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CHAPTER 8 - CHAPTER 8 HOMEWORK SOLUTIONS Questions 2 The...

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CHAPTER 8 HOMEWORK SOLUTIONS Questions: 2. The fixed asset turnover ratio = Net sales [(Beginning net fixed asset balance + Ending net fixed asset balance) ÷ 2] This ratio measures how efficiently a company utilizes its investment in property, plant, and equipment over time. The ratio can also be compared to the ratio for the company’s competitors. 4. When a long-lived asset is acquired, it is recorded in the accounts in conformity with the cost principle. That is, the acquisition cost of a long-lived asset is the cash equivalent price paid for it plus all incidental costs expended to obtain it and to place it in the location in which it is to be used. 7. Depreciation—allocation of the cost of a tangible long-lived asset over its useful life. Depreciation refers to allocation of the costs of such items as plant and equipment, buildings, and furniture. Depletion—allocation of the cost of a natural resource over its useful life. It is identical in concept to depreciation except that it relates to a different kind of asset, depletable natural resources. Amortization—allocation of the cost of an intangible asset over its estimated useful life. Conceptually, it is the same as depreciation and depletion except it relates to an intangible asset. Multiple Choice: 1. b) 2. d) 3. d) 10. c)
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Mini-Exercises: M8–2. Cutter’s fixed asset turnover ratio is = Net sales [(Beginning net fixed asset balance + Ending net fixed asset balance) ÷ 2] = $3,250,000 = 1.76 [($1,450,000 + $2,250,000) ÷ 2] Cutter’s ratio is twice as high as Delta’s 2003 ratio of .80, indicating that Cutter may be much more efficient in its use of fixed assets. M8–4. Machinery (original cost) $21,500 Accumulated depreciation at end of third year Depreciation expense = ($21,500 cost – $1,500 residual value) x 1/4 years = $5,000 Accumulated depreciation = $5,000 annual depreciation expense x 3 yrs = 15,000 Net book value at the end of the third year $6,500 M8–5. Machinery (original cost) $21,500 Accumulated depreciation at end of first year: Depreciation expense = ($21,500 – 0 acc. depr.) x 2 / 4 yrs. = $10,750 10,750 Net book value at end of first year $10,750 Machinery (original cost) $21,500 Accumulated depreciation at end of second year Depreciation expense = ($21,500 - 10,750 acc. depr.) x 2 / 4 = 5,375 Accumulated depreciation = Year 1, $10,750 + Year 2, $5,375 = 16,125 Net book value at end of second year $5,375 Machinery (original cost) $21,500 Accumulated depreciation at end of third year Depreciation expense = ($21,500 - 16,125 acc. depr.) x 2 / 4
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