Ch 7 problem session exercise PDF

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ACC 210 Dr. Buckless Problem Session...

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Chapter 7 Problem Session Exercise Problem I: Indicate whether each of the following statements is true (T) or false (F). a.

____

The cost of an intangible asset, such as a patent or goodwill, should be capitalized regardless of whether the intangible asset was purchased or created internally by the company.

b.

____

Land is not subject to depreciation while land improvements are subject to depreciation.

c.

____

The allocation of cost of a natural resource is called amortization.

d.

____

All purchased intangible assets are subject to amortization.

e.

____

The accounting definition of depreciation refers to the decrease in an operating asset’s fair market value over its useful life.

f.

____

The process of recording depreciation is an application of the matching principle.

g.

____

The balance in the “Accumulated Depreciation” account should be reported on the income statement.

h.

____

As an asset is depreciated, its book value will decrease.

i.

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Regardless of the depreciation method used, the book value of a depreciable asset at the end of its useful life should be equal to its residual (or salvage) value.

j.

____

Regardless of the depreciation method used, the accumulated depreciation balance at the end of an asset’s useful life should be equal to its depreciable cost which is calculated by taking the difference between its cost and residual value.

k.

____

The gain or loss on the disposal of a long-term asset can be determined by comparing the asset’s book value to the fair market value received (ex. cash received).

l.

____

All else being equal, if Wolfpack Company has a higher return on assets than Tarheel Inc., Wolfpack is using its operating assets more effectively than Tarheel.

m .

____

The return on assets ratio can be separated into two components, profit margin and asset turnover, in order to provide a better analysis of what is driving the ratio.

n.

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A company may use a depreciation method for tax purposes which is different than the one it uses for financial statement purposes.

o.

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A machine might be considered as being impaired if the estimated future cash flows it is expected to generate are less than its book value.

p.

____

The recording of an impairment loss will reduce a company’s net income as well as its total assets balance. 1

Problem II: A local company purchased an industrial machine on January 1, 20X4. The machine was placed into service on March 1, 20X4. Below are various costs incurred related to the machine that occurred either before or after it was placed into service. For each of these costs, indicate by using a checkmark (√) whether the cost should be capitalized as part of the asset’s cost or expensed in the period incurred. The chart indicates when the costs were incurred. In addition, in the column to the far right, indicate the name of the account which should be debited when the transaction involving this cost is incurred. The first one has been one as an example. Capitalize Expensed Account name to be debited d Costs Incurred Between January 1, 20X4, and March 1, 20X4, Before the Asset was Placed into Service 1. base invoice price of $10,000

√

Machine

2. sales taxes 3. insurance paid to cover a possible accident loss while the machinery was in transit 4. shipping charges 5. installation charges 6. test run charges Costs Incurred Between March 1, 20X4, and the End of the Asset’s Useful Life 7. insurance paid to cover accidental loss while the asset is being used over its useful life 8. ordinary repairs and maintenance costs 9. extraordinary repair cost 10. property taxes paid related to the machine Problem III: On January 1, 20X4, Woodson Distributor’s Inc. purchased a machine costing $48,000. The machine is estimated to have a residual value of $2,000 and a four year life. A. In the following chart, compare how much depreciation expense should be recorded each year of the asset’s life if the company uses the straight-line versus the double-declining balance depreciation (DDB) method. B. Straight-line Method DDB Method Year 1 Year 2 Year 3 Year 4 2

Total over all four years C. What do you notice about the total amount of depreciation taken over the entire life of the asset under both methods?

D. What do you notice about the pattern of depreciation taken over the entire life of the asset under both methods?

E. In 20X4 (year one), all else being equal, which method would yield the highest income before income tax, highest income tax expense, and highest net income?

F. In 20X4 (year one), all else being equal, which method would yield the lowest income before income tax, lowest income tax expense, and lowest net income?

G. If total income tax expense over the entire four years is the same, what is the advantage of having the most tax savings in year one versus year four?

H. Assuming a calendar year-end, the journal entry to record depreciation expense at the end of 20X4 using the straight-line method would be as follows: Debit

Credit

12/31/X4

I. If the company uses the straight-line method. What will be the balance in the Accumulated Depreciation account at the end of 20X7? What will be the book value at the end of 20X7?

J. If the company uses the DDB method. What will be the balance in the Accumulated Depreciation account at the end of 20X7? What will be the book value at the end of 20X7? 3

K. If the asset had been placed into service on March 1, 20X4 instead, what would be the amount of depreciation recorded for the year ending 12/31X4 under each of the methods?

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Problem IV: On 1/1/X1, Wolfpack Creamery sold one of its ice cream trucks for $35,000 cash. Just prior to its sale, the “Truck” asset account had a normal account balance of $60,000 and its related “Accumulated Depreciation” account had a normal account balance of $28,000. A. Compute the amount of gain or loss on the sale by comparing the book value of the sold asset to the cash received. Amount: _$_______ Cash received Book value of asset given up Gain/Loss on Sale B. Is the difference above a “gain” or a loss”?

Answer: ______

C. In the general journal below, record the sale of the truck. Debit

Credit

1/1/X1

Problem V: On 1/1/X1, Plummer Corp. purchased land and a building for a combined cost of $1,900,000. The land is estimated to have a fair market value of $294,000 and the building has a fair market value of $1,806,000. Question: Rounding to the nearest whole dollar, how much of the $1,900,000 purchase price should be allocated to the building? Answer: $___________

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