ch09 - CHAPTER 9 LONG-LIVED ASSETS BRIEF EXERCISES BE91...

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CHAPTER 9 LONG-LIVED ASSETS BRIEF EXERCISES BE9–1 a. The new method, straight-line depreciation, will increase net income in the early years and reduce income in the later years versus using an accelerated method. An accelerated method of depreciation increases the depreciation charges in the early years of the life of an asset and reduces the depreciation charges in the later years. b. Allegheny may have decided that it wanted depreciation charges to be spread evenly over the life of an asset so that the impact on net income in any one reporting period was less. It may also feel that it will make its financial statements easier to compare with its competitors. During periods of high fixed asset investment Allegheny’s results may look unfavorable versus other companies that use a straight-line method instead of an accelerated method. c. In the annual report one could look through footnote #1. This footnote typically highlights all of the significant accounting policies and methods used by the company to prepare the financial statements. BE9–2 a. The recognition of depreciation and amortization affects the basic accounting equation by reducing assets and reducing retained earnings in the stockholders’ equity section. Fixed assets such as property, plant and equipment are reduced through depreciation charges (which are collected in the contra asset account Accumulated Depreciation) which lower net income. Intangible assets are reduced by amortization charges which reduce the net income of the company. This reduction in net income reduces the retained earnings of the company. b. Boeing recognized a gain of $117 million, computed as follows: Accumulated depreciation 2002 $12,719 million + Depreciation charges for 2003 1,005 million – Accumulated depreciation 2003 12,963 million Accumulated depreciation on assets sold $ 761 million PP&E 2002 $21,484 million + PP&E purchases for 2003 741 million – PP&E 2003 21,395 million PP&E sold $ 830 million 1
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Derived Journal Entry: Cash (+A) 186 Accumulated Depreciation (+A) 761 Property, Plant & Equipment (-A) 830 Gain on Sale (R, +SE) 117 The gain on the sale of property, plant and equipment would be shown in the income statement, usually in an “other gains and losses” section. These transactions would affect the statement of cash flows in the “funds from investing activities section”. Any sales would be a source of funds in the amount of cash received. BE9–3 a. Johnson and Johnson invested $122 million ($594– $472) of land during 2003. b. Accumulated depreciation increased during 2003 because of depreciation expense taken by Johnson and Johnson. Instead of reducing the asset account directly, depreciation expense is added to accumulated depreciation, which offsets the asset account to show its reduction in value. c. During 2003 Johnson and Johnson must have sold some assets that were classified in the fixed assets accounts. These accounts are carried at historical cost so that only the sale of an asset will reduce the account. Any gains or losses on the sale of these assets would be shown on the income statement.
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