08 Chapter - Reporting and Analyzing Long-Term Assets
Chapter 8
Reporting and Analyzing Long-Term
Assets
QUESTIONS
1.
A plant asset 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 a plant asset 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 DepreciationMachinery account is a contra asset account with a
credit balance that cannot be used to buy anything. The balance of the Accumulated
DepreciationMachinery account reflects that portion of the machinery's original cost
that has been charged to depreciation expense. It also gives some indication of the
assets 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 Modified Accelerated Cost Recovery System is not generally acceptable for financial
accounting purposes because it allocates depreciation over an arbitrary period that is
usually much shorter than the predicted useful life of the asset.
7.
The materiality constraint 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 a plant asset in normal, good operating condition, and
should be charged to expense of the current period. Extraordinary repairs are made to
extend the life of a plant asset 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 units-of-production depreciation.
8-1
Chapter 08 - Reporting and Analyzing Long-Term Assets
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 companys
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 amortizedinstead, 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. Instead, the FASB ( SFAS 142) requires
that goodwill be annually tested 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. Best Buy lists Land and buildings; Leasehold improvements; Fixtures and equipment;
Property under capital lease. The net book value of these assets is $4,174 million.
18. The word net means that RadioShack is reporting its property, plant and equipment
after deducting accumulated depreciation to date.
19. GOME titles its plant assets Property, plant and equipment. The book value of its
property, plant and equipment is RMB3,719,829.
20. Apples reported long-term assets that are also discussed in this chapter are: Property,
plant, and equipment, net; Goodwill; Acquired intangible assets, net.
8-2
Chapter 08 - Reporting and Analyzing Long-Term Assets
QUICK STUDIES
Quick Study 8-1 (10 minutes)
Recorded cost = $350,000 + $10,000 + $4,000 + $21,000 = $385,000
Note: The $4,200 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 8-2 (10 minutes)
1. The main difference between plant assets and current assets is that
current assets are consumed or converted into cash within a short
period of time, while plant assets have a useful life of more than one
accounting period.
2. The main difference between plant assets and inventory is that
inventory is held for resale and plant assets are not.
3. The main difference between plant assets and long-term investments is
that plant assets are used in the primary operation of the business and
investments are not.
Quick Study 8-3 (10 minutes)
Straight-line depreciation
($32,500 - $2,500) / 4 years = $7,500 depreciation per year
Quick Study 8-4 (10 minutes)
Units-of-production depreciation
($32,500 - $2,500) / 200 concerts =
8-3
$ 150 depreciation per concert
x 47 concerts in 2011
$7,050 depreciation in 2011
Chapter 08 - Reporting and Analyzing Long-Term Assets
Quick Study 8-5 (10 minutes)
$32,500 Cost
- 7,500 Accumulated depreciation (first year)
25,000 Book value at point of revision
- 2,500 Salvage value
22,500 Remaining depreciable cost
2 Years of life remaining
$11,250 Depreciation per year for years 2 and 3
Quick Study 8-6 (10 minutes)
Note: Double-declining-balance rate = (100% / 8 years) x 2 = 25%
First year:
$1,200,000 x 25%
= $300,000
Second year:
($1,200,000 - $300,000) x 25%
= $225,000
Third year:
($1,200,000 - $300,000 - $225,000) x 25%
= $168,750*
* Total accumulated depreciation of $693,750 ($300,000 + $225,000 + $168,750)
does not exceed the depreciable cost of $1,100,000 ($1,200,000 - $100,000).
Quick Study 8-7 (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 replacement of compressor.
(d) Building..............................................................
Cash.............................................................
To record addition to building.
8-4
225,000
225,000
Chapter 08 - Reporting and Analyzing Long-Term Assets
Quick Study 8-8 (15 minutes)
Book value of old machine = $92,500 - $54,000 = $38,500
1.
Cash.............................................................................
...............................................................................
Accumulated depreciation.........................................
Equipment.............................................................
Gain on sale of equipment*..................................
42,000
54,000
92,500
3,500
To record the sale of equipment.
*(Gain = $42,000 - $38,500)
2.
Cash.............................................................................
...............................................................................
Accumulated depreciation.........................................
Equipment.............................................................
38,500
54,000
92,500
To record the sale of equipment.
3.
Cash.............................................................................
...............................................................................
Accumulated depreciation.........................................
Loss on sale of equipment.........................................
Equipment.............................................................
31,000
54,000
7,500
92,500
To record the sale of equipment.
*(Loss = $31,000 - $38,500)
Quick Study 8-9 (10 minutes)
1.
Ore Mine.................................................................... 6,800,000
Cash....................................................................
6,800,000
To record cost of ore mine. ($6,300,000 + $500,000)
2.
Depletion per unit =
$6,800,000 - $900,000
1,000,000 tons
= $5.90 per ton
Depletion ExpenseOre Mine..................................
Accumulated DepletionOre Mine...................
737,500
737,500
To record depletion of ore mine (125,000 x $5.90).
Quick Study 8-10 (10 minutes)
Intangible Assets:
b) Trademark c) Leasehold f) Copyright g) Franchise
8-5
Chapter 08 - Reporting and Analyzing Long-Term Assets
Natural Resources: a) Oil well
Note:
d) Gold mine h) Timberland
Building is reported under plant assets.
8-6
Chapter 08 - Reporting and Analyzing Long-Term Assets
Quick Study 8-11 (10 minutes)
1.
Jan. 4 Leasehold Improvements...................................... 275,000
Cash................................................................
275,000
To record leasehold improvements.
2.
Dec. 31 Amortization ExpenseLeasehold Improvements.....
Accumulated AmortizationLeasehold
Improvements................................................
34,375
34,375
To record amortization of leasehold over
the remaining life of the lease.*
*
Amortization = $275,000 / 8-year-lease-term = $34,375 per year.
Quick Study 8-12 (10 minutes)
Total asset turnover =
($ 000s)
$14,880
($15,869 + $17,819) / 2
= 0.88 times
Interpretation: The companys 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 8-13A (10 minutes)
Book value of old machine = $84,800 - $36,800 = $48,000
1.
Machinery (new).....................................................
Accumulated DepreciationMachinery (old)........
Loss on Exchange of Assets*................................
Machinery (old)..............................................
Cash...............................................................
104,000
36,800
4,000
84,800
60,000
To record asset exchange assuming commercial
substance. *$104,000 ($48,000 + $60,000) = $(4,000)
2.
Machinery (new)*....................................................
Accumulated DepreciationMachinery (old)........
Machinery (old)..............................................
Cash...............................................................
To record asset exchange assuming lack of
commercial substance.
8-7
92,000
36,800
84,800
44,000
Chapter 08 - Reporting and Analyzing Long-Term Assets
*Book value of old asset + Cash given = $48,000 + $44,000
8-8
Chapter 08 - Reporting and Analyzing Long-Term Assets
Quick Study 8-14 (10 minutes)
a.
Accounting for plant assets involving cost determination,
depreciation, additional expenditures, and disposals of plant assets
is subject to broadly similar guidance for both U.S. GAAP and IFRS.
There is one area where notable differences exist, and that is in
accounting for changes in the value of plant assets (between the time
they are acquired and disposed of).
b.
U.S. GAAP prohibits companies to record increases in the value of
plant assets subsequent to acquisition. However, IFRS permits
upward asset revaluations. If an impairment was previously recorded,
a company would reverse that impairment to the extent necessary
and record that increase in income. If the increase is beyond the
original cost, that increase is recorded in comprehensive income.
8-9
Chapter 08 - Reporting and Analyzing Long-Term Assets
EXERCISES
Exercise 8-1 (15 minutes)
Invoice price of machine.......................................
Less discount (.01 x $10,400)................................
Net purchase price.................................................
$ 10,400
(104)
10,296
Freight charges (transportation-in).......................
Mounting and power connections........................
Assembly................................................................
Materials used in adjusting...................................
Total cost to be recorded......................................
235
719
339
40
$ 11,629
Note: The $250 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.
Exercise 8-2 (15 minutes)
Cost of land
Purchase price for land.........................................
Purchase price for old building.............................
Demolition costs for old building..........................
Costs to fill and level lot........................................
Total cost of land...................................................
$ 209,000
104,000
40,400
59,722
$ 413,122
Cost of new building and land improvements
Cost of new building..............................................
$1,564,400
Cost of land improvements...................................
Total construction costs........................................
98,750
$1,663,150
Journal entry
Land........................................................................
Land Improvements...............................................
Building..................................................................
Cash..................................................................
To record costs of plant assets.
8-10
413,122
98,750
1,564,400
2,076,272
Chapter 08 - Reporting and Analyzing Long-Term Assets
Exercise 8-3 (20 minutes)
Purchase price........................................................
Closing costs..........................................................
Total cost of acquisition........................................
$404,000
21,500
$425,500
Allocation of total cost
Appraised
Value
Percent
of Total
Applying %
to Cost
Apportioned
Cost
47%
$425,500 x .47
$199,985
Land.........................
$217,140
Land improvements.
83,160
18
$425,500 x .18
76,590
Building...................
161,700
35
$425,500 x .35
148,925
Totals.......................
$462,000
100%
$425,500
Journal entry
Land...................................................................
Land Improvements..........................................
Building.............................................................
Cash............................................................
199,985
76,590
148,925
425,500
To record costs of lump-sum purchase.
Exercise 8-4 (15 minutes)
Straight-line depreciation: ($102,000 - $21,000) / 5 years = $16,200 per year
Year
Annual Depreciation
Year-End Book Value
2009...................
$ 16,200
$ 85,800
2010...................
16,200
69,600
2011...................
16,200
53,400
2012...................
16,200
37,200
2013...................
16,200
21,000
Total...................
$ 81,000
8-11
Chapter 08 - Reporting and Analyzing Long-Term Assets
Exercise 8-5 (20 minutes)
Double-declining-balance depreciation
Depreciation rate: (100% / 5 years) x 2 = 20% x 2 = 40%
Year
Beginning-Year
Book Value
2009.......
$102,000
2010.......
61,200
2011.......
Depreciation
Rate
40%
Annual
Depreciation
Year-End
Book Value
$40,800
$61,200
40
24,480
36,720
36,720
40
14,688
22,032
2012.......
22,032
40
2013.......
Total.......
21,000
--
1,032*
-$81,000
21,000
21,000
* Do not depreciate more than $1,032 in the fourth year because the
$21,000 salvage value is not subject to depreciation.
Exercise 8-6 (10 minutes)
Straight-line: ($67,000 - $4,000) / 10 years = $6,300
Exercise 8-7 (10 minutes)
Units-of-production:
Depreciation per unit = ($67,000 - $4,000) / 420,000 units = $0.15 per unit
For 29,900 units in second year: Depreciation = 29,900 x $0.15 = $4,485
Exercise 8-8 (15 minutes)
Double-declining-balance:
Double-declining-balance rate = (100% / 10 years) x 2 = 20% per year
First years depreciation = $67,000 x 20% = $13,400
Book value at beginning of second year = $67,000 - $13,400 = $53,600
Second years depreciation = $53,600 x 20% = $10,720
8-12
Chapter 08 - Reporting and Analyzing Long-Term Assets
Exercise 8-9 (10 minutes)
Straight-line depreciation for 2011
($253,000 - $25,300) / 5 years = $45,540
Exercise 8-10 (15 minutes)
Double-declining-balance depreciation for 2011
Rate = (100% / 5 years) x 2 = 40%
2010 depreciation ($253,000 x 40% x 9/12).......................
$ 75,900
Book value at January 1, 2011 ($253,000 - $75,900).........
$177,100
Depreciation for 2011 ($177,100 x 40%)............................
$ 70,840
Alternate calculation
2010 depreciation ($253,000 x 40% x 9/12)....................................
2011 depreciation
$253,000 x 40% x 3/12.................................................................
($253,000 - $75,900 - $25,300) x 40% x 9/12..............................
Total 2011 depreciation...................................................................
$
75,900
$
25,300
45,540
70,840
$
Exercise 8-11 (15 minutes)
1. Original cost of machine...............................................
Less two years' accumulated depreciation
[($26,400 - $2,900) / 4 years] x 2 years.......................
$ 26,400
Book value at end of second year................................
$ 14,650
2. Book value at end of second year................................
$ 14,650
Less revised salvage value...........................................
(2,050)
Remaining depreciable cost.........................................
$ 12,600
Revised annual depreciation = $12,600 / 3 years = $4,200
8-13
(11,750)
Chapter 08 - Reporting and Analyzing Long-Term Assets
Exercise 8-12 (30 minutes)
Straight-line depreciation
Income
before
Depreciation
Year 1..............
Year 2..............
Year 3..............
Year 4..............
Year 5..............
Totals............
$ 86,800
86,800
86,800
86,800
86,800
$434,000
Depreciation
Expense*
$ 46,780
46,780
46,780
46,780
46,780
$233,900
Net
Income
$ 40,020
40,020
40,020
40,020
40,020
$200,100
*($274,900 - $41,000) / 5 years = $46,780
Exercise 8-13 (30 minutes)
Double-declining-balance depreciation
Income
before
Depreciation
Year 1..............
Year 2..............
Year 3..............
Year 4..............
Year 5..............
Totals...........
Depreciation
Expense*
Net
Income
$ 86,800
86,800
86,800
86,800
86,800
$434,000
$109,960
65,976
39,586
18,378
0
$233,900
$ (23,160)
20,824
47,214
68,422
86,800
$200,100
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..........
$274,900
$109,960
$109,960
Year 2..........
164,940
65,976
175,936
Year 3..........
98,964
39,586**
215,522
Year 4..........
59,378
18,378***
233,900
Year 5..........
41,000
0
233,900
Total............
$233,900
Ending Book Value
($274,900 Cost Less
Accumulated
Depreciation)
$164,940
98,964
59,378
41,000
41,000
** rounded
*** Must not use $23,751; instead take only enough depreciation in Year 4 to
reduce book value to the $41,000 salvage value.
8-14
Chapter 08 - Reporting and Analyzing Long-Term Assets
Exercise 8-14 (25 minutes)
1. Annual depreciation = $620,000 / 20 years = $31,000 per year
Age of the building = Accumulated depreciation / Annual depreciation
= $496,000 / $31,000 = 16 years
2. Entry to record the extraordinary repairs
Building...................................................................
Cash................................................................
74,000
74,000
To record extraordinary repairs.
3.
4.
Cost of building
Before repairs.....................................................
Add cost of repairs.............................................
Less accumulated depreciation...........................
Revised book value of building............................
$620,000
74,000
Revised book value of building (part 3)...............
New estimate of useful life (20 - 16 + 7)...............
Revised annual depreciation................................
Journal entry
Depreciation Expense............................................
Accumulated DepreciationBuilding.............
$694,000
496,000
$198,000
$198,000
11 years
$ 18,000
18,000
18,000
To record depreciation
Exercise 8-15 (15 minutes)
1.
Equipment.............................................................
Cash................................................................
29,500
29,500
To record betterment.
2.
Repairs Expense...................................................
Cash................................................................
7,375
7,375
To record ordinary repairs.
3.
Equipment.............................................................
Cash................................................................
To record extraordinary repairs.
8-15
22,450
22,450
Chapter 08 - Reporting and Analyzing Long-Term Assets
Exercise 8-16 (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.......................
Accumulated DepreciationMilling Machine. .
Milling Machine.............................................
68,000
182,000
250,000
To record disposal of milling machine.
2. Sold for $35,000 cash
Jan. 3
Cash...................................................................
Loss on Sale of Milling Machine.......................
Accumulated DepreciationMilling Machine. .
Milling Machine.............................................
35,000
33,000
182,000
250,000
To record cash sale of milling machine.
3. Sold for $68,000 cash
Jan. 3
Cash...................................................................
Accumulated DepreciationMilling Machine. .
Milling Machine.............................................
68,000
182,000
250,000
To record cash sale of milling machine.
4. Sold for $80,000 cash
Jan. 3
Cash...................................................................
Accumulated DepreciationMilling Machine. .
Gain on Sale of Milling Machine...................
Milling Machine.............................................
To record cash sale of milling machine.
8-16
80,000
182,000
12,000
250,000
Chapter 08 - Reporting and Analyzing Long-Term Assets
Exercise 8-17 (25 minutes)
2013
July 1
Depreciation Expense..........................................
Accumulated Depreciation--Machinery.........
5,875
5,875
To record one-half year depreciation.*
*Annual depreciation = $94,000 / 8 years = $11,750
Depreciation for 6 months in 2013 = $11,750 x 6/12 = $5,875
1. Sold for $43,593 cash
July 1
Cash.....................................................................
Accumulated DepreciationMachinery............
Gain on Sale of Machinery..............................
Machinery........................................................
43,593
52,875
2,468
94,000
To record sale of machinery.*
*Total accumulated depreciation at date of disposal:
Four years 2009-2012 (4 x $11,750)......... $47,000
Partial year 2013 (6/12 x $11,750)............
5,875
Total accumulated depreciation.............. $52,875
Book value of machinery = $94,000 - $52,875 = $41,125
Gain on sale = $43,593 - $41,125 = $2,468
2. Destroyed by fire with $39,480 cash insurance settlement
July 1
Cash.....................................................................
Loss from Fire.....................................................
Accumulated DepreciationMachinery............
Machinery........................................................
39,480
1,645
52,875
94,000
To record disposal of machinery from fire.
Loss on sale = $39,480 - $41,125 = $(1,645)
Exercise 8-18 (10 minutes)
Dec. 31
Depletion ExpenseMineral Deposit...............
Accumulated DepletionMineral Deposit...
498,960
498,960
To record depletion [$3,920,000/1,400,000 tons =
$2.80 per ton; 178,200 tons x $2.80 = $498,960].
Dec. 31
Depreciation ExpenseMachinery .................
Accumulated DepreciationMachinery......
To record depreciation [$210,000/1,400,000 tons=
8-17
26,730
26,730
Chapter 08 - Reporting and Analyzing Long-Term Assets
$0.15 per ton; 178,200 tons x $0.15 = $26,730].
8-18
Chapter 08 - Reporting and Analyzing Long-Term Assets
Exercise 8-19 (10 minutes)
Jan.
1 Copyright...........................................................
Cash...............................................................
432,000
432,000
00
To record purchase of copyright.
Dec. 31 Amortization ExpenseCopyright...................
Accumulated AmortizationCopyright.......
28,800
28,800
To record amortization of copyright
[$432,000 / 15 years].
Exercise 8-20 (10 minutes)
1. Goodwill = $2,500,000 - $1,800,000 = $700,000
2. Goodwill is not amortized. Instead, Jeffrey 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 8-21 (15 minutes)
1. $85.6 million cash for property, plant and equipment
2. $99.3 million for depreciation and amortization
3. $124.3 million cash used in investing activities
Exercise 8-22 (15 minutes)
Total asset turnover for 2010 =
$4,796,000
($1,578,000 + $1,824,000)/2
= 2.82
Total asset turnover for 2011 =
$8,758,000
($1,824,000 + $1,946,000)/2
= 4.65
Analysis comments. Based on these calculations, Teridan turned its assets
over 1.83 (4.65 2.82) more times in 2011 than in 2010. This increase
indicates that Teridan became more efficient in using its assets. Moreover,
Teridan 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 Teridan has markedly improved its performance and is currently
superior to its competitors.
8-19
Chapter 08 - Reporting and Analyzing Long-Term Assets
Exercise 8-23A (15 minutes)
1. Book value of the old tractor ($83,000 - $45,000)..........................$ 38,000
2. Loss on the exchange
Book value - Trade-in allowance ($38,000 - $24,500)..............$ 13,500
3. Debit to new Tractor account
Cash paid + Trade-in allowance ($71,750 + $24,500)..............$ 96,250
Alternatively, answers can be taken from the following journal entry:
Tractor (new)...............................................................................
Loss on Exchange of Assets.....................................................
Accumulated DepreciationTractor..........................................
Tractor (old).........................................................................
Cash......................................................................................
96,250
13,500
45,000
83,000
71,750
To record asset exchange.
Exercise 8-24A (25 minutes)
Note: Book value of Machine equals $52,400 - $28,227 = $24,173
1. Sold for $20,274 cash
Jan. 2
Cash.................................................................
Loss on Sale of Machinery.............................
Accumulated DepreciationMachinery (old)
Machinery (old)...........................................
20,274
3,899
28,227
52,400
To record cash sale of machine.
2. $24,953 trade-in allowance exceeds book value; but no gain is
recognized on an asset exchange that lacks commercial substance ($780
gain is buried in the cost of the new machinery)
Jan. 2
Machinery (new)*.............................................
Accumulated DepreciationMachinery (old)
Machinery (old)...........................................
Cash**..........................................................
68,120
28,227
52,400
43,947
To record asset exchange.
*[$68,900 - ($24,953 - $24,173)] **($68,900 - $24,953)
3. $18,714 trade-in allowance is less than book value (yielding a loss)
Jan. 2
Machinery (new)..............................................
Loss on Exchange of Machinery....................
Accumulated DepreciationMachinery (old)
Machinery (old)...........................................
Cash*...........................................................
8-20
68,900
5,459
28,227
52,400
50,186
Chapter 08 - Reporting and Analyzing Long-Term Assets
To record asset exchange. *($68,900 - $18,714)
8-21
Chapter 08 - Reporting and Analyzing Long-Term Assets
Exercise 8-25 (20 minutes)
1.
Depreciation expense.................................................
...............................................................................
Accumulated depreciationProperty, plant
and equipment..................................................
4,625
4,625
To record depreciation on property, plant and
equipment.
2.
Property, plant and equipment...................................
...............................................................................
Cash......................................................................
6,651
6,651
To record betterments (improvements) on property,
plant and equipment.
3.
Cash.............................................................................
700
Loss on disposal of property, plant and equipment.
300
Accumulated DepreciationProperty, plant and
equipment....................................................................
1,322
Property, plant and equipment............................
2,322
To record asset disposal.
4.
Volkswagen would decrease its property, plant and equipment account
by 184 at December 31, 2008, for its total impairments for 2008.
8-22
Chapter 08 - Reporting and Analyzing Long-Term Assets
PROBLEM SET A
Problem 8-1A (50 minutes)
Part 1
Estimated
Market Value
$514,250
271,150
65,450
84,150
$935,000
Percent
of Total
55%
29
7
9
100%
Building.......................
Land.............................
Land improvements....
Vehicles.......................
Total.............................
.....................................
2011
Jan. 1
Building.........................................................
Land..............................................................
Land Improvements.....................................
Vehicles.........................................................
Cash........................................................
Apportioned
Cost
$495,000
261,000
63,000
81,000
$900,000
495,000
261,000
63,000
81,000
900,000
To record asset purchases.
Part 2
Year 2011 straight-line depreciation on building
[($495,000 - $30,000) / 15 years] = $31,000
Part 3
Year 2011 double-declining-balance depreciation on land improvements
(100% / 5 years) x 2 = 40% rate
$63,000 x 40% = $25,200
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
assets 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
8-23
Chapter 08 - Reporting and Analyzing Long-Term Assets
savings from use of accelerated depreciation. The company gets to use the
tax deferred amounts for investment purposes until they are due.]
8-24
Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-2A (45 minutes)
Part 1
Land
Building
2
$609,500
Building
3
Land
Improvements 1
$397,500
Land
Improvements
2
Purchase price*......... $1,643,000
Demolition..................
342,400
.....................................
Land grading..............
193,400
New building..............
New improvements. . . _________
Totals........................ $2,178,800
_______
$609,500
$2,282,000
_________
$2,282,000
*Allocation of purchase price
Appraised
Value
Percent
of Total
Apportioned
Cost**
Land......................................
Building 2.............................
Land Improvements 1.........
Totals....................................
$1,866,820
692,530
451,650
$3,011,000
62%
23
15
100%
$1,643,000
609,500
397,500
$2,650,000
_______
$397,500
$168,000
$168,000
**Multiply the percentages in column 3 by the $2,650,000 purchase price.
Part 2
2011
Jan. 1
Land................................................................... 2,178,800
Building 2...........................................................
609,500
Building 3........................................................... 2,282,000
Land Improvements 1.......................................
397,500
Land Improvements 2.......................................
168,000
Cash.............................................................
5,635,800
To record costs of plant assets.
Part 3
2011
Dec. 31 Depreciation ExpenseBuilding 2......................
Accumulated DepreciationBuilding 2.........
26,225
26,225
To record depreciation [($609,500 - $85,000)/20].
31 Depreciation ExpenseBuilding 3......................
Accumulated DepreciationBuilding 3.........
75,280
75,280
To record depreciation [($2,282,000 - $400,000)/25].
31 Depreciation ExpenseLand Improv. 1..............
Accum. DepreciationLand Improv. 1..........
To record depreciation [$397,500/12].
8-25
33,125
33,125
Chapter 08 - Reporting and Analyzing Long-Term Assets
31 Depreciation ExpenseLand Improv. 2..............
Accum. DepreciationLand Improv. 2..........
To record depreciation [$168,000/20].
8-26
8,400
8,400
Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-3A (50 minutes)
2010
Jan.
1 Equipment ........................................................... 306,900
Cash................................................................
306,900
To record loader costs ($293,660 +$11,740 +$1,500).
Jan.
3 Equipment............................................................
Cash................................................................
5,100
5,100
To record betterment of loader.
Dec. 31 Depreciation ExpenseEquipment....................
Accumulated DepreciationEquipment......
68,750*
68,750
To record depreciation.
*
2010 depreciation after January 3rd betterment
Total original cost....................................................................
$306,900
Plus cost of betterment...........................................................
5,100
Revised cost of equipment.....................................................
312,000
Less revised salvage ($36,000 + $1,000)..............................
37,000
Cost to be depreciated............................................................
275,000
Annual depreciation ($275,000 / 4 years)..............................
$ 68,750
2011
Jan.
1 Equipment............................................................
Cash................................................................
4,500
4,500
To record extraordinary repair on loader.
Feb. 17 Repairs ExpenseEquipment............................
Cash................................................................
1,125
1,125
To record ordinary repair on loader.
Dec. 31 Depreciation ExpenseEquipment....................
Accumulated DepreciationEquipment......
42,150*
42,150
To record depreciation.
*2011 depreciation after January 1st extraordinary repair
Total cost ($312,000 + $4,500)................................................
$316,500
Less accumulated depreciation ............................................
68,750
Book value................................................................................
247,750
Less salvage.............................................................................
37,000
Remaining cost to be depreciated.........................................
$210,750
8-27
Chapter 08 - Reporting and Analyzing Long-Term Assets
Revised remaining useful life (Original 4 years - 1yr. + 2yrs.)
5 yrs.
Revised annual depreciation ($210,750 / 5 yrs)...................
$ 42,150
8-28
Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-4A (40 minutes)
2010
Jan.
1 Trucks.....................................................................
Cash..................................................................
26,500
26,500
To record cost of truck ($25,015 + $1,485).
Dec. 31 Depreciation ExpenseTrucks.............................
Accumulated DepreciationTrucks...............
4,900
4,900
To record depreciation [($26,500 - $2,000)/5].
2011
Dec. 31 Depreciation ExpenseTrucks.............................
Accumulated DepreciationTrucks...............
6,300*
6,300
To record depreciation.
*
2011 depreciation
Total cost......................................................................
Less accumulated depreciation (from 2010)............
Book value....................................................................
Less revised salvage value........................................
Remaining cost to be depreciated.............................
Revised useful life.......................................................
Less one year used in 2010........................................
Revised remaining useful life.....................................
Total depreciation for 2011 ($18,900/3).....................
$ 26,500
4,900
21,600
2,700
$ 18,900
4 yrs.
1 yrs.
3 yrs.
$ 6,300
2012
Dec. 31 Depreciation ExpenseTrucks.............................
Accumulated DepreciationTrucks...............
6,300
6,300
To record annual depreciation.
Dec. 31 Cash........................................................................
Accumulated on DepreciationTrucks.....................
Loss Disposal of Trucks...................................
Trucks...............................................................
5,600
17,500**
3,400***
To record sale of truck.
**
Accumulated depreciation on truck at 12/31/2012
2010................................................................................
2011................................................................................
2012................................................................................
Total...............................................................................
***
Book value of truck at 12/31/2012
Total cost......................................................................
Less accumulated depreciation.................................
Book value ...................................................................
Loss ($5,600 cash received - $9,000 book value).....
8-29
$ 4,900
6,300
6,300
$17,500
$26,500
(17,500)
$ 9,000
$ 3,400
26,500
Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-5A (25 minutes)
Cost of machine...................................
Less estimated salvage value.............
Total depreciable cost..........................
Year
Straight-Line
a
$320,000
33,000
$287,000
Units-of-Production
b
Double-DecliningBalancec
1.................
$ 71,750
$ 71,400
$160,000
2.................
71,750
72,240
80,000
3.................
71,750
71,960
40,000
4.................
71,750
71,400
7,000
Totals.........
$287,000
$287,000
$287,000
a
Straight- line:
Cost per year = $287,000/4 years = $71,750 per year
b
Units-of-production:
Cost per unit = $287,000/512,500 units = $0.56 per unit
Year
1..............
2..............
3..............
4..............
Total.......
*
Units
127,500
129,000
128,500
127,900*
Unit Cost
$0.56
0.56
0.56
0.56
Depreciation
$ 71,400
72,240
71,960
71,400*
$287,000
Because $71,624, computed as 127,900 x 0.56, would depreciate the asset below salvage value, we
take only enough depreciation in Year 4 to reduce book value to the assets $33,000 salvage value.
c
Double-declining-balance:
(100%/4) x 2 = 50% depreciation rate
Year
1.........
2.........
3.........
4.........
Total...
Beginning
Book
Value
$320,000
160,000
80,000
40,000
Annual
Depreciation
(50% of
Book Value)
Accumulated
Depreciation
at the End of
the Year
$160,000
80,000
40,000
7,000*
$287,000
$160,000
240,000
280,000
287,000
Ending Book Value
($320,000 Cost Less
Accumulated
Depreciation)
$160,000
80,000
40,000
33,000
*Take only enough depreciation in Year 4 to reduce book value to the assets $33,000 salvage value.
8-30
Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-6A (20 minutes)
1.
Jan. 2 Machinery...........................................................
Cash..............................................................
198,750
198,750
To record machinery purchase.
Jan. 3 Machinery...........................................................
Cash..............................................................
11,000
11,000
To record machinery costs.
Jan. 3 Machinery...........................................................
Cash..............................................................
3,410
3,410
To record machinery costs.
2. a. First year
Dec. 31 Depreciation ExpenseMachinery...................
Accumulated DepreciationMachinery......
32,700
32,700
To record depreciation [($213,160* - $16,960)/6].
*($198,750 + $11,000 + $3,410)
b. Fifth year
Dec. 31 Depreciation ExpenseMachinery...................
Accumulated DepreciationMachinery......
32,700
32,700
To record years depreciation.
3. Accumulated depreciation at the date of disposal
Five years' depreciation (5 x $32,700).....................
Book value at the date of disposal
Original total cost.....................................................
Accumulated depreciation.......................................
Book value................................................................
$163,500
$213,160
(163,500)
$ 49,660
a. Sold for $21,000 cash
Dec. 31 Cash...................................................................
Loss on Sale of Machinery...............................
Accumulated DepreciationMachinery..........
Machinery.....................................................
21,000
28,660
163,500
213,160
b. Sold for $73,500 cash
Dec. 31 Cash...................................................................
Accumulated DepreciationMachinery..........
Machinery.....................................................
Gain on Sale of Machinery...........................
73,500
163,500
213,160
23,840
c. Destroyed in fire and collected $31,500 cash from insurance co.
Dec. 31 Cash...................................................................
8-31
31,500
Chapter 08 - Reporting and Analyzing Long-Term Assets
Accumulated DepreciationMachinery..........
Loss from Fire...................................................
Machinery.....................................................
8-32
163,500
18,160
213,160
Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-7A (20 minutes)
a.
July 23 Mineral Deposit.............................................
Cash........................................................
4,612,500
4,612,500
To record purchase of mineral deposit.
b.
July 25 Machinery.....................................................
Cash........................................................
512,500
512,500
To record costs of machinery.
c.
Dec. 31 Depletion ExpenseMineral Deposit..........
Accum. DepletionMineral Deposit......
441,000
441,000
To record depletion [$4,612,500/
5,125,000 tons = $0.90 per ton.
490,000 tons x $0.90 = $441,000].
d.
Dec. 31 Depreciation ExpenseMachinery.............
Accum. DepreciationMachinery.........
49,000
49,000
To record depreciation [$512,500 /
5,125,000 tons = $0.10 per ton. Then,
490,000 tons x $0.10 = $49,000].
Analysis Component
SimilaritiesAmortization, 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.
DifferencesThey are different in that they apply to different types of longterm assets: amortization applies to intangible assets with (definite) useful
lives; depletion applies to natural resources; and depreciation applies to
plant assets. Also, amortization is typically computed using the straightline method, whereas the units-of-production method is routinely used in
depletion.
8-33
Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-8A (20 minutes)
1.
2011
(a)
June 25 Leasehold..........................................................
Cash.............................................................
260,000
260,000
To record payment for sublease.
(b)
July 1 Prepaid Rent......................................................
Cash.............................................................
80,000
80,000
To record prepaid annual lease rental.
(c)
July 5 Leasehold Improvements.................................
Cash.............................................................
160,000
160,000
To record costs of leasehold improvements.
2.
2011
(a)
Dec. 31 Rent Expense....................................................
Accumulated AmortizationLeasehold....
13,000
13,000
To record leasehold amortization ($260,000/10 x
6/12).
(b)
Dec. 31 Amortization ExpenseLeasehold Improvements. .
8,000
Accumulated AmortizationLeasehold
Improvements.................................................
8,000
To record leasehold improvement amortization
($160,000/10 years remaining on lease x 6/12).
(c)
Dec. 31 Rent Expense....................................................
Prepaid Rent................................................
To record one-half year lease rental ($80,000 x 6/12).
8-34
40,000
40,000
Chapter 08 - Reporting and Analyzing Long-Term Assets
PROBLEM SET B
Problem 8-1B (50 minutes)
Part 1
Building........................
Land.............................
Land improvements....
Trucks..........................
Total.............................
2011
Jan. 1
Estimated
Market Value
$ 469,200
303,600
36,800
110,400
$ 920,000
Percent
of Total
51%
33
4
12
100%
Buildings..................................................
Land..........................................................
Land Improvements.................................
Trucks......................................................
Cash...................................................
Apportioned
Cost
$ 474,300
306,900
37,200
111,600
$ 930,000
474,300
306,900
37,200
111,600
930,000
To record asset purchases.
Part 2
Year 2011 straight-line depreciation on building
[($474,300 - $30,000) / 15 years] = $29,620
Part 3
Year 2011 double-declining-balance depreciation on land improvements
(100% / 5 years) x 2 = 40% rate
$37,200 x 40% = $14,880
Part 4
Accelerated depreciation does not increase the total amount of taxes paid
over the assets life. Instead, it defers or postpones taxes to the later years of
an assets 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.]
8-35
Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-2B (45 minutes)
Part 1
Land
Purchase price*......... $1,677,500
Demolition..................
345,400
Land grading..............
185,400
New building..............
New improvements. . . _________
Totals.......................... $2,208,300
Allocation of
purchase price
Land...................................
Building B..........................
Land Improvements B.....
Totals.................................
Building
B
$632,500
Building
C
Land
Improvements B
$440,000
Land
Improvements C
_______
$440,000
$173,000
$173,000
$2,282,000
_______ _________
$632,500 $2,282,000
Appraised
Value
$1,823,900
687,700
478,400
$2,990,000
Percent
of Total
61%
23
16
100%
Apportioned
Cost
$1,677,500
632,500
440,000
$2,750,000
Part 2
2011
Jan. 1
Land....................................................................... 2,208,300
Building B..............................................................
632,500
Building C.............................................................. 2,282,000
Land Improvements B.......................................... 440,000
Land Improvements C.......................................... 173,000
Cash.................................................................
5,735,800
To record cost of plant assets.
Part 3
2011
Dec. 31 Depreciation ExpenseBuilding B.......................
.................................................................................
.................................................................................
.................................................................................
Accumulated DepreciationBuilding B.........
27,375
27,375
To record depreciation [($632,500 - $85,000)/20].
31 Depreciation ExpenseBuilding C.......................
Accumulated DepreciationBuilding C.........
75,280
75,280
To record depreciation [($2,282,000 - $400,000)/25].
31 Depreciation Expense--Land Improvements B.....
8-36
44,000
Chapter 08 - Reporting and Analyzing Long-Term Assets
.........................................................................
.........................................................................
.........................................................................
Accum. Depreciation--Land Improvements B....
44,000
To record depreciation [$440,000/10].
31 Depreciation Expense--Land Improvements C.....
.................................................................................
.................................................................................
.................................................................................
Accum. Depreciation--Land Improvements C....
...............................................................
To record depreciation [$173,000/20].
8-37
8,650
8,650
Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-3B (50 minutes)
2010
Jan.
1 Equipment..............................................................
Cash..................................................................
62,000
62,000
To record costs of van ($58,000 + $4,000).
Jan.
3 Equipment..............................................................
Cash..................................................................
2,900
2,900
To record betterment of van.
Dec. 31 Depreciation ExpenseEquipment...................... 15,425*
Accumulated DepreciationEquipment.........
15,425
To record depreciation.
*
2010 depreciation after January 3rd betterment
Total original cost........................................................
Plus cost of betterment...............................................
Revised cost of equipment.........................................
Less revised salvage ($3,000 + $200).......................
Cost to be depreciated................................................
Annual depreciation ($61,700 / 4 years)....................
$62,000
2,900
64,900
3,200
$61,700
$15,425
2011
Jan.
1 Equipment..............................................................
Cash..................................................................
4,300
4,300
To record extraordinary repair on van.
May 10 Repairs ExpenseEquipment...............................
Cash..................................................................
1,075
1,075
To record ordinary repair on van.
Dec. 31 Depreciation ExpenseEquipment......................
Accumulated DepreciationEquipment.........
10,115*
10,115
To record depreciation.
*2011 depreciation after Jan. 1 extraordinary repair
Total cost ($64,900 + $4,300).................................................
Less accumulated depreciation............................................
Book value...............................................................................
Less salvage...........................................................................
Remaining cost to be depreciated........................................
Revised remaining useful life (Original 4 years - 1 yr. + 2 yrs.)..
$69,200
15,425
53,775
3,200
$50,575
5 yrs.
Revised annual depreciation ($50,575 / 5 yrs)....................
$10,115
8-38
Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-4B (40 minutes)
2010
Jan. 1 Machinery.............................................................
Cash................................................................
22,000
22,000
To record costs of machinery ($20,515 +$1,485).
Dec. 31 Depreciation ExpenseMachinery....................
Accumulated DepreciationMachinery.......
4,000
4,000
To record depreciation [($22,000-$2,000)/5].
2011
Dec. 31 Depreciation ExpenseMachinery....................
Accum. DepreciationMachinery................
5,150*
5,150
To record depreciation.
*
2011 depreciation:
Total cost.........................................................................
Less accumulated depreciation (from 2010)...............
Book value.......................................................................
Less revised salvage value............................................
Remaining cost to be depreciated................................
Revised useful life...........................................................
Less 1 year in 2010.........................................................
Revised remaining useful life........................................
$22,000
4,000
18,000
2,550
$15,450
4 yrs.
1 yrs.
3 yrs.
Total depreciation for 2011 ($15,450/ 3 yrs)..................
$ 5,150
2012
Dec. 31 Depreciation ExpenseMachinery....................
Accumulated DepreciationMachinery.......
5,150
5,150
To record depreciation.
Dec. 31 Cash.....................................................................
Accumulated DepreciationMachinery.............
Loss on Disposal of Machinery..........................
Machinery.......................................................
5,600
14,300**
2,100***
22,000
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...................................
8-39
$ 4,000
5,150
5,150
$14,300
$22,000
(14,300)
Chapter 08 - Reporting and Analyzing Long-Term Assets
Book value .....................................................................
$ 7,700
Loss ($5,600 cash received - $7,700 book value)......
$ 2,100
8-40
Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-5B (25 minutes)
Cost of machine..............................
Less estimated salvage value........
Total depreciable cost....................
$360,000
33,000
$327,000
Straight-Linea
Year
1...................
2...................
3...................
4...................
5...................
Totals...........
Units-of-Productionb
$ 65,400
65,400
65,400
65,400
65,400
$327,000
Double-DecliningBalancec
$ 63,750
67,800
66,750
65,700
63,000
$327,000
$144,000
86,400
51,840
31,104
13,656
$327,000
a
Straight- line:
Cost per year = $327,000/5 years = $65,400 per year
b
Units-of-production:
Cost per unit = $327,000/2,180,000 units = $0.15 per unit
Year
1...............
2...............
3...............
4...............
5...............
Total........
*
Units
425,000
452,000
445,000
438,000
441,000*
Unit Cost
$0.15
0.15
0.15
0.15
0.15
Depreciation
$ 63,750
67,800
66,750
65,700
63,000*
$327,000
Because $66,150, computed as 441,000 x 0.15, would depreciate the asset below salvage value, we
take only enough depreciation in Year 5 to reduce book value to the assets $33,000 salvage value.
c
Double-declining-balance (amounts rounded to the nearest dollar):
(100%/5) x 2 = 40% depreciation rate
Year
Beginning
Book Value
1............ $360,000
2............ 216,000
3............ 129,600
4............
77,760
5............
46,656
Total......
Annual
Depreciation
(40% of
Book Value)
$144,000
86,400
51,840
31,104
13,656*
$327,000
Accumulated
Depreciation
at the End of
the Year
$144,000
230,400
282,240
313,344
327,000
Ending Book Value
($360,000 Cost less
Accumulated
Depreciation)
$216,000
129,600
77,760
46,656
33,000
* Take only enough depreciation in Year 5 to reduce book value to the assets $33,000 salvage value.
8-41
Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-6B (20 minutes)
1.
Jan. 1 Machinery.............................................................. 238,500
Cash.................................................................
238,500
To record machinery costs.
Jan. 2 Machinery..............................................................
Cash.................................................................
11,000
11,000
To record machinery costs.
Jan. 4 Machinery..............................................................
Cash.................................................................
3,600
3,600
To record machinery costs.
2. a. First year
Dec. 31 Depreciation ExpenseMachinery......................
Accumulated DepreciationMachinery........
38,500
38,500
To record depreciation [($253,100-$22,100)/6 =
$38,500].
b. Fifth year
Dec. 31 Depreciation ExpenseMachinery......................
Accumulated DepreciationMachinery........
38,500
38,500
To record the fifth years depreciation.
3. Accumulated depreciation at the date of disposal
First five years' depreciation (5 x $38,500) ................
Book value at the date of disposal
Original total cost.......................................................
Accumulated depreciation.........................................
Total.............................................................................
$192,500
$253,100
(192,500)
$ 60,600
a. Sold for $20,500 cash
Dec. 31 Cash.....................................................................
20,500
Loss on Sale of Machinery.................................. 40,100
Accumulated DepreciationMachinery............. 192,500
Machinery.......................................................
253,100
b. Sold for $71,750 cash
Dec. 31 Cash.....................................................................
71,750
Accumulated DepreciationMachinery............. 192,500
Machinery.......................................................
253,100
Gain on Sale of Machinery............................
11,150
c. Destroyed in fire and collected $31,000 cash from insurance
Dec. 31 Cash.....................................................................
Loss from Fire......................................................
8-42
31,000
29,600
Chapter 08 - Reporting and Analyzing Long-Term Assets
Accumulated DepreciationMachinery............. 192,500
Machinery.......................................................
253,100
8-43
Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-7B (20 minutes)
a.
Feb. 19 Mineral Deposit.............................................. 6,000,000
Cash..........................................................
6,000,000
To record purchase of mineral deposit.
b.
Mar. 21 Machinery.......................................................
Cash..........................................................
480,000
480,000
To record costs of machinery.
c.
Dec. 31 Depletion ExpenseMineral Deposit...........
Accum. DepletionMineral Deposit.......
570,000
570,000
To record depletion [$6,000,000/
4,000,000 tons = $1.50 per ton.
380,000 tons x $1.50 = $570,000].
d.
Dec. 31 Depreciation ExpenseMachinery..............
Accum. DepreciationMachinery..........
45,600
45,600
To record depreciation [$480,000/
4,000,000 tons = $0.12 per ton.
380,000 tons x $0.12 = $45,600].
Analysis Component
SimilaritiesAmortization, 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.
DifferencesThey are different in that they apply to different types of longterm assets: amortization applies to intangible assets (with definite useful
lives); depletion applies to natural resources; and depreciation applies to
plant assets. Also, amortization is typically computed using the straightline method, whereas the units-of-production method is routinely used in
depletion.
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Chapter 08 - Reporting and Analyzing Long-Term Assets
Problem 8-8B (20 minutes)
1.
2011
(a)
Jan. 1 Leasehold............................................................. 200,000
Cash................................................................
200,000
To record payment for sublease.
(b)
Jan. 1 Prepaid Rent........................................................
Cash................................................................
90,000
90,000
To record prepaid annual lease rental.
(c)
Jan. 3 Leasehold Improvements.................................... 150,000
Cash................................................................
150,000
To record costs of leasehold improvements.
2.
2011
(a)
Dec. 31 Rent Expense.......................................................
Accumulated AmortizationLeasehold.......
40,000
40,000
To record leasehold amortization ($200,000/5).
(b)
Dec. 31 Amortization ExpenseLeasehold Improvements ..
30,000
Accumulated AmortizationLeasehold
Improvements...................................................
To record leasehold improvement amortization
($150,000/5 years remaining on lease).
(c)
Dec. 31 Rent Expense.......................................................
Prepaid Rent...................................................
To record annual lease rental.
8-45
30,000
90,000
90,000
Chapter 08 - Reporting and Analyzing Long-Term Assets
Serial Problem SP 8
Serial Problem SP 8, Success Systems (45 minutes)
1.
For the three months ended March 31, 2010, depreciation expense was
$400 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 ExpenseOffice Equipment ($400 x 4)...................... $1,600
Depreciation ExpenseComputer Equipment ($1,250 x 4)............$5,000
2.
Office Equipment...............................
Accumulated DepreciationOffice
Equipment.....................................
Office Equipment (book value).........
Computer Equipment........................
Accumulated Depreciation
Computer Equipment...................
Computer Equipment (book value). .
December 31,
2009
$ 8,000
December 31,
2010
$ 8,000
400
$ 7,600
2,000
$ 6,000
December 31,
2009
$20,000
December 31,
2010
$20,000
1,250
$18,750
6,250
$13,750
3.
Total asset turnover = Net sales / Average total assets
The 3-month total asset turnover for Success Systems at March 31, 2010
$43,853 / [($93,248 + $129,909)/2] = 0.39 times
An estimate of its annual total asset turnover is 1.56 (0.39 x 4 quarters).
This value for the total asset turnover is lower than usual for
companies competing in this industry (2.5).
However, Success
Systems is in its first year of operations, and its turnover will improve
if it can generate increased sales throughout the year while
maintaining a similar asset level.
8-46
Chapter 08 - Reporting and Analyzing Long-Term Assets
Reporting in Action BTN 8-1
1. The percent of original cost remaining to be depreciated is computed
by taking the ratio of the book value of property, plant, and equipment
to their original cost ($ millions):
As of 02/28/2009: $4,174 / $6,940 = 60.1%
As of 03/01/2008: $3,306 / $5,608 = 59.0%
2. Its "Summary of Significant Accounting Policies" (Note 1: Property and
Equipment) discloses estimated useful lives by major asset category as
follows:
Asset
Life (in years)
Buildings............................................................................... 25 50
Leasehold improvements.....................................................
3 25
Fixtures and equipment........................................................
3 20
Property under capital lease................................................
2 20
3. The change in total property and equipment before accumulated
depreciation for the year ended February 28, 2009, is an increase of
$1,332 million ($6,940 $5,608). In comparison, according to the
statement of cash flows, $1,303 million cash is used for the purchase of
property and equipment.
One possible explanation for the difference in these amounts is that
Best Buy acquired plant assets for something other than cashfor
example, it made non-cash capital expenditures of $42 million. Those
acquisitions commonly involve a promise (note agreement) to pay later
or a trade of some manner.
4. Total asset turnover for year ended ($ millions):
2/28/2009:
$45,015
($15,826 + $12,758)/2
= 3.1 times
3/01/2008:
$40,023
($12,758 + $13,570)/2
= 3.0 times
5. Solution depends on the financial statement data obtained.
8-47
Chapter 08 - Reporting and Analyzing Long-Term Assets
Comparative Analysis
BTN 8-2
Note: Total asset turnover = Net sales / Average total assets
1. Total asset turnover for Best Buy ($ millions)
Current Year:
$45,015 / [($15,826 + $12,758)/2] = 3.15 times
One Year Prior:
$40,023 / [($12,758 + $13,570)/2] = 3.04 times
Total asset turnover for RadioShack ($ millions)
Current Year:
$4,224.5 / [($2,283.5 + $1,989.6)/2] = 1.98 times
One Year Prior:
$4,251.7 / [($1,989.6 + $2,070.0)/2] = 2.09 times
2. Each dollar of Best Buys assets produces $3.15 in net sales for the
current year and $3.04 in net sales for the prior year. Each dollar of
RadioShacks assets produces $1.98 in net sales for the current year
and $2.09 in net sales for the prior year. Best Buy had an increase in
asset efficiency from last year to this year, whereas RadioShack had a
decrease in asset efficiency.
Best Buy employs its assets more efficiently than RadioShack for both
years. In addition, only Best Buys total asset turnover exceeds the
industry average of 2.6. RadioShacks total asset turnover is lower
than the industry average for both years.
8-48
Chapter 08 - Reporting and Analyzing Long-Term Assets
Ethics Challenge
BTN 8-3
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 currentyear 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 8-4
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.
8-49
Chapter 08 - Reporting and Analyzing Long-Term Assets
Taking It to the Net
BTN 8-5
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 substantial asset for Yahoo!.
2.
Total
Amount
Goodwill (in $ thousands)
$ Change
from Prior
%
Year
Change
Balance, December 31, 2007.....................
$4,002,030
Balance, December 31, 2008..................... ,440,889
$3
$(561,141) (14.0)%
Goodwill has decreased over this period. The decrease is due mainly
to a Goodwill Impairment Charge and, secondly, to Foreign Currency
Translation Adjustments that Yahoo! has experienced over this period.
3. Yahoo!s intangible assets are categorized into the three categories
below at December 31, 2008.
These intangibles represent 3.5%
($485,860 / $13,689,848) of total assets.
December 31, 2008 (in thousands)
Customer, affiliate and advertiser related relationships......
$ 99,828
Developed technology and patents.......................................
350,168
Trademark, trade name and domain name............................
35,864
Total intangible assets, net....................................................
$485,860
4. Note 6 indicates that Trademark, trade name, and domain name have
original estimated useful lives of one year to indefinite lived. If the
trademark and trade name have been registered with the governments
Patent Office, their legal life is probably much closer to the indefinite
life estimate. Since the economic life of these intangibles is difficult to
determine, Yahoo! must choose an economic life it feels is reasonable.
8-50
Chapter 08 - Reporting and Analyzing Long-Term Assets
Teamwork in Action
BTN 8-6
1. Annual depreciation for each year of the assets useful life:
Year
Straight-line
Double-Declining-Balance
Units-of-Production
2007 ($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 experts 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).
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Chapter 08 - Reporting and Analyzing Long-Term Assets
Teamwork in Action
BTN 8-6 - continued
4. Book value at the end of each year
= Cost - Accumulated depreciation
= $44,000 (amount varies by methodsee part 1 for annual amounts)
Straight-line
Double-DecliningBalance
Units of Production
2007........
$33,500
$22,000
$35,600
2008........
..........
..........
23,000
11,000
23,000
2009........
12,500
5,500
8,300
2010........
2,000
2,000
2,000
Year
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.
8-52
Chapter 08 - Reporting and Analyzing Long-Term Assets
Entrepreneurial Decision
BTN 8-7
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 =
(b)
Net sales
Average total assets
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--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.
8-53
Chapter 08 - Reporting and Analyzing Long-Term Assets
Hitting the Road
BTN 8-8
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.
Global Decision BTN
8-9
Note: Total asset turnover = Net sales / Average total assets
1. Total asset turnover for GOME (RMB million):
Current Year:
45,889 / [(27,495 + 29,837)/2] = 1.60 times
One Year Prior:
42,479 / [(29,837 + 21,176)/2] = 1.67 times
2. GOME was less efficient in using its assets to generate net sales than
Best Buy and RadioShack. Specifically, in the current year each RMB
worth of assets generated 1.60 times that in net sales, compared to 3.15
times each dollar in net assets for Best Buy, and 1.98 times each dollar
in net assets for RadioShack. Consequently, Best Buy was most
efficient in generating net sales from its assets.
Similarly, in the prior year, each RMBs worth of GOMEs assets
generated 1.67 times that in net sales, compared to Best Buys 3.04
turnover, and RadioShacks 2.09 turnover. Again, Best Buy performed
the best on this dimension.
8-54