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CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-21
PROBLEM 8-8 (Concluded)
3. Original cost of building ................................................................ $364,000
Pollution device capitalized .......................................................... 42,000
2015 depreciation ................................................................... (14,000)
2016 depreciation ................................................................... (12,600)
LO 6,10 PROBLEM 8-9 AMORTIZATION OF INTANGIBLE, REVISION OF RATE
1. The $85,000 of research and development costs should be recorded as an expense.
2. *Reynosa should record $595 of amortization expense each fiscal year, for a total of
3. Reynosa should record a loss of $8,925.
8-22 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 8,11 PROBLEM 8-10 PURCHASE AND DISPOSAL OF OPERATING ASSET AND
EFFECTS ON STATEMENT OF CASH FLOWS
1. Partial statement of cash flows for 2016:
Cash flows from operating activities:
Net income ........................................................................ $ XX,XXX
Depreciation expense ....................................................... 12,000
2. Castlewood would replace machinery if the replacement would result in additional
net income in the future. Any additional revenues generated as a result of a possible
increase in production capacity (that is, the ability to make and thus sell more prod-
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-23
LO 9,10,11 PROBLEM 8-11 AMORTIZATION OF INTANGIBLES AND EFFECTS ON
STATEMENT OF CASH FLOWS
1. 2016 amortization expense:
Accumulated amortization at 12/31/15 ........................ $ 102,000
2. Acquisition cost:
Cost of patent ................................................................... $ X
Accumulated amortization at 12/31/16 ........................ 119,000
Carrying value at 12/31/16 .......................................... $ 170,000
3. Assuming the indirect method is used, the amortization expense relating to the pa-
tent would be added back to net income in the Cash Flows from Operating Activities
section of the statement of cash flows.
4. The proceeds from the sale of $200,000 would be reported as an inflow in the Cash
Flows from Investing Activities section of the statement of cash flows. In addition, the
8-24 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ALTERNATE PROBLEMS
LO 3 PROBLEM 8-1A LUMP-SUM PURCHASE OF ASSETS AND SUBSEQUENT EVENTS
1. Relative fair values:
Piece 1 $200,000 23.8%
Piece 2 200,000 23.8
2. The purchase does not affect total assets; it affects only the composition of the as-
sets. Cash is a current asset; equipment is a long-term asset.
LO 5 PROBLEM 8-2A DEPRECIATION AS A TAX SHIELD
If asset is not purchased:
Annual income tax is $62,000 × 30% = $18,600
If asset is purchased:
Income Before Tax Depreciation Income Tax
and Depreciation Expense Before Tax 30%
2016 $62,000 $24,000* $38,000 $11,400
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-25
PROBLEM 8-2A (Concluded)
Total tax if not purchased:
$18,600 × 5 years ........................................................................ $93,000
Total tax if purchased ................................................................... 75,000
Depreciation tax shield ................................................................. $18,000
LO 5 PROBLEM 8-3A BOOK VERSUS TAX DEPRECIATION
1. Year Straight-Line – MACRS = Difference
1 $ 4,700* $ 5,650 $ (950)
2 4,700 9,025 (4,325)
2. The president is correct that a total of $28,200 will be deducted as depreciation
under either method over the six-year life. However, the memo should note that all
other things being equal, Payton should prefer MACRS for taxes, since it results in
lower taxes during the early years in the life of the truck. Money received earlier is
8-26 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 11 PROBLEM 8-4A AMORTIZATION AND CASH FLOW
1. 2016 income = $500,000 – $62,500 – $50,000 = $387,500
LO 11 PROBLEM 8-5A RECONSTRUCT NET BOOK VALUES USING STATEMENT OF
CASH FLOWS
1. Book value of land at time of sale:
Book value ................................................................... $ X
Sales proceeds ............................................................ 187,000
2. Net book value of property, plant, and equipment at December 31, 2015:
Net book value at 12/31/15 .......................................... $ X
3. Net book value of intangibles at December 31, 2015:
Net book value at 12/31/15 .......................................... $ X
Payment of legal fees during 2016 .............................. 6,000
Book value of trademark sold during 2016 .................. (114,000)**
2016 Amortization ........................................................ (3,000)
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-27
ALTERNATE MULTI-CONCEPT PROBLEMS
LO 1,5,8,9,10 PROBLEM 8-6A COST OF ASSETS, SUBSEQUENT BOOK VALUES, AND
BALANCE SHEET PRESENTATION
Depreciation or amortization and book values:
a. Depreciation should be calculated as follows:
Original cost................................................................. $16,000
Cab/oven ..................................................................... 10,900
Total cost ..................................................................... $26,900
Residual value ............................................................. (300)
Depreciable amount .......................................... $26,600
Depreciation expense ($26,600/5 years) .......... $ 5,320
($8,000 – $1,000)/8 × 3/12 = $219 for 3 months (January 1 to April 1, 2016)
Book value at time of sale:
Accumulated depreciation = ($8,000 – $1,000) × 5/8 = $4,375
Book value = $8,000 – $4,375 = $3,625
Book value ......................... $3,625
8-28 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 2,5 PROBLEM 8-7A COST OF ASSETS AND THE EFFECT ON DEPRECIATION
1. The proper cost to record for the acquisition is $190,000 ($168,000 + $16,500 +
$4,400 + $1,100). All costs, except the operating costs for the first year, should be
capitalized as part of the cost of the equipment. The operating costs of $26,400
should be expensed.
2. Depreciation erroneously reported in Year 1 was $21,640* ($216,400/10). Deprecia-
3. Key reported income of $55,000 – $21,640*, or $33,360. The correct amount of in-
come should be as follows:
4. Key should not include operating costs in the value of the asset recorded on the bal-
LO 7,8 PROBLEM 8-8A CAPITAL EXPENDITURES, DEPRECIATION, AND DISPOSAL
1. 2015 Depreciation = [($612,000 – $12,000)/25 years)] = $24,000
2016 Depreciation = [($612,000 + $87,600 – $30,000 – $24,000)/24)] = $26,900
Original cost, January 1, 2015 .......................................... $612,000
2. The cost of the fire equipment increased the value of an asset that will last for more
than one year. The cost would have been expensed if it was maintenance. Wagner
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-29
PROBLEM 8-8A (Concluded)
3. Loss at sale = $612,000 + $87,600 – $24,000 – $26,900 – $360,000 = $288,700
Asset cost .................................................................................... $612,000
Major overhaul in 2016 ................................................................ 87,600
LO 6,10 PROBLEM 8-9A AMORTIZATION OF INTANGIBLE, REVISION OF RATE
1. The $350,000 of costs that represent research and development should be treated
2. Maciel should record amortization expense of $23,800/20 years, or $1,190 per year.
3. The book value of the patent after five years of amortization is:
$23,800 – (5 × $1,190) = $17,850. Since the patent is worthless, the amount of
8-30 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 8,11 PROBLEM 8-10A PURCHASE AND DISPOSAL OF OPERATING ASSET AND
EFFECTS ON STATEMENT OF CASH FLOWS
1. Partial statement of cash flows for 2016:
Cash flows from operating activities:
Net income ........................................................................ $XX,XXX
Depreciation expense ....................................................... 8,000
2. Mansfield would replace the medium-sized delivery truck with a larger truck if the
replacement would result in additional net income in the future. Any additional reve-
nues generated as a result of Mansfield’s ability to deliver and sell more product
would increase net income. On the other hand, this increase would be offset by the
costs of acquiring and operating the new delivery truck.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-31
LO 9,10,11 PROBLEM 8-11A AMORTIZATION OF INTANGIBLES AND EFFECTS ON
STATEMENT OF CASH FLOWS
1. 2016 amortization expense:
Accumulated amortization at 12/31/15 ................................... $ 1,510,000
2. Acquisition cost:
Cost of patent ......................................................................... $ X
Accumulated amortization at 12/31/16 ................................... 1,661,000
Carrying value at 12/31/16 ..................................................... $ 1,357,000
3. Assuming that the indirect method is used, the amortization expense relating to the
patent would be added back to net income in the Cash Flows from Operating Activi-
ties section of the statement of cash flows.
4. The proceeds from the sale of the patent for $1,700,000 would be reported as an
inflow in the Cash Flows from Investing Activities section of the statement of cash
8-32 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
DECISION CASES
READING AND INTERPRETING FINANCIAL STATEMENTS
LO 1,9 DECISION CASE 8-1 PANERA BREAD
Property, plant, and equipment consisted of the following (in thousands):
Property and Equipment, net
Major classes of property and equipment consisted of the following (in thousands):
December 30 December 31
2014 2013
Leasehold improvements $ 693,503 $ 607,472
Building and improvements 340,854 305,060
1. A note to the statements indicates the company has the following classes of assets
in the category leasehold improvements, machinery and equipment, furniture and
fixtures, computer hardware and software, and construction in progress, smallwares,
and land.
2. The company uses the straight-line method of depreciation.
3.
Leasehold improvements 15 – 20 years
4. The company discloses the total amount of property, plant, and equipment before
5. The statement of cash flows indicates purchases of $224,217,000. It does not indi-
cate sales of property and equipment.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-33
LO 1,9 DECISION CASE 8-2 MAKING BUSINESS DECISIONS: COMPARING TWO COM-
PANIES IN THE SAME INDUSTRY: CHIPOTLE AND PANERA BREAD
A. THE RATIO ANALYSIS MODEL
1. Formulate the Question
What is the average life of the assets?
2. Gather the Information from the Financial Statements
To calculate a company’s average life of assets and average age of assets, it is es-
sential to know its total operating assets and accumulated depreciation from the bal-
ance sheet and depreciation expense from the income statement or statement of
3. Calculate the Ratio and 4. Compare the Ratio to Others
Panera _ Chipotle ____
2014 2013 2014 2013_
Average life of assets 11.85 11.77 15.64 15.52
8-34 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
DECISION CASE 8-2 (Concluded)
5. Interpret the Ratios
The average life and age of assets have been consistent from year to year and are
in line with other companies in the industry. The asset turnover ratio is a measure of
B. THE BUSINESS DECISION MODEL
1. Formulate the Question:
If you were a lender, would you be willing to lend money to either company and use
the operating assets as collateral for the loan?
2. Gather Information from the Financial Statements and Other Sources:
This information will come from a variety of sources, not limited to but including:
• The balance sheet provides information about the age and composition of the
3. Analyze the Information Gathered:
4. Make the Decision:
Taking into account all of the various sources of information, decide either to
• Lend money to the company, or
• Find an alternative use for the money
5. Monitor Your Decision:
If you decide to lend the money, you will need to monitor your investment periodically.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-35
MAKING FINANCIAL DECISIONS
LO 1,5 DECISION CASE 8-3 COMPARING COMPANIES
ACCELERATED COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
Sales ...................................................................................... $720,000
Cost of goods sold ................................................................. 360,000
Gross profit ............................................................................. $360,000
Since the balance of the Accumulated Depreciation account for Straight Company is
$240,000 and the depreciation expense is $120,000 per year, the assets must be two
years old. The amount of depreciation expense for Accelerated Company using the
double-declining-balance method is as follows:
2015: $600,000 × 40% = $240,000
*2016: $600,000 – $240,000 = $360,000 × 40% = $144,000
LO 5 DECISION CASE 8-4 DEPRECIATION ALTERNATIVES
For accounting purposes, the company should use straight-line depreciation because it
will better match the cost of using the asset with the equal production levels. For taxes,
8-36 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ETHICAL DECISION MAKING
LO 3 DECISION CASE 8-5 VALUING ASSETS
1. Recognize an Ethical Dilemma:
Students should be asked to determine the impact of using the first appraisal versus
2. Analyze the Key Elements in the Situation:
Students should be asked about the nature of the appraisal process. Is it possible for
two appraisers to have different estimates of the fair market value? Should the ac-
countant always accept the first appraisal? When is it acceptable to seek another
3. List Alternatives and Evaluate the Impact of Each on Those Affected:
The proper amount to record for operating assets can have a potential effect on
4. Select the Best Alternative:
It appears that the concept of neutrality has been violated in this case. It is not wrong
for Terry and Tammy to seek a second appraisal if their motive was to develop
questioned.
LO 5 DECISION CASE 8-6 DEPRECIATION ESTIMATES
Both methods will result in the total cost of the asset being recorded on the income
statement over the life of the asset. However, depreciating the asset is preferable be-
cause it matches the cost evenly over the asset’s life. You should try to convince the
manager that it is not correct to depreciate the asset over a longer life and then record a
large loss in the third year. If the manager is not convinced, you may have to consider
whether the matter should be discussed with his/her superior and/or the company’s
auditors.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-37
SOLUTION TO INTEGRATIVE PROBLEM
1. PEK COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
Sales revenue ......................................................... $1,250,000
Cost of goods sold .................................................. 636,500
Gross profit ........................................................ $ 613,500
PEK COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
Cash flows from operating activities:
Net income .................................................................................. $263,830
Adjustments to reconcile net income to net cash provided by
operating activities (includes depreciation expense) .............. 110,200*
8-38 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
2. PEK COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
Sales ....................................................................... $1,250,000
Cost of goods sold .................................................. 636,500
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
Cash flows from operating activities:
Net income .................................................................................. $248,366
Adjustments to reconcile net income to net
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-39
3. a. LIFO cost of goods sold:
40,000($3.25) = $130,000
60,000($3.10) = 186,000
75,000($3.00) = 225,000
4. a. Sales on account .................................................................... $800,000
Times estimated uncollectibles ............................................... 3%
Increase in other expenses ............................................... $ 24,000
b. Increase in other expenses .................................................... $ 24,000
