Ch09 - Chapter 9 Reporting and Interpreting Property Plant...

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Chapter 9 Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles EXERCISES E9–3 (1) R; (2) C; (3) C; (4) R ; (5) C; (6) C; (7) N; (8) C; (9) R; (10) N. E9–7 Req. 1 Apportionment of price paid ($178,000) plus transfer costs ($2,000): Appraised Value Apportionment of Lump-Sum Cost Item Amount Ratio Total Cost Paid Apportioned Cost Building .................... $150,000 .75 x $180,000 = $135,000 Land ......................... 50,000 .25 x 180,000 = 45,000 $200,000 1.00 $180,000 Total cost of building = Apportioned cost per above, $135,000 + Renovation cost, $23,000 =$158,000 Req. 2 Building (A) ...................................................................... 158,000 Land (A) ........................................................................... 45,000 Cash (A) ($178,000 + $2,000 + $23,000) ................ 203,000 Req. 3 ($158,000 cost – $14,000 residual value) ÷ 12 years = $12,000 Req. 4 Land ................................................................................... $ 45,000 Building .............................................................................. 158,000 Less: Accumulated amortization ($12,000 x 2) ................. 24,000 134,000 Total book value at end of Year 2 ..................................... $179,000
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E9–10 Req. 1 (2008): Amortization expense (+E - SE) ..................................... 5,000 Accumulated amortization, equipment (+XA - A) ...... 5,000 Adjusting entry for 2008 ($80,000 – $5,000) ÷ 15 years = $5,000. Req. 2 (2009): Repair expense (+E - SE) ............................................... 850 Cash ( - A) ...................................................................... 850 Ordinary repairs incurred. Equipment (+A) .................................................................. 10,500 Cash ( - A) ...................................................................... 10,500 Extraordinary repairs incurred and capitalized. Req. 3 (December 31, 2009): Adjusting entry for 2009 amortization: Amortization expense (+E - SE) ...... ………………. 7,625 Accumulated amortization, equipment (+XA - A) 7,625 Equipment cost ........................................................... $80,000 Accumulated amortization through 2008 ................... 55,000 Net book value before overhaul .............................. 25,000 Extraordinary repairs capitalized ................................ 10,500 Net book value after overhaul ................................. 35,500 Less residual value ..................................................... 5,000 Balance to be amortized over remaining life of 4 years $30,500 Remaining life: 15 years – ($55,000 ÷ $5,000) years = 4 years Amortization, 2009: $30,500 ÷ 4 years = $7,625
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Req. 4 Date Assets Liabilities Shareholders’ Equity Dec. 31, 2008 Accumulated amortization –5,000 No effect Amortization expense –5,000 During 2009 Cash –850 No effect Repair expense –850 Cash Equipment –10,500 +10,500 No effect No effect Dec. 31, 2009 Accumulated amortization –7,625 No effect Amortization expense –7,625 E9–15 Req. 1 Amortization Expense Book Value at End of Method of Amortization Year 1 Year 2 Year 1 Year 2 Straight-line ........................... $12,000 $12,000 $53,000 $41,000 Units of production ................ 16,000 18,000 49,000 31,000 Double-declining balance ...... 26,000 15,600 39,000 23,400 Computations: Amount to be amortized: $65,000 – $5,000 = $60,000: Straight line: $60,000 ÷ 5 years = $12,000 per year Units of production: $60,000 ÷ 150,000 units = $.40 per unit Year 1: 40,000 x $.40 = $16,000 Year 2: 45,000 x .40 = 18,000 Double-declining balance (Rate: 2 x the straight line rate of 20% = 40%): Year 1: $65,000 x 40% = $26,000 Year 2: ($65,000 – $26,000) x 40% = $15,600 Req. 2 The double-declining balance method would result in the lowest EPS for Year 1 because it produced the highest amortization expense and therefore the lowest income (from Requirement 1). In Year 2, the units-of-production method would result in the lowest EPS because it produced the highest amortization expense and therefore the lowest income in that year.
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Req. 3 Amortization is a non-cash expense; that is, no cash is paid when amortization is recognized. Ignoring income tax implications, all methods have the same impact on cash flows in year 1. Req. 4 The acquisition of the machine would decrease cash provided by investing activities by the amount of the purchase cost ($65,000). As a non-cash expense, annual amortization has no overall effect on cash provided by (used in) operating activities.
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