chapter 9 property, plant, and equipment and intangible...

9-1© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

1. a. Property, plant, and equipment or Plant assetsb. Current assets (inventory)

2. Real estate acquired as speculation should be listed in the statement of financial position under the caption “Investments,” below the Current Assets section.

3. $1,100,000

4. Capital expenditures include the cost of acquiring PP&E and the cost of improving an asset.These costs are recorded by increasing (debiting) a PP&E account. Capital expendituresalso include the costs of extraordinary repairs, which are recorded by decreasing (debiting) the asset’s accumulated depreciation account. Revenue expenditures are recorded as expenses and are costs that benefit only the current period and are incurred for normal maintenance and repairs of PP&E.

5. Capital expenditure

6. 12 years

7. a. Nob. No

8. a. An accelerated depreciation method is most appropriate for situations in which the decline in productivity or earning power of the asset is proportionately greater in the early years of use than in later years, and the repairs tend to increase with the age of the asset.

b. An accelerated depreciation method reduces income tax payable to the IRS in the earlier periods of an asset’s life. Thus, cash is freed up in the earlier periods to be used for other business purposes.

c. MACRS was enacted by the Tax Reform Act of 1986. It is used for depreciation for PP&E acquired after 1986.

9. a. No, the accumulated depreciation for an asset cannot exceed the cost of the asset. To do so would create a negative carrying amount, which is meaningless.

b. The cost and accumulated depreciation should be removed from the accounts when the asset is no longer useful and is removed from service. Presumably, the asset will then be sold, traded in, or discarded.

10. a. Over the shorter of its legal life or years of usefulness.b. Expense as incurred.c. Goodwill should not be amortized, but written down when impaired.

CHAPTER 9PROPERTY, PLANT, AND EQUIPMENT AND INTANGIBLE ASSETS

DISCUSSION QUESTIONS

CHAPTER 9 Property, Plant, and Equipment and Intangible Assets


11. IAS 16 provides two models for PP&E valuation and depreciation—thecost model and the revaluation model. Companies are permitted to choose betweenthe depreciation methods. Under cost model, there are two methods for the calculationof depreciation expense—composite depreciation and component depreciation.

IFRS allows the application of the revaluation model as well as the cost model.The application of the revaluation model as well as the cost model. A revaluation increase is recognized in the statement of financial position as an adjustment to shareholders’ equitywhile a revaluation decrease is reported as an expense (an impairment loss) in thestatement of comprehensive income.

12. PP&E $10,000 Revaluation Surplus—PP&E $10,000

13. Loss on Revaluation $20,000 PP&E $20,000

14. There are two depreciation methods under the cost model depreciation—component depreciation and composite deprecation. Component depreciation requires that any part of PP&E should be separately depreciated over its useful life if it is significant, can be separately identified, and has a significantly different estimated useful life. In addition, component depreciation is required for components of an asset with differing patterns of benefits. In contrast with component depreciation, composite depreciation is based on an average of the depreciable lives of each retirement unit included in the composite asset. Under IFRS the retired component is derecognized and gain or loss from derecognition is recognized in profit or loss. Under IFRS derecognition gains are not classified as revenue.Over the useful life of the PP&E, the total depreciation expenses are the same under both methods. However, the patterns are different. From the above example, the annual depreciation expense under the component method is a constant amount while the composite depreciation illustrates a high variation although the economic over years remain constant. Therefore, component depreciation is preferable to composite depreciation under IFRS.

15. To maintain a smooth, continuing operation for an item of PP&E (e.g, an aircraft),a company may perform regular major inspections (overhaul) for faults regardless of whether parts of the item are replaced. For this, IAS 16 (para. 14) stipulates that when a major inspection is performed, the company should recognizethe cost of the inspection in the carrying amount of the item of property, plant andequipmen as a replacement if the recognition criteria are satisfied. Any remaining carryingamount of the cost of the previous inspection (as distinct from physical parts) should bederecognized regardless of whether the cost of the previous inspection was identified inthe transaction acquiring or constructing the item.

16 When a company chooses to apply fair value to PP&E, IAS 16 requires the following conditions to be satisfied: (a) fair value can be measured reliably; (b) revaluation model has to be applied for an entire class of PP&E; (c) items within the same class of PP&E must be revalued simultaneously; (d) revaluations should be carried out regularly; and finally (e) the company must apply the accounting policy consistently.



Ex. 9–1a. New printing press: 1, 2, 3, 5, 6b. Used printing press: 7, 8, 9, 11

Ex. 9–2a. Yes. All expenditures incurred for the purpose of making the land suitable for

its intended use should be debited to the land account.

b. No. Land is not depreciated.

Ex. 9–4Capital expenditures: 3, 4, 5, 6, 7, 9, 10Revenue expenditures: 1, 2, 8

EXERCISES



Ex. 9–4

Mar. 20 Accumulated Depreciation—Delivery Truck 1,890Cash 1,890

June 11 Delivery Truck 1,350Cash 1,350

Nov. 30 Repairs and Maintenance Expense 55Cash 55

Ex. 9–5a. No. The $44,500,000 represents the original cost of the equipment. Its

replacement cost, which may be more or less than $44,500,000, is not reported in the financial statements.

b. No. The $29,800,000 is the accumulation of the past depreciation charges on the equipment. The recognition of depreciation expense has no relationship to the cash account or accumulation of cash funds.

Ex. 9–6(a) 25% (1/4), (b) 12.5% (1/8), (c) 10% (1/10), (d) 6.25% (1/16), (e) 4% (1/25), (f) 2.5% (1/40), (g) 2% (1/50)

Ex. 9–7$3,950 [($60,000 – $12,600) ÷ 12]

Ex. 9–8

175 hours at $3.68 = $644 depreciation for January

$214,000 – $30,00050,000 hours

= $3.68 depreciation per hour



Ex. 9–9a. Depreciation Rate per Mile:

Truck #1 ($80,000 – $15,000) ÷ 250,000 = $0.26Truck #2 ($54,000 – $6,000) ÷ 300,000 = $0.16Truck #3 ($72,900 – $10,900) ÷ 200,000 = $0.31Truck #4 ($90,000 – $22,800) ÷ 240,000 = $0.28

Miles Operated21,00033,5008,000

22,500Total………………………………………………………………

* Mileage depreciation of $2,480 (31 cents × 8,000) is limited to $1,860, which reducesthe carrying amount of the truck to $10,900, its residual value.

b. Depreciation Expense—Trucks 18,980Accumulated Depreciation—Trucks 18,980

Truck depreciation.

Ex. 9–10

a.

b.

Ex. 9–11a. 4% of ($240,000 – $30,000) = $8,400 or [($240,000 – $30,000)/25]

b. Year 1: 8% of $240,000 = $19,200Year 2: 8% of ($240,000 – $19,200) = $17,664

10% of $90,000 = $9,000

Second Year5% of $90,000 = $4,500

or$90,000 ÷ 20 = $4,500

10% of ($90,000 – $9,000) = $8,100

or$90,000 ÷ 20 = $4,500

$18,980

First Year5% of $90,000 = $4,500

Credit to

$ 5,4605,3601,860

4

Rate per Mile DepreciationAccumulated

6,300

Truck No.123

$0.260.160.310.28

*



Ex. 9–12a. Year 1: 9/12 × [($36,000 – $6,000) ÷ 10] = $2,250

Year 2: ($36,000 – $6,000) ÷ 10 = $3,000

b. Year 1: 9/12 × 20% of $36,000 = $5,400Year 2: 20% of ($36,000 – $5,400) = $6,120

Ex. 9–13a. $17,250 [($780,000 – $90,000) ÷ 40]b. $366,000 [$780,000 – ($17,250 × 24 yrs.)]c. $29,600 [($366,000 – $70,000) ÷ 10 yrs.]

Ex. 9–14

a. Apr. 30 Carpet 18,000Cash 18,000

b. Dec. 31 Depreciation Expense 800Accumulated Depreciation—Carpet 800

Carpet depreciation[($18,000 ÷ 15 years) × 8/12].

Ex. 9–15a. Cost of equipment………………………………………………………………………… $420,000

Accumulated depreciation at December 31, 2014(4 years at $26,000* per year)………………………………………………………… 104,000

carrying amount at December 31, 2014………………………………………………… $316,000

* ($420,000 – $30,000) ÷ 15 = $26,000

b. (1) Depreciation Expense—Equipment 19,500Accumulated Depreciation—Equipment 19,500

Equipment depreciation ($26,000 × 9/12 = $19,500).

(2) Cash 275,000Accumulated Depreciation—Equipment* 123,500Loss on Sale of Equipment 21,500

Equipment 420,000

* $104,000 + $19,500 = $123,500



Ex. 9–16a. 2011 depreciation expense: $55,800 [($714,000 – $44,400) ÷ 12]

2012 depreciation expense: $55,8002013 depreciation expense: $55,800

b. $546,600 [$714,000 – ($55,800 × 3)]

c. Cash 525,000Accumulated Depreciation—Equipment 167,400Loss on Sale of Equipment 21,600

Equipment 714,000

d. Cash 560,000Accumulated Depreciation—Equipment 167,400

Equipment 714,000Gain on Sale of Equipment 13,400

Ex. 9–17a. $21,750,000 ÷ 15,000,000 tons = $1.45 depletion per ton

3,600,000 tons × $1.45 = $5,220,000 depletion expense

b. Depletion Expense 5,220,000Accumulated Depletion 5,220,000

Depletion of mineral deposit.

Ex. 9–18a. ($480,000 ÷ 8) + ($80,000 ÷ 5) = $76,000 total patent expense

b. Amortization Expense—Patents 76,000Patents 76,000

Amortized patent rights ($60,000 + $16,000).



Ex. 9–19a. Property, Plant, and Equipment (in millions):

Current PrecedingYear Year

Land and buildings…………………………………………………… $1,471 $ 955Machinery, equipment, and internal-use software……………… 3,589 1,932Office furniture and equipment…………………………………… 144 115Other PP&E related to leases……………………………………… 2,030 1,665

$7,234 $4,667Less accumulated depreciation and amortization……………… 2,466 1,713Carrying amount……………………………………………………… $4,768 $2,954

A comparison of the carrying amounts of the current and preceding years indicates that they increased. A comparison of the total cost and accumulated depreciation reveals that Apple purchased $2,567 million ($7,234 – $4,667) of additional property, plant, and equipment, which was offset by the additional depreciation expense of $753 million ($2,466 – $1,713) taken during the current year.

b. We would expect Apple’s carrying amount of PP&E to increase during theyear as its sales increase. Although additional depreciation expense willreduce the carrying amount, most companies, such as Apple, invest in new assetsin an amount that is at least equal to the depreciation expense. However,during periods of economic downturn, companies purchase fewer PP&Eand the carrying amount of their PP&E may decline.

Ex. 9–201. Property, plant, and equipment should be reported at cost and not replacement

cost.2. Land does not depreciate.3. Patents and goodwill are intangible assets that should be listed in a separate

section following the Property, Plant, and Equipment section. Patents should be reported at their net carrying amounts (cost less amortization to date). Goodwill should not be amortized, but should be only written down upon impairment.



Ex. 9–21

= 1.19

b. Verizon earns $1.19 revenue for every dollar of PP&E. This is a low PP&E turnover ratio, reflecting the high fixed asset intensity in a telecommunications company. The industry average PP&E turnover ratio isslightly lower at 1.10. Thus, Verizon is using its PP&E more efficiently than the industry as a whole.

Ex. 9–22a. Best Buy: 12.74 ($50,272 ÷ $3,947)

RadioShack: 16.09 ($4,473 ÷ $278)

b. RadioShack’s PP&E turnover ratio of 16.09 is higher than Best Buy’s PP&E turnover ratio of 12.74. Thus, RadioShack is generating $3.35 ($16.09 – $12.74) more revenue for each dollar of property, plant, and equipment than is Best Buy. On this basis, RadioShack is managing its PP&E more efficientlythan is Best Buy.

Appendix Ex. 9–23a. Price (fair market value) of new equipment………………………… $275,000

Trade-in allowance of old equipment……………………………… 90,000Cash paid on the date of exchange………………………………… $185,000

b. Fair market value (trade-in allowance) of old equipment………… $ 90,000

Less carrying amount of old equipment…………………………… 68,000Gain on exchange of equipment……………………………………… $ 22,000

or

Price (fair market value) of new equipment………………………… $275,000Less assets given up in exchange:

Carrying amount of old equipment……………………………… $ 68,000Cash paid on the exchange……………………………………… 185,000 253,000

Gain on exchange of equipment……………………………………… $ 22,000

a.

PP&E Turnover Ratio =

RevenueAverage Carrying Amount of PP&E=PP&E Turnover Ratio

PP&E Turnover Ratio

$106,565($87,711 + $91,985) ÷ 2



Appendix Ex. 9–24a. Price (fair market value) of new equipment……………………… $275,000

Trade-in allowance of old equipment……………………………… 90,000Cash paid on the date of exchange……………………………… $185,000

b. Fair market value (trade-in allowance) of old equipment……… $ 90,000

Less carrying amount of old equipment………………………… 108,500Gain on exchange of equipment…………………………………… $ (18,500)

or

Price (fair market value) of new equipment……………………… $275,000Less assets given up in exchange:

Carrying amount of old equipment…………………………… $108,500Cash paid on the exchange…………………………………… 185,000 293,500

Loss on exchange of equipment…………………………………… $ (18,500)

Appendix Ex. 9–25

a. Depreciation Expense—Equipment 6,000Accumulated Depreciation—Equipment 6,000

Equipment depreciation ($12,000 × 6/12).

b. Accumulated Depreciation—Equipment 126,000Equipment 220,000Loss on Exchange of Equipment 9,000

Equipment 180,000Cash 175,000

Appendix Ex. 9–26

a. Depreciation Expense—Trucks 5,250Accumulated Depreciation—Trucks 5,250

Truck depreciation ($7,000 × 9/12).

b. Accumulated Depreciation—Trucks 40,250Trucks 75,000

Trucks 56,000Cash 51,000Gain on Exchange of Trucks 8,250



Prob. 9–1A1. Land Other

Item Land Improvements Building Accountsa. $ 2,500b. 340,000c. 15,500d. 5,000e.* (4,000)f. 29,000g. $ 60,000h. 6,000i. 12,000j.* $(900,000)k. 5,500l. $32,000m. 11,000n. 2,000o. 2,500p.* (7,500)q. 800,000r. 34,500s.* (500)

2. $400,000 $45,000 $900,000* Receipt.

3. Since land used as a plant site does not lose its ability to provide services, it is not depreciated. However, land improvements do lose their ability to provide services as time passes and are therefore depreciated.

4. Since Land Improvements are depreciated, depreciation expense of $1,200 ($12,000 × 1/20 × 2) would be overstated and net profit would be understated by $1,200 on the statement of comprehensive income. On the statement of financial position, Land would be understated by $12,000, Land Improvements would be overstated by $10,800 ($12,000 – $1,200), and Retained Earnings would be understated by $1,200.

PROBLEMS



Prob. 9–2A1.

a. Straight- b. Units-of- c. Double-Line Output Declining-Balance

Year Method Method Method2012 $ 40,500 $ 58,050 $ 90,0002013 40,500 35,775 30,0002014 40,500 27,675 1,500Total $121,500 $121,500 $121,500

Calculations:Straight-line method:

($135,000 – $13,500) ÷ 3 = $40,500 each year

Units-of-output method:($135,000 – $13,500) ÷ 18,000 hours = $6.75 per hour

2012: 8,600 hours × $6.75 = $58,0502013: 5,300 hours × $6.75 = $35,7752014: 4,100 hours × $6.75 = $27,675

Double-declining-balance method:2012: $135,000 × 2/3 = $90,0002013: ($135,000 – $90,000) × 2/3 = $30,0002014: ($135,000 – $90,000 – $30,000 – $13,500*) = $1,500

* Carrying amount should not be reduced below the residual value of $13,500.

2. The double-declining-balance method yields the most depreciation expense in 2012 of $90,000.

3. Over the three-year life of the equipment, all three depreciation methods yieldthe same total depreciation, $121,500, which is the cost of the equipment of $135,000 less the residual value of $13,500.

Depreciation Expense



Prob. 9–3Aa. Straight-line method:

2012: [($270,000 – $9,000) ÷ 3] × 9/12………………………………………… $65,2502013: ($270,000 – $9,000) ÷ 3…………………………………………………… 87,0002014: ($270,000 – $9,000) ÷ 3…………………………………………………… 87,0002015: [($270,000 – $9,000) ÷ 3] × 3/12………………………………………… 21,750

b. Units-of-output method:2012: 7,500 hours × $14.50*……………………………………………………… $108,7502013: 5,500 hours × $14.50……………………………………………………… 79,7502014: 4,000 hours × $14.50……………………………………………………… 58,0002015: 1,000 hours × $14.50……………………………………………………… 14,500

* ($270,000 – $9,000) ÷ 18,000 hours = $14.50 per hour

c. Double-declining-balance method:2012: $270,000 × 2/3 × 9/12…………...………………………………………… $135,0002013: ($270,000 – $135,000) × 2/3……………………………………………… 90,0002014: ($270,000 – $135,000 – $90,000) × 2/3………………………………… 30,0002015: ($270,000 – $135,000 – $90,000 – $30,000 – $9,000*)………………… 6,000

* Carrying amount should not be reduced below $9,000, the residual value.



Prob. 9–4A1.

Depreciation Carrying Amount,Year Expense End of Year

a. 1…………………………………………… $142,000 $658,0002…………………………………………… 142,000 516,0003…………………………………………… 142,000 374,0004…………………………………………… 142,000 232,0005…………………………………………… 142,000 90,000

* [($800,000 – $90,000) ÷ 5]

b. 1 [$800,000 × (1/5) × 2]……………… $320,000 $480,0002 [$480,000 × (1/5) × 2]……………… 192,000 288,0003 [$288,000 × (1/5) × 2]……………… 115,200 172,8004 [$172,800 × (1/5) × 2]……………… 69,120 103,6805 ($800,000 – $696,320 – $90,000)… 13,680 90,000


2. CashAccumulated Depreciation—Equipment

EquipmentGain on Sale of Equipment*

* $135,000 – $103,680

3. CashAccumulated Depreciation—EquipmentLoss on Sale of Equipment*

Equipment

* $103,680 – $88,750

Depreciation,End of Year

800,000

88,750696,32014,930

800,000

135,000

696,320710,000

426,000

Accumulated

568,000710,000

696,320

31,320

$320,000

627,200512,000

$142,000284,000

*

*



Prob. 9–5A

2012 Jan. 4 Delivery Truck 28,000

Cash 28,000

Nov. 2 Truck Repair Expense 675Cash 675

Dec. 31 Depreciation Expense—Delivery Truck 14,000Accum. Depreciation—Delivery Truck 14,000

Delivery truck depreciation.[$28,000 × (1/4 × 2)]


Cash 48,000

Apr. 1 Depreciation Expense—Delivery Truck 1,750Accum. Depreciation—Delivery Truck 1,750

Delivery truck depreciation.[($28,000 – $14,000) × (1/4 × 2) × 3/12]

1 Accum. Depreciation—Delivery Truck 15,750Cash 15,000

Delivery Truck 28,000Gain on Sale of Delivery Truck 2,750

June 11 Truck Repair Expense 450Cash 450





Prob. 9–5A (Concluded)

2014 July 1 Delivery Truck 54,000

Cash 54,000

Oct. 2 Depreciation Expense—Delivery Truck 8,640Accum. Depreciation—Delivery Truck 8,640


2 Cash 16,750Accum. Depreciation—Delivery Truck 27,840Loss on Sale of Delivery Truck 3,410

Delivery Truck 48,000


Delivery truck depreciation.[$54,000 × (1/8 × 2) × 1/2]

CHAPTER 9 Property, Plant, and Equipmentand Intangible Assets


Prob. 9–6A1. a. $1,600,000 ÷ 5,000,000 board feet = $0.32 per board foot;

1,100,000 board feet × $0.32 per board foot = $352,000

b. Loss from impaired goodwill, $3,750,000

c. $6,600,000 ÷ 12 years = $550,000;3/4 of $550,000 = $412,500

2. a. Depletion Expense 352,000Accumulated Depletion 352,000

Depletion of timber rights.

b. Loss from Impaired Goodwill 3,750,000Goodwill 3,750,000

Impaired goodwill.

c. Amortization Expense—Patents 412,500Patents 412,500

Patent amortization.

CHAPTER 9 Property, Plant, and Equipmentand Intangible Assets

9-18© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a

publicly accessible website, in whole or in part.

Prob. 9–7ADouble-Declining-Balance methodConstant rate — 2 ÷ 10 = 20%Year 1 ¥4,000,000 × 20% × 9 ÷ 12 = ¥600,000(1) Eliminated against CostDec. 31 Accumulated Depreciation－Plant Assets 600,000 Plant Assets 192,000 Revaluation Surplus 408,000(2) Restated ProportionatelyDec. 31 Plant Assets 480,000 Accumulated Depreciation－Plant Assets 72,000 Revaluation Surplus 408,000

Prob. 9–8ADouble-Declining-Balance methodConstant rate — 2 ÷ 10 = 20%Year 1 ¥4,000,000 × 20% × 6 ÷ 12 = ¥400,000(1) Eliminated against CostDec. 31 Accumulated Depreciation－Plant Assets 400,000 Plant Assets 40,000 Revaluation Surplus 360,000(2) Restated ProportionatelyDec. 31 Plant Assets 400,000 Accumulated Depreciation－Plant Assets 40000 Revaluation Surplus 360,000

CHAPTER 9 Property, Plant, and Equipmentand and Intangible Assets


Prob. 9–1B1. Land Other

Item Land Improvements Building Accountsa. $ 3,600b. 780,000c. 23,400d. 15,000e. $ 75,000f. 10,000g.* (3,400)h. 18,000i. 8,400j.* $(800,000)k. 13,400l. 3,000m. 2,000n. $14,000o. 21,600p. 40,000q.* (4,500)r. 800,000s.* (1,400)

2. $860,000 $35,600 $922,000* Receipt.

3. Since land used as a plant site does not lose its ability to provide services, it is not depreciated. However, land improvements do lose their ability to provide services as time passes and are therefore depreciated.

4. Since Land Improvements are depreciated, depreciation expense of $4,320 ($21,600 × 1/10 × 2) would be understated and net profit would be overstated by $4,320 on the statement of comprehensive income. On the statement of financial position, Land would be verstated by $21,600, Land Improvements would be understated by $17,280 ($21,600 – $4,320), and Retained Earnings would be overstated by $4,320.



Prob. 9–2B1.

a. Straight- b. Units-of- c. Double-Line Output Declining-Balance

Year Method Method Method2013 $ 71,250 $102,600 $160,0002014 71,250 91,200 80,0002015 71,250 62,700 40,0002016 71,250 28,500 5,000Total $285,000 $285,000 $285,000

Calculations:Straight-line method:

($320,000 – $35,000) ÷ 4 = $71,250 each year

Units-of-output method:($320,000 – $35,000) ÷ 20,000 hours = $14.25 per hour

2013: 7,200 hours × $14.25 = $102,6002014: 6,400 hours × $14.25 = $91,2002015: 4,400 hours × $14.25 = $62,7002016: 2,000 hours × $14.25 = $28,500

Double-declining-balance method:2013: $320,000 × [(1/4) × 2] = $160,0002014: ($320,000 – $160,000) × [(1/4) × 2] = $80,0002015: ($320,000 – $160,000 – $80,000) × [(1/4) × 2] = $40,0002016: ($320,000 – $160,000 – $80,000 – $40,000 – $35,000*) = $5,000

* Carrying amount should not be reduced below the residual value of $35,000.

2. The double-declining-balance method yields the most depreciation expense in 2013 of $160,000.

3. Over the four-year life of the equipment, all three depreciation methods yield the same total depreciation, $285,000, which is the cost of the equipment of $320,000 less the residual value of $35,000.

Depreciation Expense



Prob. 9–3Ba. Straight-line method:

2012: [($108,000 – $7,200) ÷ 3] × 3/12…………………………………………… $ 8,4002013: [($108,000 – $7,200) ÷ 3]…………………………………………………… 33,6002014: [($108,000 – $7,200) ÷ 3]…………………………………………………… 33,6002015: [($108,000 – $7,200) ÷ 3] × 9/12…………………………………………… 25,200

b. Units-of-output method:2012: 1,350 hours × $8.40*……………………………………………………… $11,3402013: 4,200 hours × $8.40………………………………………………………… 35,2802014: 3,650 hours × $8.40………………………………………………………… 30,6602015: 2,800 hours × $8.40………………………………………………………… 23,520

* ($108,000 – $7,200) ÷ 12,000 hours = $8.40 per hour

c. Double-declining-balance method:2012: $108,000 × 2/3 × 3/12…………...………………………………………… $18,0002013: ($108,000 – $18,000) × 2/3………………………………………………… 60,0002014: ($108,000 – $18,000 – $60,000) × 2/3…………………………………… 20,0002015: ($108,000 – $18,000 – $60,000 – $20,000 – $7,200*)………………… 2,800




Prob. 9–4B1.

Depreciation Carrying AmountYear Expense End of Year

a. 1……………………………………………… $25,625 $84,3752……………………………………………… 25,625 58,7503……………………………………………… 25,625 33,1254……………………………………………… 25,625 7,500

* [($110,000 – $7,500) ÷ 4]

b. 1 [$110,000 × (1/4) × 2]…………………… $55,000 $55,0002 [$55,000 × (1/4) × 2]…………………… 27,500 27,5003 [$27,500 × (1/4) × 2]…………………… 13,750 13,7504 ($110,000 – $96,250 – $7,500)………… 6,250 7,500


2. CashAccumulated Depreciation—Equipment

EquipmentGain on Sale of Equipment*

* $18,000 – $13,750

3. CashAccumulated Depreciation—EquipmentLoss on Sale of Equipment*

Equipment

* $13,750 – $10,500

Depreciation,End of Year

110,000

10,50096,2503,250

102,500

4,250

96,250110,000

18,000

102,500

$ 55,000

96,25082,500

$ 25,62551,25076,875

Accumulated

*

*



Prob. 9–5B


Cash 24,000

Mar. 7 Truck Repair Expense 900Cash 900




Cash 50,000

Feb. 28 Truck Repair Expense 250Cash 250

Apr. 30 Depreciation Expense—Delivery Truck 2,000Accum. Depreciation—Delivery Truck 2,000


30 Accum. Depreciation—Delivery Truck 14,000Cash 9,500Loss on Sale of Delivery Truck 500

Delivery Truck 24,000





Prob. 9–5B (Concluded)

2014 Sept. 1 Delivery Truck 58,500

Cash 58,500

4 Depreciation Expense—Delivery Truck 6,250Accum. Depreciation—Delivery Truck 6,250


4 Cash 36,000Accum. Depreciation—Delivery Truck 18,750

Delivery Truck 50,000Gain on Sale of Delivery Truck 4,750


Delivery truck depreciation.[$58,500 × (1/10 × 2) × 4/12]



Prob. 9–6B1. a. Loss from impaired goodwill, $3,400,000

b. $4,800,000 ÷ 8 years = $600,000;1/4 of $600,000 = $150,000

c. $2,975,000 ÷ 12,500,000 board feet = $0.238 per board foot;4,150,000 board feet × $0.238 per board foot = $987,700

2. a. Loss from Impaired Goodwill 3,400,000Goodwill 3,400,000

Impaired goodwill.

b. Amortization Expense—Patents 150,000Patents 150,000

Patent amortization.

c. Depletion Expense 987,700Accumulated Depletion 987,700

Depletion of timber rights.



CP 9–1It is considered unprofessional for employees to use company assets for personal reasons, because such use reduces the useful life of the assets for normal business purposes. Thus, it is unethical for Dave Elliott to use Lyric Consulting Co.’s computers and laser printers to service his part-time accounting business, even on an after-hours basis. In addition, it is improper for Dave’s clients to call him during regular working hours. Such calls may interrupt or interfere with Dave’s ability to carry out his assigned duties for Lyric Consulting Co.

CP 9–2You should explain to Nolan and Stacy that it is acceptable to maintain two sets of records for tax and financial reporting purposes. This can happen when a company uses one method for financial statement purposes, such as straight-line depreciation, and another method for tax purposes, such as MACRS depreciation. This should not be surprising, since the methods for taxes and financial statements are established by two different groups with different objectives. That is, tax laws and related accounting methods are established by Congress. The Internal Revenue Service then applies the laws and, in some cases, issues interpretations of the law and congressional intent. The primary objective of the tax laws is to generate revenue in an equitable manner for government use. Generally accepted accounting principles, on the other hand, are established primarily by the Financial Accounting Standards Board. The objective of generally accepted accounting principles is the preparation and reporting of true economic conditions and results of operations of business entities.

You might note, however, that companies are required in their tax returns to reconcile differences in accounting methods. For example, income reported on the company’s financial statements must be reconciled with taxable income.

Finally, you might also indicate to Nolan and Stacy that even generally accepted accounting principles allow for alternative methods of accounting for the same transactions or economic events. For example, a company could use straight-line depreciation for some assets and double-declining-balance depreciation for other assets.

CASES & PROJECTS



CP 9–31. a. Straight-line method:

2012: ($400,000 ÷ 5) × 1/2………………………………………………… $40,0002013: ($400,000 ÷ 5)………………………………………………………… 80,0002014: ($400,000 ÷ 5)………………………………………………………… 80,0002015: ($400,000 ÷ 5)………………………………………………………… 80,0002016: ($400,000 ÷ 5)………………………………………………………… 80,0002017: ($400,000 ÷ 5) × 1/2………………………………………………… 40,000

b. MACRS:2012: ($400,000 × 20%)…………………………………………………… $ 80,0002013: ($400,000 × 32%)…………………………………………………… 128,0002014: ($400,000 × 19.2%)…………………………………………………… 76,8002015: ($400,000 × 11.5%)…………………………………………………… 46,0002016: ($400,000 × 11.5%)…………………………………………………… 46,0002017: ($400,000 × 5.8%)…………………………………………………… 23,200



CP 9–3 (Continued)

2. a. Straight-line method:2012 2013 2014 2015 2016 2017

Income before depreciation…………… $750,000 $750,000 $750,000 $750,000 $750,000 $750,000Depreciation expense…………………… 40,000 80,000 80,000 80,000 80,000 40,000Profit before income tax………………… $710,000 $670,000 $670,000 $670,000 $670,000 $710,000Income tax………………………………… 284,000 268,000 268,000 268,000 268,000 284,000Net profit…………………………………… $426,000 $402,000 $402,000 $402,000 $402,000 $426,000

b. MACRS:2012 2013 2014 2015 2016 2017

Income before depreciation…………… $750,000 $750,000 $750,000 $750,000 $750,000 $750,000Depreciation expense…………………… 80,000 128,000 76,800 46,000 46,000 23,200Profit before income tax………………… $670,000 $622,000 $673,200 $704,000 $704,000 $726,800Income tax………………………………… 268,000 248,800 269,280 281,600 281,600 290,720Net profit…………………………………… $402,000 $373,200 $403,920 $422,400 $422,400 $436,080

Year

Year



CP 9–3 (Concluded)3. For financial reporting purposes, Tim should select the method that provides

the net profit figure that best represents the results of operations.

Note to Instructors: The concept of matching revenues and expenses is discussedin Chapter 3. However, for income tax purposes, Tim should consider selecting the method that will minimize taxes. Based on the analyses in (2), both methods of depreciation will yield the same total amount of taxes over the useful life of the equipment. MACRS results in fewer taxes paid in the early years of useful life and more in the later years. For example, in 2012 the income tax expense using MACRS is $268,000, which is $16,000 ($284,000 – $268,000) less than the income tax expense using the straight-line depreciation of $284,000. TuttleConstruction Co. can invest such differences in the early years and earn income.

In some situations, it may be more beneficial for a taxpayer not to choose MACRS. These situations usually occur when a taxpayer is expected to be subject to a low tax rate in the early years of use of an asset and a higher tax rate in the later years of the asset’s useful life. In this case, the taxpayer may be better off to defer the larger deductions to offset the higher tax rate.

CP 9–4Note to Instructors: The purpose of this activity is to familiarize students with theprocedures involved in acquiring a patent, a copyright, and a trademark. You may wish to divide the class into three groups to report back on patents, copyrights, and trademarks separately.

The following is some information on patents, copyrights, and trademarks that you may find helpful in your discussions.

PatentsA patent is requested by filing a written application at the relevant patent office. The person or company filing the application is referred to as “the applicant.” The applicant may be the inventor or its assignee. The application contains a description of how to make and use the invention that must provide sufficient detail for a person skilled in the art (i.e., the relevant area of technology) to make and use the invention. In some countries, there are requirements for providing specific information such as the usefulness of the invention, the best mode of performing the invention known to the inventor, or the technical problem or problems solved by the invention. Drawings illustrating the invention may also be provided.



CP 9–4 (Concluded)The application also includes one or more claims, although it is not always a requirement to submit these when first filing the application. The claims set out what the applicant is seeking to protect in that they define what the patent owner has a right to exclude others from making, using, or selling, as the case may be. In other words, the claims define what a patent covers or the “scope of protection.”

After filing, an application is often referred to as “patent pending.” While this term does not confer legal protection, and a patent cannot be enforced until granted, it serves to provide warning to potential infringers that if the patent is issued, they may be liable for damages.

Source: http://en.wikipedia.org/wiki/Patent#Application_and_prosecution.

CopyrightWhile copyright in the United States automatically attaches upon the creation of an original work of authorship, registration with the Copyright Office puts a copyright holder in a better position if litigation arises over the copyright. A copyright holder desiring to register his or her copyright should do the following:1. Obtain and complete appropriate form.2. Prepare clear rendition of material being submitted for copyright.3. Send both documents to the U.S. Copyright Office in Washington, D.C.

Source: http://en.wikipedia.org/wiki/United_States_copyright_law#Procedural_issues.

TrademarkThe law considers a trademark to be a form of property. Proprietary rights in relation to a trademark may be established through actual use in the marketplace, or through registration of the mark with the trademarks office (or “trademarks registry”) of a particular jurisdiction. In some jurisdictions, trademark rights can be established through either or both means. Certain jurisdictions generally do not recognize trademarks rights arising through use. In the United States, the only way to qualify for a federally registered trademark is to first use the trademark in commerce. If trademark owners do not hold registrations for their marks in suchjurisdictions, the extent to which they will be able to enforce their rights through trademark infringement proceedings will therefore be limited. In cases of dispute, this disparity of rights is often referred to as “first to file” as opposed to “first to use.” Other countries such as Germany offer a limited amount of common law rights for unregistered marks where, to gain protection, the goods or services must occupy a highly significant position in the marketplace—where this could be 40% or more market share for sales in the particular class of goods or services.

Source: http://en.wikipedia.org/wiki/Trademark#Maintaining_rights.



CP 9–5

$421,849$105,093

$19,045$33,837

$37,937$23,685

b. The PP&E turnover measures the amount of revenue earned per dollar of PP&E. Walmart earns $4.01 of revenue for every dollar of PP&E, while Occidental earns $0.56 and Comcast Corporation earns $1.60 in revenue for every dollar of PP&E. Occidental and Comcast require more PP&E to operate their businesses than does Walmart, for a given level of revenue volume.

Does this mean that Walmart is a better company? Not necessarily. Revenue is not the same as earnings. More likely, Walmart has a smaller profit margin than do Occidental and Comcast. Although not required by the exercise, the operating profit before interest and taxes as a percent of sales (operating margin) for the three companies is Occidental, 39.2%; Comcast, 21.8%; and Walmart, 6.1%.Thus, the difference between the PP&E turnovers seems reasonable. Generally, companies with very low PP&E turnovers, such as gas and oil exploration and production (Occidental) and cable communications (Comcast), must be compensated with higher operating margins.

Note to Instructors: You may wish to consider the impact of different PP&Eturnover ratios across industries and the implications of these differences. This is a conceptual question designed to have students think about how competitive markets would likely reward the low PP&E turnover companies for embracing high PP&E commitments.

RevenueAverage Carrying Amount of PP&E=PP&E Turnover Ratioa.

Walmart: = 4.01

= 1.60

= 0.56Occidental Petroleum:

Comcast Corporation:

chapter 9 property, plant, and equipment and intangible...

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