8-1
CHAPTER 8
Operating Assets: Property, Plant,
and Equipment, and Intangibles
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Objectives Exercises Minutes Level
Module 1
1. Understand balance sheet disclosures for 11* 30 Mod
operating assets.
2. Determine the acquisition cost of an operating asset. 1 10 Easy
Module 2
5. Compare depreciation methods and understand the factors 3 20 Mod
affecting the choice of method. 4 15 Mod
12* 5 Easy
8. Analyze the effect of the disposal of an asset at a gain or loss. 6 15 Mod
7 15 Mod
Module 3
9. Understand the balance sheet presentation of intangible assets. 13* 10 Mod
13* 10 Mod
Module 4
11. Explain the impact that long-term assets have on the statement 9 5 Mod
of cash flows. 10 5 Mod
8-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Problems Estimated
and Time in
Learning Objectives Alternates Minutes Level
Module 1
1. Understand balance sheet disclosures for
operating assets. 6* 30 Mod
2. Determine the acquisition cost of an operating asset. 7* 15 Diff
Module 2
5. Compare depreciation methods and understand the factors 2 10 Easy
affecting the choice of method. 3 15 Mod
6* 30 Mod
7* 15 Diff
8# 20 Mod
Module 3
9. Understand the balance sheet presentation of intangible assets. 6** 30 Mod
11* 20 Diff
Module 4
11. Explain the impact that long-term assets have on the statement 4 15 Mod
of cash flows. 5 40 Diff
10* 35 Mod
11* 20 Diff
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-3
Estimated
Time in
Learning Objectives Cases Minutes Level
Module 1
1. Understand balance sheet disclosures for 1* 20 Mod
operating assets. 2* 20 Mod
3* 20 M
Module 2
5. Compare depreciation methods and understand the factors 3* 20 Mod
affecting the choice of method. 4 25 Mod
6 15 Mod
Module 3
9. Understand the balance sheet presentation of intangible assets. 1* 20 Mod
2* 20 Mod
Module 4
11. Explain the impact that long-term assets have on the statement
of cash flows.
8-4 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISES
LO 2 EXERCISE 8-1 ACQUISITION COST
The acquisition cost of the asset should be computed as follows:
List price ………………………………………………………………………….. $60,000
Discount of 2% ………………………………………………………………….. (1,200)
LO 3 EXERCISE 8-2 LUMP-SUM PURCHASE
1. The total market value is calculated as follows:
Land ………………………………………………………………………………… $200,000
Building ……………………………………………………………………………. 150,000
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-5
EXERCISE 8-2 (Concluded)
The journal entry would be as follows:
Journal Jan. 1 Land ……………………………………………………. 173,333
Entry Building ……………………………………………….. 130,000
Analysis Equipment ……………………………………………. 216,667
Build-
ing 130,000
Equip-
ment
216,667
Cash
(520,000)
2. The amount of depreciation expense that should be recorded for 2016 is as follows:
Land = $0
3. The assets would appear on the balance sheet as follows:
Long-term assets:
8-6 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
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LO 5 EXERCISE 8-3 STRAIGHT-LINE AND UNITS-OF-PRODUCTION METHODS
Depreciation, accumulated depreciation, and book value for the straight-line method
should be as follows:
Annual Accumulated Book
Year Depreciation Depreciation Value
2016 $10,800* $10,800 $49,200
*($60,000 – $6,000)/5 years = $10,800 per year
The estimated total number of units to be produced is
10,000 + 20,000 + 30,000 + 40,000 + 50,000 = 150,000 units.
Annual Accumulated Book
Year Depreciation Depreciation Value
2016 10,000 × $0.36 = $ 3,600 $ 3,600 $56,400
2017 20,000 × $0.36 = 7,200 10,800 49,200
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-7
LO 5 EXERCISE 8-4 ACCELERATED DEPRECIATION
1. Accumulated Book Value
Year Annual Depreciation Depreciation at end of Yr. 1 becomes
beginning Yr. 2 and so on
2016 40%* × $6,000 = $2,400 $2,400 $3,600
2.
Journal Dec. 31 Depreciation Expense ……………………………. 2,400
Entry Accumulated Depreciation …………………. 2,400
3. Koffman may believe that the double-declining-balance method best matches the
decline in usefulness of the asset with the revenues produced by the asset. Koffman
may also choose this method because it allows more depreciation to be taken in the
early years of the asset life and thus delays taxes until the later years.
8-8 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 6 EXERCISE 8-5 CHANGE IN ESTIMATE
1. Depreciation, accumulated depreciation, and book value for the straight-line method
should be as follows:
Accumulated
Year Depreciation Depreciation Book Value
2016 $ 8,000* $ 8,000 $72,000
2017 8,000 16,000 64,000
*($80,000 – $8,000)/9 years = $8,000
**$64,000 – $2,000 = $62,000
$62,000/4 years = $15,500
Depreciation = Remaining Depreciable Amount/Remaining Life
Depreciation = $62,000/4 years
= $15,500
2. Depreciation for 2016 and 2017 was not wrong. The company used the best infor-
mation available at that time to develop its estimate of depreciation. The information
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-9
LO 8 EXERCISE 8-6 ASSET DISPOSAL
1.
Journal July 1 Depreciation Expense ……………………………. 4,500
Entry Accumulated Depreciation—Asset ……… 4,500
Analysis To record depreciation of asset to July 1 for ½ year 2016.
($60,000 – $6,000)/6 years = $9,000 per year.
causes total assets to decrease.
Journal July 1 Cash ……………………………………………………. 40,000
Entry Accumulated Depreciation—Asset …………… 22,500*
Analysis Asset ………………………………………………. 60,000
Gain on Sale of Asset ……………………….. 2,500**
8-10 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 8-6 (Concluded)
The depreciation for 2016 is calculated as follows:
($60,000 – $6,000)/6 years = $9,000 per year
$9,000 × 6/12 = $4,500 for 2016
2. The gain or loss should appear in the Other Income category of the income state-
ment to indicate that it is not part of the normal operating activity of the company. A
gain occurs when the selling price of the asset exceeds its book value. A loss occurs
activity of the company.
LO 8 EXERCISE 8-7 ASSET DISPOSAL
1.
Journal July 1 Depreciation Expense ……………………………. 4,500
Entry Accumulated Depreciation—Asset ……… 4,500
Analysis To record depreciation to July 1 for ½ year 2016.
($60,000 – $6,000)/6 years = $9,000 per year.
$9,000 × 6/12 = $4,500.
Balance Sheet Income Statement
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-11
EXERCISE 8-7 (Concluded)
Journal July 1 Cash ……………………………………………………. 15,000
Entry Note Receivable ……………………………………. 15,000
Analysis Accumulated Depreciation—Asset …………… 22,500
Loss on Sale of Asset ……………………………. 7,500
Asset ………………………………………………. 60,000
To record sale of the asset.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 15,000
Note Receiv-
able 15,000
(7,500)
Loss on Sale
of Asset 7,500**
(7,500)
2. The gain or loss should appear in the Other Income category of the income state-
ment to indicate that it is not part of the normal operating activity of the company. A
gain occurs when the selling price of the asset exceeds its book value. A loss occurs
LO 10 EXERCISE 8-8 AMORTIZATION OF INTANGIBLES
Trademark is not amortized because it has an indefinite life.
Amortization expense = $0
Accumulated amortization = $0
8-12 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 11 EXERCISE 8-9 IMPACT OF TRANSACTIONS INVOLVING OPERATING ASSETS ON
STATEMENT OF CASH FLOWS
Purchase of land: I
Proceeds from sale of land: I
Gain on sale of land: O
LO 11 EXERCISE 8-10 IMPACT OF TRANSACTIONS INVOLVING INTANGIBLE ASSETS
ON STATEMENT OF CASH FLOWS
Cost incurred to acquire copyright: I
Proceeds from sale of patent: I
MULTI-CONCEPT EXERCISES
LO 1,7 EXERCISE 8-11 CAPITAL VERSUS REVENUE EXPENDITURES
1. The following entries should be made to capitalize costs:
Jan. 1
Journal Building ……………………………………………………….. 40,000
Entry Cash ……………………………………………………… 40,000
Analysis To record cost of new conveyor system.
Balance Sheet Income Statement
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-13
EXERCISE 8-11 (Continued)
Journal Delivery Truck ………………………………………………. 5,000
Entry Cash ……………………………………………………… 5,000
Analysis To record cost of hydraulic lift installed on truck.
2. The entry to record depreciation should be as follows:
Journal Dec. 31 Depreciation Expense ……………………………. 14,322
Entry Accumulated Depreciation—Building …… 9,739
Analysis Accumulated Depreciation—Truck ……… 4,583
To record 2016 depreciation.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Accum. Depr.
—Building
(9,739)*
(14,322)
Depreciation
Expense 14,322
(14,322)
The depreciation for 2016 should be calculated as follows:
Building Truck
Original cost …………………………………………………… $200,000 $20,000
Depreciation for 2014 and 2015 ………………………… (16,000)* (6,667)**
Book value …………………………………………………….. $184,000 $13,333
Capitalized costs …………………………………………….. 40,000 5,000
8-14 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 8-11 (Concluded)
3. The assets should appear on the 2016 balance sheet as follows:
Building …………………………………………………………. $240,000
Accumulated depreciation ………………………………… 25,739* $214,261
LO 4,5 EXERCISE 8-12 CAPITALIZATION OF INTEREST AND DEPRECIATION
1. $200,000 + $8,000 = $208,000
LO 9,10 EXERCISE 8-13 RESEARCH AND DEVELOPMENT AND PATENTS
a. All research and development costs should be treated as an expense. The 2016 in-
come statement should reflect an expense of $20,000.
b. Patent costs should be treated as an asset. The 2016 balance sheet should reflect a
Patent account of $10,000 – ($10,000/5 years) = $8,000.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-15
PROBLEMS
LO 3 PROBLEM 8-1 LUMP-SUM PURCHASE OF ASSETS AND SUBSEQUENT EVENTS
1. Relative fair values:
Section 1 ……………………………………………………….. $ 630,000 50%
Section 2 ……………………………………………………….. 378,000 30
2. The purchase of the land has no effect on total assets. Current assets (cash) de-
clines and long-term assets (land) increases and, therefore, only the composition of
assets on the balance sheet is changed.
3. Carter would be concerned with the value assigned to each section if it intended to
LO 5 PROBLEM 8-2 DEPRECIATION AS A TAX SHIELD
If the asset is not purchased, the company must pay income tax of $50,000 × 35% =
$17,500.
If the asset is purchased, the company should record depreciation of $20,000 per
8-16 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 PROBLEM 8-3 BOOK VERSUS TAX DEPRECIATION
1. Year Straight-Line – MACRS = Difference
1 $ 5,600* $ 6,720 $(1,120)
2 5,600 10,750 (5,150)
2. The president is correct that a total of $33,600 will be deducted as depreciation un-
der either method over the six-year life. However, the memo should stress that all
other things being equal, Griffith should prefer MACRS for taxes, since it results in
the payment of less income tax during the early years in the life of the truck. Money
LO 11 PROBLEM 8-4 DEPRECIATION AND CASH FLOW
1. O’HARE COMPANY
INCOME STATEMENT
2. The amount of the net cash inflow for 2016 is $100,000.
3. The amount of the net income ($85,000) does not equal the amount of the net cash
inflow ($100,000) because of depreciation expense. Depreciation is an expense on
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-17
PROBLEM 8-4 (Concluded)
4. If O’hare develops a cash flow statement using the indirect method, the Operating
category should appear as follows:
LO 11 PROBLEM 8-5 RECONSTRUCT NET BOOK VALUES USING STATEMENT OF CASH
FLOWS
1. Book value of equipment at time of sale:
Book value …………………………………………………………. $ X
Book value of copyright at time of sale:
Book value …………………………………………………………. $ X
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 ………………………… 15,000
Book value of copyright sold during 2016 ……………….. (20,000)**
2016 amortization ……………………………………………….. (33,000)
8-18 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
MULTI-CONCEPT PROBLEMS
LO 1,3,5,7,8 PROBLEM 8-6 COST OF ASSETS, SUBSEQUENT BOOK VALUES, AND
BALANCE SHEET PRESENTATION
1. Values assigned to each asset:
a. Value at time of purchase: $14,000 + $4,800 = $18,800
b. Allocation of purchase price:
2. Depreciation or other expense recorded for each asset during 2016:
a. ($18,800 – $800)/4 years = $4,500
b. Supplies expense $150
Depreciation of office furniture $450/9 years = 50
Depreciation of equipment $1,800/4 years = 450
3. Balance Sheet Presentation:
Current assets:
Prepaid license expense ($1,500 – $458) ………….. $ 1,042
Property, plant, and equipment:
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-19
LO 2,5 PROBLEM 8-7 COST OF ASSETS AND THE EFFECT ON DEPRECIATION
2. Reported income in Year 1 is $51,500 ($100,000 – $16,500 – $25,000 – $4,000 –
$3,000). Reported income should be $80,300 ($100,000 – $19,700).
LO 5,7,8 PROBLEM 8-8 CAPITAL EXPENDITURES, DEPRECIATION, AND DISPOSAL
1. The entry to record depreciation for 2015 is as follows:
Journal Dec. 31 Depreciation Expense ……………………………. 14,000
Entry Accumulated Depreciation—Building …… 14,000
Analysis To record depreciation for 2015.
($364,000 – $14,000)/25 = $14,000.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Accum. Depr.
—Building*
(14,000) (14,000)
Depreciation
Expense 14,000
(14,000)
*The Accumulated Depreciation account has increased. It is shown as a decrease in the equation above because it is a contra account and
causes total assets to decrease.
8-20 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 8-8 (Continued)
Journal Jan. 1 Building ……………………………………………….. 42,000
Entry Cash ………………………………………………. 42,000
Analysis To record pollution control equipment.
Balance Sheet Income Statement
The depreciation for 2015 should be calculated as follows:
($364,000 – $14,000)/25 years = $14,000 for 2015.
The depreciation for 2016 should be calculated as follows:
Original cost ………………………………………………….. $ 364,000
2015 depreciation …………………………………………… (14,000)
Journal Dec. 31 Depreciation Expense ……………………………. 12,600
Entry Accumulated Depreciation—Building …… 12,600
Analysis To record depreciation for 2016.
Balance Sheet Income Statement
2. The pollution control equipment extended the life of the asset and should be capital-
ized rather than expensed. It is difficult to determine whether Merton would rather