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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 amortization affects the basic accounting equation by reducing assets and reducing retained earnings in the stockholders’ equity section. Intangible assets are reduced by amortization charges while these amortization charges reduce the net income of the company. This reduction in net income reduces the retained earnings of the company. b. Ford would recognize a loss of $700 million computed as follows: Accumulated depreciation at 12/31/X1 $25.3 billion + Depreciation charges for 20X2 2.6 billion – Accumulated depreciation at 12/31/X2 26.2 billion Accumulated depreciation on assets sold $ 1.7 billion Original cost $ 3.0 billion Accumulated depreciation 1.7 billion Net book value $ 1.3 billion – Cash from the sale of assets 1.0 billion $ 0.3 billion The loss 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. 1
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BE9–3 a. Johnson and Johnson invested $120 million ($586– $466) of land during 1999. b. Accumulated depreciation increased during 1999 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 1999 Johnson and Johnson must have sold some assets that were classified in the buildings and building equipment account. 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. The change from 1998 ($10,269) to 1999 ($11,046) is $777. Since Johnson & Johnson spent $1,728 then $951 must have
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This note was uploaded on 02/09/2010 for the course BUS 101 taught by Professor Noname during the Spring '10 term at KCTCS.

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