Homework 4 - P7-4 Req. 1 Sales revenue Cost of goods sold*...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: P7-4 Req. 1 Sales revenue Cost of goods sold* (42 @ $10,000) + (5 @ $11,500) Gross profit Expenses Pretax income Ending inventory (15* 11500) Req. 2 Sales revenue Cost of goods sold* (20 @ $8,000) + (27 @ $10,000) Gross profit Expenses Pretax income Ending inventory (15* 10,000+20*11,500) Req. 3 Pretax income increased by $47,500 because of the decision to purchase the additional units at the end of the year. This decision provided lower cost units to allocate to cost of goods sold, which increased pretax income. There is evidence of deliberate income manipulation. Although no information is provided as to expected future sales, nor the time to order and receive units, the timing of the purchase of the additional units is suspect because the cost of the equipment will be decreased again during the first quarter of next year. 1,151,500 430,000 721,500 300,000 421,500 380,000 1,151,500 477,500 674,000 300,000 374,000 172,500 E8-14 Req. 1a Cash (+A)............................................................................... 1,500,000 Accumulated depreciation (−XA, +A)....................................6,500,000 Furniture (−A)....................................................................... Sale of an asset at book value; the result is no loss or gain. Req. 1b Cash (+A).............................................................................. 2,600,000 Accumulated depreciation (−XA, +A)...................................6,500,000 Gain on sale of long-lived asset (+Gain, +SE)................... Furniture (−A)..................................................................... Sale of an asset above book value; the result is a gain. Req. 1c Cash (+A)............................................................................... 900,000 Accumulated depreciation (−XA, +A)....................................6,500,000 Loss on sale of long-lived asset (+Loss, −SE)........................ 600,000 Furniture (−A)....................................................................... Sale of an asset below book value; the result is a loss. Req. 2 Summarization of the effects of the disposal: 8,000,000 1,100,000 8,000,000 8,000,000 1. The loss or gain on disposal of a long-lived asset is the difference between the disposal price and the book value at date of disposal. 2. When the disposal price is the same as the book value there is no loss or gain; when the price is above book value there is a gain; and when the price is below book value, there is a loss on disposal. 3. A loss or gain on disposal of a long-lived asset normally would occur because the book value does not purport to be market value. E8–17. Req. 1 Acquisition cost: Patent Trademark Technology $ 6,000 12,000 65,000 Req. 2 Amortization on December 31, 2010 (straight-line method with no residual value): Patent: $6,000x 1/15 years remaining = $400 amortization expense Trademark: The trademark is not amortized due to its indefinite life. Technology: $65,000 x 1/4 years = $16,250 amortization expense Req. 3 Income statement for 2010: Operating expenses: Amortization expense ($400 + $16,250) $16,650 Balance sheet at December 31, 2010: (under noncurrent assets) Intangibles: Patent ($6000 - $400)..............................................$ 5,600 Trademark ............................................................... 12,000 Technology ($65,000 - $32,500)................................32,500 $ 50,100 P8-5 Req. 1 a Straight-line: Year At acquisition 1 2 (93,000-2,000)/13 (93,000-2,000)/13 Computation Depreciation Expense Accumulated Depreciation Net Book Value 93,000 7000 7000 7000 14000 86,000 79,000 b. Units-of-production: (93,000-2,000)/182,000=0.5 per unit of output Year At acquisition 1 2 0.5*20,000=10,000 0.5*16,000=8,000 Computation Depreciation Expense Accumulated Depreciation Net Book Value 93,000 10,000 8,000 10,000 18,000 83,000 75,000 c. Double-declining-balance: Year Computation Depreciation Expense Accumulated Depreciation Net Book Value At acquisition 1 2 93000*(2/13) (93000-14,308)*(2/13) 93,000 14,308 12,107 14,308 26,414 78,692 66585 Req. 2 Cash flow: Because of tax purposes, the declining-balance method is usually preferred because an early tax deduction is preferable to a later tax deduction. This method can shield the early Cash flow from taxing as much as possible. DB depreciation expense is highest; therefore, it yields lower taxable income and therefore lower income tax payable (and lower cash outflow) in the early years. In later years, this effect would reverse. Other than cash outflows for taxes, cash flows are unaffected by the method chosen by management. Turning to Fixed asset turnover: The DB method would be most favorable for fixed asset turnover. Because DB yields the highest amount of depreciation expense, it yields the lowest level of fixed assets and thus the highest fixed asset turnover during the early years. In later years, this effect would reverse. EPS—In terms of EPS, straight-line (SL) depreciation would be favorable. This depreciation method yields the lowest amount of depreciation expense, the highest net income, and therefore the highest EPS during the early years when compared with the accelerated methods. In later years, this comparative effect would reverse. I recommend that General Motors should choose a different method for tax purposes than for financial reporting purposes. For reducing taxes in year 1, I recommend using the double-declining-balance method. For financial reporting purpose, using straight-line depreciation method would result in the highest EPS for year 1 (assuming no other method better reflects matching expenses with revenues). As time goes on (in years 2 and later), the relative advantages of one method over another will reverse. However, accounting methods should be used consistently over time, it needs reasonable justification for changing dep methods. ...
View Full Document

This note was uploaded on 12/01/2010 for the course UGBA 102A taught by Professor Udpa during the Summer '07 term at University of California, Berkeley.

Ask a homework question - tutors are online