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Unformatted text preview: SOLUTIONS TO SELF STUDY QUESTIONS 3. op The effects of the three methods on annual depreciation expense are: (a) Straight-line – constant amount (b) Diminishing-balance – decreasing amount (c) Units- of-production – varying amount. yr igh 4. Capital expenditures are additions and improvements incurred to increase the operating efficiency, productive capacity or the expected useful life of the asset. These expenditures are usually material in amount, incur infrequently and are recorded as debits to the PPE asset affected, whereas expenses are expenditures for the ordinary repairs made to maintain the operating efficiency and expected productive life of the asset. These expenditures usually occur frequently and are recorded as a debit to the Repairs and Maintenance Expense account as incurred and are an expense in the income statement. te 5. 10. d -N o pr In a sale of PPE assets, the carrying (book) value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the carrying value of the PPE asset, a gain on disposal occurs. If the proceeds of the sale are less than the carrying value of the PPE asset sold, a loss on disposal occurs. in tin g By selecting a higher estimated useful life, Betty Ltd is spreading the PPE asset’s cost over a longer period of time. The depreciation expense reported in each period is lower and profit is higher. Barney’s choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower profit. Therefore, Betty Ltd may appear to be a better performer. or co py Page 1 of 10 in g Brief Exercis e 8.6 Sharkey Ltd op (a) Average useful life = yr igh Average cost of PPE assets Depreciati on expense Accumulate d depreciati on $8.5b = 7.0 years $1.212b Depreciation expense (b) Average Age = (c) Asset turnover ratio = te ($30.1b+$21.8b) 2 = 21.4 years $1.212b d Net sales $18.6b = 0.65 times ($27.3b+$29.7b) 2 Average total assets -N o pr in tin g or co py Page 2 of 10 in g Exercise 8.1 Zhang Ltd (a) op The following points explain the application of the historical cost principle in determining the acquisition of PPE assets. yr igh 1. Under the historical cost principle, the acquisition cost for a PPE asset includes all expenditures necessary to acquire the asset and make it ready for its intended use. 2. For example, the cost of factory machinery includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs. te d 3. Cost is the fair value at acqu isition date of all assets given up or liabilities undertaken, plus any incidental costs. -N 4. Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an arm’s -length transaction. (b) o 1. 2. 3. 4. 5. 6. 7. Land Factory Machinery. Delivery Truck Land Improvements Delivery truck Factory Machinery Prepaid Insurance 8. Motor Vehicle Expense pr in tin g or co py Page 3 of 10 in g Exercise 8.2 Troy Ltd Cost of new machine Balance date Estimated residual Depreciable amount op yr igh (a) $114,000 purchased 1 October 2007 31 December $18,000 = Cost less Residual = $114,000 - $18,000 = $96,000 Straight line depreciation rate: te 100% ÷ 5 years = 20% d 2007 Depreciation 2008 Depreciation (b) -N = Depreciable amount x dep’n rate x 3 months = $96,000 x 20% x 3/12 = $4,800 = Depreciable amount x dep’n rate = $96,000 x 20% = $19,200 o pr Diminishing-balance method: Straight line rate doubled (given in question) 20% x 2 = 40% 2007 Depreciation in tin g = Depreciable amount x dep’n rate x 3 months = $114,000 x 40% x 3/12 = $11,400 Remember the Diminishing -balance method applies the rate to the carrying value not the depreciable amount. 2008 Depreciation (c) or = Depreciable amount x dep’n rate = $102,600 x 40% = $41,040 co Units-of-production method: Depreciation cost per unit = Depreciable amount ÷ Total units of production = $96,000 ÷ 20,000 hours = $4.80 per hour 2007 depreciation = 900 hours x $4.80 = $4,320 Page 4 of 10 py in g Exercise 8.8 Chen Ltd 1 Jan op Accumula ted Depreciation – Machinery Machinery (Machine scrapped fully depreciated) yr igh 30 June Depreciation Expense Accum Dep’n – Computer (Dep’n to date of sale) te 62,000 62,000 2,500 2,500 Calculation: 30 June d 35,000 x 1/7 x 6/12 -N Cash Accumulated Depreciation – Computer Gain on Sale Computer (Sale of Computer Equipment) Calculation: o 25,000 17,500 7,500 35,000 pr Cost Accum Dep’n (5,000 x 3 years + 2,500) Carrying amount of equipment sold Proceeds from sale Gain on sale 31 Dec in tin g Depreciation Expense Accum Dep’n – Truck (Update depreciation) 3,000 Calculation: (27,000 - 3,000) x 1/8 31 Dec Loss on Disposal Accumulated Depreciation – Truck Delivery Truck (Removal of asset from books) 12,000 15,000 Page 5 of 10 35,000 (17,500) 17,500 25,000 7,500 or 3,000 co 3,000 27,000 Calculation: (27,000 - 3,000) x 5/8 2,500 15,000 py in g Problem S et A 8.7 Erin Ltd op a) Accumulated Depreciation on balance date 31 December 2008 yr igh 1. Straight-line: (Cost -Residual value) / Useful life = Depreciation expense Year 2005 2006 2007 2008 te Calculation MACHINE 1 (135,000 -7,000) / 10 = 12,800 (135,000 -7,000) / 10 = 12,800 (135,000 -7,000) / 10 = 12,800 (135,000 -7,000) / 10 = 12,800 d 2. Diminishing balance: -N o Accum Dep’n 12,800 25,600 38,400 51,200 pr in tin g Carrying amount at beginning of year x Diminishing balance rate = Depreciation expense Diminishing balance depreciation rate = 1.5 x straight-line rate = 1.5 x 10% = 15% Year 2006 2007 2008 Calculation MACHINE 2 96,000 x 15% = 14,400 (96,000-14,400) x 15% = 12,240 (96,000-26,640) x 15% = 10,404 Page 6 of 10 or Accum Dep’n co 14,400 26,640 37,044 py in g 3. Unit of Product ion: op Depreciation cost per unit = Depreciable co st / Total unit of production = $60,000 / 30,000 hours = $ 2.00 per machine hour Depreciation cost per unit * Units of production during the year = Depreciation expense yr igh Year 2006 2007 2008 te d Calculation MACH INE 3 500 x 2.00 = 1,000 3,500 x 2.00 = 7,000 4,500 x 2.00 = 9,000 -N Accum Dep’n 1,000 8,000 17,000 (b) If machine 2 were purchased on 1 April, the depreciation expense for this machine in year 2006 should only be 9 months. Year 2006 2007 o pr Calculation in tin g MACHINE 2 96,000 x 15% x 9/12 (96,000- 10,800) x 15% Dep’n Expense 10,800 12,780 or co py Page 7 of 10 in g Building Business S kills 4.10 NEWSPAPER TASK PRACTICE Example Solution - Using the Ethical Conflict Resolution Process op Fine Foods yr igh Introduction Rita Roma was hired as the assistant accountant of Fine Foods. She is responsible for the payment of all invoices and for maintaining the company’s high credit rating by paying all bills when due and taking advantage of all settlement discounts. te The accountant training Rita, Jamie Caterino, instructs Rita that she is to continue the practice of preparing all cheques “net of discount” and dating cheques the last day of the discount period. However, he advises her to hold the cheques at least 4 days beyond the discount period before mailing them so the company gets another 4 days interest on its money. He advises her that complaints by suppliers are dealt with by blaming the mailroom or the post office. d -N o pr Identification of t he Relevant Accounting / Ethical Issues Rita Roma, as a new employee, is placed in a position of responsibility and is pressured by her supervisor to continue an unethical practice previously performed by him. The unethical practice is taking undeserved cash discounts. The ethical issue she is faced with is whether she should follow her boss’ unethical instructions or offend her boss and maybe lose the job she just assumed. in tin g From a commercial point of view, holding back the cheques is financially advantageous to Fine Foods and does not appear to hav e affected their credit rating with suppliers. However, if suppliers became aware of the practice, Fine Food’s reputation and credit rating may suffer. Identification of Stakeholders The stakeholders (affected parties) are: Rita Roma, the assistant accountant Jamie Caterino, the accountant Fine Foods, the company Creditors of Fine Foods (suppliers) Mail room employees (those assigned the blame) The Post Office (also assigned blame). Page 8 of 10 or co py in g Outline of Ethical Perspectives Rita is in the position of having to determine what she ought to do, that is, determine what is morally good, acceptable and right. op She has a number of alternatives to consider: yr igh Alternative 1 Tell the accountant, her boss Jamie Caterino, that she will attempt to take every allowabl e cash discount by preparing and mailing cheques within the discount period. This will probably offend her boss and may jeopardise her continued employment. te d Alternative 2 Join the team and continue the practice of taking undeserved settlement discounts. -N Alternative 3 Go over her boss’s head and take the chance of receiving just and reasonable treatment from an officer superior to Jamie. The company may not condone this practice. o pr In order to determine which alternative is ethical, Rita may consider a number of different ethical perspectives. in tin g Teleological ethics theories are also called consequential theories because they deal with the consequences or outcomes of actions. Two teleological theories are egoism and utilitarianism. According to egoism, the dominant guide to a person’s behavior should be the action that will benefit them the most. From this perspective, Rita may consider it best to follow the second alternative, act in her own self interest, and join the team in continuing the practice of taking undeserved discounts. However, whilst taking account of the discounts offered by suppliers may make her performance appear good, her reputation may suffer if the unethical practices adopted are revealed. or co py From a utilitarian perspective, her decision should maximize the greatest good for the greatest number. This would involve an assessment of the costs and benefits of her actions and consideration of all of the stakeholders involved. According to this perspective, the first alternative may be ad opted, and the unethical practices discontinued. She may decide not to continue the unethical behaviour once she considers not only her own reputation and that of Fine Foods but takes into account the other stakeholders, namely the suppliers being cheated of the discount and the mailroom and post office staff who are blamed for the late cheques. Page 9 of 10 in g Deontological ethics are based on duties and rights. From this perspective, Rita has an obligation to follow the code of ethics of the accounting bodies which r equire her to act in an ethical manner. From this perspective she should adopt either the first alternative and discontinue the unethical practice or adopt the third alternative and advise her superiors of the unethical practice being promoted by Jamie Ca terino. op Another perpective to consider is that of virtue ethics which is concerned primarily with integrity and focuses on the person undertaking the action. From this perspective, Rita should adopt either alternatives one or two thereby acting in a fair and honest manner. yr igh A further ethical consideration here is the Sunlight test. The reputation of Fine Foods and its credit rating may suffer if the unethical practice adopted was to be made public. Discovery of such unethical behavior would also adversely affect the reputation of the staff of Fine Foods, particularly that of Rita and Jamie. te d -N Conclusion Rita definitely has a choice, but probably not without consequence. Based upon the ethical perspectives discussed above, to continue the practice is def initely unethical. If Rita submits to this request to act unethically, she may be asked to perform other unethical tasks. If Rita stands her ground and refuses to participate in this unethical practice, she probably won’t be asked to do other unethical things – if she isn’t fired. Maybe nobody has ever challenged Jamie’s unethical behavior and his reaction may be one of respect rather than anger and retribution. Being ethically compromised is no way to start a new job. o pr in tin g or co py Page 10 o f 10 in g ...
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