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Chapter 10 Accounting for Long-Term Assets DISCUSSION QUESTIONS 1.

An item of property, plant and equipment is tangible; it is used in the production or sale of other assets or services; and it has a useful life longer than one accounting period.

2.

The cost of an item of property, plant and equipment includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.

3.

Land is an asset with an unlimited life and, therefore, is not subject to depreciation. Land improvements have limited lives and are subject to depreciation.

4.

Often the lump-sum or basket purchase includes assets with different lives that must be depreciated separately. Sometimes the purchase may include land, which is never depreciated.

5.

The Accumulated Depreciation—Machinery account is a contra asset account with a credit balance that cannot be used to buy anything. The balance of the Accumulated Depreciation—Machinery account reflects that portion of the machinery's original cost that has been charged to depreciation expense. It also gives some indication of the asset’s age and how soon it will need to be replaced. Any funds available for buying machinery are shown on the balance sheet as liquid assets with debit balances.

6.

The company can show both the cost and accumulated depreciation on the balance sheet, or it can also just show the net amount (cost less the accumulated depreciation). More details can be disclosed in the Notes.

7.

The materiality principle justifies charging low-cost plant asset purchases to expense because such amounts are unlikely to impact the decisions of financial statement users.

8.

Ordinary repairs are made to keep an item of property, plant and equipment in normal, good operating condition, and should be charged to expense of the current period. Extraordinary repairs are made to extend the life of an item of property, plant and equipment beyond the original estimated life; they are recorded as capital expenditures (and added to the asset account).

9.

A company might sell or exchange an asset when it reaches the end of its useful life, or if it becomes inadequate or obsolete, or if the company has changed its business plans. An asset also can be damaged or destroyed by fire or some other accident that would require its disposal.

10. The process of allocating the cost of natural resources to expense over the periods when they are consumed is called depletion. The method to compute depletion is similar to unitsof-production depreciation.

© McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


11. No, depletion expense should be calculated on the units that are extracted (similar to the units-of-production basis) and sold. 12. An intangible asset: (1) has no physical existence; (2) derives value from the unique legal and contractual rights held by its owner; and (3) is used in the company’s operations. 13. Intangible assets are generally recorded at their cost and amortized over their predicted useful life. (However, some costs are not included, such as the research and development costs leading up to a patent.) The costs of intangible assets are generally allocated to amortization expense using the straight-line method over their useful lives. If the useful life of an intangible asset is indefinite, then it is not amortized—instead, it is annually tested for impairment. 14. A company has goodwill when its value exceeds the value of its individual assets and liabilities. Goodwill appears in the balance sheet when one company acquires another company or separate segment and pays a price that exceeds the combined values of all its net assets (assets less liabilities) excluding goodwill. 15. No; this type of goodwill would not be amortized but be tested annually for impairment. If the book value of goodwill does not exceed its fair (market) value, goodwill is not impaired. However, if the book value of goodwill exceeds its fair value, an impairment loss is recorded equal to that excess. (Details of this two-step test are in advanced courses.) 16. Total asset turnover is calculated by dividing net sales by average total assets. Financial statement users can use total asset turnover to evaluate the efficiency of a company in using its assets to generate sales.

17. Nestlé’s book value of property, plant and equipment assets is 21,097 Swiss franc million. 18. Kraft Foods’ book value of property, plant and equipment is US$9,917 million. 19. Adidas’ Long term assets discussed in this chapter are: Property, plant, and equipment; Goodwill; Trademarks; Other intangible assets.

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QUICK STUDY Quick Study 10-1 (10 minutes) Recorded cost = $190,000 + $20,000 + $4,000 + $13,700 = $227,700 Note: The $1,850 repair charge is an expense because it is not a normal and reasonable expenditure necessary to get the asset in place and ready for its intended use.

Quick Study 10-2 (10 minutes) 1. The main difference between property, plant and equipment and current assets is that current assets are consumed or converted into cash within a short period of time, while property, plant and equipment have a useful life of more than one accounting period. 2. The main difference between property, plant and equipment and inventory is that inventory is held for resale and property, plant and equipment are not. 3. The main difference between property, plant and equipment and longterm investments is that property, plant and equipment are used in the primary operation of the business and investments are not. Quick Study 10-3 (10 minutes) 1. Straight-line ($65,800 - $2,000) / 4 years = $15,950 depreciation per year 2. Units-of-production ($65,800 - $2,000) / 200 concerts =

$

319 depreciation per concert x 45 concerts in 2008 $14,355 depreciation in 2008

Quick Study 10-4 (10 minutes) $65,800 Cost - 15,950 Accumulated depreciation (first year) 49,850 Book value at point of revision - 2,000 Salvage value 47,850 Remaining depreciable cost á 2 Years of life remaining $23,925 Depreciation per year for years 2 and 3 Š McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Quick Study 10-5 (10 minutes) Note: Double-declining-balance rate = (100% / 8 years) x 2 = 25%

First year: $830,000 x 25%

= $207,500

Second year: ($830,000 - $207,500) x 25%

= $155,625

Third year: ($830,000 - $207,500 - $155,625) x 25%

= $116,719* (rounded)

* Total accumulated depreciation of $479,844 ($207,500 + $155,625 + $116,719) does not exceed the depreciable cost of $755,000 ($830,000 - $75,000).

Quick Study 10-6 (10 minutes) 1. (a) Capital expenditure (b) Revenue expenditure (c) Revenue expenditure (d) Capital expenditure 2. (a)

Equipment................................................................ Cash ..................................................................

40,000 40,000

To record addition of a new wing.

(d) Building .................................................................... 225,000 Cash ..................................................................

225,000

To record an extraordinary repair.

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Quick Study 10-7 (15 minutes) Book value of old machine = $76,800 - $40,800 = $36,000 1.

Cash ................................................................................ Accumulated depreciation ............................................

47,000 40,800

Equipment ........................................................................ Gain on sale of equipment* ............................................ To record the sale of equipment. *(Gain = $47,000 - $36,000)

2.

Cash ................................................................................ Accumulated depreciation ............................................

76,800 11,000

36,000 40,800

Equipment ........................................................................ To record the sale of equipment.

3.

Cash ................................................................................ Accumulated depreciation ............................................ Loss on sale of equipment

76,800

31,000 40,800 5,000

Equipment ........................................................................ To record the sale of equipment. *(Loss = $31,000 - $36,000)

76,800

Quick Study 10-8 (10 minutes) 1.

Ore Mine ..........................................................................1,800,000 Cash ......................................................................... 1,800,000 To record cost of ore mine.

2. Depletion per unit =

$1,800,000 - $200,000 1,000,000 tons

= $1.60 per ton

Depletion Expense—Ore Mine ...................................... 288,000 Accumulated Depletion—Ore Mine .......................

288,000

To record depletion of ore mine (180,000 x $1.60).

Quick Study 10-9 (5 minutes) Intangible Assets:

(b) Trademark (e) Copyright (f) Franchise

Natural Resources: (a) Oil well

(c) Gold mine (g) Timberland

Note: Building is reported under property, plant and equipment assets.

© McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Quick Study 10-10 (5 minutes) Amortization Expense—Patents . . . . . . . . . . . . . . . . 15,000 Accumulated Amortization—Patents . . . . . . . . . 15,000 To amortize patent costs over its useful life. *

Amortization = $150,000 / 10-year-life = $15,000 per year.

Quick Study 10-11 (10 minutes) Total asset turnover = ($ millions)

$14,880 ($15,869 + $17,819) / 2

= 0.88 times

Interpretation: The company’s turnover of 0.88 times is markedly lower than its competitors’ turnover of 2.0. This company must perform better if it is to be successful in the long run.

Quick Study 10-12A (10 minutes) Book value of old machine = $42,400 - $18,400 = $24,000 1.

Machinery (new) ........................................................ Accumulated Depreciation–Machinery (old)........... Loss on Exchange of Assets* .................................. Machinery (old) ................................................. Cash ...................................................................

52,000 18,400 2,000 42,400 30,000

To record asset exchange assuming commercial substance. *$52,000 – ($24,000 + $30,000) = $(2,000)

2.

Machinery (new)* ....................................................... Accumulated Depreciation–Machinery (old)........... Machinery (old) ................................................. Cash ...................................................................

46,000 18,400 42,400 22,000

To record asset exchange assuming lack of commercial substance. *Book value of old asset + cash given = $24,000 + $22,000

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EXERCISES Exercise 10-1 (15 minutes) Invoice price of machine ......................................................... $ 12,500 Less discount (.02 x $12,500) .................................................(250) Net purchase price................................................................... 12,250 Freight charges (transportation-in) ........................................ 360 Mounting and power connections ......................................... 895 Assembly .................................................................................. 475 Materials used in adjusting ..................................................... 40 Total cost to be recorded ........................................................ $ 14,020

Exercise 10-2 (15 minutes) Cost of land Purchase price for land ........................................................... $ 280,000 Purchase price for old building .............................................. 110,000 Demolition costs for old building ........................................... 33,500 Costs to fill and level lot.......................................................... 47,000 Total cost of land ..................................................................... $ 470,500 Cost of new building and land improvements Cost of new building ............................................................... $1,452,200 Cost of land improvements..................................................... 87,800 Total construction costs ......................................................... $1,540,000 Journal entry Land ................................................................................ 470,500 Land Improvements ....................................................... 87,800 Building........................................................................... 1,452,200 Cash ..........................................................................

2,010,500

To record costs of property, plant and equipment.

Š McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Exercise 10-3 (20 minutes) Purchase price ............................................................. Closing costs ............................................................... Total cost of acquisition .............................................

$375,280 20,100 $395,380

Allocation of total cost Appraised Value

Land .............................. $157,040 Land improvements ...... 58,890 Building ......................... 176,670 Totals ............................ $392,600

Percent of Total

Applying % to Cost

Apportioned Cost

40% 15 45 100%

$395,380 x .40 $395,380 x .15 $395,380 x .45

$158,152 59,307 177,921 $395,380

Journal entry Land .......................................................................... 158,152 Land Improvements ................................................ 59,307 Building .................................................................... 177,921 Cash ..................................................................

395,380

To record costs of lump-sum purchase.

Exercise 10-4 (20 minutes) 1. Straight-line depreciation: ($154,000 - $25,000) / 4 years = $32,250 per year Year Annual Depreciation Year-End Book Value 2007 ........ $ 32,250 $121,750 2008 ........ 32,250 89,500 2009 ........ 32,250 57,250 2010 ........ 32,250 25,000 Total ....... $129,000 2. Double-declining-balance depreciation Depreciation rate: 100% / 4 years = 25% x 2 = 50% Beginning-Year Depreciation Annual Year Book Value Rate Depreciation 2007....... $154,000 50% $ 77,000 2008....... 77,000 50 38,500 2009....... 38,500 50 13,500* 2010....... 25,000 --Total ....... $129,000

Year-End Book Value $77,000 38,500 25,000 25,000

* Do not depreciate more than $13,500 in the third year since the salvage value is not subject to depreciation. Š McGraw-Hill Companies, 2011 Principles of Accounting 20e


Exercise 10-5 (15 minutes) 1. Straight-line ($43,500 - $5,000) / 10 years = $3,850 2. Units-of-production Depreciation per unit = ($43,500 - $5,000) / 385,000 units = $0.10 per unit For 32,500 units in second year: Depreciation = 32,500 x $0.10 = $3,250 3. Double-declining-balance Double-declining-balance rate = (100% / 10 years) x 2 = 20% per year First year’s depreciation = $43,500 x 20% = $8,700 Book value at beginning of second year = $43,500 - $8,700 = $34,800 Second year’s depreciation = $34,800 x 20% = $6,960 Exercise 10-6 (15 minutes) 1. Straight-line depreciation for 2010 ($280,000 - $40,000) / 5 years = $48,000 2. Double-declining-balance depreciation for 2010 Rate = (100% / 5 years) x 2 = 40% 2009 depreciation ($280,000 x 40% x 9/12) ............................ $ 84,000 Book value at January 1, 2010 ($280,000 - $84,000) ............. $196,000 Depreciation for 2010 ($196,000 x 40%) ................................. $ 78,400 Alternate calculation 2009 depreciation ($280,000 x 40% x 9/12) ........................................ $ 2010 depreciation $280,000 x 40% x 3/12 ..................................................................... $ ($280,000 - $84,000 - $28,000) x 40% x 9/12 .................................. Total 2010 depreciation ....................................................................... $

84,000 28,000 50,400 78,400

Exercise 10-7 (15 minutes) 1. Original cost of machine .............................................................$ 23,860 Less two years' accumulated depreciation [($23,860 - $2,400) / 4 years] x 2 years .................................... (10,730) Book value at end of second year ..............................................$ 13,130 2. Book value at end of second year ..............................................$ 13,130 Less revised salvage value ......................................................... (2,000) Remaining depreciable cost .......................................................$ 11,130 Revised annual depreciation = $11,130 / 3 years = $3,710 © McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Exercise 10-8 (30 minutes) 1. Straight-line depreciation Income before Depreciation

Year 1 ........ Year 2 ........ Year 3 ........ Year 4 ........ Year 5 ........ Totals.........

$ 88,500 88,500 88,500 88,500 88,500 $442,500

Depreciation Expense*

$ 38,960 38,960 38,960 38,960 38,960 $194,800

Net Income

$ 49,540 49,540 49,540 49,540 49,540 $247,700

*($238,400 - $43,600) / 5 years = $38,960

2. Double-declining-balance depreciation

Year 1 ........ Year 2 ........ Year 3 ........ Year 4 ........ Year 5 ........ Totals ........

Income before Depreciation

Depreciation Expense*

Net Income

$ 88,500 88,500 88,500 88,500 88,500 $442,500

$ 95,360 57,216 34,330 7,894 0 $194,800

$ (6,860) 31,284 54,170 80,606 88,500 $247,700

Supporting calculations for depreciation expense *Note: (100% / 5 years) x 2 = 40% depreciation rate Annual Accumulated Beginning Depreciation Depreciation at Book (40% of the End of the Value Book Value) Year Year 1 .............. $238,400 $ 95,360 $ 95,360 Year 2 .............. 143,040 57,216 152,576 Year 3 .............. 85,824 34,330** 186,906 Year 4 .............. 51,494 7,894*** 194,800 Year 5 .............. 43,600 0 194,800 Total................. $194,800

Ending Book Value ($238,400 Cost Less Accumulated Depreciation) $143,040 85,824 51,494 43,600 43,600

** rounded *** Must not use $20,598; instead take only enough depreciation in Year 4 to reduce book value to the $43,600 salvage value.

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Exercise 10-9 (25 minutes) 1. Annual depreciation = $572,000 / 20 years = $28,600 per year Age of the building = Accumulated depreciation / Annual depreciation = $429,000 / $28,600 = 15 years 2. Entry to record the extraordinary repairs Building ........................................................................... 68,350 Cash ........................................................................

68,350

To record extraordinary repairs.

3.

4.

Cost of building Before repairs.................................................................. $572,000 Add cost of repairs ......................................................... 68,350 Less accumulated depreciation ....................................... Revised book value of building ........................................

$640,350 429,000 $211,350

Revised book value of building (part 3) ........................... New estimate of useful life (20 - 15 + 7) ........................... Revised annual depreciation ............................................

$211,350 12 years $17,612.5

Journal entry Depreciation Expense* ..................................................17,612.5 Accumulated Depreciation–Building .......................

17,612.5

To record depreciation. *Students may round this amount to 17,613, which is fine.

Exercise 10-10 (15 minutes) 1.

Equipment ..................................................................... 22,000 Cash ........................................................................

22,000

To record betterment.

2.

Repairs Expense ........................................................... Cash ........................................................................

6,250 6,250

To record ordinary repairs.

3.

Equipment ..................................................................... 14,870 Cash ........................................................................

14,870

To record extraordinary repairs.

Š McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Exercise 10-11 (20 minutes) Note: Book value of milling machine = $250,000 - $182,000 = $68,000 1. Disposed at no value Jan. 3

Loss on Sale of Milling Machine ................................. 68,000 Accumulated Depreciation—Milling Machine ........... 182,000 Milling Machine ........................................................ 250,000 To record disposal of milling machine.

2. Sold for $35,000 cash Jan. 3

Cash .............................................................................. 35,000 Loss on Sale of Milling Machine ................................. 33,000 Accumulated Depreciation—Milling Machine ........... 182,000 Milling Machine ........................................................ 250,000 To record cash sale of milling machine.

3. Sold for $68,000 cash Jan. 2

Cash .............................................................................. 68,000 Accumulated Depreciation—Milling Machine ........... 182,000 Milling Machine ........................................................ 250,000 To record cash sale of milling machine.

4. Sold for $80,000 cash Jan. 2

Cash .............................................................................. 80,000 Accumulated Depreciation—Milling Machine ........... 182,000 Gain on Sale of Milling Machine ............................. 12,000 Milling Machine ........................................................ 250,000 To record cash sale of milling machine.

© McGraw-Hill Companies, 2011 Principles of Accounting 20e


Exercise 10-12 (25 minutes) 2011

July 1

Depreciation Expense ............................................. Accumulated Depreciation--Machinery ............

7,500 7,500

To record one-half year depreciation.* *Annual depreciation = $105,000 / 7 years = $15,000 Depreciation for 6 months in 2011 = $15,000 x 6/12 = $7,500

1. Sold for $45,500 cash July 1

Cash ..............................................................................45,500 Accumulated Depreciation—Machinery ....................67,500 Gain on Sale of Machinery ...................................... Machinery ..................................................................

8,000 105,000

To record sale of machinery.*

*Total accumulated depreciation at date of disposal: Four years 2007-2010 (4 x $15,000) ......... $60,000 Partial year 2011 (6/12 x $15,000) ............ 7,500 Total accumulated depreciation .............. $67,500 Book value of machinery = $105,000 - $67,500 = $37,500

2. Destroyed by fire with $25,000 cash insurance settlement July 1

Cash ..............................................................................25,000 Loss from Fire ..............................................................12,500 Accumulated Depreciation—Machinery ....................67,500 Machinery ..................................................................

105,000

To record disposal of machinery from fire.

Exercise 10-13 (10 minutes) Dec. 31

Depletion Expense—Mineral Deposit ........................ 405,528 Accumulated Depletion—Mineral Deposit ............

405,528

To record depletion [$3,721,000/1,525,000 tons = $2.44 per ton; 166,200 tons x $2.44 = $405,528].

Dec. 31

Depreciation Expense—Machinery ...........................23,268 Accumulated Depreciation—Machinery ...............

23,268

To record depreciation [$213,500/1,525,000 tons= $0.14 per ton; 166,200 tons x $0.14 = $23,268]. © McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Exercise 10-14 (10 minutes) Jan.

1 Copyright ...................................................................... 418,000 Cash.......................................................................... To record purchase of copyright.

418,000 00

Dec. 31 Amortization Expense—Copyright ............................41,800 Accumulated Amortization—Copyright ................

41,800

To record amortization of copyright [$418,000 / 10 years].

Exercise 10-15 (10 minutes) 1. Goodwill = $2,500,000 - $1,800,000 = $700,000 2. Goodwill is not amortized. Instead, Robinson must test the value of the Goodwill each year, and if the value is impaired, it must be written down. 3. Goodwill is only recorded when it is purchased. Goodwill is not recorded by the company that has created it.

Exercise 10-16 (15 minutes) Numbers in Euro millions 1. 316 for property, plant and equipment 2. 234 for depreciation and amortization 3. 444 used in investing activities

Exercise 10-17 (15 minutes) Total asset turnover for 2010 =

$5,865,000 ($1,686,000 + $1,800,000)/2

= 3.36

Total asset turnover for 2011 =

$8,689,000 ($1,800,000 + $1,982,000)/2

= 4.59

Analysis comments. Based on these calculations, Lok turned its assets over 1.23 (4.59 – 3.36) more times in 2011 than in 2010. This increase indicates that Lok became more efficient in using its assets. Moreover, Lok has improved its efficiency in using assets relative to its competitors who average 3.0. Together, these results based on total asset turnover indicate that Lok has markedly improved its performance and is currently superior to its competitors.

© McGraw-Hill Companies, 2011 Principles of Accounting 20e


Exercise 10-18A (15 minutes) 1. Book value of the old tractor ($96,000 - $52,500) .......................... $ 43,500 2. Loss on the exchange Book value - Trade-in allowance ($43,500 - $29,000).............. $ 14,500 3. Debit to new Tractor account Cash paid + Trade-in allowance ($83,000 + $29,000) .............. $112,000 Alternatively, answers can be taken from the following journal entry: Tractor (new)* ........................................................................... 112,000 Loss on Exchange of Assets .................................................... 14,500 Accumulated Depreciation–Tractor.......................................... 52,500 Tractor (old) ...................................................................... Cash ..................................................................................

96,000 83,000

To record asset exchange. *($29,000 + $83,000)

Exercise 10-19A (25 minutes) Note: Book value of Machine equals $44,000 - $24,625 = $19,375

1. Sold for $18,250 cash Jan. 2

Cash .............................................................................. 18,250 Loss on Sale of Machinery .......................................... 1,125 Accumulated Depreciation—Machinery (old) ............ 24,625 Machinery (old) ........................................................

44,000

To record cash sale of machine.

2. $25,000 trade-in allowance exceeds book value; but no gain is recognized on an asset exchange that lacks commercial substance ($5,625 gain is ‘buried’ in the cost of the new machinery)

Jan. 2

Machinery (new)*.......................................................... 54,575 Accumulated Depreciation—Machinery (old) ............ 24,625 Machinery (old) ........................................................ Cash** .......................................................................

44,000 35,200

To record asset exchange. *[$60,200 - ($25,000 - $19,375)] **($60,200 - $25,000)

3. $15,000 trade-in allowance is less than book value (yielding a loss) Jan. 2

Machinery (new) ........................................................... 60,200 Loss on Exchange of Machinery ................................ 4,375 Accumulated Depreciation—Machinery (old) ............ 24,625 Machinery (old) ........................................................ Cash* ........................................................................

44,000 45,200

To record asset exchange. *($60,200 - $15,000) © McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


PROBLEM SET A Problem 10-1A (50 minutes) Part 1

Building .......................... Land ............................... Land improvements ...... Vehicles ......................... Total ............................... 2011 Jan. 1

Estimated Market Value $508,800 297,600 28,800 124,800 $960,000

Percent of Total 53% 31 3 13 100%

Apportioned Cost $477,000 279,000 27,000 117,000 $900,000

Building ........................................................................... 477,000 Land ................................................................................ 279,000 Land Improvements ....................................................... 27,000 Vehicles .......................................................................... 117,000 Cash .......................................................................... 900,000 To record asset purchases.

Part 2 Year 2011 straight-line depreciation on building [($477,000 - $27,000) / 15 years] = $30,000 Part 3 Year 2011 double-declining-balance depreciation on land improvements (100% / 5 years) x 2 = 40% rate $27,000 x 40% = $10,800 Part 4 Accelerated depreciation does not lower the total amount of taxes paid over the asset's life. Instead, it defers or postpones taxes to the later years of an asset’s useful life. This is because accelerated methods charge a higher portion of asset costs against revenue in earlier years and a lower portion in later years. The result is to reduce taxable income more in earlier years but less in later years. [Note: From a present value perspective, there is a tax savings from use of accelerated depreciation. The company gets to use the tax deferred amounts for investment purposes until they are due.] Š McGraw-Hill Companies, 2011 Principles of Accounting 20e


Problem 10-2A (45 minutes) Part 1

Land Purchase price*.................. $1,612,000 Demolition .......................... 328,400 Land grading ...................... 175,400 New building ...................... New improvements ............ _________ Totals ................................. $2,115,800

*Allocation of purchase price

Land ....................................... Building 2 ............................... Land Improvements 1 ............ Totals......................................

Building 2 $598,000

Building 3

$2,202,000 _______ _________ $598,000 $2,202,000

Land Improvements 1 $390,000

Land Improvements 2

_______ $390,000

Appraised Value

Percent of Total

Apportioned Cost**

$1,736,000 644,000 420,000 $2,800,000

62% 23 15 100%

$1,612,000 598,000 390,000 $2,600,000

$164,000 $164,000

**Multiply the percentages in column 3 by the $2,600,000 purchase price.

Part 2 2011

Jan. 1

Land ...................................................................... 2,115,800 Building 2 ............................................................. 598,000 Building 3 ............................................................. 2,202,000 Land Improvements 1.......................................... 390,000 Land Improvements 2.......................................... 164,000 Cash ................................................................ 5,469,800 To record costs of property, plant and equipment.

Part 3 2011

Dec. 31 Depreciation Expense—Building 2 .............................. 26,900 Accumulated Depreciation—Building 2 ................

26,900

To record depreciation [($598,000 - $60,000)/20].

31 Depreciation Expense—Building 3 .............................. 72,400 Accumulated Depreciation—Building 3 ................

72,400

To record depreciation [($2,202,000 - $392,000)/25].

31 Depreciation Expense—Land Improv. 1 ...................... 32,500 Accum. Depreciation—Land Improv. 1 ..................

32,500

To record depreciation [$390,000/12].

31 Depreciation Expense—Land Improv. 2 ......................8,200 Accum. Depreciation—Land Improv. 2 ..................

8,200

To record depreciation [$164,000/20].

© McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Problem 10-3A (50 minutes) 2010

Jan.

1 Equipment ................................................................300,600 Cash ..................................................................... 300,600 To record loader costs ($287,600 +$11,500 +$1,500).

Jan.

3 Equipment .................................................................... 4,800 Cash ........................................................................

4,800

To record betterment of loader.

Dec. 31 Depreciation Expense—Equipment ........................... 70,850* Accumulated Depreciation—Equipment .............

70,850

To record depreciation. *

2010 depreciation after January 3rd betterment Total original cost ................................................................. $300,600 Plus cost of betterment......................................................... 4,800 Revised cost of equipment ................................................... 305,400 Less revised salvage ($20,600 + $1,400).............................. 22,000 Cost to be depreciated .......................................................... 283,400 Annual depreciation ($283,400 / 4 years) .............................. $ 70,850

2011

Jan.

1 Equipment .................................................................... 5,400 Cash ........................................................................

5,400

To record extraordinary repair on loader.

Feb. 17 Repairs Expense—Equipment ................................... Cash ........................................................................

820 820

To record ordinary repair on loader.

Dec. 31 Depreciation Expense—Equipment ...........................43,590* Accumulated Depreciation—Equipment .............

43,590

To record depreciation. *2011 depreciation after January 1st extraordinary repair Total cost ($305,400 + $5,400)....................................................................... $310,800 Less accumulated depreciation ................................................................... 70,850 Book value .................................................................................................... 239,950 Less salvage ................................................................................................. 22,000 Remaining cost to be depreciated ................................................................ $217,950 Revised remaining useful life (Original 4 years - 1yr. + 2yrs.) .............................. 5 yrs. $ 43,590 Revised annual depreciation ($217,950 / 5 yrs) ............................................

© McGraw-Hill Companies, 2011 Principles of Accounting 20e


Problem 10-4A (40 minutes) 2010

Jan.

1 Trucks ...........................................................................22,000 Cash ........................................................................

22,000

To record cost of truck ($20,515 + $1,485).

Dec. 31 Depreciation Expense—Trucks .................................. 4,000 Accumulated Depreciation—Trucks ....................

4,000

To record depreciation [($22,000 - $2,000)/5]. 2011

Dec. 31 Depreciation Expense—Trucks .................................. 5,200* Accumulated Depreciation—Trucks ....................

5,200

To record depreciation. *

2011 depreciation Total cost ....................................................................................................... $ 22,000 Less accumulated depreciation (from 2010) ................................................. 4,000 Book value ..................................................................................................... 18,000 Less revised salvage value ........................................................................... 2,400 Remaining cost to be depreciated................................................................. $ 15,600 Revised useful life ......................................................................................... 4 yrs. Less one year used in 2007 ........................................................................... 1 yrs. Revised remaining useful life ........................................................................ 3 yrs. Total depreciation for 2008 ($15,600/3) ......................................................... $ 5,200

2012

Dec. 31 Depreciation Expense—Trucks .................................. 5,200 Accumulated Depreciation—Trucks ....................

5,200

To record annual depreciation.

Dec. 31 Cash .............................................................................. 5,300 Accumulated Depreciation—Trucks ..........................14,400** Loss on Disposal of Trucks ........................................ 2,300*** Trucks ..................................................................... 22,000 To record sale of truck. **

Accumulated depreciation on truck at 12/31/2012 2010.............................................................................. $ 4,000 2011.............................................................................. 5,200 2012.............................................................................. 5,200 Total ............................................................................. $14,400 *** Book value of truck at 12/31/2012 Total cost ..................................................................... $22,000 Less accumulated depreciation ................................... (14,400) Book value .................................................................. $ 7,600 Loss ($5,300 cash received - $7,600 book value) ........ $ 2,300 © McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Problem 10-5A (25 minutes) Cost of machine ................................................................ $257,500 Less estimated salvage value ......................................... 20,000 Total depreciable cost ...................................................... $237,500

Year Straight-Line 1 ...................... $ 59,375 2 ...................... 59,375 3 ...................... 59,375 4 ...................... 59,375 Totals .............. $237,500

a

b

Units-of-Production $110,000 62,300 60,900 4,300 $237,500

Double-DecliningBalancec $128,750 64,375 32,188 12,187 $237,500

a

Straight- line: Cost per year = $237,500/4 years = $59,375 per year

b

Units-of-production: Cost per unit = $237,500/475,000 units = $0.50 per unit Year 1 ............... 2 ............... 3 ............... 4 ............... Total ......... *

Units 220,000 124,600 121,800 15,200

Unit Cost $0.50 0.50 0.50 0.50

Depreciation $ 110,000 62,300 60,900 4,300* $237,500

Take only enough depreciation in Year 4 to reduce book value to the asset’s $20,000 salvage value.

c

Double-declining-balance: (100%/4) x 2 = 50% depreciation rate

Year 1 ........ 2 ........ 3 ........ 4 ........ Total ..

Beginning Book Value $257,500 128,750 64,375 32,187

Annual Depreciation (50% of Book Value) $128,750 64,375 32,188* 12,187** $237,500

Accumulated Depreciation at the End of the Year

Ending Book Value ($257,500 Cost Less Accumulated Depreciation)

$128,750 193,125 225,313 237,500

$128,750 64,375 32,187 20,000

* rounded **Take only enough depreciation in Year 4 to reduce book value to the asset’s $20,000 salvage value.

© McGraw-Hill Companies, 2011 Principles of Accounting 20e


Problem 10-6A (20 minutes) 1. Jan. 2 Machinery ................................................................. 178,000 Cash ....................................................................

178,000

To record machinery purchase.

Jan. 3 Machinery ................................................................. Cash ....................................................................

2,840 2,840

To record machinery costs.

Jan. 3 Machinery ................................................................. Cash ....................................................................

1,160 1,160

To record machinery costs.

2. a. First year Dec. 31 Depreciation Expense—Machinery ............................28,000 Accumulated Depreciation—Machinery ..............

28,000

To record depreciation [($182,000 - $14,000)/6].

b. Fifth year Dec. 31 Depreciation Expense—Machinery ............................28,000 Accumulated Depreciation—Machinery ..............

28,000

To record year’s depreciation.

3. Accumulated depreciation at the date of disposal Five years' depreciation (5 x $28,000) ..........................$140,000 Book value at the date of disposal Original total cost ...........................................................$182,000 Accumulated depreciation ............................................. (140,000) Book value .......................................................................$ 42,000 a. Sold for $15,000 cash

Dec. 31 Cash .............................................................................. 15,000 Loss on Sale of Machinery ......................................... 27,000 Accumulated Depreciation—Machinery .................... 140,000 Machinery ................................................................

182,000

b. Sold for $50,000 cash

Dec. 31 Cash .............................................................................. 50,000 Accumulated Depreciation—Machinery .................... 140,000 Machinery ................................................................ Gain on Sale of Machinery .....................................

182,000 8,000

c. Destroyed in fire and collected $30,000 cash from insurance co.

Dec. 31 Cash .............................................................................. 30,000 Accumulated Depreciation—Machinery .................... 140,000 Loss from Fire .............................................................. 12,000 Machinery ................................................................

182,000

© McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Problem 10-7A (20 minutes) a. July 23 Mineral Deposit ............................................................ 4,715,000 Cash ........................................................................

4,715,000

To record purchase of mineral deposit.

b. July 25 Machinery ..................................................................... 410,000 Cash ........................................................................

410,000

To record costs of machinery.

c. Dec. 31 Depletion Expense—Mineral Deposit ........................ 441,600 Accum. Depletion—Mineral Deposit ....................

441,600

To record depletion [$4,715,000/ 5,125,000 tons = $0.92 per ton. 480,000 tons x $0.92 = $441,600].

d. Dec. 31 Depreciation Expense—Machinery ............................ 38,400 Accum. Depreciation—Machinery .......................

38,400

To record depreciation [$410,000/ 5,125,000 tons = $0.08 per ton. 480,000 tons x $0.08 = $38,400].

Analysis Component Similarities—Amortization, depletion, and depreciation are similar in that they are all methods of allocating costs of long-term assets to the periods that benefit from their use. Differences—They are different in that they apply to different types of long-term assets: amortization applies to intangible assets with (definite) useful lives; depletion applies to natural resources; and depreciation applies to property, plant and equipment. Also, amortization is typically computed using the straight-line method, whereas the units-of-production method is routinely used in depletion.

© McGraw-Hill Companies, 2011 Principles of Accounting 20e


Problem 10-8A (20 minutes) a.

Expense. This is advertising which is expensed because of the difficulty in reliably ascertaining future benefits.

b.

Expense. Although the training of employees may generate future benefits, the number of periods benefited is highly indeterminate. These training expenditures are generally expensed.

c.

Goodwill represents the excess paid over the fair value of the net assets purchased. Goodwill is not amortized but is subject to assessment for impairment periodically.

d.

Expense. Research and development costs are generally expensed because of the great uncertainty in generating future benefits. If a patent is acquired in the future, the acquisition costs (e.g. legal and registration fees) will be capitalized and amortized over the patent's useful life, limited to 10 years.

Š McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


PROBLEM SET B Problem 10-1B (50 minutes) Part 1 Estimated Market Value Building .......................... $ 890,000 Land ................................ 427,200 Land improvements ...... 249,200 Trucks............................. 213,600 Total ................................ $1,780,000 2011 Jan. 1

Percent of Total 50% 24 14 12 100%

Apportioned Cost $ 900,000 432,000 252,000 216,000 $1,800,000

Buildings ........................................................................ 900,000 Land ................................................................................ 432,000 Land Improvements....................................................... 252,000 Trucks ............................................................................. 216,000 Cash ..........................................................................

1,800,000

To record asset purchases.

Part 2 Year 2011 straight-line depreciation on building [($900,000 - $120,000) / 12 years] = $65,000 Part 3 Year 2011 double-declining-balance depreciation on land improvements (100% / 10 years) x 2 = 20% rate $252,000 x 20% = $50,400 Part 4 Accelerated depreciation does not increase the total amount of taxes paid over the asset’s life. Instead, it defers or postpones taxes to the later years of an asset’s useful life. This is because accelerated methods charge a higher portion of asset costs against revenue in earlier years and a lower portion in later years. The result is to reduce taxable income more in earlier years and less in later years. [Note: From a present value perspective, there is a tax savings from use of accelerated depreciation. The company gets to use the deferred tax amounts for investment purposes until they are due.] © McGraw-Hill Companies, 2011 Principles of Accounting 20e


Problem 10-2B (45 minutes) Part 1

Land Purchase price*.......... $ 868,000 Demolition .................. 122,000 Land grading .............. 174,500 New building .............. New improvements .... _________ Totals ......................... $1,164,500

Building B

Building C

Land Improvements B

$527,000

$155,000

$1,458,000 _______ _________ $527,000 $1,458,000

_______ $155,000

Allocation of Appraised purchase price Value Land ........................................ $ 795,200 Building B ............................... 482,800 Land Improvements B ............ 142,000 Totals ...................................... $1,420,000

Percent of Total 56% 34 10 100%

Land Improvements C

$103,500 $103,500

Apportioned Cost $ 868,000 527,000 155,000 $1,550,000

Part 2 2011

Jan. 1

Land....................................................................... 1,164,500 Building B ............................................................. 527,000 Building C ............................................................. 1,458,000 Land Improvements B .......................................... 155,000 Land Improvements C .......................................... 103,500 Cash................................................................. 3,408,000 To record cost of property, plant and equipment.

Part 3 2011

Dec. 31 Depreciation Expense—Building B ....................................... 28,500 Accumulated Depreciation—Building B .......................... 28,500 To record depreciation [($527,000 - $99,500)/15].

31 Depreciation Expense—Building C ...........................60,000 Accumulated Depreciation—Building C ..............

60,000

To record depreciation [($1,458,000 - $258,000)/20].

31 Depreciation Expense--Land Improvements B .........31,000 Accum. Depreciation--Land Improvements B ........

31,000

To record depreciation [$155,000/5].

31 Depreciation Expense--Land Improvements C. ........10,350 Accum. Depreciation--Land Improvements C ........

10,350

To record depreciation [$103,500/10]. © McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Problem 10-3B (50 minutes) 2010

Jan.

1 Equipment ....................................................................27,670 Cash ........................................................................

27,670

To record costs of van ($25,860 + $1,810).

Jan.

3 Equipment .................................................................... 1,850 Cash ........................................................................

1,850

To record betterment of van.

Dec. 31 Depreciation Expense—Equipment ........................... 5,124* Accumulated Depreciation—Equipment .............

5,124

To record depreciation. *

2007 depreciation after January 3rd betterment Total original cost ................................................................. $27,670 Plus cost of betterment ........................................................ 1,850 Revised cost of equipment ................................................... 29,520 Less revised salvage ($3,670 + $230) .................................. 3,900 Cost to be depreciated.......................................................... $25,620 Annual depreciation ($25,620 / 5 years)................................ $ 5,124

2011

Jan.

1 Equipment .................................................................... 2,080 Cash ........................................................................

2,080

To record extraordinary repair on van.

May 10 Repairs Expense—Equipment ................................... Cash ........................................................................

800 800

To record ordinary repair on van.

Dec. 31 Depreciation Expense—Equipment ........................... 3,763* Accumulated Depreciation—Equipment .............

3,763

To record depreciation. *2011 depreciation after 1/1 extraordinary repair Total cost ($29,520 + $2,080) ......................................................................... $31,600 Less accumulated depreciation .................................................................... 5,124 Book value..................................................................................................... 26,476 Less salvage.................................................................................................. 3,900 Remaining cost to be depreciated ................................................................ $22,576 Revised remaining useful life (Original 5 years - 1yr. + 2yrs.) ................................... 6 yrs. Revised annual depreciation ($22,576 / 6 yrs) (rounded).............................. $ 3,763

© McGraw-Hill Companies, 2011 Principles of Accounting 20e


Problem 10-4B (40 minutes) 2010 Jan. 1 Machinery ..................................................................... 114,270 Cash ........................................................................ 114,270 To record costs of machinery ($107,800 +$6,470).

Dec. 31 Depreciation Expense—Machinery ............................17,425 Accumulated Depreciation—Machinery ..............

17,425

To record depreciation [($114,270-$9,720)/6].

2011 Dec. 31 Depreciation Expense—Machinery ............................ 27,500* Accum. Depreciation—Machinery .......................

27,500

To record depreciation. *

2008 depreciation: Total cost ................................................................................ $114,270 Less accumulated depreciation (from 2007) .......................... 17,425 Book value .............................................................................. 96,845 Less revised salvage value .................................................... 14,345 Remaining cost to be depreciated ......................................... $ 82,500 Revised useful life ..................................................................4 yrs. Less 1 year in 2004 .................................................................1 yrs. Revised remaining useful life .................................................3 yrs.

Total depreciation for 2008 ($82,500/ 3 yrs) ............................ $ 27,500

2012 Dec. 31 Depreciation Expense—Machinery ............................27,500 Accumulated Depreciation—Machinery ..............

27,500

To record depreciation.

Dec. 31 Cash ..............................................................................25,240 Accumulated Depreciation—Machinery ....................72,425** Loss on Disposal of Machinery ..................................16,605*** Machinery ............................................................... 114,270 To record sale of machine. **

Accumulated depreciation on machine at 12/31/2012: 2010 .............................................................................. 2011 .............................................................................. 2012 .............................................................................. Total ............................................................................. *** Book value of machine at 12/31/2012: Total cost ..................................................................... Less accumulated depreciation ................................... Book value ..................................................................

$ 17,425 27,500 27,500 $ 72,425 $114,270 (72,425) $ 41,845

Loss ($25,240 cash received - $41,845 book value) .... $ 16,605 © McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Problem 10-5B (25 minutes) Cost of machine ............................................................. $324,000 Less estimated salvage value ...................................... 30,000 Total depreciable cost ................................................... $294,000 Year

1 ................... 2 ................... 3 ................... 4 ................... 5 ................... Totals ...........

Straight-Linea

Units-of-Productionb

$ 58,800 58,800 58,800 58,800 58,800 $294,000

$ 71,120 64,080 63,400 68,720 26,680 $294,000

Double-DecliningBalancec

$129,600 77,760 46,656 27,994 11,990 $294,000

a

Straight- line: Cost per year = $294,000/5 years = $58,800 per year

b

Units-of-production: Cost per unit = $294,000/1,470,000 units = $0.20 per unit Year 1.............. 2.............. 3.............. 4.............. 5.............. Total ....... *

Units 355,600 320,400 317,000 343,600 138,500

Unit Cost $0.20 0.20 0.20 0.20 0.20

Depreciation $ 71,120 64,080 63,400 68,720 26,680* $294,000

Take only enough depreciation in Year 5 to reduce book value to the asset’s $30,000 salvage value.

c

Double-declining-balance (amounts rounded to the nearest dollar): (100%/5) x 2 = 40% depreciation rate

Year

Beginning Book Value

1 ........... $324,000 2 ........... 194,400 3 ........... 116,640 4 ........... 69,984 5 ........... 41,990 Total.....

Annual Depreciation (40% of Book Value) $129,600 77,760 46,656 27,994* 11,990** $294,000

Accumulated Depreciation at the End of the Year $129,600 207,360 254,016 282,010 294,000

Ending Book Value ($324,000 Cost less Accumulated Depreciation) $194,400 116,640 69,984 41,990 30,000

* rounded ** Take only enough depreciation in Year 5 to reduce book value to the asset’s $30,000 salvage value.

© McGraw-Hill Companies, 2011 Principles of Accounting 20e


Problem 10-6B (20 minutes) 1. Jan. 1 Machinery .................................................................. 150,000 Cash ..................................................................... 150,000 To record machinery costs.

Jan. 2 Machinery .................................................................. Cash .....................................................................

3,510 3,510

To record machinery costs.

Jan. 4 Machinery .................................................................. Cash .....................................................................

4,600 4,600

To record machinery costs.

2. a. First year Dec. 31 Depreciation Expense—Machinery ............................20,000 Accumulated Depreciation—Machinery ..............

20,000

To record depreciation [($158,110-$18,110)/7 = $20,000].

b. Sixth year Dec. 31 Depreciation Expense—Machinery ............................20,000 Accumulated Depreciation—Machinery ..............

20,000

To record the sixth year’s depreciation.

3. Accumulated depreciation at the date of disposal First six years' depreciation (6 x $20,000) ......................$120,000 Book value at the date of disposal Original total cost ..............................................................$158,110 Accumulated depreciation ................................................(120,000) Total .....................................................................................$ 38,110 a. Sold for $28,000 cash

Dec. 31 Cash ..............................................................................28,000 Loss on Sale of Machinery .........................................10,110 Accumulated Depreciation—Machinery .................... 120,000 Machinery ............................................................... 158,110 b. Sold for $52,000 cash

Dec. 31 Cash ..............................................................................52,000 Accumulated Depreciation—Machinery .................... 120,000 Machinery ............................................................... 158,110 Gain on Sale of Machinery .................................... 13,890 c. Destroyed in fire and collected $25,000 cash from insurance

Dec. 31 Cash ..............................................................................25,000 Loss from Fire ..............................................................13,110 Accumulated Depreciation—Machinery .................... 120,000 Machinery ............................................................... 158,110

© McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Problem 10-7B (20 minutes) a. Feb. 19 Mineral Deposit ............................................................ 5,400,000 Cash ........................................................................

5,400,000

To record purchase of mineral deposit.

b. Mar. 21 Machinery ..................................................................... 400,000 Cash ........................................................................

400,000

To record costs of machinery.

c. Dec. 31 Depletion Expense—Mineral Deposit ........................ 342,900 Accum. Depletion—Mineral Deposit ....................

342,900

To record depletion [$5,400,000/ 4,000,000 tons = $1.35 per ton. 254,000 tons x $1.35 = $342,900].

d. Dec. 31 Depreciation Expense—Machinery ............................ 25,400 Accum. Depreciation—Machinery .......................

25,400

To record depreciation [$400,000/ 4,000,000 tons = $0.10 per ton. 254,000 tons x $0.10 = $25,400].

Analysis Component Similarities—Amortization, depletion, and depreciation are similar in that they are all methods of allocating costs of long-term assets to the periods that benefit from their use. Differences—They are different in that they apply to different types of long-term assets: amortization applies to intangible assets (with definite useful lives); depletion applies to natural resources; and depreciation applies to property, plant and equipment. Also, amortization is typically computed using the straight-line method, whereas the units-of-production method is routinely used in depletion.

© McGraw-Hill Companies, 2011 Principles of Accounting 20e


Problem 10-8B (20 minutes) a.

Expense. This is advertising which is expensed because of the difficulty in reliably ascertaining future benefits.

b.

Expense. Although the training of employees may generate future benefits, the number of periods benefited is highly indeterminate. These training expenditures are generally expensed.

c.

Goodwill represents the excess paid over the fair value of the net assets purchased. Goodwill is not amortized but is subject to assessment for impairment periodically.

d.

Expense. Research and development costs are generally expensed because of the great uncertainty in generating future benefits. If a patent is acquired in the future, the acquisition costs (e.g. legal and registration fees) will be capitalized and amortized over the patent's useful life, limited to 15 years.

Š McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Serial Problem — SP 10 Serial Problem — SP 10, Success Systems (45 minutes) 1.

For the three months ended March 31, 2010, depreciation expense was $625 for office equipment and $1,250 for the computer equipment. Annualizing (multiplying quarterly results by four) these three month totals yield the following annual amounts for depreciation expense: Depreciation Expense—Office Equipment ($625 x 4) ......................$2,500 Depreciation Expense—Computer Equipment ($1,250 x 4).............$5,000

2. December 31, 2009 Office Equipment ........................................ $10,000 Accumulated Depreciation–Office Equipment .............................................. 625 Office Equipment (book value) ................. $ 9,375

December 31, 2010 $10,000

December 31, 2009 Computer Equipment ................................. $25,000 Accumulated Depreciation– Computer Equipment ........................... 1,250 Computer Equipment (book value)........... $23,750

December 31, 2010 $25,000

3,125 $ 6,875

6,250 $18,750

3. Total asset turnover = Net sales / Average total assets

The 3-month total asset turnover for Success Systems at March 31, 2010

$51,195 / [($122,625 + $147,621)/2] = 0.38 times An estimate of its annual total asset turnover is 1.52 (0.38 x 4 quarters). This value for the total asset turnover is lower than usual for companies competing in this industry (2.5). However, Success Systems is in its first year of operations, and its turnover will improve if it can generate increased sales throughout the year while maintaining a similar asset level.

© McGraw-Hill Companies, 2011 Principles of Accounting 20e


Reporting in Action — BTN 10-1 1. The percent of original cost remaining to be depreciated is computed by taking the ratio of Nestlé’s book value of property, plant, and equipment to their original cost ($ millions): As at 31 December 2008: 21,097 / (21,097 + 25,094) = 45.7% 2. Its accounting policies (Note 1) states that intangible assets

comprise indefinite life intangible assets and finite life intangible assets. Indefinite life intangible assets are those for which there is no foreseeable limit to their useful economic life and are not depreciated but tested for impairment annually. Finite life intangible assets are those for which there is an expectation of obsolescence that limits their useful economic life or where the useful life is limited by contractual or other terms. They are depreciated over the shorter of their contractual or useful economic lives, on a straight-line basis assuming a zero residual value: management information systems over a period ranging from three to five years; and other finite life intangible assets over five to 20 years. 3.

Nestlé

Sales (Swiss franc millions) Average total assets Total asset turnover

2007 107,552

2008 109,908

108,583

110,788

0.99

0.99

4. Solution depends on the financial statement data obtained.

© McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Comparative Analysis Key Figure

Net Sales Total assets

Current Year 109,908 106,215

Nestlé (in Swiss franc millions) 1 Year Prior 2 Years Prior 107,552 115,361

98,458 101,805

— BTN 10-2

Kraft Foods (in US millions) Current Year 1 Year Prior 42,201 63,078

36,134 67,993

Note: Total asset turnover = Net sales / Average total assets

1. Total asset turnover for Nestlé Current Year:

109,908 / [(106,215 + 115,361)/2] = 0.99 times

One Year Prior:

107,552 / [(115,361 + 101,805)/2] = 0.99 times

Total asset turnover for Kraft Foods Current Year:

42,201 / [(63,078 + 67,993)/2] = 0.64 times

One Year Prior:

36,134 / [(67,993 + 55,574)/2] = 0.58 times

2. Nestlé employs its assets more efficiently than does Kraft Foods for both years. In addition, only Nestlé’s total asset turnover exceeds the industry average of 0.8.

© McGraw-Hill Companies, 2011 Principles of Accounting 20e

2 Years Prior 33,256 55,574


Ethics Challenge

— BTN 10-3

1. When managers acquire new assets a number of decisions relative to depreciation must be made. Specifically, the asset must be assigned a useful life, a salvage value, and a method of depreciation. 2. When assets are placed in use on a day other than the first day of the month an assumption is often made that the assets are placed in use on the first day of the month nearest to the date of the purchase. For example, for assets purchased on the 1st through 15th days of the month, the first day of the month is assumed to be the purchase date. For assets purchased on the 16th through month-end, the first day of the next month is assumed to be the purchase date. By selecting the first day of the following month, Choi is getting a onetime deferral of some partial months of depreciation. She is still employing a systematic and rational method of allocating costs if she consistently chooses the first day of the following month. However, since she appears to be using this method only with respect to current year additions, it appears that she is using accounting rules to reduce depreciation expense this year. Also, her practice is not in keeping with general business practices as described above. The facts of the situation seem to suggest an ethical violation rather than a legitimate depreciation decision rule. 3. By always assuming the first day of the following month as the date of purchase, less depreciation is (initially) accrued for the assets employed. This means depreciation expense will be less than if assets were considered employed on the first of the month closest to the date of purchase. With reduced depreciation charges, net income will be higher for this current year. Therefore, this practice will result in a higher profit margin for her company for this year.

Communicating in Practice

— BTN 10-4

The solution to this activity will vary based on the industry and the companies chosen for analysis. Many instructors find it useful to report the results from the teams to the class for purposes of classroom discussion and analysis.

Š McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Taking It to the Net

— BTN 10-5

1. Yahoo! has Goodwill in the amount of ($ thousands) $3,440,889 at December 31, 2008. Goodwill represents 25.1% ($3,440,889 / $13,689,848) of Yahoo!’s total assets. This is a very significant asset for Yahoo!. 2.

$ thousands Amount Balance, January 1, 2007 ............................$2,968,557 Balance, December 31, 2007 ...................... 4,002,030 Balance, December 31, 2008 ...................... 3,440,889 Total increase over two-year period ..........

$ Change from Prior % Year Change $1,033,473 -561,141 472,332

34.8% -14.0% 15.9%

Goodwill has increased markedly over the two-year period. The increase is due to the acquisitions that Yahoo! has made during 2007. 3. Yahoo!’s other intangible assets include Customer, affiliate, and advertiser related relationships, Developed technology and patents, and Trademark, trade name and domain name. These intangibles represent 3.5% ($485,860 / $13,689,848) of total assets.

4. Note 6 indicates that Trademark, trade name, and domain name have original estimated economic lives of one year to infinite years. If the trademark and trade name have been registered with the government’s Patent Office, their legal lives are good guidelines to use but Yahoo! still must choose economic lives that are reasonable.

© McGraw-Hill Companies, 2011 Principles of Accounting 20e


Teamwork in Action

— BTN 10-6

1. Annual depreciation for each year of the asset’s useful life: Year 2007

Straight-line

Double-Declining-Balance

Units-of-Production

($44,000-2,000)/4 (100%/4) x 2 = 50% is ($44,000-$2,000)/60,000 miles = $10,500 declining-balance rate. = $.70 per mile. BV x rate = $44,000 x 50% 12,000 miles x $.70 = $ 8,400 = $22,000

2008

$10,500

$22,000 x 50%= $11,000

18,000 miles x $.70 = $12,600

2009

$10,500

$11,000 x 50% = $5,500

21,000 miles x $.70 = $14,700

2010

$10,500

$5,500 (depreciate to salvage) = $3,500

9,000* miles x $.70 = $ 6,300

* Depreciation is based on the estimated capacity of 60,000 miles. Even though the van is driven 10,000 miles in the last year, depreciation can only be taken for the remaining 9,000 miles of estimated capacity. This will record depreciation to the estimated salvage value.

2. Depreciation is recorded in an adjusting entry at the end of each period. The entry is: Depreciation Expense ................................... Accumulated Depreciation ..............

xxxx* xxxx*

*Amount varies by method and year (see part 1).

3. Each expert’s presentation of the comparison of methods will be slightly different. The experts should make the following points: The straight-line method reduces net income by the same amount each year. The declining-balance method reduces net income the largest in 2007 (first year of use) and by a lesser amount in each subsequent year. The impact of the units-of-production method varies year to year according to the amount of estimated capacity consumed (miles driven).

© McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Teamwork in Action

— BTN 10-6 - continued

4. Book value at the end of each year = Cost - Accumulated depreciation = $44,000 – (amount varies by method—see part 1 for annual amounts)

Year Straight-line 2007 ........ $33,500 2008 ........ 23,000 2009 ........ 12,500 2010 ........ 2,000

Double-DecliningBalance $22,000 11,000 5,500 2,000

Units of Production $35,600 23,000 8,300 2,000

For reporting purposes, each expert will have different results. But each should show: Plant Assets: Transport Van ................................................ Less: Accumulated Depreciation .................

$44,000 XXXX* XXXX*

* Amounts vary by the method and the year selected for illustration. Experts should explain the amounts shown.

© McGraw-Hill Companies, 2011 Principles of Accounting 20e


Entrepreneurial Decision

— BTN 10-7

Part 1 (a) Under current conditions, the total asset turnover is 3.2. This is computed as net sales of $8,000,000 divided by its average total assets of $2,500,000.* This means the company turns its assets over 3.2 times per year or, stated differently, each $1 of assets produces $3.20 of net sales per year. * Total asset turnover =

Net sales Average total assets

(b) Under this proposal, its asset turnover would increase to 4. This is computed by taking its net sales of $12,000,000 ($8,000,000 + $4,000,000) and dividing by its average total assets of $3,000,000. This means the company would now turn its assets over 4 times per year or, stated differently, each $1 of assets would now produce $4.00 of net sales per year.

Part 2 The proposal would yield an improved total asset turnover of 4 vis-Ă -vis the current total asset turnover of 3.2. However, we need to recognize that this proposal depends on our confidence in both maintaining current sales, meeting future sales expectations, and not losing or alienating current and/or future customers due to the expanded operations. Assuming all of our estimates are reasonable, we need to focus on any potential customer concern and the impact on other dimensions of analysis that such a proposal can bring about.* *We must remember that total asset turnover is only one dimension of a complete analysis of this proposal. For example, we would want to explore the impact of this proposal on net income and other activities.

Š McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


Hitting the Road

— BTN 10-8

No formal solution exists for this activity. It is usually interesting for the class to exchange their discoveries via class discussion. This is particularly the case with respect to patents, copyrights, and trademarks.

Š McGraw-Hill Companies, 2011 Principles of Accounting 20e


Global Decision — BTN

10-9

Note: Total asset turnover = Net sales / Average total assets

1. Total asset turnover for Nike: Current Year:

18,627 / [(12,443 + 10,688)/2] = 1.61 times

One Year Prior:

16,326 / [(10,688 + 9,870)/2] = 1.59 times

2. Nike was more efficient in using its assets to generate net sales than both Adidas and Puma. Specifically, in the current year each dollar worth of assets generated 1.61 times that in net sales, compared to 1.21 times each Euro in net assets for Adidas and 1.34 times each Euro in net assets for Puma. Similarly, in the prior year, each dollar worth of Nike’s assets generated 1.59 times that in net sales, compared to Adidas’ 1.23 turnover and Puma’s 1.33 in turnover.

© McGraw-Hill Companies, 2011 Solutions Manual, Chapter 10


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