Ch11HWSol(6th) - Chapter 11 HW Assignment: E11-4, 6, 7, 8,...

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Chapter 11 HW Assignment: E11-4, 6, 7, 8, 9, 14, 17; P11-4, 5, 11, 23 (1 – 10) Solutions E11-4 Long-term investments: (h) Common stock of Flower Corporation (l) Investment in bonds of Beech Brothers, Inc. Property, plant, and equipment: (a) Machinery, net (c) Land (e) Processing plant, net (j) Standby equipment, net Intangible assets: (d) Patents (k) Goodwill Other long-term assets: (f) Obsolete equipment awaiting sale, net (g) Prepaid insurance (the portion not expiring within the next year) Note: (b) Office supplies and (i) Cash are not part of long-term assets. E11-6 Calculation of Gain on Sale Financial Reporting Purposes Tax Purposes Original cost Less: Straight-line depreciation to date ($10,500 @ 236 months) Accelerated depreciation to date Book value at date of sale Selling price Less: Book value Gain on sale of building (a, b) $4,186,000 2,478,000 $1,708,000 $7,200,000 1,708,000 $5,492,000 $4,186,000 3,500,000 $ 686,000 $7,200,000 686,000 $6,514,000 Companies typically use straight-line depreciation for financial reporting purposes to minimize the effect of depreciation on net income. Accelerated methods result in larger amounts of depreciation expense for tax purposes in the early years of asset lives. Therefore, cash outflow for taxes is reduced because of the lower amount of taxable income than if straight-line depreciation were used. In later years, a company incurs higher cash outflows for taxes because accelerated methods produce lower depreciation expense than the straight-line method. If an asset is sold, a larger amount of taxable profit will be reported than the profit reported for financial reporting purposes. If tax rates remain constant, the effect on cash outflow for taxes over the life of an asset will be the same regardless of which method is used. The timing of the cash flows is affected, however. By delaying the outflows, a company can invest the cash it saves in other productive assets and earn a return on this investment until the cash is needed to pay taxes. Thus, a company is better off if it can delay tax payments by recording higher amounts of depreciation in the early years of an asset’s life. Chapter 11 HW Solutions Page 1
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E11-7 a. Cost of equipment $ 480,000 Less: Depreciation per year [($480,000 − $30,000) ÷ 8 years = $56,250] Accumulated depreciation total over 5 years 281,250 Book value on year 5 balance sheet $ 198,750 b. Remaining undepreciated cost $ 198,750 Less: New estimated residual value 20,000 New depreciable amount $ 178,750 Divide by number of years remaining ÷ 2 Depreciation expense per remaining year $ 89,375 c. The nature of estimates is that they are not expected to be realized exactly. Even high-quality estimates made by highly qualified people usually will not turn out exactly. Some revision is to be expected. Over time, circumstances change. Therefore, we cannot conclude that a poor job was done initially. E11-8
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This note was uploaded on 09/04/2008 for the course ACC 310F taught by Professor Verduzco during the Spring '07 term at University of Texas at Austin.

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Ch11HWSol(6th) - Chapter 11 HW Assignment: E11-4, 6, 7, 8,...

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