ch08 - Chapter 8 Solutions Overview: Problem Length {S} {M}...

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Chapter 8 Solutions Overview: Problem Length Problem #s {S} 2, 4, 5, 6, 7, 8, 9 and 15. {M} 1, 3, 10, 12, 13, 14 and 16. {L} 11 and 8A-1. 1.{M}(i) Straight-line depreciation (ii) Sum-of-years’ digits Depreciable base $10,000,000 $10,000,000 Sum-of-years’- digits 15 Straight line Sum-of-years’ Year Method Digits 1 $ 2,000,000 $ 3,333,333 2 2,000,000 2,666,667 3 2,000,000 2,000,000 4 2,000,000 1,333,333 5 2,000,000 666,667 Total $10,000,000 $10,000,000 (iii)Double declining balance Depreciable base $12,000,000 Rate = 40% Double-declining balance Year Depreciation Balance 1 $ 4,800,000 $ 7,200,000 2 2,880,000 4,320,000 3 1,728,000 2,592,000 4 592,000 2,000,000 5 2,000,000 Total $10,000,000 8-1
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2.{S} (i) Straight-line methods report constant depreciation expense throughout the life of the asset. Accelerated methods result in higher depreciation expense initially, but a declining trend thereafter. The effect on total depreciation expense depends on the growth rate of capital spending (whether the effect of higher depreciation expense on new assets offsets the impact of declining depreciation expense on old ones). Using the same economic life, accelerated methods will report higher depreciation expense than the straight-line method during the early years and lower expense thereafter. (ii) The effect on net income is the reverse of the above. Net income is lower initially. Its reversal will depend on the level and growth of capital expenditures in the future. (iii) Accelerated depreciation methods report lower net income (higher depreciation expense), lower assets, and lower equity (higher accumulated depreciation) than the straight-line method. The numerator effect may dominate, producing lower return ratios. For a growing firm with increasing capital expenditures, the early years' depreciation expense difference will persist, resulting in lower return ratios. (iv) Accelerated depreciation methods report lower income in the first year but higher income in later years as depreciation expense declines. Reported assets are lower throughout. Companies with rapidly growing capital expenditures are likely to report lower ROA as the income effect dominates. As they mature, however, slowing capital expenditures and the growing effect of the reduced denominator (assets) is likely to result in higher ROA than under the straight-line method. (v) For financial reporting purposes, the choice of method has no effect on reported cash flows, as depreciation is a noncash expense. However, for tax purposes, the use of accelerated methods rather than the straight- line method reduces taxes paid, increasing cash from operations. (vi) As depreciation expense has no effect on revenues, accelerated depreciation methods increase reported asset turnover, as the denominator is lower. 8-2
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3.{M}a. and b. As discussed on page 276 of the text, Baxter must use a two-step process. First, it must determine whether the asset is impaired, by comparing the machinery’s carrying amount with the undiscounted future cash flows expected from its use and disposal.
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ch08 - Chapter 8 Solutions Overview: Problem Length {S} {M}...

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