years)
=
$15,125,000 in Year 1
=
(Cost – Accumulated depreciation) × 2 × (1 / Useful life)
=
($60,500,000 ̶ $15,125,000) × 2 × (1/ 8 years)
=
9-9
SOLUTION
Straight-line
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
S9-6 Changing the estimated life of an asset
Learning Objective 2
Assume that Smith’s Auto Sales paid $45,000 for equipment with a 15-year life and zero expected
residual value. After using the equipment for six years, the company determines that the asset will
remain useful for only five more years.
Requirements
1. Record depreciation expense on the equipment for Year 7 by the straight-line method.
2. What is accumulated depreciation at the end of Year 7?
SOLUTION
Requirement 1
Straight-line
=
(Cost − Residual value) / Useful life
=
($45,000 ̶ $0) / 15 years
=
$3,000 per year
Accumulated depreciation after 6 years
=
$3,000 per year × 6 years
=
$18,000
Book value after 6 years
=
(Cost – Accumulated Depreciation)
=
$45,000 ̶ $18,000
=
$27,000
Revised depreciation
=
(Book value − Revised residual value) / Revised useful life remaining
($27,000 ̶ $0) / 5 years
=
$5,400 per year
=
($53,400 ̶ $3,000) / 6 years × (10/12)
=
$7,000
9-10
Requirement 2
Straight-line
Depreciation Expense – Years 1– 6
$ 18,000
S9-7 Discarding of a fully depreciated asset
Learning Objective 3
On June 15, 2017, Family Furniture discarded equipment that had a cost of $27,000, a residual value of
$0, and was fully depreciated. Journalize the disposal of the equipment.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
June 15
Accumulated Depreciation—Equipment
27,000
27,000
S9-8 Discarding an asset
Learning Objective 3
On October 31, 2018, Alternative Landscapes discarded equipment that had a cost of $26,920.
Accumulated Depreciation as of December 31, 2017, was $25,000. Assume annual depreciation on the
equipment is $1,920. Journalize the partial-year depreciation expense and disposal of the equipment.
SOLUTION
Partial year depreciation = $1,920 × 10/12 = $1,600
Market value of assets received
Less: Book value of asset disposed of
Less: Accumulated Depreciation ($25,000 + $1,600)
Gain or (Loss)
Depreciation Expense – Year 7
Total Accumulated Depreciation
$ 23,400
9-11
Date
Accounts and Explanation
Debit
Credit
Oct. 31
Depreciation Expense—Equipment
1,600
Accumulated Depreciation—Equipment
1,600
S9-9 Selling an asset at gain or loss
Learning Objective 3
Alpha Communication purchased equipment on January 1, 2018, for $27,500. Suppose Alpha
Communication sold the equipment for $20,000 on December 31, 2020. Accumulated Depreciation as of
December 31, 2020, was $10,000. Journalize the sale of the equipment, assuming straight-line
depreciation was used.
SOLUTION
Market value of assets received
$ 20,000
Less: Book value of asset disposed of
Cost
Less: Accumulated Depreciation
17,500
Gain or (Loss)
Date
Credit
Dec. 31
Cash
Accumulated Depreciation—Equipment
Equipment
Gain on Disposal
2,500
S9-10 Selling an asset at gain or loss
Learning Objective 3
Peter Company purchased equipment on January 1, 2018, for $28,000. Suppose Peter Company sold the
equipment for $4,000 on December 31, 2019. Accumulated Depreciation as of December 31, 2019, was
$11,000. Journalize the sale of the equipment, assuming straight-line depreciation was used.
Accumulated Depreciation—Equipment
Loss on Disposal
Equipment
9-12
SOLUTION
Market value of assets received
$ 4,000
S9-11 Accounting for depletion of natural resources
Learning Objective 4
Ajax Petroleum holds huge reserves of oil assets. Assume that at the end of 2018, Ajax Petroleum’s cost
of oil reserves totaled $27,000,000, representing 3,000,000 barrels of oil.
Requirements
1. Which method does Ajax Petroleum use to compute depletion?
2. Suppose Ajax Petroleum removed and sold 500,000 barrels of oil during 2019. Journalize depletion
expense for 2019.
SOLUTION
Requirement 1
Requirement 2
Depletion per unit
=
(Cost – Residual value) / Estimated total units
=
$9 per barrel
Depletion expense
=
Depletion per unit × Number of units extracted
=
$9 per barrel × 500,000 barrels
=
$4,500,000
Less: Book value of asset disposed of
Cost
$ 28,000
Less: Accumulated Depreciation
17,000
Gain or (Loss)
Date
Accounts and Explanation
Credit
S9-12 Accounting for an intangible asset
Learning Objective 5
On October 1, 2018, Modern Company purchased a patent for $153,600 cash. Although the patent gives
legal protection for 20 years, the patent is expected to be used for only eight years.
Requirements
1. Journalize the purchase of the patent.
2. Journalize the amortization expense for the year ended December 31, 2018. Assume straight-line
amortization.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Credit
Requirement 2
Date
Accounts and Explanation
Debit
Credit
S9-13 Accounting for goodwill
Learning Objective 5
Decca Publishing paid $230,000 to acquire Thrifty Nickel, a weekly advertising paper. At the time of the
acquisition, Thrifty Nickel’s balance sheet reported total assets of $130,000 and liabilities of $70,000.
The fair market value of Thrifty Nickel’s assets was $100,000. The fair market value of Thrifty Nickel’s
liabilities was $70,000.
9-14
Requirements
1. How much goodwill did Decca Publishing purchase as part of the acquisition of Thrifty Nickel?
2. Journalize Decca Publishing’s acquisition of Thrifty Nickel.
SOLUTION
Requirement 1
Purchase price to acquire Thrifty Nickel
$ 230,000
Requirement 2
Date
Accounts and Explanation
Credit
Assets
Goodwill
230,000
S9-14 Computing the asset turnover ratio
Learning Objective 6
Biagas, Inc. had net sales of $55,600,000 for the year ended May 31, 2018. Its beginning and ending
total assets were $52,800,000 and $98,500,000, respectively. Determine Biagas’s asset turnover ratio for
year ended May 31, 2018.
SOLUTION:
Asset turnover ratio
=
Net sales / Average total assets
=
$55,600,000 / [($52,800,000 + $98,500,000) / 2]
=
$55,600,000 / $75,650,000
=
0.73 times (rounded)
Market value of Thrifty Nickel’s assets
Less: Thrifty Nickel’s liabilities
Market value of Thrifty Nickel’s net assets
Goodwill
$ 200,000
9-15
S9A-15 Exchanging plant assets
Learning Objective 7 Appendix 9A
Micron Precision, Inc. purchased a computer for $2,500, debiting Computer Equipment. During 2016
and 2017, Micron Precision, Inc. recorded total depreciation of $1,600 on the computer. On January 1,
2018, Micron Precision, Inc. traded in the computer for a new one, paying $2,100 cash. The fair market
value of the new computer is $3,900. Journalize Micron Precision, Inc.’s exchange of computers.
Assume the exchange had commercial substance.
SOLUTION
Market value of assets received
$ 3,900
Less:
Date
Accounts and Explanation
Debit
Credit
Jan. 1
Computer Equipment (new)
3,900
Accumulated Depreciation—Computer Equipment
1,600
2,500
2,100
S9A-16 Exchanging plant assets
Learning Objective 7 Appendix 9A
White Corporation purchased equipment for $22,000. White recorded total depreciation of $19,000 on
the equipment. On January 1, 2018, White traded in the equipment for new equipment, paying $23,200
cash. The fair market value of the new equipment is $25,100. Journalize White Corporation’s exchange
of equipment. Assume the exchange had commercial substance.
Cash paid
Gain or (Loss)
$ 900
SOLUTION
Market value of assets received
$ 25,100
Less:
Book value of asset exchanged
(19,000)
Cash paid
Gain or (Loss)
9-17
Exercises
E9-17 Determining the cost of assets
Learning Objective 1
1. Land $333,000
Lawson Furniture purchased land, paying $65,000 cash and signing a $250,000 note payable. In
addition, Lawson paid delinquent property tax of $5,000, title insurance costing $4,000, and $9,000 to
level the land and remove an unwanted building. The company then constructed an office building at a
cost of $400,000. It also paid $54,000 for a fence around the property, $12,000 for a sign near the
entrance, and $8,000 for special lighting of the grounds.
Requirements
1. Determine the cost of the land, land improvements, and building.
2. Which of these assets will Lawson depreciate?
SOLUTION
Requirement 1
Land
Requirement 2
E9-18 Making a lump-sum purchase of assets
Learning Objective 1
Lot 3 $177,500
Maplewood Properties bought three lots in a subdivision for a lump-sum price. An independent
appraiser valued the lots as follows:
Lot
Appraised
Value
1
$ 144,000
2
96,000
3
240,000
Maplewood paid $355,000 in cash. Record the purchase in the journal, identifying each lot’s cost in a
separate Land account. Round decimals to two places, and use the computed percentages throughout.
SOLUTION
Asset
Market
Value
Percentage of Total Value
× Total
Purchase
Price
= Assigned
Cost of
Each Asset
Lot 1
$ 144,000
$144,000 / $480,000 = 30%
× $355,000
= $ 106,500
Lot 2
× $355,000
= 71,000
Lot 3
$240,000 / $480,000 = 50%
× $355,000
Total
$ 480,000
E9-19 Distinguishing capital expenditures from revenue expenditures
Learning Objective 1
Consider the following expenditures:
a. Purchase price.
b. Ordinary recurring repairs to keep the machinery in good
working order.
c. Lubrication before machinery is placed in service.
d. Periodic lubrication after machinery is placed in service.
e. Major overhaul to extend useful life by three years.
f. Sales tax paid on the purchase price.
g. Transportation and insurance while machinery is in transit from
seller to buyer.
h. Installation.
i. Training of personnel for initial operation of the machinery.
Classify each of the expenditures as a capital expenditure or a revenue expenditure related to machinery.
SOLUTION
a.
Capital expenditure
Revenue expenditure
c.
Capital expenditure
Revenue expenditure
e.
Capital expenditure
Capital expenditure
Capital expenditure
Capital expenditure
Capital expenditure
E9-20 Computing depreciation—three methods
Learning Objective 2
1. Double-declining-balance, 12/31/19, Exp. $8,250
Crispy Fried Chicken bought equipment on January 2, 2018, for $33,000. The equipment was expected
9-20
Requirements
1. Prepare a schedule of depreciation expense, accumulated depreciation, and book value per year for
the equipment under the three depreciation methods: straight-line, units-of-production, and double-
declining-balance. Show your computations. Note: Three depreciation schedules must be prepared.
2. Which method tracks the wear and tear on the equipment most closely?
SOLUTION
Requirement 1
Depreciable cost = Cost − Residual value = $33,000 − $6,000 = $27,000
Straight-Line Depreciation Schedule
Depreciation for the Year
Date
Asset
Cost
Depreciable
Cost
Depreciation
Rate
Depreciation
Expense
Accumulated
Depreciation
Book
Value
Depreciation per unit
=
(Cost – Residual value) / Useful life in units
=
$4 per hour
Units-of-Production Depreciation Schedule
Depreciation for the Year
Date
Asset
Cost
Depreciation
per Unit
Number
of Units
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1/02/18
$ 33,000
$ 33,000
1/02/18
$33,000
$ 33,000
E9-20, cont.
Requirement 1, cont.
Double-Declining-Balance Depreciation Schedule
Depreciation for the Year
Date
Asset
Cost
Book
Value
DDB
Rate
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1/02/18
$ 33,000
$ 33,000
Requirement 2
E9-21 Changing an asset’s useful life and residual value
Learning Objective 2
Yr. 16 $14,350
Salem Hardware Consultants purchased a building for $540,000 and depreciated it on a straight-line
basis over a 40-year period. The estimated residual value is $100,000. After using the building for 15
years, Salem realized that wear and tear on the building would wear it out before 40 years and that the
estimated residual value should be $88,000. Starting with the 16th year, Salem began depreciating the
building over a revised total life of 35 years using the new residual value. Journalize depreciation
expense on the building for years 15 and 16.
SOLUTION
Straight-line depreciation
=
(Cost − Residual value) / Useful life
=
Accumulated depreciation after 15 years
=
$11,000 per year × 15 years
=
$165,000
Book value after 15 years
=
(Cost – Accumulated Depreciation)
$540,000 ̶ $165,000
=
$375,000
Revised depreciation
=
(Book value − Revised residual value) / Revised useful life remaining
=
9-22
Date
Accounts and Explanation
Debit
Credit
Year 15
Depreciation Expense—Building
11,000
E9-22 Recording partial-year depreciation and sale of an asset
Learning Objectives 2, 3
Depr. Exp. $3,400
On January 2, 2017, Comfy Clothing Consignments purchased showroom fixtures for $17,000 cash,
expecting the fixtures to remain in service for five years. Comfy has depreciated the fixtures on a
double-declining-balance basis, with zero residual value. On October 31, 2018, Comfy sold the fixtures
for $7,600 cash. Record both depreciation expense for 2018 and sale of the fixtures on October 31,
2018.
SOLUTION
Double-declining-balance
=
(Cost – Accumulated depreciation) × 2 × (1 / Useful life)
($17,000 ̶ $0) × 2 × (1/5 years)
=
$6,800 in year 1
=
(Cost – Accumulated depreciation) × 2 × (1 / Useful life)
($17,000 ̶ $6,800) × 2 × (1/ 5 years) × 10/12
=
Market value of assets received
Less: Book value of asset disposed of
Cost
$ 17,000
Less: Accumulated Depreciation ($6,800 + $3,400)
Gain or (Loss)
Date
Accounts and Explanation
Debit
Credit
9-23
E9-23 Recording partial-year depreciation and sale of an asset
Learning Objectives 2, 3
Loss $(2,000)
On January 2, 2016, Pet Spa purchased fixtures for $37,800 cash, expecting the fixtures to remain in
service for six years. Pet Spa has depreciated the fixtures on a straight-line basis, with $9,000 residual
value. On May 31, 2018, Pet Spa sold the fixtures for $24,200 cash. Record both depreciation expense
for 2018 and sale of the fixtures on May 31, 2018.
SOLUTION
Straight-line depreciation
=
(Cost − Residual value) / Useful life
=
($37,800 ̶ $9,000) / 6 years
=
$4,800 per year (2016 and 2017)
Date
Accounts and Explanation
Debit
Credit
May 31
Depreciation Expense—Fixtures
2,000
Accumulated Depreciation—Fixtures
2,000
Cash
Accumulated Depreciation—Fixtures
Loss on Disposal
2,000
Fixtures
=
(Cost − Residual value) / Useful life
($37,800 ̶ $9,000) / 6 years × 5/12
=
Market value of assets received
Less: Book value of asset disposed of
Cost
$ 37,800
Less: Accumulated Depreciation ($4,800 + $4,800 + $2,000)
Gain or (Loss)
E9–24 Journalizing natural resource depletion
Learning Objective 4
$1.30 per ton
Cannon Mountain Mining paid $462,300 for the right to extract mineral assets from a 400,000-ton
deposit. In addition to the purchase price, Cannon also paid a $900 filing fee, a $1,800 license fee to the
state of Nevada, and $55,000 for a geological survey of the property. Because Cannon purchased the
rights to the minerals only and did not purchase the land, it expects the asset to have zero residual value.
During the first year, Cannon removed and sold 50,000 tons of the minerals. Make journal entries to
record (a) purchase of the minerals (debit Minerals), (b) payment of fees and other costs, and (c)
depletion for the first year.
SOLUTION
Purchase price of minerals
$ 462,300
Add related costs:
Filing fee
License
Geological survey
Total cost of minerals
$ 520,000
Depletion per unit
=
(Cost – Residual value) / Estimated total units
=
($520,000 ̶ $0) / 400,000 tons
=
$1.30 per ton
Depletion expense
=
Depletion per unit × Number of units extracted
=
$1.30 per ton × 50,000 tons
=
$65,000
9-25
E9-25 Handling acquisition of patent, amortization, and change in useful life
Learning Objectives 2, 5
2. Amort. Exp. $50,000
Melbourn Printers (MP) manufactures printers. Assume that MP recently paid $200,000 for a patent on a
new laser printer. Although it gives legal protection for 20 years, the patent is expected to provide a
competitive advantage for only eight years.
Requirements
1. Assuming the straight-line method of amortization, make journal entries to record (a) the purchase
of the patent and (b) amortization for the first full year.
2. After using the patent for four years, MP learns at an industry trade show that another company is
designing a more efficient printer. On the basis of this new information, MP decides, starting with
Year 5, to amortize the remaining cost of the patent over two remaining years, giving the patent a
total useful life of six years. Record amortization for Year 5.
SOLUTION
Requirement 1
Amortization expense
=
(Cost – Residual value) / Useful life
=
($200,000 ̶ $0) / 8 years
=
$25,000
9-26
Requirement 2
Accumulated amortization after 4 years
=
$25,000 per year × 4 years
=
$100,000
E9-26 Measuring and recording goodwill
Learning Objective 5
1. Goodwill $1,000,000
Princeton has acquired several other companies. Assume that Princeton purchased Kelleher for
$9,000,000 cash. The book value of Kelleher’s assets is $19,000,000 (market value, $20,000,000), and it
has liabilities of $12,000,000 (market value, $12,000,000).
Requirements
1. Compute the cost of the goodwill purchased by Princeton.
2. Record the purchase of Kelleher by Princeton.
SOLUTION
Requirement 1
Purchase price to acquire Kelleher
$ 9,000,000
Market value of Kelleher’s assets
$ 20,000,000
Less: Kelleher’s liabilities
Market value of Kelleher’s net assets
Goodwill
Book value after 4 years
=
(Cost – Accumulated Amortization)
$200,000 ̶ $100,000
=
$100,000
Revised amortization
=
(Book value − Revised residual value) / Revised useful life remaining
=
9-27
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Assets
20,000,000
E9-27 Computing asset turnover ratio
Learning Objective 6
Blackerby Photo reported the following figures on its December 31, 2018, income statement and balance
sheet:
Net sales
$ 441,000
Dec. 31,
2018
Dec. 31,
2017
Cash
$ 31,000
$ 30,000
Accounts Receivable
68,000
65,000
Merchandise Inventory
80,000
79,000
Prepaid Expenses
16,000
5,000
Property, plant, and equipment,
net
175,000
18,000
Compute the asset turnover ratio for 2018 Round to two decimal places.
SOLUTION
Dec. 31, 2018
Dec. 31, 2017
Cash
$ 31,000
$ 30,000
Accounts Receivable
Merchandise Inventory
Prepaid Expenses
Property, plant, and equipment, net
Total Assets
Asset turnover ratio
Net sales / Average total assets
$441,000 / [($370,000 + $197,000) / 2]
$441,000 / $283,500
1.56 times (rounded)
Goodwill
12,000,000
9-28
E9A-28 Exchanging assets—two situations
Learning Objective 7 Appendix 9A
2. Loss $(7,000)
Partner Bank recently traded in office fixtures. Here are the facts:
Old fixtures:
New fixtures:
Cost, $91,000
Cash paid, $110,000
Accumulated depreciation,
$68,000
Market value,
$133,000
Requirements
1. Record Partner Bank’s trade-in of old fixtures for new ones. Assume the exchange had commercial
substance.
2. Now let’s change one fact. Partner Bank feels compelled to do business with Elm Furniture, a bank
customer, even though the bank can get the fixtures elsewhere at a better price. Partner Bank is
aware that the new fixtures’ market value is only $126,000. Record the trade-in. Assume the
exchange had commercial substance.
SOLUTION
Requirement 1
Market value of assets received
$133,000
Less:
Book value of asset exchanged
Cash paid
Gain or (Loss)
$ 0
9-29
Requirement 2
Market value of assets received
$ 126,000
Less:
E9A-29 Measuring asset cost, units-of-production depreciation, and asset trade
Learning Objectives 1, 2, 7 Appendix 9A
1. $11,880
Wimot Trucking Corporation uses the units-of-production depreciation method because units-of-
production best measures wear and tear on the trucks. Consider these facts about one Mack truck in the
company’s fleet.
When acquired in 2015, the rig cost $360,000 and was expected to remain in service for 10 years or
1,000,000 miles. Estimated residual value was $90,000. The truck was driven 80,000 miles in 2015,
120,000 miles in 2016, and 160,000 miles in 2017. After 44,000 miles, on March 15, 2018, the company
traded in the Mack truck for a less expensive Freightliner. Wimot also paid cash of $20,000. Fair market
value of the Mack truck was equal to its net book value on the date of the trade.
Requirements
1. Record the journal entry for depreciation expense in 2018.
2. Determine Wimot’s cost of the new truck.
3. Record the journal entry for the exchange of assets on March 15, 2018. Assume the exchange had
commercial substance.
Book value of asset exchanged
Cash paid
(133,000)
Gain or (Loss)
$ (7,000)
9-30
SOLUTION
Requirement 1
Depreciation per unit
=
(Cost – Residual value) / Useful life in units
=
$0.27 per mile
Units-of-production
=
Depreciation per unit × Current year usage
=
$0.27 per mile × 80,000 miles
=
$21,600 in 2015
=
Depreciation per unit × Current year usage
=
$0.27 per mile × 120,000 miles
=
$32,400 in 2016
=
Depreciation per unit × Current year usage
=
$0.27 per mile × 160,000 miles
=
$43,200 in 2017
=
Depreciation per unit × Current year usage
=
$0.27 per mile × 44,000 miles
=
$11,880 in 2018
Total accumulated depreciation
=
$21,600 + $32,400 + $43,200 + $11,880
=
$109,080
9-31
E9A-29, cont.
Requirement 2
Market value of assets received
$270,920
Requirement 3
Date
Accounts and Explanation
Credit
Mar. 15
Truck (new)
Accumulated Depreciation—Truck
360,000
Less:
Book value of asset exchanged
$ 360,000
Cash paid
Gain or (Loss)
9-32
Problems (Group A)
P9-30A Determining asset cost and recording partial-year depreciation, straight-line
Learning Objectives 1, 2
1. Bldg. $461,100
Discount Parking, near an airport, incurred the following costs to acquire land, make land
improvements, and construct and furnish a small building:
a. Purchase price of three acres of land
$
80,000
b. Delinquent real estate taxes on the land to be paid by Discount Parking
6,300
c. Additional dirt and earthmoving
9,000
d. Title insurance on the land acquisition
3,200
e. Fence around the boundary of the property
9,600
f. Building permit for the building
1,000
g. Architect’s fee for the design of the building
20,700
h. Signs near the front of the property
9,300
i. Materials used to construct the building
215,000
j. Labor to construct the building
175,000
k. Interest cost on construction loan for the building
9,400
l. Parking lots on the property
28,500
m. Lights for the parking lots
11,200
n. Salary of construction supervisor (80% to building; 20% to parking lot and concrete
walks)
50,000
o. Furniture
11,200
p. Transportation of furniture from seller to the building
2,200
q. Additional fencing
6,600
Discount Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture
over 10 years, all on a straight-line basis with zero residual value.
Requirements
1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for
each cost by listing the cost under the correct account. Determine the total cost of each asset.
2. All construction was complete and the assets were placed in service on October 1. Record partial-
year depreciation expense for the year ended December 31. Round to the nearest dollar.
9-33
SOLUTION
Requirement 1
Land
Land
Improvements
Building
Furniture
Purchase price
$ 80,000
Real estate taxes
6,300
Requirement 2
Straight-line
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
Land Improvements
=
($75,200 ̶ $0) / 15 years × (3/12)
=
$1,253 (rounded)
($461,100 ̶ $0) / 40 years × (3/12)
=
$2,882 (rounded)
Furniture
=
($13,400 ̶ $0) / 10 years × (3/12)
=
$335
Dirt and earthmoving
9,000
Title insurance
3,200
Fence
Building permit
$ 1,000
Architect’s fee
Signs
Building materials
Building labor
Interest on construction loan
Parking lots
Lights for parking lots
Salary of construction supervisor
Furniture
Transportation of furniture
Additional fencing
Totals
$ 461,100
9-34
P9-30A, cont.
Requirement 2, cont.
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Depreciation Expense—Land Improvements
1,253
Accumulated Depreciation—Land Improvements
1,253
To record depreciation on land improvements.
P9-31A Determining asset cost, preparing depreciation schedules (3 methods), and identifying
depreciation results that meet management objectives
Learning Objectives 1, 2
1. Units-of-production, 12/31/18, Dep. Exp. $24,000
On January 3, 2018, Rapid Delivery Service purchased a truck at a cost of $100,000. Before placing the
truck in service, Rapid spent $3,000 painting it, $600 replacing tires, and $10,400 overhauling the
engine. The truck should remain in service for five years and have a residual value of $12,000. The
truck’s annual mileage is expected to be 32,000 miles in each of the first four years and 8,000 miles in
the fifth year—136,000 miles in total. In deciding which depreciation method to use, Andy Sargeant, the
general manager, requests a depreciation schedule for each of the depreciation methods (straight-line,
units-of-production, and double-declining-balance).
Requirements
1. Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation
expense, accumulated depreciation, and asset book value.
2. Rapid prepares financial statements using the depreciation method that reports the highest net
income in the early years of asset use. Consider the first year that Rapid uses the truck. Identify the
depreciation method that meets the company’s objectives.
Depreciation Expense—Building
2,882
Accumulated Depreciation—Building
2,882
To record depreciation on building.
Depreciation Expense—Furniture
Accumulated Depreciation—Furniture
To record depreciation on furniture.
9-35
SOLUTION
Requirement 1
Purchase price of truck
$ 100,000
Depreciable cost = Cost − Residual value = $114,000 − $12,000 = $102,000
Straight-Line Depreciation Schedule
Depreciation for the Year
Date
Asset
Cost
Depreciable
Cost
Depreciation
Rate
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1/03/18
$ 114,000
$ 114,000
Add related costs:
Painting
Tires
Engine overhaul
Total cost of truck
$ 114,000
Depreciation per unit
(Cost – Residual value) / Useful life in units
$0.75 per mile
P9-31A, cont.
Requirement 1, cont.
Units-of-Production Depreciation Schedule
Depreciation for the Year
Date
Asset
Cost
Depreciation
per Unit
Number
of Units
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1/03/18
$ 114,000
$ 114,000
12/31/18
$ 0.75
32,000
$ 24,000
$ 24,000
90,000
12/31/19
0.75
32,000
66,000
12/31/20
0.75
32,000
42,000
12/31/21
0.75
32,000
18,000
12/31/22
0.75
8,000
12,000
Double-Declining-Balance Depreciation Schedule
Depreciation for the Year
Date
Asset
Cost
Book
Value
DDB
Rate
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1/03/18
$ 114,000
$ 114,000
$ 114,000
$ 45,600
68,400
41,040
24,624
14,774
12,000
Requirement 2
The depreciation method that reports the highest net income in the first year is the straight-line method.
It produces the lowest depreciation expense ($20,400) and therefore the highest net income.
9-37
P9-32A Recording lump-sum asset purchases, depreciation, and disposals
Learning Objectives 1, 2, 3
Sep. 1 Gain $193,250
Ellie Johnson Associates surveys American eating habits. The company’s accounts include Land,
Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated
Depreciation account for each depreciable asset. During 2018, Ellie Johnson Associates completed the
following transactions:
Jan. 1
Purchased office equipment, $113,000. Paid $80,000 cash and
financed the remainder with a note payable.
Apr. 1
Acquired land and communication equipment in a lump-sum purchase.
Total cost was $310,000 paid in cash. An independent appraisal valued
the land at $244,125 and the communication equipment at $81,375.
Sep. 1
Sold a building that cost $520,000 (accumulated depreciation of
$285,000 through December 31 of the preceding year). Ellie Johnson
Associates received $420,000 cash from the sale of the building.
Depreciation is computed on a straight-line basis. The building has a
40-year useful life and a residual value of $25,000.
Dec.
31
Recorded depreciation as follows:
Communication equipment is depreciated by the straight-line method
over a five-year life with zero residual value.
Office equipment is depreciated using the double-declining-balance
method over five years with a $1,000 residual value.
Record the transactions in the journal of Ellie Johnson Associates.
SOLUTION
9-38
Date
Accounts and Explanation
Credit
Jan. 1
Office Equipment
Cash
80,000
Note Payable
33,000
To record purchase of office equipment.
Calculations:
Apr. 1 – Acquisition of land and communication equipment:
Asset
Market
Value
Percentage of Total Value
× Total
Purchase
Price
= Assigned
Cost of
Each Asset
Land
$ 244,125
$244,125 / $325,500 = 75%
× $310,000
= $ 232,500
Comm. Equip.
$81,375 / $325,500 = 25%
× $310,000
= 77,500
Total
$ 325,500
Land
232,500
Communication Equipment
77,500
Cash
310,000
To record purchase of land and comm. equipment.
Depreciation Expense—Building
Accumulated Depreciation—Building
To record depreciation on building.
Cash
420,000
Accumulated Depreciation—Building
293,250
Building
520,000
Gain on Disposal
193,250
To record sale of building.
Dec. 31
Depreciation Expense—Communication Equipment
11,625
Accumulated Depreciation—Comm. Equipment
11,625
To record depreciation on communication equipment.
Depreciation Expense—Office Equipment
45,200
Accumulated Depreciation—Office Equipment
45,200
To record depreciation on office equipment.
P9-32A, cont.
Sep. 1 – Sale of building
Straight-line depreciation
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
=
($520,000 ̶ $25,000) / 40 years × 8/12
=
$8,250 per partial year (2018)
Market value of assets received
$ 420,000
Less: Book value of asset disposed of
Cost
$ 520,000
Less: Accumulated Depreciation ($285,000 + $8,250)
(293,250)
226,750
Gain or (Loss)
$ 193,250
Dec. 31 – Depreciation on communication equipment
Straight-line depreciation
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
=
($77,500 ̶ $0) / 5 years × 9/12
=
$11,625 per partial year (2018)
Dec. 31 – Depreciation on office equipment
Double-declining-balance depreciation
=
(Cost – Accumulated depreciation) × 2 × (1 / Useful life)
=
($113,000 ̶ $0) × 2 × (1/5 years)
=
$45,200 in 2018
P9-33A Accounting for natural resources
Learning Objective 4
Depl. Exp. $548,640
Conseco Oil, Inc. has an account titled Oil and Gas Properties. Conseco paid $6,600,000 for oil reserves
holding an estimated 1,000,000 barrels of oil. Assume the company paid $570,000 for additional
geological tests of the property and $450,000 to prepare for drilling. During the first year, Conseco
removed and sold 72,000 barrels of oil. Record all of Conseco’s transactions, including depletion for the
first year.
SOLUTION
Purchase price of oil reserves
$ 6,600,000
Add related costs:
Geological tests
Drilling preparation
Total cost of oil reserves
$ 7,620,000
Depletion per unit
=
(Cost – Residual value) / Estimated total units
=
($7,620,000 ̶ $0) / 1,000,000 barrels
=
$7.62 per barrel
Depletion expense
=
Depletion per unit × Number of units extracted
=
$7.62 per barrel × 72,000 barrels
=
$548,640
Date
Accounts and Explanation
Debit
Credit
Oil and Gas Properties
6,600,000
Cash
6,600,000
To record purchase of oil reserves.
Oil and Gas Properties
1,020,000
Cash
1,020,000
oil reserves.
Depletion Expense—Oil and Gas Properties
Accumulated Depletion—Oil and Gas Properties
To record depletion.
P9-34A Accounting for intangibles
Learning Objective 5
1. Goodwill $230,000
Midland States Telecom provides communication services in Iowa, Nebraska, the Dakotas, and
Montana. Midland States Telecom purchased goodwill as part of the acquisition of Sheldon Wireless
Enterprises, which had the following figures:
Book value of assets
$ 900,000
Market value of assets
1,400,000
Market value of
liabilities
530,000
Requirements
1. Journalize the entry to record Midland States Telecom’s purchase of Sheldon Wireless for
$440,000 cash plus a $660,000 note payable.
2. What special asset does Midland States Telecom’s acquisition of Sheldon Wireless identify? How
should Midland States Telecom account for this asset after acquiring Sheldon Wireless? Explain in
detail.
SOLUTION
Requirement 1
Purchase price to acquire Sheldon Wireless ($440,000 + $660,000)
$1,100,000
Market value of Sheldon Wireless’s assets
$ 1,400,000
Less: Sheldon Wireless’s liabilities
Market value of Sheldon Wireless’s net assets
Goodwill
Date
Accounts and Explanation
Credit
Assets
Goodwill
530,000
440,000
660,000
Requirement 2
The acquisition identifies the asset goodwill.
9-42
P9A-35A Journalizing partial-year depreciation and asset disposals and exchanges
Learning Objectives 2, 3, 7 Appendix 9A
Jan. 1 Gain $8,000
During 2018, Mora Corporation completed the following transactions:
Jan. 1
Traded in old office equipment with book value of $55,000 (cost of
$127,000 and accumulated depreciation of $72,000) for new equipment.
Mora also paid $70,000 in cash. Fair value of new equipment is $133,000.
Assume the exchange had commercial substance.
Apr. 1
Sold equipment that cost $18,000 (accumulated depreciation of $8,000
through December 31 of the preceding year). Mora received $6,100 cash
from the sale of the equipment. Depreciation is computed on a straight-line
basis. The equipment has a five-year useful life and a residual value of $0.
Dec.
31
Recorded depreciation as follows:
Office equipment is depreciated using the double-declining-balance method
over four years with a $9,000 residual value.
Record the transactions in the journal of Mora Corporation.
SOLUTION
Date
Accounts and Explanation
Credit
Jan. 1
Office Equipment (new)
1
Cash
Accumulated Depreciation—Equipment
Loss on Disposal
Equipment
18,000
To record sale of equipment.
Depreciation Expense—Office Equipment
Accumulated Depreciation—Office Equipment
66,500
To record depreciation on office equipment.
Accumulated Depreciation—Office Equipment
72,000
Office Equipment (old)
127,000
Cash
70,000
Gain on Disposal
8,000
To record exchange of office equipment.
Depreciation Expense—Equipment
9-43
Calculations:
Jan. 1 – Exchange of office equipment
Apr. 1 – Sale of equipment
Straight-line depreciation
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
=
($18,000 ̶ $0) / 5 years × 3/12
=
$900 per partial year (2018)
Market value of assets received
Less: Book value of asset disposed of
Cost
$ 18,000
Less: Accumulated Depreciation ($8,000 + $900)
Gain or (Loss)
Double-declining-balance depreciation
=
(Cost – Accumulated depreciation) × 2 × (1 / Useful life)
=
($133,000 – $0) × 2 × (1/4 years)
=
$66,500
Dec. 31 – Depreciation on office equipment
Market value of assets received
Less:
Book value of asset exchanged
$ 127,000
Cash paid
Gain or (Loss)
9-44
Problems (Group B)
P9-36B Determining asset cost and recording partial-year depreciation
Learning Objectives 1, 2
1. Bldg. $483,500
Safe Parking, near an airport, incurred the following costs to acquire land, make land improvements, and
construct and furnish a small building:
a. Purchase price of three acres of land
$
86,000
b. Delinquent real estate taxes on the land to be paid by Safe Parking
6,300
c. Additional dirt and earthmoving
8,400
d. Title insurance on the land acquisition
3,400
e. Fence around the boundary of the property
9,600
f. Building permit for the building
900
g. Architect’s fee for the design of the building
20,100
h. Signs near the front of the property
9,000
i. Materials used to construct the building
217,000
j. Labor to construct the building
172,000
k. Interest cost on construction loan for the building
9,500
l. Parking lots on the property
29,400
m. Lights for the parking lots
11,600
n. Salary of construction supervisor (80% to building; 20% to parking lot and concrete
walks)
80,000
o. Furniture
11,700
p. Transportation of furniture from seller to the building
1,900
q. Additional fencing
6,900
Safe Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture over
10 years, all on a straight-line basis with zero residual value.
Requirements
1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for
each cost by listing the cost under the correct account. Determine the total cost of each asset.
2. All construction was complete and the assets were placed in service on September 1. Record
partial-year depreciation expense for the year ended December 31. Round to the nearest dollar.
9-45
SOLUTION
Requirement 1
Land
Land
Improvements
Building
Furniture
Purchase price
$ 86,000
Requirement 2
Straight-line
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
Land Improvements
=
($82,500 ̶ $0) / 15 years × (4/12)
=
$1,833 (rounded)
($483,500 ̶ $0) / 40 years × (4/12)
=
$4,029 (rounded)
Furniture
=
($13,600 ̶ $0) / 10 years × (4/12)
=
$453 (rounded)
Real estate taxes
Dirt and earthmoving
Title insurance
Fence
Building permit
Architect’s fee
Signs
Building materials
Building labor
Interest on construction loan
Parking lots
Lights for parking lots
Salary of construction supervisor
Furniture
Transportation of furniture
Additional fencing
Totals
$ 104,100
$ 483,500
9-46
P9-36B, cont.
Requirement 2, cont.
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Depreciation Expense—Land Improvements
1,833
Accumulated Depreciation—Land Improvements
1,833
To record depreciation on land improvements.
P9-37B Determining asset cost, preparing depreciation schedules (3 methods), and identifying
depreciation results that meet management objectives
Learning Objectives 1, 2
1. Units-of-production, 12/31/18, Dep. Exp. $15,000
On January 3, 2018, Speedy Delivery Service purchased a truck at a cost of $67,000. Before placing the
truck in service, Speedy spent $3,000 painting it, $1,200 replacing tires, and $3,500 overhauling the
engine. The truck should remain in service for five years and have a residual value of $5,100. The
truck’s annual mileage is expected to be 20,000 miles in each of the first four years and 12,800 miles in
the fifth year—92,800 miles in total. In deciding which depreciation method to use, Alec Rivera, the
general manager, requests a depreciation schedule for each of the depreciation methods (straight-line,
units-of-production, and double-declining-balance).
Requirements
1. Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation
expense, accumulated depreciation, and asset book value.
2. Speedy prepares financial statements using the depreciation method that reports the highest net
income in the early years of asset use. Consider the first year that Speedy uses the truck. Identify
the depreciation method that meets the company’s objectives.
Depreciation Expense—Building
4,029
Accumulated Depreciation—Building
4,029
To record depreciation on building.
Depreciation Expense—Furniture
Accumulated Depreciation—Furniture
To record depreciation on furniture.
9-47
SOLUTION
Requirement 1
Purchase price of truck
$ 67,000
Depreciable cost = Cost − Residual value = $74,700 − $5,100 = $69,600
Straight-Line Depreciation Schedule
Depreciation for the Year
Date
Asset
Cost
Depreciable
Cost
Depreciation
Rate
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1/03/18
$ 74,700
$ 74,700
Add related costs:
Painting
Tires
Engine overhaul
Total cost of truck
$ 74,700
Depreciation per unit
=
(Cost – Residual value) / Useful life in units
=
$0.75 per mile
P9-37B, cont.
Requirement 1, cont.
Units-of-Production Depreciation Schedule
Depreciation for the Year
Date
Asset
Cost
Depreciation
per Unit
Number
of Units
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1/03/18
$ 74,700
$ 74,700
12/31/18
$ 0.75
20,000
$ 15,000
15,000
59,700
12/31/19
0.75
20,000
30,000
44,700
12/31/20
0.75
20,000
45,000
29,700
12/31/21
0.75
20,000
60,000
14,700
12/31/22
0.75
12,800
69,600
5,100
Double-Declining-Balance Depreciation Schedule
Depreciation for the Year
Date
Asset
Cost
Book
Value
DDB
Rate
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1/03/18
$ 74,700
$ 74,700
$ 29,880
47,808
58,565
65,019
69,600
Requirement 2
The depreciation method that reports the highest net income in the first year is the straight-line method.
9-49
P9-38B Recording lump-sum asset purchases, depreciation, and disposals
Learning Objectives 1, 2, 3
Sep. 1 Gain $163,250
Whitney Plumb Associates surveys American eating habits. The company’s accounts include Land,
Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated
Depreciation account for each asset. During 2018, Whitney Plumb completed the following transactions:
Jan. 1
Purchased office equipment, $117,000. Paid $77,000 cash and financed the
remainder with a note payable.
Apr. 1
Acquired land and communication equipment in a lump-sum purchase.
Total cost was $350,000 paid in cash. An independent appraisal valued the
land at $275,625 and the communication equipment at $91,875.
Sep. 1
Sold a building that cost $520,000 (accumulated depreciation of $285,000
through December 31 of the preceding year). Whitney Plumb received
$390,000 cash from the sale of the building. Depreciation is computed on a
straight-line basis. The building has a 40-year useful life and a residual
value of $25,000.
Dec.
31
Recorded depreciation as follows:
Communication equipment is depreciated by the straight-line method over a
five-year life with zero residual value.
Office equipment is depreciated using the double-declining-balance method
over five years with a $2,000 residual value.
Record the transactions in the journal of Whitney Plumb Associates.
9-50
SOLUTION
Date
Accounts and Explanation
Credit
Jan. 1
Office Equipment
Cash
77,000
Note Payable
40,000
To record purchase of office equipment.
Calculations:
Apr. 1 – Acquisition of land and communication equipment:
Asset
Market
Value
Percentage of Total Value
× Total
Purchase
Price
= Assigned
Cost of
Each Asset
$91,875 / $367,500 = 25%
Land
262,500
Communication Equipment
87,500
Cash
350,000
To record purchase of land and comm. equipment.
Depreciation Expense—Building
Accumulated Depreciation—Building
To record depreciation on building.
Cash
390,000
Accumulated Depreciation—Building
293,250
Building
520,000
Gain on Disposal
163,250
To record sale of building.
Depreciation Expense—Communication Equipment
13,125
Accumulated Depreciation—Comm. Equipment
13,125
To record depreciation on communication equipment.
Depreciation Expense—Office Equipment
46,800
Accumulated Depreciation—Office Equipment
46,800
To record depreciation on office equipment.
P9-38B, cont.
Sep. 1 – Sale of building
Straight-line depreciation
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
=
($520,000 ̶ $25,000) / 40 years × 8/12
=
$8,250 per partial year (2018)
Market value of assets received
$ 390,000
Less: Book value of asset disposed of
Cost
$ 520,000
Less: Accumulated Depreciation ($285,000 + $8,250)
(293,250)
226,750
Gain or (Loss)
$ 163,250
Dec. 31 – Depreciation on communication equipment
Straight-line depreciation
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
=
($87,500 ̶ $0) / 5 years × 9/12
=
$13,125 per partial year (2018)
Dec. 31 – Depreciation on office equipment
Double-declining-balance depreciation
=
(Cost – Accumulated depreciation) × 2 × (1 / Useful life)
=
($117,000 ̶ $0) × 2 × (1/5 years)
=
$46,800 in 2018
P9-39B Accounting for natural resources
Learning Objective 4
Depl. Exp. $1,383,750
Donahue Oil Incorporated has an account titled Oil and Gas Properties. Donahue paid $6,400,000 for oil
reserves holding an estimated 400,000 barrels of oil. Assume the company paid $510,000 for additional
geological tests of the property and $470,000 to prepare for drilling. During the first year, Donahue
removed and sold 75,000 barrels of oil. Record all of Donahue’s transactions, including depletion for the
first year.
SOLUTION
Purchase price of oil reserves
$ 6,400,000
Add related costs:
Geological tests
Drilling preparation
Total cost of oil reserves
$ 7,380,000
Depletion per unit
(Cost – Residual value) / Estimated total units
($7,380,000 ̶ $0) / 400,000 barrels
$18.45 per barrel
Depletion expense
Depletion per unit × Number of units extracted
$18.45 per barrel × 75,000 barrels
$1,383,750
Date
Accounts and Explanation
Debit
Credit
Oil and Gas Properties
6,400,000
Cash
6,400,000
To record purchase of oil reserves.
Oil and Gas Properties
Cash
oil reserves.
Depletion Expense—Oil and Gas Properties
1,383,750
Accumulated Depletion—Oil and Gas Properties
1,383,750
To record depletion.
P9-40B Accounting for intangibles
Learning Objective 5
1. Goodwill $210,000
Core Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Core
purchased goodwill as part of the acquisition of Surety Wireless Company, which had the following
figures:
Book value of assets
$
700,000
Market value of assets
1,000,000
Market value of
liabilities
510,000
Requirements
1. Journalize the entry to record Core’s purchase of Surety Wireless for $280,000 cash plus a
$420,000 note payable.
2. What special asset does Core’s acquisition of Surety Wireless identify? How should Core
Telecom account for this asset after acquiring Surety Wireless? Explain in detail.
SOLUTION
Requirement 1
Purchase price to acquire Surety Wireless ($280,000 + $420,000)
$ 700,000
Requirement 2
The acquisition identifies the asset goodwill.
9-54
P9A-41B Journalizing partial-year depreciation and asset disposals and exchanges
Learning Objectives 2, 3, 7 Appendix 9
Jan. 1 Gain $6,000
During 2018, Lora Company completed the following transactions:
Jan. 1
Traded in old office equipment with book value of $55,000 (cost of
$129,000 and accumulated depreciation of $74,000) for new equipment.
Lora also paid $55,000 in cash. Fair value of new equipment is $116,000.
Assume the exchange had commercial substance.
Apr. 1
Sold equipment that cost $12,000 (accumulated depreciation of $1,000
through December 31 of the preceding year). Lora received $7,100 cash
from the sale of the equipment. Depreciation is computed on a straight-line
basis. The equipment has a five-year useful life and a residual value of $0.
Dec.
31
Recorded depreciation as follows:
Office equipment is depreciated using the double-declining-balance method
over four years with a $7,000 residual value.
Record the transactions in the journal of Lora Company.
SOLUTION
Date
Accounts and Explanation
Credit
Jan. 1
Office Equipment (new)
Accumulated Depreciation—Office Equipment
Office Equipment (old)
129,000
Cash
55,000
Gain on Disposal
6,000
To record exchange of office equipment.
Depreciation Expense—Equipment
Cash
7,100
Loss on Disposal
3,300
Equipment
12,000
To record sale of equipment.
Depreciation Expense—Office Equipment
58,000
Accumulated Depreciation—Office Equipment
58,000
To record depreciation on office equipment.
9-55
Jan. 1 – Exchange of office equipment
P9-41B, cont.
Apr. 1 – Sale of equipment
Straight-line depreciation
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
=
($12,000 ̶ $0) / 5 years × 3/12
=
$600 per partial year (2018)
Market value of assets received
Less: Book value of asset disposed of
Cost
$ 12,000
Less: Accumulated Depreciation ($1,000 + $600)
Gain or (Loss)
Double-declining-balance depreciation
=
(Cost – Accumulated depreciation) × 2 × (1 / Useful life)
=
($116,000 – $0) × 2 × (1/4 years)
=
$58,000
Excel Skill Problem
P9-42 Using Excel to prepare depreciation schedules
Download an Excel template for this problem online in MyAccountingLab or at http://www.pearsonhighered.com/Horngren.
The Fraser River Corporation has purchased a new piece of factory equipment on January 1, 2018, and wishes to compare
three depreciation methods: straight-line, double-declining-balance, and units-of-production.
The equipment costs $400,000 and has an estimated useful life of four years, or 8,000 hours. At the end of four years, the
equipment is estimated to have a residual value of $20,000.
Requirements
1. Use Excel to prepare depreciation schedules for straight-line, double-declining-balance, and units-of-
production methods. Use cell references from the Data table.
2. Prepare a second depreciation schedule for double-declining-balance method, using the Excel function DDB.
The DDB function cannot be used in the last year of the asset’s useful life.
3. At December 31, 2018, Fraser River is trying to determine if it should sell the factory equipment. Fraser River
will only sell the factory equipment if the company earns a gain of at least $6,000. For each of the three
depreciation methods, what is the minimum amount that Fraser River will sell the factory equipment for in
order to have a gain of $6,000?
SOLUTION
The student templates for Using Excel are available online in MyAccountingLab in the Multimedia Library or at
tbd
Continuing Problem
P9-43 Calculating and journalizing partial-year depreciation
This problem continues the Canyon Canoe Company situation from Chapter 8. Amber and Zack Wilson are
continuing to review business practices. Currently, they are reviewing the company’s property, plant, and
equipment and have gathered the following information:
Asset
Acquisition
Date
Cost
Estimated
Life
Estimated
Residual Value
Depreciation
Method*
Monthly
Depreciation
Expense
Canoes
Nov. 3, 2018
$
4,800
4 years
$ 0
SL
$ 100
Land
Dec. 1, 2018
85,000
n/a
Building
Dec. 1, 2018
35,000
5 years
5,000
SL
500
Canoes
Dec. 2, 2018
7,200
4 years
0
SL
150
Computer
Mar. 2, 2019
3,600
3 years
300
DDB
Office
Furniture
Mar. 3, 2019
3,000
5 years
600
SL
*
SL Straight-line; DDB Double-declining-balance==
Requirements
1. Calculate the amount of monthly depreciation expense for the computer and office furniture for 2019.
2. For each asset, determine the book value as of December 31, 2018. Then, calculate the depreciation expense
for the first six months of 2019 and the book value as of June 30, 2019.
3. Prepare a partial balance sheet showing Property, Plant, and Equipment as of June 30, 2019.
SOLUTION
Requirement 1
Monthly depreciation expense on Computer:
9-59
Requirement 2
Asset
Cost
Monthly
Depreciation
Expense
Months
Depreciated
in 2018
Accumulated
Depreciation
12/31/18
Book
Value
12/31/18
Asset
Cost
Accum.
Deprn.
12/31/18
Book
Value
12/31/18
Monthly
Deprn.
Expense
2019
Months
Depreciated
in 2019
(Jan. –
Jun.)
Accum.
Deprn.
6/30/19
Book
Value
6/30/19
Canoes
$ 4,800
$ 200
$ 4,600
$ 100
6
$ 800
$ 4,000
Land
85,000
85,000
Building
35,000
34,500
6
Canoes
6
Computer
4
800
Furniture
Totals
$ 850
$ 990
Canoes
Land
85,000
Building
34,500
Canoes
Totals
$131,150
9-60
P9-43, cont.
Requirement 3
CANYON CANOE COMPANY
Balance Sheet – Partial
June 30, 2019
Assets
Property, Plant, and Equipment:
Land
85,000
Building
Less: Accu. Depr.—Building
31,500
Canoes
12,000
Less: Accu. Depr.—Canoes
10,150
Computer
Less: Accu. Depr.—Computer
Office Furniture
Less: Accu. Depr.—Offc. Furn.
Total Property, Plant, and Equipment
9-61
Comprehensive Problem for Chapters 7-9
Top Quality Appliance—Long Beach has just purchased a franchise from Top Quality Appliance (TQA). TQA is
a manufacturer of kitchen appliances. TQA markets its products via retail stores that are operated as franchises.
As a TQA franchisee, Top Quality Appliance—Long Beach will receive many benefits, including having the
exclusive right to sell TQA brand appliances in Long Beach. TQA appliances have an excellent reputation and the
TQA name and logo are readily recognized by consumers. TQA also manages national television advertising
campaigns that benefit the franchisees. In exchange for these benefits, Top Quality Appliance—Long Beach will
pay an annual franchise fee to TQA based on a percentage of sales. The annual franchise fee is a separate cost and
in addition to the purchase of the franchise.
Top Quality Appliance—Long Beach
Chart of Accounts
Cash
Common Stock
Petty Cash
Retained Earnings
Accounts Receivable
Dividends
Allowance for Bad Debts
Sales Revenue
Merchandise Inventory
Interest Revenue
Office Supplies
Cost of Goods Sold
Prepaid Insurance
Franchise Fee Expense
Interest Receivable
Salaries Expense
Notes Receivable
Utilities Expense
Land
Insurance Expense
Building
Supplies Expense
Accumulated Depreciation—Building
Bad Debt Expense
Store Fixtures
Bank Expense
Accumulated Depreciation—Store Fixtures
Credit Card Expense
Office Equipment
Depreciation Expense—Building
Equipment
Franchise
Depreciation Expense—Office Equipment
Accounts Payable
Amortization Expense—Franchise
Interest Payable
Interest Expense
Notes Payable
Cash Short and Over
Top Quality Appliance—Long Beach completed the following transactions during 2018, its first year of
operations:
9-62
h.
Purchased appliances from TQA (merchandise inventory) on account for $425,000.
i.
Established a petty cash fund for $150.
j.
Sold appliances on account to B&B Contractors for $215,000, terms n/30 (cost, $86,000).
k.
Sold appliances to Davis Contracting for $150,000 (cost, $65,000), receiving a 6-month, 8% note.
l.
Recorded credit card sales of $80,000 (cost, $35,000), net of processor fee of 2%.
m.
Received payment in full from B&B Contractors.
n.
Purchased appliances from TQA on account for $650,000.
o.
Made payment on account to TQA, $300,000.
p.
Sold appliances for cash to LB Home Builders for $350,000 (cost, $175,000).
q.
Received payment in full on the maturity date from Davis Contracting for the note.
Sold appliances to Leard Contracting for $265,000 (cost, $130,000), receiving a 9–month, 8% note.
Made payment on account to TQA, $500,000.
Sold appliances on account to various businesses for $985,000, terms n/30 (cost, $395,000).
u.
Collected $715,000 cash on account.
v.
Paid cash for expenses: Salaries, $180,000; Utilities, $12,650
Replenished the petty cash fund when the fund had $62 in cash and petty cash tickets for $85 for office supplies.
x.
Paid dividends, $5,000.
Paid the franchise fee to TQA of 5% of total sales of $2,045,000.
Requirements
1. Record the transactions in the general journal. Omit explanations.
2. Post to the general ledger.
3. It is a common business practice to reconcile the bank accounts on a monthly basis. However, in this problem,
the reconciliation of the company’s checking account will be done at the end of the year, based on an annual
summary.
Reconcile the bank account by comparing the following annual summary statement from Long Beach National
Bank to the Cash account in the general ledger. Record journal entries as needed and post to the general ledger.
Use transaction z as the posting reference.
Beginning Balance, January 1, 2018
$    0
Deposits and other credits:
$ 500,000
deposited the cash received from the stockholders.
b.
Paid $50,000 cash for a TQA franchise.
the following market values: Land, $100,000; Building, $500,000.
d.
Paid $75,000 for store fixtures.
Paid $45,000 for office equipment.
Paid $600 for office supplies.
g.
Paid $3,600 for a two-year insurance policy.
78,400
350,000
715,000
Interest Revenue
1,859,965
Checks and other debits:
125
Checks:
50,000
200,000
45,000
75,000
150
3,600
600
300,000
500,000
192,650
Bank service charge
2,340
(1,369,465)
Ending balance, December 31, 2018
$    490,500
(1) Bank Checks is a company that prints business checks (considered a bank expense) for Top Quality Appliance—Long
Beach
4. In preparation for preparing the adjusting entries, complete depreciation schedules for the first five years
for the depreciable plant assets, assuming the assets were purchased on January 2, 2018:
5. Record adjusting entries for the year ended December 31, 2018:
a. One year of the prepaid insurance has expired.
b. Management estimates that 5% of Accounts Receivable will be uncollectible.
c. An inventory of office supplies indicates $475 of supplies have been used.
6. Post adjusting entries and prepare an adjusted trial balance.
7. Prepare a multi-step income statement and statement of retained earnings for the year ended December
8. Evaluate the company’s success for the first year of operations by calculating the following ratios. Round
to two decimal places. Comment on the results.
a. Liquidity:
i. Current ratio
ii. Acid-test ratio
iii. Cash ratio
b. Efficiency:
i. Accounts receivable turnover
ii. Day’s sales in receivables
iii. Asset turnover
iv. Rate of return on total assets
SOLUTION
Requirement 1
Date
Accounts
Debit
Credit
a.
Cash
500,000
Common Stock
500,000
Franchise
Cash
c.
Cash
200,000
Notes Payable
400,000
e.
Office Equipment
f.
Office Supplies
600
Cash
600
Prepaid Insurance
Cash
425,000
425,000
9-65
i.
Petty Cash
150
Cash
150
j.
Accounts Receivable
Sales Revenue
Cost of Goods Sold
Merchandise Inventory
9-66
Comprehensive Problem, cont.
Requirement 1, cont.
Date
Accounts
Debit
Credit
k.
Note Receivable—Davis Contracting
150,000
Sales Revenue
150,000
m.
Cash
215,000
Accounts Receivable
215,000
n.
Merchandise Inventory
650,000
Accounts Payable
650,000
o.
Accounts Payable
300,000
Cash
300,000
p.
Cash
350,000
Sales Revenue
350,000
Cost of Goods Sold
175,000
Merchandise Inventory
175,000
q.
Cash
156,000
Interest Revenue ($150,000 × 0.08 × 6/12)
Notes Receivable—Davis Contracting
150,000
Notes Receivable—Leard Contracting
265,000
Sales Revenue
265,000
Cost of Goods Sold
130,000
Merchandise Inventory
130,000
Cost of Goods Sold
Merchandise Inventory
Cash
Credit Card Expense ($80,000 × 0.02)
Sales Revenue
Cost of Goods Sold
Merchandise Inventory
9-67
Comprehensive Problem, cont.
Requirement 1, cont.
Date
Accounts
Debit
Credit
s.
Accounts Payable
500,000
Cash
500,000
w.
Office Supplies
85
Cash Over and Short
3
Cash ($150 ‒ $62)
88
x.
Dividends
5,000
Cash
5,000
y.
102,250
102,250
Accounts Receivable
985,000
Sales Revenue
985,000
Merchandise Inventory
395,000
u.
715,000
715,000
v.
Salaries Expense
180,000
Utilities Expense
Cash
192,650
9-68
Comprehensive Problem, cont.
Requirements 2, 3, and 7
Cash
Petty Cash
i.
150
Bal.
150
Accounts Receivable
j.
215,000
215,000
m.
t.
985,000
715,000
u.
Bal.
270,000
Allowance for Bad Debts
13,500
Adj. b.
13,500
Bal.
h.
425,000
86,000
j.
n.
650,000
65,000
k.
35,000
l.
175,000
p.
130,000
395,000
t.
Bal.
189,000
500,000
50,000
b.
l.
200,000
m.
215,000
75,000
d.
p.
350,000
45,000
q.
156,000
600
u.
715,000
3,600
g.
150
i.
300,000
o.
500,000
192,650
v.
88
5,000
x.
102,250
y.
Bal.
540,062
2,465
Bal.
539,162
9-69
Comprehensive Problem, cont.
Requirements 2, 3, and 7, cont.
Office Supplies
f.
600
w.
85
Interest Receivable
Adj. d.
3,533
Bal.
3,533
Notes Receivable
k.
150,000
150,000
q
r.
265,000
Bal.
265,000
100,000
Bal.
100,000
500,000
Bal.
500,000
15,000
Adj. e.
15,000
Bal.
Bal.
5,000
Adj. e.
5,000
Bal.
Bal.
685
475
Adj. c.
Bal.
210
g.
3,600
1,800
Adj. a.
Bal.
1,800
9-70
Comprehensive Problem, cont.
Requirements 2, 3, and 7, cont.
Office Equipment
e.
45,000
Bal.
45,000
Accounts Payable
o.
300,000
425,000
h.
s.
500,000
650,000
n.
275,000
Bal.
Interest Payable
20,000
Adj. g.
20,000
Bal.
400,000
c.
400,000
Bal.
500,000
a.
500,000
Bal.
Bal.
18,000
Adj. e.
18,000
Bal.
b.
50,000
5,000
Adj. f.
Bal.
45,000
9-71
Comprehensive Problem, cont.
Requirements 2, 3, and 7, cont.
Interest Revenue
6,000
q.
1,565
z.
7,565
Bal.
3,533
Adj. d.
11,098
Bal.
Cost of Goods Sold
j.
86,000
k.
65,000
l.
35,000
p.
175,000
130,000
t.
395,000
Bal.
886,000
y.
102,250
Bal.
102,250
Salaries Expense
v.
180,000
Bal.
180,000
Utilities Expense
v.
12,650
Bal.
12,650
Insurance Expense
Adj. a.
Bal.
215,000
j.
150,000
k.
80,000
l.
350,000
p.
265,000
985,000
t.
2,045,000
Bal.
9-72
Comprehensive Problem, cont.
Requirements 2, 3, and 7, cont.
Supplies Expense
Adj. c.
475
Depreciation Expense—Building
Adj. e.
15,000
Bal.
15,000
Depreciation Expense—Store Fixtures
Adj. e.
5,000
Adj. e.
18,000
Bal.
18,000
Adj. f.
5,000
Bal.
5,000
Adj. g.
20,000
Bal.
Bal.
475
Adj. b.
13,500
Bal.
13,500
2,465
Bal.
2,465
1,600
Bal.
1,600
9-73
Comprehensive Problem, cont.
Requirement 3
TOP QUALITY APPLIANCE—LONG BEACH
Bank Reconciliation
December 31, 2018
BANK
BOOK
Balance, Dec. 31, 2018
$ 490,500
Balance, Dec. 31, 2018
$ 540,062
Date
Accounts
Debit
Credit
z.
Cash
1,565
Interest Revenue
1,565
Bank Expense ($125 + $2,340)
2,465
Cash
2,465
Deposit in Transit
Interest revenue
$ 1,565
LESS:
LESS:
Outstanding checks:
EFT payment to Bank Checks
Service charge
December 31, 2018
$ 539,162
December 31, 2018
$ 539,162
9-74
Comprehensive Problem, cont.
Requirement 4
BUILDING
Depreciable cost = Cost − Residual value = $500,000 − $50,000 = $450,000
Straight-Line Depreciation Schedule—BUILDING
Depreciation for the Year
Date
Asset
Cost
Depreciable
Cost
Depreciation
Rate
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1/01/18
$500,000
$ 500,000
12/31/18
$ 450,000
1 / 30
$ 15,000
$ 15,000
485,000
STORE FIXTURES
Depreciable cost = Cost − Residual value = $75,000 − $0 = $75,000
Straight-Line Depreciation Schedule—STORE FIXTURES
Depreciation for the Year
Date
Asset
Cost
Depreciable
Cost
Depreciation
Rate
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1/01/18
$75,000
$ 75,000
12/31/18
$ 75,000
1 / 15
$ 5,000
$ 5,000
70,000
12/31/19
1 / 15
65,000
12/31/20
1 / 15
60,000
12/31/21
1 / 15
55,000
12/31/22
1 / 15
50,000
12/31/19
1 / 30
470,000
12/31/20
1 / 30
455,000
12/31/21
1 / 30
440,000
12/31/22
1 / 30
425,000
9-75
Comprehensive Problem, cont.
Requirement 4, cont.
OFFICE EQUIPMENT
Double-Declining-Balance Depreciation Schedule—OFFICE EQUIPMENT
Depreciation for the Year
Date
Asset
Cost
Book
Value
DDB
Rate
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1/01/18
$ 45,000
$ 45,000
12/31/18
$ 45,000
2 × (1 / 5)
$ 18,000
$ 18,000
27,000
12/31/19
2 × (1 / 5)
16,200
12/31/20
2 × (1 / 5)
12/31/21
2 × (1 / 5)
12/31/22
9-76
Comprehensive Problem, cont.
Requirement 5,
Date
Accounts
Debit
Credit
Adjusting Entries
a.
Insurance Expense(1)
1,800
Prepaid Insurance
1,800
(1)
$3,600 × 1/2 (2-year policy, 1 year expired)
(2)
Target balance = Accounts receivable balance × percentage
= $270,000 × 0.05 = $13,500
Adjustment = Allowance for Bad Debts balance + Target balance
= $0 + $13,500 = $13,500
Bad Debts Expense(2)
Allowance for Bad Debts
c.
Supplies Expense
Interest Receivable
3,533
Interest Revenue ($265,000 × 0.08 × 2/12)
3,533
e.
Depreciation Expense—Building
Accumulated Depreciation—Building
Depreciation Expense—Store Fixtures
5,000
Accumulated Depreciation—Store Fixtures
5,000
Depreciation Expense—Office Equipment
Accumulated Depreciation—Office Equip.
Amortization Expense—Franchise ($50,000 / 10 years)
5,000
Franchise
5,000
Interest Expense ($400,000 × 0.05 × 12/12)
Interest Payable
9-77
Comprehensive Problem, cont.
Requirement 6
TOP QUALITY APPLIANCE––LONG BEACH
Adjusted Trial Balance
December 31, 2018
Balance
Account
Debit
Credit
Cash
$ 539,162
Petty Cash
150
Notes Receivable
265,000
Land
100,000
Building
500,000
Accumulated Depreciation—Building
15,000
Store Fixtures
75,000
Accumulated Depreciation—Store Fixtures
Office Equipment
45,000
Accumulated Depreciation—Office Equip.
Franchise
45,000
Accounts Payable
275,000
Interest Payable
Notes Payable
400,000
Common Stock
500,000
Retained Earnings
Dividends
5,000
Sales Revenue
2,045,000
Interest Revenue
11,098
Cost of Goods Sold
886,000
Franchise Fee Expense
102,250
Salaries Expense
180,000
Utilities Expense
12,650
Insurance Expense
1,800
Supplies Expense
Bad Debts Expense
13,500
Bank Expense
Credit Card Expense
1,600
Depreciation Expense—Building
15,000
Depreciation Expense—Store Fixtures
Depreciation Expense—Office Equip
18,000
Amortization Expense—Franchise
Interest Expense
20,000
Cash Short and Over
Total
Accounts Receivable
270,000
Allowance for Bad Debts
$ 13,500
Merchandise Inventory
189,000
Office Supplies
Prepaid Insurance
1,800
Interest Receivable
3,533
9-78
Comprehensive Problem, cont.
Requirement 7
TOP QUALITY APPLIANCE—LONG BEACH
Income Statement
For Year Ended December 31, 2018
Franchise Expense
$ 102,250
Salaries Expense
180,000
Utilities Expense
12,650
Insurance Expense
1,800
Supplies Expense
475
Bad Debt Expense
13,500
Bank Expense
2,465
Credit Card Expense
1,600
Depreciation Expense—Building
15,000
Depreciation Expense—Store Fixtures
5,000
Depreciation Expense—Office Equip.
18,000
Amortization Expense—Franchise
5,000
Cash Short and Over
Interest Revenue
Interest Expense
Total Other Income and (Expenses)
$ 792,355
TOP QUALITY APPLIANCE—LONG BEACH
Statement of Retained Earnings
For Year Ended December 31, 2018
Retained Earnings, January 1, 2018
$ 0
Net income for the year
792,355
792,355
Dividends
Retained Earnings, December 31, 2018
$ 787,355
1,159,000
9-79
Comprehensive Problem, cont.
Requirement 7, cont.
TOP QUALITY APPLIANCE—LONG BEACH
Balance Sheet
December 31, 2018
Assets
Current Assets:
Cash
$ 539,162
Petty Cash
150
Accounts Receivable
$ 270,000
Less: Allowance for Bad Debts
(13,500)
256,500
Merchandise Inventory
189,000
Office Supplies
Prepaid Insurance
Interest Receivable
Notes Receivable
265,000
Total Current Assets
Property, Plant, and Equipment:
Land
100,000
Building
Less: Accumulated Depreciation
(15,000)
485,000
Store Fixtures
Less: Accumulated Depreciation
Office Equipment
Less: Accumulated Depreciation
Total Property, Plant and Equipment
682,000
Intangible Assets
Franchise
Total Assets
9-80
Comprehensive Problem, cont.
Requirement 7, cont.
TOP QUALITY APPLIANCE—LONG BEACH
Balance Sheet
December 31, 2018
Liabilities
Current Liabilities:
Accounts Payable
$ 275,000
Interest Payable
Total Current Liabilities
Notes Payable
Total Liabilities
Common Stock
9-81
Comprehensive Problem, cont.
Requirement 8
Liquidity Ratios:
Cash ratio
=
Cash and cash equivalents / Current liabilities
=
($539,162 + $150) / $295,000
=
1.83
Current ratio
=
Total current assets / Total current liabilities
=
$1,255,355 / $295,000
=
4.26
=
($539,162 + $150 + $256,500 + 3,533 + 265,000) / $295,000
=
3.61
9-82
Comprehensive Problem, cont.
Requirement 8, cont.
Efficiency Ratios:
Days’ sales in receivables
=
365 days / Accounts receivable turnover
=
365 days / 12.59
=
29 days
Asset turnover
=
Net sales / Average total assets
=
$2,045,000 / [($0 + $1,982,355) / 2]
=
$2,045,000 / $991,177.5
=
2.06
Rate of return on total assets
=
(Net income + Interest expense) / Average total assets
=
($792,355 + $20,000) / [($0 + $1,982,355) / 2]
=
$812,355 / $991,177.5
=
0.82
Analysis:
Top Quality Appliance—Long Beach is collecting its average receivables more than 12 times per year,
or about every 29 days. If we assume the company has credit terms of 30 days, then the collection
period is very good.
Accounts receivable turnover
=
Net credit sales* / Average net accounts receivable
=
$1,615,000 / [($0 + $256,500) / 2]
=
$1,615,000 / $128,250
=
12.59
9-83
Critical Thinking
Tying It All Together Case 9-1
McDonald’s Corporation is the world’s leading global food service retailer with more than 36,000 locations worldwide in
more than 100 countries. The corporation operates and franchises McDonald’s restaurants, which serve menu items such as
the Big Mac, Chicken McNuggets, and McFlurry desserts. In addition, McDonald’s also serves McCafe beverages and
pastries.
Requirements
1. Where would McDonald’s Corporation report plant assets on its financial statements? How are plant assets
reported and what is the value as of December 31, 2015?
2. Does McDonald’s Corporation depreciate its plant assets? How do you know? What is the depreciation
method used and the useful lives?
3. How is the book value of plant assets calculated? What is the net book value of McDonald’s plant assets as of
December 31, 2015?
4. What type of intangibles would be included on McDonald’s financial statements and where?
5. What is goodwill? Does McDonald’s Corporation report goodwill? If so, how much goodwill is reported as of
December 31, 2015? What does McDonald’s goodwill primarily result from?
SOLUTION
Requirement 1
Plant assets such as property and equipment are reported at cost less accumulated depreciation on the
Requirement 2
Yes, McDonald’s Corporation depreciates its plant assets using the straight-line method. The useful life
Requirement 3
Book value is calculated as the cost of plant assets minus accumulated depreciation. McDonald’s
Corporation’s book value as of December 31, 2015 is $23,117.6 (in millions) or $37,692.4 – $14,574.8.
Requirement 4
McDonald’s Corporation would report intangibles on the balance sheet. McDonald’s business
information (Part 1, Intellectual Property) identified the following intangibles: trademarks (such as “The
9-84
Goodwill represents the excess of the cost over the market value of net assets of an acquired restaurant.
9-85
Ethical Issue 9-1
Western Bank & Trust purchased land and a building for the lump sum of $3,000,000. To get the maximum tax
deduction, Western allocated 90% of the purchase price to the building and only 10% to the land. A more realistic
allocation would have been 70% to the building and 30% to the land.
Requirements
1. Explain the tax advantage of allocating too much to the building and too little to the land.
2. Was Western’s allocation ethical? If so, state why. If not, why not? Identify who was harmed.
SOLUTION
Requirement 1
The taxpayer wants to allocate as much of the purchase price as possible to the building because tax law
Requirement 2
Whether the taxpayer’s choice was ethical or unethical is a difficult call. If the taxpayer is deliberately
Fraud Case 9-1
Jim Reed manages a fleet of utility trucks for a rural county government. He’s been in his job for 30 years, and he
knows where the angles are. He makes sure that when new trucks are purchased, the residual value is set as low as
possible. Then, when they become fully depreciated, they are sold off by the county at residual value. Jim makes
sure his buddies in the construction business are first in line for the bargain sales, and they make sure he gets a
little something back. Recently, a new county commissioner was elected with vows to cut expenses for the
taxpayers. Unlike other commissioners, this man has a business degree, and he is coming to visit Jim tomorrow.
Requirements
1. When a business sells a fully depreciated asset for its residual value, is a gain or loss recognized?
2. How do businesses determine what residual values to use for their various assets? Are there “hard and fast”
rules for residual values?
3. How would an organization prevent the kind of fraud depicted here?
SOLUTION
Requirement 1
9-86
Requirement 2
Residual values are determined by judgment and experience. Although the IRS has standards for tax
Requirement 3
An organization could arrange for public auction of surplus vehicles, which would allow the public to
9-87
Financial Statement Case 9-1
View a link to Target Corporation’s Fiscal 2015 annual report at http://www.pearsonhighered.com/Horngren.
Refer to the Target Corporation financial statements, including Notes 14 and 15. Answer the following questions.
Requirements
1. Which depreciation method does Target Corporation use for reporting in the financial statements? What type
of depreciation method does the company probably use for income tax purposes?
2. What was the amount of depreciation and amortization expense for the year ending January 30, 2016?
3. The statement of cash flows reports the cash purchases of property, plant, and equipment. How much were
Target’s additions to property, plant, and equipment during the year ending January 30, 2016? Did Target
record any proceeds from the sale of property, plant, and equipment?
4. What was the amount of accumulated depreciation at January 30, 2016? What was the net book value of
property, plant, and equipment for Target as of January 31, 2016?
5. Compute Target’s asset turnover ratio for year ending January 30, 2016. Round to two decimal places. How
does Target’s ratio compare with that of Kohl’s Corporation?
SOLUTION
Requirement 1
Target depreciates property and equipment using the straight-line method over estimated useful lives
Requirement 2
Requirement 3
Target’ statement of cash flows for the year ended January 30, 2016, Investing activities section, reports
Requirement 4
As of January 30, 2016, Target reports accumulated depreciation of $16,246 million on property and
9-88
Requirement 5
=
1.81 times (rounded)
Kohl’s Corporation has a ratio of 1.37 for the same time period. Target has a higher ratio which
indicates Target is more efficient at using its assets to generate sales.
Asset turnover ratio
=
Net sales / Average total assets
=
$73,785 / [($40,262 + $41,172) / 2]
=
$73,785 / $40,717
9-89
Communication Activity 9-1
In 150 words or fewer, explain the different methods that can be used to calculate depreciation. Your explanation
should include how to calculate depreciation expense using each method.
SOLUTION
Student answers will vary, but should include the following points: