Plant Assets Depreciation Methods

Chapter 7
Plant Assets & Intangibles

Short Exercises
(5 min.) S 7-1
1. Property and Equipment, at Cost
Millions
Aircraft
$ 2,392
Package handling and ground support

equipment
12,229
Computer and electronic equipment.
28,159
Vehicles.
581
Facilities and other.
1,432
Total cost..
44,793
Less: Accumulated depreciation.

Net property and equipment
2. Cost
Book value
(14,900)
$29,893
= $44,793 million
= $29,893 million
Book value is less than cost because accumulated depreciation is

subtracted from cost to compute book value.
Chapter 7
(5 min) S 7-2
Land ($210,000 .30*)..

Building ($210,000 .10)..
Equipment ($210,000 .60).
Note Payable..
*Supporting computations:
Current
Market
Value
63,000
21,000
126,000
210,000
Percent of Total
Land.
$ 66,000
$66,000 / $220,000
30.0%
Building...
22,000
$22,000 / $220,000
10.0%
Equipment..
132,000
$132,000 / $220,000
60.0%
Total.
$220,000
100.0%
(5 min.) S 7-3
Income Statement
Revenues
CORRECT
Expenses
UNDERSTATED
Net income
Financial Accounting 8/e Solutions Manual
OVERSTATED
(10 min.) S 7-4

1. First-year depreciation:
Straight-line ($44,400,000 $5,400,000) / 5 years
$ 7,800,000
Units-of-production [($44,400,000 $5,400,000) /

6,500,000 miles] 725,000 miles..
$ 4,350,000
Double-declining-balance ($44,400,000 40%)...
$17,760,000
Second-year depreciation:
Straight-line ($44,400,000 $5,400,000) / 5 years
$ 7,800,000
Units-of-production [($44,400,000 $5,400,000) /

6,500,000 miles] 1,225,000 miles...
$ 7,350,000
Double-declining-balance [($44,400,000 $17,760,000)

40%].
$10,656,000
2. Book value:
Cost
Less: Accumulated
Depreciation
StraightLine
Units-ofProduction
DoubleDecliningBalance
$44,400,000
$44,400,000
$44,400,000
(7,800,000)
Chapter 7
(4,350,000)
(17,760,000)
Book value, Year 1..
$36,600,000
$40,050,000
$26,640,000
(10 min.) S 7-5

1. Double-declining-balance
(DDB)
depreciation
offers
the
tax
advantage for the first year of an assets use. Because DDBs firstyear depreciation is greater than first-year depreciation under other
methods, net income is lower. Lower net income results in lower
taxes and more cash that the taxpayer can invest to earn a return.
2.
DDB depreciation..
Straight-line depreciation...
Excess depreciation tax deduction.
Income tax rate..
Income tax savings for first year..
$17,760,000
(7,800,000)
$ 9,960,000
.36
$ 3,585,600
(5-10 min.) S 7-6

First-year depreciation (for a partial year):
a. Straight-line (41,000,000 5,200,000) / 5 years
3/12
b. Units-of-production (41,000,000 5,200,000) /
5,200,000 miles 390,000 miles) or
2,683,200 if depletion per unit is rounded
Chapter 7
1,790,000
2,685,000
c. Double-declining-balance (41,000,000 2/5

3/12)..
4,100,000
SL depreciation produces the highest net income (lowest depreciation).

DDB
depreciation
produces
the
lowest
net
income
(highest
depreciation).
(10 min.) S 7-7
Depreciation Expense Concession Stand......
Accumulated Depreciation Concession Stand
15,000
15,000
Depreciation for years 1-5:

$90,000 / 10 years = $ 9,000 per year
$ 9,000 5 years = $45,000 for years 1-5
Assets remaining
depreciable
book value
(New) Estimated
useful life remaining
(New) Annual
depreciation
$90,000 $45,000
3 years
$15,000 per year
$45,000
(5-10 min.) S 7-8

6
1. ($67,850,000 $2,950,000) / 11 years 5 = $29,500,000

2.
2017
Jan. 1 Cash...........
Accumulated Depreciation...
Loss on Sale of Airplane...
Airplane.
Chapter 7
8,000,000
29,500,000
30,350,000
67,850,000
(5-10 min.) S 7-9

1. Units-of-production depreciation method is similar to the method
used to calculate depletion.
2. Oil Inventory ($18* .8).

Oil Reserves...
*$18 = $234 / 13
3. Cost of Oil Sold ($18 .2)

Oil Inventory..
Billions
14.4
14.4
Billions
3.6
3.6
(5-10 min.) S 7-10

Req. 1
Cost of goodwill purchased:
Purchase price paid for Seacoast Snacks, Inc.
Market value of Seacoast Snacks net assets:
Market value of Seacoast Snacks assets
Less: Seacoast Snacks liabilities
Market value of Seacoast Snacks net assets
Cost of goodwill
Req. 2
8
Millions
$8.2
$12.0
(10.0)
2.0
$6.2
In future years PTL, Inc. will determine whether its goodwill has been
impaired. If the goodwills value has not been impaired, there is nothing
to record. But if goodwills value has been impaired, PTL, Inc. will
record a loss and write down the book value of the goodwill.
(5 min.) S 7-11
(Dollar amounts in millions)
Return on assets
15%
= Net income Average total assets

=
$18
$120
(5 min.) S 7-12
2012 Return on assets
Net income
Average total assets
17.7%
$42,500
$240,000
2013 Return on assets
Net income
18.0%
$45,000
$250,000
(5 min.) S 7-13
Chapter 7
Southeast Satellite Systems, Inc.

Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from investing activities:
Purchase of other companies.
$(15.0)
Capital expenditures.........
(8.0)
Proceeds from sale of North American operations......
13.0
Net cash (used for) investing activities.......
10
Millions
$(10.0)
(5 min.) S 7-14
Asset
a.
b.
c.
d.
Book
Value
Equipment $160,000
Trademark
$320,000
Land
$56,000
Factory
$3 million
building
Estimated
Future
Fair
Impaired?
Cash
Value
(Y or N)
Flows
$120,000 $100,000
Y
$420,000 $380,000
N
$30,000
$28,000
Y
$3 million $2 million
N
Chapter 7
Amount
of Loss
$60,000
-$28,000
--
11
Exercises
(5-10 min.) E 7-15A
Land:
$330,000 + $2,500 + $5,500 + $5,000 = $343,000
Land improvements: $51,000 + $11,000 + $2,000 = $64,000

Building: $54,000 + $750,000 = $804,000
(10-15 min.) E 7-16A

Allocation of cost to individual machines:
Appraised
Percentage of Total
Machine Value
Appraised (Market) Value
Total
Cost
$ 63,000
$63,000 / $210,000 =
.30 $204,000 .30
= $ 61,200
107,100
107,100 / 210,000 =
.51
204,000 .51
104,040
39,900
39,900 / 210,000 =
.19
204,000 .19
38,760
Totals
$210,000
Sale price of machine No. 1.

Cost.
Gain on sale of machine
12
Cost of
Each
Machine
1.00
$204,000
$63,000
61,200
$ 1,800
(5-10 min.) E 7-17A

(a) Sales tax
Capital Expenditure
(b) Transportation and insurance
Capital Expenditure
(c) Purchase price
Capital Expenditure
(d) Installation
(e) Training of personnel
Capital Expenditure
Capital Expenditure
(f) Reinforcement to platform
Capital Expenditure
(g) Income tax

(h) Major overhaul
Immediate Expense
Capital Expenditure
(i) Ordinary recurring repairs

(j) Lubrication before machine is placed in
Immediate Expense
service
(k) Periodic lubrication
Capital Expenditure
Immediate Expense
Chapter 7
13
(15 min.) E 7-18A

Journal
ACCOUNT TITLES
1. a. Land
Cash........................................................
b. Building
($1,300 + $15,300 + $685,000 + $28,220)....
Note Payable...........................................
Cash ($1,300 + $15,300 + $28,220)........
c. Depreciation Expense.................................
Accumulated Depreciation
($729,820 $336,000) / 35 6/12...........
DEBIT
CREDIT
483,000
483,000
729,820
685,000
44,820
5,626
5,626
2. BALANCE SHEET
Plant assets:
Land...
Building.
Less Accumulated depreciation.
$483,000
$729,820
(5,626)
Building, net.
724,194
3. INCOME STATEMENT
Expense:
Depreciation expense...
14
5,626
Chapter 7
15
(15-20 min.) E 7-19A
Req. 1
Year
Straight-Line
Units-ofProduction
2012
$ 4,025
$ 6,210
$ 9,300
2013
4,025
5,520
4,650
2014
4,025
1,610
2,150
2015
4,025
2,760
-0-
$16,100
$16,100
_____
Double-DecliningBalance
$16,100
Computations:
Straight-line: ($18,600 $2,500) 4 = $4,025 per year.
Units-of-production: ($18,600 $2,500) 35,000 miles = $.46 per mile;
2012
13,500
$.46
$ 6,210
2013
12,000
.46
5,520
2014
3,500
.46
1,610
2015
6,000
.46
2,760
Double-declining-balance Twice the straight-line rate: 1/4 2 = 50%

2012 $18,600 .50
= $9,300
2013 ($18,600 $9,300) .50 = $4,650

2014 ($9,300 $4,650)
= $4,650 $2,500 (residual value) = $2,150
Req. 2
The units-of production method tracks the wear and tear on the van
most closely.
16
Req. 3
For income tax purposes, the double-declining-balance method is best
because it provides the most depreciation and, thus, the largest tax
deductions in the early life of the asset. The company can invest the
tax savings to earn a return on the investment.
(15 min.) E 7-20A
INCOME STATEMENT
Expenses:
Depreciation expense Building
[($53,000 + $103,000 + $66,000) $56,000] / 20....
8,300
Depreciation expense Furniture and Fixtures

($59,000 2/5).........................................................
23,600
Supplies expense
($9,600 $1,200).....................................................
8,400
BALANCE SHEET
Current assets:
Supplies......................................................................
1,200
Plant assets:
Building ($53,000 + $103,000 + $66,000)
$222,000
(8,300)
$213,700
Furniture and fixtures.....

59,000
(23,600)
35,400
Chapter 7
17
STATEMENT OF CASH FLOWS

Purchase of buildings ($53,000* + $66,000).....................
$(119,000)
Purchase of furniture and fixtures...................................
(59,000)
_____
*Does not include the $103,000 note payable because Sunshine Bakery
paid no cash on the note.
18
(10-15 min.) E 7-21A
Journal
DATE
ACCOUNT TITLES
DEBIT
Year
20 Depreciation Expense ($355,000 40).

Accumulated Depreciation Building..
8,875
Year
21 Depreciation Expense..
Accumulated Depreciation Building..
16,840*
_____
*Computations:
CREDIT
8,875
16,840
Depreciable cost: $445,000 $90,000 = $355,000

Depreciation through year 20: = $8,875 20 = $177,500
Assets remaining depreciable book value:
$445,000 $177,500 $14,900 (new residual value) = $252,600
New annual depreciation:
$252,600 15 (revised life remaining) = $16,840
Chapter 7
19
(15-20 min.) E 7-22A
DATE
2013
Sept.
Journal
ACCOUNT TITLES
DEBIT CREDIT
Depreciation for 9 months:
30
Depreciation Expense..............................
1,566a
Fixtures............................................
1,566
Sale of fixtures:
30 Cash..
2,600
Store Fixtures ($3,480 + $1,566)..
5,046
Loss on Sale of Fixtures..
1,054b
Fixtures..
8,700
_____
2012 depreciation: $8,700 2/5 = $3,480
2013 depreciation: ($8,700 $3,480) 2/5 9/12 = $1,566
Loss on sale of fixtures:

Sale price of old fixtures.
$ 2,600
Book value of old fixtures:

Cost..
$8,700
Less: Accumulated depreciation ($3,480 +

$1,566)....
(5,046)
Loss on sale...
20
( 3,654)
$(1,054)
(10-15 min.) E 7-23A

Cost of old truck..
$360,000
Less: Accumulated depreciation:
($360,000 $50,000)
75 + 85 + 135 + 39
1,000
(103,540)a
Book value of old truck..

_____
a
Alternate solution setup for accumulated depreciation:
($360,000 $50,000)
1,000,000 miles
_______
$256,460
$.31 per mile
75,000 + 85,000 + 135,000 + 39,000 = 334,000 miles driven

Accumulated depreciation
334,000 miles $.31
$103,540
Calculation of gain or loss:

Purchase price of Freightliner truck
$210,000
Cash paid for Freightliner truck
(20,000)
Trade-in value of Mack truck
190,000
Book value of Mack truck
(256,460)
Net loss on disposal of Mack truck
$ (66,460)
Journal
DATE
ACCOUNT TITLES
DEBIT
Chapter 7
CREDIT
21
2015
22
Truck Freightliner
Accumulated Depreciation Mack
Truck..................................................
Loss on Disposal of Mack Truck....
Truck Mack
Cash................................................
210,000
103,540
66,460
360,000
20,000
(10-15 min.) E 7-24A
DATE
Journal
ACCOUNT TITLES
DEBIT
(a) Purchase of mineral assets:

Mineral Asset.
Cash
425,000
(b) Payment of fees and other costs:

Mineral Asset ($110 + $2,000)
Cash
2,110
CREDIT
425,000
2,110
Mineral Asset..
Cash.
55,390
55,390
(c) Depletion for the first year

Mineral Asset Inventory..
Mineral Asset
67,550*
(d) Sale of ore

Cost of Mineral Asset Sold.....
Mineral Asset Inventory.
57,900
67,550
57,900
_____
*$425,000 + $110 + $2,000 + $55,390 = $482,500
$482,500 250,000 tons = $1.93 per ton
35,000 tons $1.93 = $67,550
30,000 tons x $1.93 = $57,900
Chapter 7
23
(10-15 min.) E 7-25A
DATE
Req. 1
(a)
Journal
ACCOUNT TITLES
Purchase of patent:
Patents..............................................
Cash..............................................
(b) Amortization for each year:

Amortization Expense Patents
($1,500,000 15)..........................
Patents.........................................
DEBIT
CREDIT
1,500,000
1,500,000
100,000
100,000
Req. 2
Impairment of patent in year 10:
Impairment Loss on Patents...........
Patents.........................................
500,000**
500,000
Yes, the asset is impaired because its net book value ($500,000*) is
greater than the estimated future cash flows ($400,000).
_____
*Asset remaining book value: $1,500,000 ($100,000 10) = $500,000
**Impairment loss: $500,000 [$500,000 (book value) - $0 (fair value)]
24
(5-10 min.) E 7-26A

Req. 1
Millions
Purchase price paid for HarborSide.com...................
$20
Market value of HarborSides net assets:

Market value of HarborSides assets ($15 + $21).
$36
Less: HarborSides liabilities..................................
(28)
Market value of HarborSides net assets...............
Cost of goodwill...........................................................
$ 12
Req. 2
Journal
DATE
ACCOUNT TITLES
Current Assets................................................
Long-Term Assets...........................................
Goodwill...........................................................
Liabilities...................................................
Cash...........................................................
DEBIT CREDIT
15
21
12
28
20
Req. 3
Caltron will determine whether its goodwill has been impaired in value.
If the goodwills value has not been impaired, there is nothing to
Chapter 7
25
record. But if goodwills value has been impaired, Caltron will record a
loss and write down the book value of the goodwill.
26
(5-10 min.) E 7-27A

Req. 1
Profit margin for the year ended January 31, 2011:
Net earnings
Net sales
$ 2,010
$48,815
4.12%
Req. 2
Asset turnover for the year ended January 31, 2011:
Net sales
$48,815
$33,699
= 1.45
Req. 3
Return on assets for the year ended January 31, 2011:
Net earnings
_____
$ 2,010
$33,699
5.96% or (4.12% x 1.45 = 5.97%)*
*difference due to rounding
Chapter 7
27
(10 min.) E 7-28A

a.
Sale of building
(or disposal of building).
$ 680,000
b.
Insurance proceeds from fire

190,000
c.
Renovation of store
(or capital expenditures)
(130,000)
d.
Purchase of store fixtures

(60,000)
28
Chapter 7
29
(5-10 min.) E 7-29B

Land:
$160,000 + $150,000 + $5,000 + $2,000 + $3,000 = $320,000
Land improvements: $46,000 + $16,000 + $7,000 = $69,000

Building: $58,000 + $700,000 = $758,000
(10-15 min.) E 7-30B

Req. 1
Allocation of cost to individual machines:
Appraised
Percentage of Total
Machine Value
Appraised (Market) Value
$ 50,000 $ 50,000 / $200,000 =
Total
Cost
.25 $192,000 .25 = $ 48,000
96,000
96,000 / 200,000 =
.48
192,000 .48 =
92,160
54,000
54,000 / 200,000 =
.27
192,000 .27 =
51,840
Totals
$200,000
1.00
$192,000
Req. 2
Sale price of machine no. 3..
$54,000
Cost.
(51,840)
Gain on sale of machine
30
Cost of
Each
Machine
2,160
(5-10 min.) E 7-31B
(a) Sales tax
Capital Expenditure
(b) Transportation and insurance
Capital Expenditure
(c) Purchase price
Capital Expenditure
(d) Installation
(e) Training of personnel
Capital Expenditure
Capital Expenditure
(f) Reinforcement to platform
Capital Expenditure
(g) Income tax

(h) Major overhaul
Immediate Expense
Capital Expenditure
(i) Ordinary recurring repairs

(j) Lubrication before machine is placed in
Immediate Expense
service
(k) Periodic lubrication
Capital Expenditure
Immediate Expense
Chapter 7
31
(15 min.) E 7-32B
Req. 1
Journal
ACCOUNT TITLES
a. Land
Cash.....
b. Building
($1,700 + $15,700 + $705,000 + $30,040).......
Note Payable..
Cash ($1,700 + $15,700 + $30,040)
c. Depreciation Expense
($752,440 $340,000) / 35 4/12...
DEBIT
CREDIT
485,000
485,000
752,440
705,000
47,440
3,928
3,928
Req. 2
BALANCE SHEET
Plant assets:
Land.........................................................
Building...................................................
Less: Accumulated depreciation..........
Building, net............................................
$485,000
$752,440
(3,928)
748,512
Req. 3
INCOME STATEMENT
Expense:
Depreciation expense............................
32
3,928
Chapter 7
33
(15-20 min.) E 7-33B
Req. 1
Year
Straight-Line
Units-ofProduction
Double-DecliningBalance
2012
$ 4,525
$ 4,800
$11,000
2013
4,525
5,120
5,500
2014
4,525
2,900
1,600
2015
4,525
5,280
-0-
$18,100
$18,100
_____
$18,100
Computations:
Straight-line: ($22,000 $3,900) 4 = $4,525 per year.
Units-of-production: ($22,000 $3,900) 113,125 miles = $.16 per mile;
2012
30,000
$.16
$ 4,800
2013
32,000
.16
5,120
2014
18,125
.16
2,900
2015
33,000
.16
5,280
Double-declining-balance Twice the straight-line rate: 1/4 2 = 50%

2012 $22,000 .50
= $11,000
2013 ($22,000 $11,000) .50
= $5,500
2014 ($11,000 - $5,500) $3,900 = $5,500 $3,900 (residual value)

= $1,600
Req. 2
The units-of production method tracks the wear and tear on the van
most closely.
34
Req. 3
For income tax purposes, the double-declining-balance method is best
because it provides the most depreciation and, thus, the largest tax
deductions in the early life of the asset. The company can invest the
tax savings to earn a return on the investment.
(15 min.) E 7-34B
INCOME STATEMENT
Expenses:
Depreciation expense Building
[($158,000 + $65,000) $50,000] / 20
$ 8,650
Depreciation expense Furniture and Fixtures

($51,000 2/5)
20,400
Supplies expense
($9,000 $1,300)
7,700
BALANCE SHEET
Current assets:
Supplies
$ 1,300
Plant assets:
Building ($158,000 + $65,000).
$223,000
Less: Accumulated depreciation
(8,650)
Furniture and fixtures...
51,000
(20,400)
Chapter 7
$214,350
30,600
35
STATEMENT OF CASH FLOWS

Purchase of buildings ($54,000* + $65,000).
$(119,000)
Purchase of furniture and fixtures.

(51,000)
_____
*Does not include the $104,000 note payable because Early Bird Caf
paid no cash on the note.
36
(10-15 min.) E 7-35B
Journal
DATE
Year
ACCOUNT TITLES
DEBIT CREDIT
20 Depreciation Expense ($357,000 40)......

Accumulated Depreciation Building
Year
21 Depreciation Expense.................................
Accumulated Depreciation Building
_____
*Computations:
8,925
8,925
17,080*
17,080
Depreciable cost: $450,000 $93,000 = $357,000

Depreciation through year 20: $357,000 40 = $8,925 20 = $178,500
Assets remaining depreciable book value:
$450,000 $178,500 $15,300 = $256,200
New annual depreciation: $256,200 15 (revised life remaining)
= $17,080
Chapter 7
37
(15-20 min.) E 7-36B
DATE
2013
Oct.
31
31
Journal
ACCOUNT TITLES
Depreciation for 10 months:
Depreciation Expense
Fixtures..
Sale of fixtures:
Cash
Store Fixtures ($3,280 + $1,640)..
Loss on Sale of Fixtures.
Fixtures..
DEBIT CREDIT
1,640a
1,640
2,200
4,920
1,080b
_____
a
2012 depreciation: $8,200 2/5 = $3,280
2013 depreciation: ($8,200 $3,280) 2/5 10/12 = $1,640
8,200
Loss on sale of fixtures:

Sale price of old fixtures
$2,200
Book value of old fixtures:

Cost
$8,200
(4,920)
Loss on sale..
38
(3,280)
$(1,080)
Chapter 7
39
(10-15 min.) E 7-37B

Cost of old truck
$430,000
Less: Accumulated depreciation:
($430,000 $20,000)
81+ 111 + 141 + 41

1,000
(153,340)a
Book value of old truck

_____
a
Alternate solution setup for accumulated depreciation:
($430,000 $20,000)
1,000,000 miles
_______
$276,660
$.41 per mile
81,000 + 111,000 + 141,000 + 41,000 = 374,000 miles driven

Accumulated depreciation
374,000 miles $.41
$153,340
Calculation of gain or loss:

Purchase price of Freightliner truck..
40
$250,000
Cash paid for Freightliner truck..
(24,000)
Trade-in value of Mack truck...
226,000
Book value of Mack truck.
(276,660)
Net loss on disposal of Mack truck...
$ (50,660)
Journal
ACCOUNT TITLES
DATE
2015
Truck Freightliner
Accumulated Depreciation Mack
Truck..................................................
Loss on Disposal of Mack Truck
Truck Mack
Cash................................................
DEBIT
CREDIT
250,000
153,340
50,660
430,000
24,000
(10-15 min.) E 7-38B
DATE
Journal
ACCOUNT TITLES AND
EXPLANATION
DEBIT
(a) Purchase of mineral assets:

Mineral Asset.
Cash
428,000
(b) Payment of fees and other costs:

Mineral Asset ($130 + $2,300)
Cash
2,430
Mineral Asset.
Cash
(c) Depletion for the year
Mineral Asset Inventory..
Mineral Asset
(d) Sales of ore
Cost of Mineral Asset Sold.
Chapter 7
CREDIT
428,000
2,430
66,820
66,820
76,500*
76,500
61,200**
41
Mineral Asset Inventory.

_____
*$428,000 + $2,430 + $66,820 = $497,250
$497,250 325,000 tons = $1.53 per ton
50,000 tons $1.53 = $76,500
**40,000 tons x $1.53 = $61,200
42
61,200
(10-15 min.) E 7-39B
DATE
Req. 1
(a)
Journal
ACCOUNT TITLES
Purchase of patent:
Patents.............................................
Cash.............................................
(b) Amortization for each year:

Amortization Expense Patents
($1,200,000 12)..............................
Patents........................................
Req. 2
Impairment loss:
Impairment Loss on Patents..........
Patents.........................................
DEBIT
CREDIT
1,200,000
1,200,000
100,000
100,000
400,000
400,000
The asset is impaired because the net book value ($400,000) is greater
than the estimated future cash flows ($350,000). The amount of the
impairment loss is $400,000 (net book value minus fair value of $-0-).
Chapter 7
43
(5-10 min.) E 7-40B

Req. 1
Millions
Purchase price paid for Northeast.com.
$19
Market value of Northeasts net assets:

Market value of Northeasts assets ($11 + $25)..
$36
Less: Northeasts liabilities..
(22)
Market value of Northeasts net assets.
14
Cost of goodwill
$5
Req. 2
DATE
Journal
ACCOUNT TITLES
Current Assets..
11
Long-Term Assets....
25
Goodwill..
Liabilities
22
Cash.
19
Req. 3
44
DEBIT CREDIT
Doltron will determine whether its goodwill has been impaired in value.
If the goodwills value has not been impaired, there is nothing to
record. But if goodwills value has been impaired, Doltron will record a
loss and write down the book value of the goodwill.
Chapter 7
45
(5-10 min.) E 7-41B

Req. 1
Profit margin for the year ended January 31, 2011:
Net earnings
Net sales
$ 1,116
$82,189
= 1.36%
Req. 2
Asset turnover for the year ended January 31, 2011:
Net sales
$82,189
$23,505
= 3.5
Req. 3
Return on assets for the year ended January 31, 2011:
Net earnings
_____
$ 1,116 = 4.75% or (1.36% x 3.5 = 4.76%) *

$23,505
*difference due to rounding
46
(10 min.) E 7-42B

a.
Sale of building
$ 620,000
b.
Insurance proceeds from fire

100,000
c.
Renovation of store
(140,000)
d.
Purchase of store fixtures

(80,000)
Chapter 7
47
48
Quiz
Q7-43
Q7-44
Q7-45
Q7-46
Q7-47
[$480,000 / ($480,000 + $270,000) ($3,000,000 +

$1,000,000)] 15 = $170,667
DDB [($34,000 2/5) = $13,600; ($34,000 $13,600 2/5)]
UOP ($34,000 $4,000) /100,000 hrs. = $.30 25,000 hrs.)
Q7-48
($26,000 $2,000) / 6 3 = $12,000;

($26,000 $12,000) / 7 = $2,000
Q7-49
Q7-50
Q7-51
Q7-52
SL depreciation = $1,050 [($9,200 $800) / 8

Book value = $7,100 [$9,200 ($1,050 x 2)]
Q7-53
$800 gain = $7,900 (sale price) $7,100 (book value)
Q7-54
($832,000 $68,800) (54,000 / 240,000) = $171,720
Q7-55
$66 ($72 $23) = $17
Q7-56
$1,000,000 $820,000
Q7-57
$45,000 / $500,000
Chapter 7
49
50
Problems
(20-30 min.) P 7-58A
Req. 1
ITEM
LAND
(a)
$280,000
(b)
8,300
LAND
SALES
IMPROVEMENTS BUILDING
(c)
GARAGE
BUILDING FURNITURE
$ 70,000
$ 31,400
(d)
300
(e)
5,900
(f)
1,500
(g)
500
(h)
19,200
(i)
516,000
(j)
41,000
(k)
9,600
(l)
6,900*
(m)
52,500
(n)
7,800
(o)
4,500
38,250
2,250
(p)
$79,800
(q)
1,200
Totals
$294,500
Computations:
(a)
Land:
Garage building:
$104,600
$583,550
$113,250
$81,000
$320,000 / $400,000 $350,000 = $280,000

$ 80,000 / $400,000 $350,000 = $70,000
Chapter 7
51
(o)
Land improvements: $ 45,000 .10 = $4,500

Sales building:
$ 45,000 .85 = $38,250
Garage building:
$ 45,000 .05 = $2,250
_____
*Some accountants would debit this cost to the Land account.
52
(continued) P 7-58A
Req. 2
DATE
Journal
ACCOUNT TITLES
DEBIT CREDIT
Dec. 31 Depreciation Expense Land

Improvements ($104,600 / 20 9/12)...
Land Improvements
31 Depreciation Expense Sales Building
($583,550 / 50 9/12)...
Sales Building..
31 Depreciation Expense Garage
Building ($113,250 / 50 9/12)..
Garage Building..
31 Depreciation Expense Furniture
($81,000 / 12 9/12).....
Furniture
3,923*
3,923
8,753
8,753
1,699
1,699
5,063
5,063
____
*$3,664 ($97,700 / 20 9/12) if $6,900 (l in Req. 1) is debited to Land.
Chapter 7
53
54
(continued) P 7-58A
Req. 3
This problem shows how to determine the cost of a plant asset. It also
demonstrates the computation of depreciation for a variety of plant
assets. Because virtually all businesses use plant assets, a manager
needs to understand how those assets costs and depreciation
amounts are determined. Depreciation affects net income. Managers
need to understand the meaning, components, and computation of net
income, because often their performance is measured by how much
net income the business earns. This problem covers all these concepts
with specific examples.
Student responses will vary.
Chapter 7
55
(15 min.) P 7-59A

Req. 1
Journal
ACCOUNT TITLES
DEBIT
Equipment...
Cash.
108,000
Depreciation Expense Buildings.

Accumulated Depreciation Buildings
30,700
Depreciation Expense Equipment...

Accumulated Depreciation Equipment..
40,000
CREDIT
108,000
30,700*
40,000**
*($701,000 $87,000) / 20
**[($409,000 $263,000) 2/10 + ($108,000 2/10 6/12)]
Req. 2
BALANCE SHEET
Property, plant, and equipment:
Land
Buildings
$147,000
$ 701,000
Less: Accumulated Depreciation

($348,000 + $30,700)
Equipment ($409,000 + $108,000)
56
(378,700)
$ 517,000
322,300
($263,000 + $40,000).................
Total property, plant, and equipment..
Chapter 7
(303,000)
214,000
$683,300
57
(25-35 min.) P 7-60A
DATE
Jan.
Journal
ACCOUNT TITLES
4 Equipment (new)
Equipment
Equipment (old)...
Cash ($178,000 $77,000).
Gain on Trade-in of Equipment
[$77,000 - ($134,000 - $61,000)]
June 29 Depreciation Expense Building.

Building..
[($650,000 $220,000) / 40 6/12]
29 Cash...................................................
Note Receivable.................................
Building ($140,000 + $5,375).............
Building.....................................
Oct.
58
DEBIT
178,000
61,000
134,000
101,000
4,000
5,375
5,375
110,000
394,625
145,375
30 Land*................................................
144,000
Building**...........................................
216,000
Cash...........................................
*[$160,800 / ($160,800 + $241,200) $360,000]
**[$241,200 / ($160,800 + $241,200) $360,000]
CREDIT
650,000
360,000
(continued) P 7-60A
DATE
Dec.
Journal
ACCOUNT TITLES
31 Depreciation Expense
Equipment ($178,000 2/8)...............
Equipment.................................
31 Depreciation Expense Buildings.
Buildings...................................
[$216,000 (30% $216,000)] / 40
2/12
Chapter 7
DEBIT
CREDIT
44,500
44,500
630
630
59
(30-40 min.) P 7-61A

Req. 1
Straight-Line Depreciation Schedule
Depreciation for the Year
DATE
1-07-2012
12-31-2012
12-31-2013
12-31-2014
12-31-2015
12-31-2016
ASSET
COST
$277,000
DEPRECIATION DEPRECIABLE DEPRECIATION ACCUMULATED

RATE
COST
=
EXPENSE
DEPRECIATION
1/5
1/5
1/5
1/5
1/5
$252,000
252,000
252,000
252,000
252,000
$50,400
50,400
50,400
50,400
50,400
Asset cost: $240,000 + $1,400 + $6,500 + $29,100 = $277,000

Depreciation for each year: ($277,000 $25,000) / 5 years = $50,400
60
50,400
100,800
151,200
201,600
252,000
ASSET BOOK
VALUE
$277,000
226,600
176,200
125,800
75,400
25,000
(continued) P 7-61A
Req. 1
Units-of-Production Depreciation Schedule
DATE
ASSET
COST
1-07-2012
$277,000
12-31-2012
12-31-2013
12-31-2014
12-31-2015
12-31-2016
Total documents
DEPRECIATION NUMBER OF
DEPRECIATION ACCUMULATED ASSET BOOK
PER DOCUMENT DOCUMENTS =
EXPENSE
DEPRECIATION
VALUE
$1.12
1.12
1.12
1.12
1.12
50,000
47,500
45,000
42,500
40,000
225,000
$56,000
53,200
50,400
47,600
44,800
$ 56,000
109,200
159,600
207,200
252,000
$277,000
221,000
167,800
117,400
69,800
25,000
Depreciation per document: ($277,000 $25,000) / 225,000 documents = $1.12 per document
Chapter 7
61
(continued) P 7-61A
Req. 1
Double-Declining-Balance Depreciation Schedule
DATE
1-07-2012
ASSET
COST
DDB RATE
ASSET BOOK DEPRECIATION ACCUMULATED ASSET BOOK

VALUE
=
EXPENSE
DEPRECIATION
VALUE
$277,000
12-31-2012
12-31-2013
12-31-2014
12-31-2015
12-31-2016
$277,000
.40*
.40
.40
.40
$277,000
166,200
99,720
59,832
35,899
* DDB rate: (1/5 years 2) = 2/5 = .40

** Depreciation for 2016: $35,899 - $25,000 = $10,899
62
$110,800
66,480
39,888
23,933
10,899**
$ 110,800
177,280
217,168
241,101
252,000
166,200
99,720
59,832
35,899
25,000
(continued) P 7-61A
Req. 2
The depreciation method that maximizes reported income in the first
year of the computers life is the straight-line method, which produces
the lowest depreciation for that year ($50,400). The method that
maximizes cash flow by minimizing income tax payments in the first
year is the double-declining-balance method (or MACRS depreciation
when used for tax purposes) which produces the highest depreciation
amount for that year ($110,800).
Req. 3
DEPRECIATION METHOD THAT
IN THE EARLY YEARS
MAXIMIZES
MINIMIZES
REPORTED
INCOME TAX
INCOME
PAYMENTS
Net income for first year:

Cash provided by operations
before income tax
Depreciation expense
Income before income tax
Income tax expense (32%)
SL
DDB
Net income advantage of SL over DDB
$158,000
$158,000
50,400
110,800
107,600
47,200
34,432
15,104
$ 73,168
$ 32,096
$41,072
Cash flow analysis for first year:

Cash provided by operations before
income tax
Income tax expense
$158,000
34,432
Chapter 7
$158,000
15,104
63

(cash flow)
Cash flow advantage of DDB over SL
64
$123,568
$142,896
$19,328
(20-25 min.) P 7-62A

Req. 1
Millions
Cost of plant assets...
$4,831
(2,124)
Book value, net
$2,707
Req. 2
Evidences of the purchase of plant assets and goodwill:
1. Property, plant, and equipment increased on the balance sheet.
2. Goodwill increased on the balance sheet.
3. Statement of cash flows reports Additions to property, plant, and
equipment.
Req. 3
Property, Plant, and Equipment
2/28/11 Bal.
4,197 Cost of
Purchased
during 2012
2/29/12 Bal.
Accum. depr.
assets sold
713
in 2012
2/28/11 Bal.
of assets sold
79
in 2012
4,831
1,729
Depr. during
65
2012
2/29/12 Bal.
460
2,124
Goodwill
2/28/11 Bal.
512
Purchased
during 2012
2/29/12 Bal.
_____
43*
555
*Determined by deduction, since there was no loss on goodwill.

Chapter 7
65
Req. 4
Feb.
66
29 Loss on Impairment ($555 - $450)

Goodwill
105
105
(20-30 min.) P 7-63A

Req. 1
Journal
DATE
ACCOUNT TITLES
Iron Ore..
Cash..
DEBIT
2,400,000
Iron Ore..
Cash..
63,000
Iron Ore..
Cash..
73,000
Iron Ore....................
Note Payable...
34,100
Iron Ore Inventory...

Iron Ore
428,350*
Accounts Receivable (25,000 $33)..

Sales Revenue
825,000
Cost of Iron Ore Sold (25,000 x $13.18).

Iron Ore Inventory.
329,500
Operating Expenses...
Cash..
246,000
Income Tax Expense (see Req. 2)..

Income Tax Payable.
69,860
Chapter 7
CREDIT
2,400,000
63,000
73,000
34,100
428,350
825,000
329,500
246,000
69,860
67
*$2,400,000 + $63,000 +$73,000 + $34,100 =

$2,570,100; $2,570,100 / 195,000 = $13.18 x
32,500
68
(continued) P 7-63A
Req. 2
Mid Atlantic Energy Company
Income Statement Iron Ore Operations
Year 1
Sales revenue.
$825,000
Cost of iron ore sold....
$329,500
Other operating expenses..
246,000
575,500
Income before tax............
249,500
Income tax expense (28%)..
69,860
Net income..
$ 179,640
The iron ore operations were profitable. Net income of $179,640 on

sales of $825,000 is quite high (21.8% of sales).
Req. 3
Iron ore inventory ($428,350 - $329,500)..
Iron ore ($2,570,100 - $428,350)..
$2,141,750
Chapter 7
98,850
69
Req. 1
(30-40 min.) P 7-64A
To determine the gain or loss on the sale of a plant asset, compare the
cash received to the assets book value, as follows:
Billions
Cash received from sale of asset.
$ 0.8
Book value of asset sold:

Cost.
$ 1.6
(1.0)
Gain (Loss) on sale..
( 0.6 )
$ 0.2
Req. 2
Balance sheet at December 31, 2012:
Property, plant, and equipment ($4.9 + $1.3 $1.6)
Less: Accumulated depreciation ($2.6 + $1.8 $1.0).
Property, plant, and equipment, net (book value)...
$ 4.6
(3.4)
$ 1.2
Req. 3
Statement of cash flows for 2012:
Cash flows from operating activities:
Net income ($26.6 $21.7)..
$ 4.9
Reconciliation of net income to

net cash provided by operations:
Depreciation
1.8

Purchases of property, plant, and equipment
70
(1.3)
Sales of property, plant, and equipment
Chapter 7
0.8
71
(20-30 min.) P 7-65A

Req. 1
Jan. 29, 2011
Net income
Jan. 30, 2010
$ 2,920
$ 2,488
Net revenue
$67,390
$65,357
= Profit margin
= 4.33%
= 3.81%
Req. 2
Jan. 29, 2011
Sales (net revenue)
= Asset turnover
Jan. 30, 2010
$67,390
$44,119
=
1.53
$65,357
$44,320
=
1.47
Req. 3
Jan. 29, 2011
Net income
Jan. 30, 2010
$ 2,920
$ 2,488
$44,119
$44,320
6.62%
5.61%
= Return on assets
Req. 4
All of the following contributed to the increase in ROA during the most
recent year:
72
Sales increased, increasing net income, profit margin, and asset

turnover.
Expenses decreased, increasing net income and profit margin.
Assets decreased, increasing the asset turnover.
Chapter 7
73
(20-30 min.) P 7-66B
Req. 1
ITEM
LAND
(a)
$297,000
(b)
8,000
(c)
LAND
IMPROVEMENTS
SALES
BUILDING
GARAGE
$ 63,000
$ 31,300
(d)
600
(e)
5,200
(f)
1,700
(g)
200
(h)
19,400
(i)
512,000
(j)
41,500
(k)
9,700
(l)
6,100*
(m)
52,300
(n)
7,200
(o)
4,200
34,860
2,940
(p)
$79,000
(q)
1,400
Totals
$310,800
$102,800
$576,160 $107,440
Computations:
(a)
Land: $330,000 / $400,000 $360,000 = $297,000
Garage: $70,000 / $400,000 $360,000 = $63,000
(o) Land improvements: $42,000 .10 = $4,200
Sales building: $42,000 .83 = $34,860
Garage: $42,000 .07 = $2,940
74
FURNITURE
$80,400
_____
*Some accountants would debit this cost to the Land account.
Chapter 7
75
(continued) P 7-66B
Req. 2
DATE
Journal
ACCOUNT TITLES
Dec. 31 Depreciation Expense Land

Improvements ($102,800 / 25 6/12)...
Land Improvements
31 Depreciation Expense Sales
Building ($576,160 / 40 6/12)..
Sales Building......................................
31 Depreciation Expense Garage
($107,440 / 40 6/12)
Garage
31 Depreciation Expense Furniture
($80,400 / 10 6/12)..
Furniture.
DEBIT CREDIT
2,056*
2,056
7,202
7,202
1,343
1,343
4,020
4,020
_____
*$1,934 ($96,700 / 25 6/12) if $6,100 (l in Req. 1) is debited to Land.
76
(continued) P 7-66B
Req. 3
This problem shows how to determine the cost of a plant asset. It also
demonstrates the computation of depreciation for a variety of plant
assets. Because virtually all businesses use plant assets, a manager
needs to understand how those assets costs and depreciation are
determined. Depreciation affects net income. Managers need to
understand the meaning, components, and computation of net income
because often their performance is measured by how much net income
the business earns. This problem covers all these concepts with
specific examples.
Chapter 7
77
(15 min.) P7-67B

Req. 1
Journal
ACCOUNT TITLES
DEBIT
CREDIT
Equipment...
Cash.
100,000
Depreciation Expense Buildings.

Accumulated Depreciation Buildings
30,850*
Depreciation Expense Equipment

Accumulated Depreciation Equipment..
38,800**
100,000
30,850
38,800
*($702,000 $85,000) / 20 = $30,850]

**[($408,000 $264,000) 2/10] + ($100,000 2/10 6/12) = $38,800]
Req. 2
BALANCE SHEET
Property, plant, and equipment:
Land...........................................................
Buildings...................................................
$ 143,000
$702,000

($344,000 + $30,850).......................
78
(374,850)
327,150
Equipment ($408,000 + $100,000)............
$508,000

($264,000 + $38,800).......................
Total property, plant, and equipment..........
Chapter 7
(302,800)
205,200
$675,350
79
DATE
Jan.
Journal
ACCOUNT TITLES
3 Equipment (new)................................
Equipment..........................................
Equipment (old)..
Cash....
Gain on Trade-in of Equipment...
June 30 Depreciation Expense Building

[($640,000 $240,000) / 40 x 6/12]....
Building.........................................
(25-35 min.) P 7-68B

DEBIT
178,000
68,000
131,000
105,000
10,000
5,000
5,000
June 30 Cash...................................................
Note Receivable.................................
Building ($100,000 + $5,000).............
Building.........................................
120,000
415,000
Oct.
64,000
256,000
31 Land ($70,200 / $351,000 $320,000)..

Building ($280,800 / $351,000 $320,000)
Cash...............................................
Dec. 31 Depreciation Expense

Equipment ($178,000 2/4)..............
Equipment......................................
Dec. 31
80
Depreciation Expense Building

[($256,000 - $25,600) / 40 X 2/12]......
Building.....................................
CREDIT
105,000
640,000
320,000
89,000
89,000
960
960
(30-40 min.) P 7-69B

Req. 1
Straight-Line Depreciation Schedule
DATE
1-04-2012
ASSET
COST
DEPRECIATION
DEPRECIABLE DEPRECIATION
RATE
COST
=
EXPENSE
ACCUMULATED
DEPRECIATION
$279,500
ASSET BOOK
VALUE
$279,500
12-31-2012
1/5
$255,000
$51,000
$ 51,000
228,500
12-31-2013
1/5
255,000
51,000
102,000
177,500
12-31-2014
1/5
255,000
51,000
153,000
126,500
12-31-2015
1/5
255,000
51,000
204,000
75,500
12-31-2016
1/5
255,000
51,000
255,000
24,500
Asset cost: $235,000 + $1,100 + $6,200 + $37,200 = $279,500

Depreciation for each year: ($279,500 $24,500) / 5 years = $51,000
Chapter 7
81
(continued) P 7-69B
Req. 1
Units-of-Production Depreciation Schedule
DATE
1-04-2012
ASSET
COST
DEPRECIATION
DOCUMENT
NUMBER OF
DOCUMENTS
DEPRECIATION ACCUMULATED
EXPENSE
DEPRECIATION
$279,500
ASSET BOOK
VALUE
$279,500
12-31-2012
$1.70
35,000
$59,500
$ 59,500
220,000
12-31-2013
1.70
32,500
55,250
114,750
164,750
12-31-2014
1.70
30,000
51,000
165,750
113,750
12-31-2015
1.70
27,500
46,750
212,500
67,000
12-31-2016
1.70
25,000
42,500
255,000
24,500
Total documents
150,000
Depreciation per document: ($279,500 $24,500) / 150,000 documents = $1.70
82
(continued) P 7-69B
Req. 1
Double-Declining-Balance Depreciation Schedule
DATE
1-04-2012
ASSET
COST
DDB RATE
ASSET BOOK
DEPRECIATION
VALUE
=
EXPENSE
ACCUMULATED
DEPRECIATION
$279,500
ASSET BOOK
VALUE
$279,500
12-31-2012
.40*
$279,500
$111,800
$111,800
167,700
12-31-2013
.40
167,700
67,080
178,880
100,620
12-31-2014
.40
100,620
40,248
219,128
60,372
12-31-2015
.40
60,372
24,149
243,277
36,223
36,223
11,723**
255,000
24,500
12-31-2016
*DDB rate = (1/5 years 2) = 2/5 = .40

**Depreciation for 2016: $36,223 $24,500 = $11,723
Chapter 7
83
(continued) P 7-69B
Req. 2
The depreciation method that maximizes reported income in the first

year of the computers life is the straight-line method. Straight-line
produces the lowest depreciation for that year ($51,000).
The method that maximizes cash flow by minimizing income tax
payments in the first year is the double-declining-balance method (or
MACRS depreciation when used for tax purposes), which produces the
highest depreciation amount for that year ($111,800).
Req. 3
Net income for first year:

Cash provided by operations before income tax
DEPRECIATION METHOD
THAT IN THE EARLY
YEARS
MAXIMIZES MINIMIZES
REPORTED INCOME TAX
INCOME
PAYMENTS
SL
DDB
$154,000
$154,000
51,000
111,800
Income before income tax
103,000
42,200
41,200
16,880
$ 61,800
$ 25,320
Net income
Net income advantage of SL over DDB
$ 36,480
Cash flow analysis for first year:

Cash provided by operations before
income tax
84
$154,000
$154,000
Income tax expense
41,200
16,880
$ 112,800
$ 137,120

(called cash flow)
Cash flow advantage of DDB over SL
$24,320
Chapter 7
85
(20-25 min.) P 7-70B

Req. 1
Millions
Cost of plant assets..
$ 4,838
Less: Accumulated depreciation..
(2,124)
Book value of plant assets.
$ 2,714
Req. 2
Evidences of the purchase of plant assets and goodwill:
1. Property, plant, and equipment increased on the balance sheet.
2. Goodwill increased on the balance sheet.
3. Statement of cash flows reports Additions to property, plant and
equipment.
Req. 3
Property, Plant, and Equipment
2/28/11 Bal.
4,192 Cost of
Purchased
during 2012
2/29/12 Bal.
Accum. depr.
assets sold
723
in 2012
2/28/11Bal.
of assets sold
77
4,838
in 2012
Depr. during
66
2012
2/29/12 Bal.
Goodwill
2/28/11 Bal.
510
Purchased
during 2012
2/29/12 Bal.
_____
47*
557
*Determined by deduction, since there was no loss on goodwill.

86
1,729
461
2,124
Req. 4
Feb.
29 Loss on Impairment.................................
Goodwill ($557 - $450).........................
Chapter 7
107
107
87
(20-30 min.) P 7-71B
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION
Iron Ore .....
Cash..
88
DEBIT
2,800,000
Iron Ore .
Cash..
67,000
Iron Ore .....

Cash..
76,500
Iron Ore .....

Note Payable...
38,550
Iron Ore Inventory...

Iron Ore
478,515*
Accounts Receivable (25,000 $37)..

Sales Revenue
925,000
Cost of Iron Ore Sold (25,000 x $13.87).

Iron Ore Inventory..
346,750
Operating Expenses...
Cash..
254,000
Income Tax Expense (see Req. 2)..

Income Tax Payable..
113,488
CREDIT
2,800,000
67,000
76,500
38,550
478,515
925,000
346,750
254,000
113,488
*$2,800,000 + $67,000 + $76,500 +$38,550 =

$2,982,050; $2,982,050 / 215,000 = $13.87 x
34,500
(continued) P 7-71B
Req. 2
Central Energy Company
Income Statement Iron Ore Mine Project
Year 1
Sales revenue..
Cost of iron ore sold..
$346,750
Operating expenses...
254,000
Income before tax...
Net income
$925,000
600,750
324,250
113,488
$ 210,762
The Iron Ore Mine project was very profitable. Net income of $210,762 on
sales of $925,000 (23%) is outstanding.
Req. 3
Iron ore inventory ($478,515 - $346,750)..
Iron ore ($2,982,050 - $478,515)..
$ 2,503,535
Chapter 7
131,765
89
Req. 1
(30-40 min.) P 7-72B
To determine the gain or loss on the sale of a plant asset, compare the
cash received to the assets book value, as follows:
Billions
Cash received from sale of asset................................
$ 0.6
Book value of asset sold:

Cost...........................................................................
$0.9
Less: Accumulated depreciation...........................
(0.8)
Gain (Loss) on sale.......................................................
( 0.1)
$0.5
Req. 2
Balance sheet at December 31, 2012:
Property, plant, and equipment ($4.8 + $2.0 $0.9).......
Less: Accumulated depreciation ($2.8 + $1.3 $0.8).....
Property, plant, and equipment, net (book value)...........
$ 5.9
(3.3)
$ 2.6
Req. 3
Statement of cash flows for 2012:
Cash flows from operating activities:
Net income ($26.2 $22.0)
$4.2
Reconciliation of net income to

net cash provided by operations:
Depreciation
90
1.3

Purchases of property, plant, and equipment..
$(2.0)
Sales of property, plant, and equipment .
0.6
Chapter 7
91
(20-30 min.) P 7-73B

Req. 1
Jan. 31, 2011
Jan. 31, 2010
$ 1,114
$ 991
Net revenue
$18,391
$17,178
= Profit margin
= 6.06%
= 5.77%
Jan. 31, 2011
Jan. 31, 2010
$18,391
$17,178
$13,362
$12,262
= Asset turnover
Net income
Req. 2
Sales
Req. 3
Net income
1.38
Jan. 31, 2011

$ 1,114
1.40
Jan. 31, 2010

$
991
$13,362
$12,262
= Return on assets
= 8.34%
= 8.08%
Req. 4
The following contributed to the increase in ROA during the most recent
year.
Sales increased, increasing net income and profit margin.
Assets increased, decreasing the asset turnover.
92
Challenge Exercises and Problem

(10-15 min.) E 7-74
Req. 1
Current Assets..
Assets of Discontinued Operations.
Property and Equipment
Goodwill..
Intangible Assets..
Other Assets..
Liabilities...
Cash and Common Stock.
(in millions)
5,288
2,264
6,579
8,946
679
31
12,038
11,749
Req. 2
Loss from Impairment.
Goodwill....
Chapter 7
5,382
5,382
93
(15-20 min.) E 7-75
Net income under straight-line depreciation.
Millions
$64
Difference in depreciation for 2013 (year 2 of 8):

Straight line depreciation, as reported...
$30
DDB depreciation for year 2 (see below)
45
Increase in depreciation expense....
15
Decrease in net income...
(15)
Net income Kerusi can expect for 2013

if the company uses DDB depreciation..
$49
DDB depreciation by year:

Year
1
$240 2/8..
2
($240 $60) 2/8.............
94
Millions
$60
45
(15-25 min.) E 7-76

Year
1
1. Total current assets
2. Equipment, net
3. Net income
15.0 U*
15.0 U*
2
3
Millions of Euros ()
No effect
10.0 U**
5.0 U
5.0 O
5.0 O
Correct
5.0 O
_____
U = Understated
O = Overstated
* Cost (20.0 million) Depreciation expense (5 million)
= 15 million
** Cost (20.0 million) Two years depreciation (10.0 million)
= 10.0 million
Chapter 7
95
(20-30 min.) P 7-77
Req.1
Property and Equipment
Bal 5/31/2008 (BS)
29,305
Capital expenditures (SCF) 2,459
202
2,302
Bal.5/31/2009 (BS)
Impairment (note)
Original cost of plant and
equipment sold (plug)
29,260
Acc. Depr. on assets sold
1,784
(plug)
15,827 Bal. 5/31/2008 (BS)

1,800 Depr. exp.(note)
15,843 Bal 5/31/2009 (BS)
Req. 2
Journal
DATE ACCOUNT TITLES AND EXPLANATION
Property and Equipment........................
Cash....................................................
96
DEBIT
2,459
Depreciation Expense............................
Accumulated Depreciation................
1,800
Loss on Impairment of Assets...............

Property and Equipment...................
202
Cash (SCF)...............................................
Accumulated Depreciation.....................
Loss on Sale of Assets...........................
Property and Equipment...............
79
1,784
439
CREDIT
2,459
1,800
202
2,302
Decision Cases
(30-45 min.) Decision Case 1
Req. 1
La Petite France Bakery and Burgers Ahoy!
Income Statements
For the Year Ended December 31
La Petite France
Burgers Ahoy!
ACCOUNT TITLE
(FIFO and SL)
(LIFO and DDB)
Sales revenue
$350,000
$350,000
Cost of goods sold..
Gross margin.......
128,000*
222,000
Operating expenses....... $50,000

La Petite (SL):
[($150,000 $20,000) / 10]. 13,000
Burgers (DDB):
($150,000 1/10 2)...
Total expenses..
63,000
Income before tax.......
159,000
Income tax expense (40%).
63,600
Net income.
$ 95,400
Chapter 7
149,000*
201,000
$50,000
30,000
80,000
121,000
48,400
$ 72,600
97
(continued) Decision Case 1

Req. 1
*Cost of goods sold:
La Petite (FIFO):
Units
10,000
5,000
7,000
3,000
25,000
Burgers (LIFO):
10,000
7,000
5,000
3,000
25,000
98
$4
5
6
7
=
=
=
=
$7
6
5
4
=
=
=
=
Cost
$ 40,000
25,000
42,000
21,000
$128,000
$ 70,000
42,000
25,000
12,000
$149,000

Req. 2
INVESTMENT NEWSLETTER
TO:
Our Clients
FROM:
Student Name
RE:
Selecting the stock of La Petite France Bakery or Burgers

Ahoy! as a long-term investment
In picking a stock we suggest you consider the following factors:

La Petite France and Burgers Ahoy! are basically identical companies.
The two companies started operations at the same time and engaged in
essentially the same transactions. Their main difference lies in the
accounting methods that they use.
1. La Petite Frances income statement reports a net income of $95,400
compared to $72,600 for Burgers Ahoy!. On the surface La Petite
France appears to be more profitable. This difference is illusory,
however, because La Petite uses the FIFO method to account for
inventories and the straight-line method to account for depreciation of
its plant assets. If prices continue to rise, use of these methods result
in the highest possible reported income. However, this may not result
in a higher price for La Petite Frances stock.
Chapter 7
99
2. Burgers Ahoy! reports a lower net income than La Petite France, but
Burgers has more cash to invest in promising projects because
Burgers pays less in income taxes. Burgers uses the LIFO method for
inventories and the double-declining-balance method for depreciation.
These methods result in lower net incomes. More
importantly, LIFO and DDB result in the lowest amount of income tax
and thereby save money that Burgers can invest in new projects.
3. Over the long run we favor Burgers Ahoy! because Burgers will have
more cash to invest. That should result in higher real profits even if
those profits dont show up on the income statement immediately.
100
(20-30 min.) Decision Case 2

1. A dishonest manager might debit the cost of an expense to a plant
asset account in order to overstate reported asset and income
amounts. Remember the WorldCom case discussed in the chapter.
2. A dishonest manager might debit an expense account for the cost of a

plant asset for two reasons: (1) To obtain a quicker tax deduction for
the expense than for depreciation expense over the life of the asset,
and (2) To understate reported asset and income amounts.
3. We support the recording and reporting of intangible assets at cost,

less accumulated amortization, in accordance with GAAP because the
business paid a price for intangibles like any other asset. The
argument for recording intangibles at $1 or $0 is consistent with the
perspective of a lender, who might reason that, in the liquidation of a
business, most of its intangibles are worthless. However, accounting
serves other users besides lenders. Also, someone who evaluates a
company and believes its intangibles are worthless can simply
subtract the intangibles cost from total assets and from total owners
equity to compute revised totals for analytical purposes. But the
reverse is not true. If intangibles were not reported on the balance
sheet, a user of the statements who believes the intangibles have
Chapter 7
101
value could not add the unknown amount to compute revised total
assets and total owner equity.
102
Ethical Issue
Req. 1
The ethical issue in this case is What is the proper amount of the
purchase price to allocate to the land and the proper amount to allocate
to the building?
The taxpayer wants to allocate as much of the
purchase price as possible to the building because tax laws allow a

deduction from taxable income for depreciation expense on plant assets
other than land. The greater the allocation to the building, the greater the
depreciation deduction, and therefore the lower the tax payments
because there is no tax deduction on the land. The cost of the land is not
depreciated.
Req. 2 and Req. 3
The stakeholders in this situation include United Jersey Bank, their
management, their shareholders, the Internal Revenue Service, and
taxpayers in general.
The immediate economic consequences of the
decision are positive for United Jersey Bank as well as their

management.
However, those consequences, as well as legal
consequences, could ultimately turn negative for them if an IRS audit

finds them to be unlawfully evading taxes.
United Jersey Banks
allocation was unethical. The nations taxpayers you and I are

robbed of fair and equitable treatment by this dishonest tactic.
Chapter 7
103
Req. 4
United Jersey Bank should change the allocation of their purchase price
to 60% building and 40% land. In the long run, for fair and equitable
treatment for all taxpayers, as well as the best economic and legal
outcome, there is nothing like the truth.
104
Focus on Financials: Amazon.com, Inc.

(30-40 min.)
Req. 1
Fixed assets include furniture and fixtures, heavy equipment,
technology, infrastructure, internal-use software and website
development.
Req. 2
Note 1 states that the depreciation method used for the financial
statements is the straight-line method. Note 1 does not state the
method used for income-tax purposes, but Amazon.com most likely
uses the Modified Accelerated Cost Recovery System (MACRS).
This method is preferable for income-tax purposes because it provides
the most depreciation expense as quickly as possible. This decreases
immediate tax payments and saves cash for use in the business.
Req. 3
Millions
Depreciation and amortization expense
$ 552
Accumulated depreciation and amortization..
$ 842
Chapter 7
105
Accumulated depreciation and amortization exceeds depreciation and

amortization expense because the expense is for only the current year.
Accumulated depreciation and amortization is the sum of the
depreciation and amortization amounts for all years the company has
used its property and equipment.
Req. 4
During 2010, Amazon.com, Inc. paid $979 million to purchase fixed
assets, including internal-use software and website development. These
expenditures increased significantly from $373 million in 2009. This is
good news. The company increased its investment in these types of
assets by about 162% in 2010, indicating that they were expanding their
operations.
Req. 5
Amazon.com, Inc. reports goodwill of $1,349 million on its 2010 balance
sheet, and acquired intangible assets, included within Other Assets on
the balance sheet, of $745 million. As explained in Notes 1 and 4 to the
Consolidated Financial Statements, the company does not amortize
goodwill and other indefinite-lived assets. It evaluates the remaining
useful lives of assets that are not being amortized to determine whether
circumstances continue to support an indefinite life. Amazon.com, Inc.
106
performs an annual impairment test for goodwill and writes goodwill off
when its value is impaired.
Amazon.com, Inc. amortizes the cost of the other intangibles over their
estimated useful lives.
Chapter 7
107
Focus on Analysis: RadioShack, Corp.

(20-30 min.)
Req. 1
RadioShack Corporation paid $80.1 million for capital expenditures
during fiscal 2010. This information is found in the investing activities
section of the cash flows statement.
Req. 2
Property and equipment are recorded at cost less accumulated
depreciation and amortization.
Major additions and betterments that
substantially extend the useful life of an asset are capitalized and

depreciated. Expenditures for normal maintenance and repairs are
charged directly to expense as incurred.
Req. 3
Depreciation and amortization are calculated using the straight-line
method over the following useful lives: 10-40 years for buildings; 2-15
years for furniture, fixtures, equipment and software; leasehold
improvements are amortized over the shorter of the terms of the
underlying leases, including certain renewal periods, or the estimated
useful lives of the improvements.
108
Req. 4
Gross property, plant and equipment (from Note 3) at the end of fiscal
2010 was $1,094.4 million. It was $1,081.7 million at the end of fiscal
2009.
Accumulated depreciation and amortization (from Note 3) was
$820.1 million at the end of fiscal 2010 and $799.4 million at the end of
(continued) RadioShack, Corp.
fiscal 2009.
Accordingly, the book value of property, plant, and
equipment (net assets) was $274.3 million at the end of fiscal 2010 and
$282.3 million at the end of fiscal 2009. Gross PPE increased slightly
during 2010 but net PPE still declined slightly during 2010. This change
indicates that the major cause for the change in property, plant, and
equipment was an additional year depreciation recorded because the
assets were used an additional year.
Req. 5
2010
Net income
2009
$ 206.1
205.0
(2,175.4 +$2,429.3) / 2 $2,429.3 + $2,254.0 / 2
= Return on assets
8.95%
= 8.75%
Radio Shacks performance was slightly better in 2010 than in 2009.

Return on Assets is slightly higher in 2010 than in 2009.
Chapter 7
109
Group Projects
110

Plant Assets Depreciation Methods

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Plant Assets Depreciation Methods

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Chapter 7

Plant Assets & Intangibles

Package handling and ground support

Computer and electronic equipment.

Facilities and other.

Less: Accumulated depreciation.

Book value is less than cost because accumulated depreciation is

Plant Assets & Intangibles

Land ($210,000 .30*)..

Financial Accounting 8/e Solutions Manual

(10 min.) S 7-4

Units-of-production [($44,400,000 $5,400,000) /

Double-declining-balance ($44,400,000 40%)...

Units-of-production [($44,400,000 $5,400,000) /

Double-declining-balance [($44,400,000 $17,760,000)

Plant Assets & Intangibles

Book value, Year 1..

Financial Accounting 8/e Solutions Manual

(10 min.) S 7-5

(5-10 min.) S 7-6

Plant Assets & Intangibles

c. Double-declining-balance (41,000,000 2/5

SL depreciation produces the highest net income (lowest depreciation).

Depreciation for years 1-5:

$15,000 per year

(5-10 min.) S 7-8

Financial Accounting 8/e Solutions Manual

1. ($67,850,000 $2,950,000) / 11 years 5 = $29,500,000

Plant Assets & Intangibles

(5-10 min.) S 7-9

2. Oil Inventory ($18* .8).

3. Cost of Oil Sold ($18 .2)

(5-10 min.) S 7-10

Financial Accounting 8/e Solutions Manual

= Net income Average total assets

Average total assets

2013 Return on assets

Average total assets

Plant Assets & Intangibles

Southeast Satellite Systems, Inc.

Proceeds from sale of North American operations......

Net cash (used for) investing activities.......

Financial Accounting 8/e Solutions Manual

Plant Assets & Intangibles

$330,000 + $2,500 + $5,500 + $5,000 = $343,000

Land improvements: $51,000 + $11,000 + $2,000 = $64,000

(10-15 min.) E 7-16A

.30 $204,000 .30

Sale price of machine No. 1.

Financial Accounting 8/e Solutions Manual

(5-10 min.) E 7-17A

(b) Transportation and insurance

(c) Purchase price

(f) Reinforcement to platform

(g) Income tax

(i) Ordinary recurring repairs

Plant Assets & Intangibles

(15 min.) E 7-18A

Financial Accounting 8/e Solutions Manual

Plant Assets & Intangibles

(15-20 min.) E 7-19A

Double-declining-balance Twice the straight-line rate: 1/4 2 = 50%