3.07P&IATeaching Note P&IA030216 PDF

Preview

Summary

Teaching Notes for Profit and Loss...

Description

BUAD 5107 Teaching Note Plant and Intangible Assets 1. This problem illustrates the importance of classification decisions. Land does not depreciate, land improvements do. The useful life of land improvements is typically shorter than the useful life of a building. The Matoaka Company purchased a parcel of low-lying land for $650,000 to construct a boat repair yard with the intent of demolishing the building on the site and constructing a new building. Two months after the purchase the existing building on the property was demolished and construction was started on a new building. Additional data are available as follows: Cost of demolishing existing building Proceeds from the sale of materials salvaged from the demolished building Title insurance and legal fees to purchase the property Interest incurred during construction on construction loans Architect’s fees Decorative fencing Cost of new building Sidewalks and parking lot

$ 80,000 30,000 6,000 40,000 150,000 25,000 1,500,000 120,000

A. Compute the cost of the land. $____________________ B. Compute the cost of land improvements. $____________________ C. Compute the cost of the new building. $____________________ 2. This problem illustrates economic events related to plant and intangible assets. Review the journal entries that follow and describe the purpose of each journal entry. A. Depreciation expense $ 500,000 Accumulated depreciation $ 500,000 B. Impairment loss $3,000,000 Plant asset $3,000,000 note: the account “impairment loss” is closed to retained earnings at year-end

1

C. Patents Cash Notes payable

$1,200,000

D. Amortization expense Patents

$

E. Cash Accumulated depreciation Equipment Gain on sale

$ 440,000 1,800,000

$ 300,000 $ 900.000 50,000 $

50,000

$2,000,000 240,000

3. This problem illustrates the concepts of accounting and tax depreciation. The Crim Company paid $100,000 for an asset that has an estimated residual value of $10,000 and an estimated useful life of five years. The MACRS percentages for a five year life are: 20%, 32%, 19.2%, 11.5%, 11.5%, and 5.8%. Compute depreciation for the first and second years of the asset’s useful life using the following methods: A. Straight-line Year 1 $ __________________ Year 2 $ __________________ B. Declining balance at twice the straight-line rate Year 1 $___________________ Year 2 $___________________ C. MACRS Year 1 $___________________ Year 2 $___________________ 4. Economic depreciation: Accounting depreciation is arbitrary. For the most part, accounting depreciation is calculated based on historic data coupled with the freedom to select between methods that can produce significantly different amounts. Economic depreciation is a term that typically refers to a change in the value of an asset. Furthermore, not all fixed assets decline in value - a fixed asset that gains in value despite the passage of time is described as “appreciating” rather than depreciating. What is the justification for incorporating accounting depreciation, rather than economic depreciation, into GAAP?

2...