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Concluded the balance sheets under all three

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Unformatted text preview: ,000 185,000 2012 118,334 \$ 153,334 \$ Total E9–5 c. Concluded The balance sheets under all three methods report identical amounts for each balance sheet account. Since the asset was fully amortized by December 31, 2014, the method used to amortize the asset does not affect the amounts reported on the balance sheet as of December 31, 2014. E9–6 a. and b. Stork Freight Company Income Statement For the Year Ended December 31 12­Year Useful Life Revenues 6­Year Useful Life \$ 50,000,000 50,000,000 \$ \$ 25,000,000 25,000,000 \$ Expenses: Operating expenses Depreciation expense 1,250,000 2,500,000 Total expenses 26,250,000 Net income \$ 27,500,000 \$ 22,500,000 23,750,000 The percentage decrease in net income would be approximately 5.26% [(\$22,500,000 – \$23,750,000) ÷ \$23,750,000]. c. 12­Year Useful Life Net income 22,500,000 Dividend payout percentage Dividends 6,750,000 6­Year Useful Life \$ 23,750,000 \$ \$ 30% 7,125,000 \$ 30% The difference in dividends due simply to using different estimated useful lives for the planes would be \$375,000 (\$7,125,000 – \$6,750,000). However, it should be noted that in the 6­year useful life example, dividends in years 7 – 12 would be higher (due to the lack of depreciation expense). E9–7 a. An asset's book value equals the asset's initial capitalized value less the associated accumulated depreciation. With straight­line depreciation, accumulated depreciation equals depreciation expense per year times the number of years the asset has been used. Therefore, the asset's book value would be calculated as follows: Depreciation expense per year 8 = (Cost – Salvage Value) ÷ Useful Life = (\$60,000 – \$12,000) ÷ 5 years = \$9,600 per year Book Value = Capitalized Cost – Accumulated Depreciation = \$60,000 – (\$9,600 3 years) = \$31,200 E9–7 b. Concluded Depreciation Expense = [(Cost – Accumulated Depreciation) – Salvage Value] ÷ Remaining Useful Life = (Book value – Salvage value) ÷ Remaining useful life = (\$31,200 – \$12,000) ÷ 5 remaining years = \$3,840 Depreciation Expense (E, –SE) Accumulated Depreciation (–A) Depreciated asset for 2011. 3,840 3,840 E9–8 (a ) (b ) (c) (d ) (e ) (f) (g ) (h ) 1 2 3 Double­Declining­ Balance Activity Method x1 x x x x x1 x x2 x x x x x3 x Under certain conditions, all three methods could meet this objective. However, for the straight­line method and the double­declining­balance method, this objective will be met only by chance. The activity method will always meet this objective because depreciation is based upon the actual use of the asset. It is possible that the activity method would generate the largest net income in the last year of an asset's useful life. However, this result would be due to the company's use patterns of the asset and would not be due to the depreciation method per se. See note (2). The same rationale would hold in this case too. E9–9 9 Straight­ Line x1 x Objective a. (1 ) Straight­line depreciation: Depreciation per Year = (Cost – Salvage Value) ÷ Useful Life = (\$300,000 – \$60,000) ÷ 4 years = \$60,000 per year for 2011, 2012, 2013, and 2014 E9–9 Concluded (2 ) Double­declining­balance depreciation: Date Depreciation Factor Depreciation Expense Cost Accumulated Depreciation 1/1/11 12/31/11 12/31/12 12/31/13 12/31/14 50% 50% 50% 50% 0 \$150,000a 300,000 150,000 150,000 75,000 300,000 225,000 75,000 15,000b 300,000 240,000 60,000 0 300,000 240,000 60,000 Book Value \$300,000 \$300,000 \$ a Depreciation Expense = Book Value at Beginning of the Period Depreciation Factor b Book Value Depreciation Factor = \$75,000 50% = \$37,500. If Benick Industries depreciated \$37,500 in 2013, the asset's book value would drop below its salvage value. To prevent this from happening, depreciation expense for 2013 can be only \$15,000. b. A manager should consider the costs and benefits associated with each depreciation method. The most likely benefit is the impact of depreciation methods on income taxes. An accelerated method decreases the present value of tax payments. However, since there is no requirement that a company use the same depreciation method for financial reporting purposes as it does for tax reporting, tax considerations are not an issue for financial reporting. A manager should also consider the bookkeeping costs associated with each method. However, with computers the bookkeeping costs should be relatively consistent across methods. Finally, since the choice of depreciation methods affects net income, managers might consider the impact of the different depreciation methods on contracts such as debt covenants and incentive compensation contracts. Comparability with other firms in the same industry may also be a factor. E9–10 a. Computer System (+A) Cash (–A) Purchased computer system. Note: b. 10 (1 ) 335,000 335,000 Capitalizing the \$10,000 of training costs could be debated. But, without incurring these costs, the computer system would not be in a serviceable condition. Hence, the training costs meet the requirement to be capitalized as part of the fixed asset. Straight­line depreciation: Depreciation per Year = (Cost – Salvage Value) ÷ Useful Life = (\$335,000 – \$70,000) ÷ 5 years = \$53,000 per year for 2011, 2012, 2013, 2014, and 2015 E9–10 (2 ) Concluded Double­declining­balance depreciation: Date 1/1/11 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 Depreciation Factor 40% 40% 40% 40% 40% Depreciation Expense Cost Accumulated Depreciation Book Value \$335,0...
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