Warren SM CHAPTER 10 FIXED ASSETS AND INTANGIBLE ASSETS PDF

Preview

Summary

CHAPTER 10FIXED ASSETS AND INTANGIBLE ASSETSEYE OPENERS a. Tangible b. Capable of repeated use in the opera- tions of the business e. Long-lived a. Property, plant, and equipment b. Current assets (merchandise inventory) Real estate acquired as speculation should be listed in the balance sheet under...

Description

CHAPTER 10 FIXED ASSETS AND INTANGIBLE ASSETS EYE OPENERS 11. a. No b. No 12. 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 and provides for depreciation for fixed assets acquired after 1986. 13. No. Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections,” is quite specific about the treatment of changes in depreciable assets’ estimated service lives. Such changes should be reflected in the amounts for depreciation expense in the current and future periods. The amounts recorded for depreciation expense in the past are not affected. 14. a. No, the accumulated depreciation for an asset cannot exceed the cost of the asset. To do so would create a negative book value, 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. 15. 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.

1. a. Tangible b. Capable of repeated use in the operations of the business e. Long-lived 2. a. Property, plant, and equipment b. Current assets (merchandise inventory) 3. Real estate acquired as speculation should be listed in the balance sheet under the caption “Investments,” below the Current Assets section. 4. $298,500 5. Capital expenditures include the cost of acquiring fixed assets and the cost of improving an asset. These costs are recorded by increasing (debiting) the fixed asset account. Capital expenditures also 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 fixed assets. 6. Capital expenditure 7. A capital lease is accounted for as if the lessee has purchased the asset and the asset is written off over its useful life. An operating lease is accounted for as a current-period expense (rent expense). 8. Ordinarily not; if the book values closely approximate the market values of fixed assets, it is coincidental. 9. a. No, it does not provide a special cash fund for the replacement of assets. Unlike most expenses, however, depreciation expense does not require an equivalent outlay of cash in the period to which the expense is allocated. b. Depreciation is the cost of fixed assets periodically charged to revenue over their expected useful lives. 10. 12 years

581

PRACTICE EXERCISES PE 10–1A May

27 Accumulated Depreciation—Delivery Van........ Cash.................................................................. 27 Delivery Van.......................................................... Cash..................................................................

950 950 450 450

PE 10–1B Oct.

9 Delivery Truck....................................................... Cash.................................................................. 9 Repairs and Maintenance Expense.................... Cash..................................................................

PE 10–2A a. $410,000 ($485,000 – $75,000) b. 4% = (1/25) c. $16,400 ($410,000 × 4%), or ($410,000/25 years)

PE 10–2B a. $120,000 ($125,000 – $5,000) b. 12.5% = (1/8) c. $15,000 ($120,000 × 12.5%), or ($120,000/8 years)

PE 10–3A a. $99,000 ($134,000 – $35,000) b. $0.33 per mile ($99,000/300,000 miles) c. $17,160 (52,000 miles × $0.33)

1,150 1,150 40 40

PE 10–3B a. $80,000 ($95,000 – $15,000) b. $2.00 per hour ($80,000/40,000 hours) c. $10,200 (5,100 hours × $2.00)

PE 10–4A a. 5% = [(1/40) × 2] b. $32,500 ($650,000 × 5%)

PE 10–4B a. 40% = [(1/5) × 2] b. $58,000 ($145,000 × 40%)

PE 10–5A a. $12,000 [($250,000 – $34,000)/18] b. $130,000 [$250,000 – ($12,000 × 10)] c. $15,500 [($130,000 – $6,000)/8]

PE 10–5B a. $8,125 [($80,000 – $15,000)/8] b. $47,500 [$80,000 – ($8,125 × 4)] c. $7,500 [($47,500 – $10,000)/5]

PE 10–6A a. $81,000 = $324,000 × [(1/8) × 2)] = $324,000 × 25% b. $17,750 gain, computed as follows: Cost...................................................... $324,000 Less: First-year depreciation............ (81,000) Second-year depreciation....... (60,750) [($324,000 – $81,000) × 25%] Book value at end of second year.... $182,250 Gain on sale ($200,000 – $182,250) = $17,750 c.

Cash.................................................................................. Accumulated Depreciation—Equipment...................... Equipment................................................................... Gain on Sale of Equipment.......................................

200,000 141,750 324,000 17,750

PE 10–6B a. $9,500 [($160,000 – $17,500)/15] b. $13,000 loss {$90,000 – [$160,000 – ($9,500 × 6)]} c.

Cash.................................................................................. Accumulated Depreciation—Equipment...................... Loss on Sale of Equipment............................................ Equipment...................................................................

90,000 57,000 13,000 160,000

PE 10–7A a.

$0.60 per ton = $120,000,000/200,000,000 tons

b. $18,693,000 = (31,155,000 tons × $0.60 per ton) c.

Dec. 31

Depletion Expense........................................ 18,693,000 Accumulated Depletion........................... 18,693,000 Depletion of mineral deposit.

PE 10–7B a.

$0.40 per ton = $50,000,000/125,000,000 tons

b. $16,954,000 = (42,385,000 tons × $0.40 per ton) c.

Dec. 31

Depletion Expense........................................ 16,954,000 Accumulated Depletion........................... 16,954,000 Depletion of mineral deposit.

PE 10–8A a.

Dec. 31

b. Dec. 31

Loss from Impaired Goodwill....................... Goodwill.................................................... Impaired goodwill.

500,000

Amortization Expense—Patents.................. Patents...................................................... Amortized patent rights [($388,000/8) × 6/12].

24,250

500,000

24,250

PE 10–8B a.

Dec. 31

b. Dec. 31

Loss from Impaired Goodwill....................... Goodwill.................................................... Impaired goodwill.

875,000

Amortization Expense—Patents.................. Patents...................................................... Amortized patent rights [($425,000/17) × 9/12].

18,750

875,000

18,750

EXERCISES Ex. 10–1 a. New printing press: 1, 2, 3, 4, 6 b. Used printing press: 7, 8, 9, 11

Ex. 10–2 a. 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. 10–3 Initial cost of land ($30,000 + $270,000).................... Plus: Legal fees........................................................... Delinquent taxes................................................ Demolition of building...................................... Less: Salvage of materials.......................................... Cost of land...................................................................

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

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

$300,000 $ 1,425 12,000 18,500

31,925 $331,925 4,500 $327,425

Ex. 10–6 Feb. 16 Accumulated Depreciation—Delivery Truck..... Cash.................................................................. July Oct.

3,150 3,150

15 Delivery Truck....................................................... Cash..................................................................

1,100

3 Repairs and Maintenance Expense.................... Cash..................................................................

72

1,100 72

Ex. 10–7 a. No. The $3,175,000 represents the original cost of the equipment. Its replacement cost, which may be more or less than $3,175,000, is not reported in the financial statements. b. No. The $2,683,000 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. 10–8 (a) 50% (1/2), (b) 12.5% (1/8), (c) 10% (1/10), (d) 5% (1/20), (e) 4% (1/25), (f) 2.5% (1/40), (g) 2% (1/50)

Ex. 10–9 $3,350 [($93,750 – $10,000)/25]

Ex. 10–10 $145,000  $7,000 = $1.84 depreciation per hour 75,000 hours 150 hours at $1.84 = $276 depreciation for July

Ex. 10–11 a. Depreciation per Rate per Mile: Truck Truck Truck Truck

#1 #2 #3 #4

($50,000 ($72,900 ($38,000 ($90,000

Truck No.

– $6,500)/150,000 = $0.29 – $9,900)/300,000 = $0.21 – $3,000)/200,000 = $0.175 – $13,000)/200,000 = $0.385

Rate per Mile

Credit to Accumulated Depreciation

Miles Operated

1 29.0 cents 23,000 2 21.0 25,000 3 17.5 36,000 4 38.5 40,000 Total................................................................................................

$ 6,670 3,000* 6,300 15,400 $ 31,370

*Mileage depreciation of $5,250 (21 cents × 25,000) is limited to $3,000, which reduces the book value of the truck to $9,900, its residual value. b. Depreciation Expense—Trucks..................................... Accumulated Depreciation—Trucks........................ Truck depreciation.

31,370 31,370

Ex. 10–12 First Year a. 5% of $75,000 = $3,750 or ($75,000/20) = $3,750 b. 10% of $75,000 = $7,500

Second Year 5% of $75,000 = $3,750 or ($75,000/20) = $3,750 10% of ($75,000 – $7,500) = $6,750

Ex. 10–13 a. 12 1/2% of ($172,000 – $20,000) = $19,000 or [($172,000 – $20,000)/8] b. Year 1: 25% of $172,000 = $43,000 Year 2: 25% of ($172,000 – $43,000) = $32,250

Ex. 10–14 a. Year 1: 3/12 × [($85,000 – $5,000)/10] = $2,000 Year 2: ($85,000 – $5,000)/10 = $8,000 b. Year 1: 3/12 × 20% of $85,000 = $4,250 Year 2: 20% of ($85,000 – $4,250) = $16,150

Ex. 10–15 a. $17,500 [($1,050,000 – $420,000)/36] b. $700,000 [$1,050,000 – ($17,500 × 20 yrs.)] c. $20,000 [($700,000 – $300,000)/20 yrs.]

Ex. 10–16 a.

Mar.

30 Carpet.............................................................. Cash...........................................................

12,000

b. Dec. 31 Depreciation Expense................................... Accumulated Depreciation...................... Carpet depreciation [($12,000/15 years) × 9/12].

600

12,000 600

Ex. 10–17 a.

Cost of equipment...................................................................... Accumulated depreciation at December 31, 2010 (4 years at $38,500* per year).............................................. Book value at December 31, 2010............................................ *($504,000 – $42,000)/12 = $38,500

b. (1) Depreciation Expense—Equipment....................... Accumulated Depreciation—Equipment.......... Truck depreciation ($38,500 × 3/12 = $9,625). (2) Cash........................................................................... Accumulated Depreciation—Equipment............... Loss on Sale of Equipment..................................... Equipment............................................................ *($154,000 + $9,625 = $163,625)

$504,000 154,000 $350,000 9,625 9,625

315,000 163,625* 25,375 504,000

Ex. 10–18 a. 2007 depreciation expense: $29,250 [($265,500 – $31,500)/8] 2008 depreciation expense: $29,250 2009 depreciation expense: $29,250 b. $177,750 [$265,500 – ($29,250 × 3)] c.

Cash.................................................................................. Accumulated Depreciation—Equipment...................... Loss on Disposal of Fixed Assets................................. Equipment...................................................................

168,500 87,750 9,250

d. Cash.................................................................................. Accumulated Depreciation—Equipment...................... Equipment................................................................... Gain on Sale of Equipment.......................................

180,000 87,750

265,500

265,500 2,250

Ex. 10–19 a. $16,200,000/90,000,000 tons = $0.18 depletion per ton 13,750,000 × $0.18 = $2,475,000 depletion expense b. Depletion Expense.......................................................... Accumulated Depletion............................................. Depletion of mineral deposit.

2,475,000 2,475,000

Ex. 10–20 a. ($750,000/15) + ($90,000/12) = $57,500 total patent expense b. Amortization Expense—Patents.................................... Patents........................................................................ Amortized patent rights ($50,000 + $7,500).

57,500 57,500

Ex. 10–21 a. Property, Plant, and Equipment (in millions): Current Year Land and buildings..................................................... $ 626 Machinery, equipment, and internal-use software. . 595 Office furniture and equipment................................. 94 Other fixed assets related to leases......................... 760 $2,075 Less accumulated depreciation................................ 794 Book value................................................................... $1,281

Preceding Year $ 361 470 81 569 $1,481 664 $ 817

A comparison of the book values of the current and preceding years indicates that they increased. A comparison of the total cost and accumulated depreciation reveals that Apple purchased $594 million ($2,075 – $1,481) of additional fixed assets, which was offset by the additional depreciation expense of $130 million ($794 – $664) taken during the current year. b. The book value of fixed assets should normally increase during the year. Although additional depreciation expense will reduce the book value, most companies invest in new assets in an amount that is at least equal to the depreciation expense. However, during periods of economic downturn, companies purchase fewer fixed assets, and the book value of their fixed assets may decline.

Ex. 10–22 1. Fixed assets 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 Fixed Assets section. Patents should be reported at their net book values (cost less amortization to date). Goodwill should not be amortized, but should be only written down upon impairment.

Appendix 1 Ex. 10–23 Sum of Years of Useful Life =

N(N + 1) 20(20 + 1) = = 210 2 2

First year: 20/210 × $75,000 = $7,143 Second year: 19/210 × $75,000 = $6,786

Appendix 1 Ex. 10–24 Sum of Years of Useful Life =

N(N + 1) 8(8 + 1) = = 36 2 2

First year: 8/36 × ($172,000 – $20,000) = $33,778 Second year: 7/36 × ($172,000 – $20,000) = $29,556

Appendix 1 Ex. 10–25 Sum of Years of Useful Life =

N(N + 1) 10(10 + 1) = = 55 2 2

First year: 3/12 × 10/55 × ($85,000 – $5,000) = $3,636 Second year: [(9/12 × 10/55 × ($85,000 – $5,000)] + [(3/12 × 9/55 × ($85,000 – $5,000)] = $10,909 + $3,273 = $14,182

Appendix 2 Ex. 10–26 a. Price (fair market value) of new equipment....................................... Trade-in allowance of old equipment................................................. Cash paid on the date of exchange.................................................... b. Price (fair market value) of new equipment..................... Less assets given up in exchange: Book value of old equipment...................................... Cash paid on the exchange........................................ Gain on exchange of equipment.......................................

$300,000 120,000 $180,000

$300,000 $115,500 180,000

295,500 $ 4,500

Appendix 2 Ex. 10–27 a. Price (fair market value) of new equipment....................................... Trade-in allowance of old equipment................................................. Cash paid on the date of exchange.................................................... b. Price (fair market value) of new equipment........................ Less assets given up in exchange: Book value of old equipment........................................ Cash paid on the exchange........................................... Loss on exchange of equipment..........................................

$300,000 120,000 $180,000

$300,000 $127,750 180,000

307,750 $ 7,750

Appendix 2 Ex. 10–28 a.

Depreciation Expense—Equipment.............................. Accumulated Depreciation—Equipment................. Equipment depreciation ($20,000 × 9/12).

15,000

b. Accumulated Depreciation—Equipment...................... Equipment........................................................................ Loss on Exchange of Fixed Assets.............................. Equipment................................................................... Cash............................................................................

235,000 462,000 5,000

15,000

336,000 366,000

Appendix 2 Ex. 10–29 a.

Depreciation Expense—Trucks..................................... Accumulated Depreciation—Trucks........................ Truck depreciation ($16,000 × 3/12).

4,000

b. Accumulated Depreciation—Trucks............................. Trucks............................................................................... Trucks.......................................................................... Cash............................................................................ Gain on Exchange of Fixed Assets.........................

68,000 150,000

4,000

96,000 120,000 2,000

Ex. 10–30 a. Fixed Asset Turnover Ratio =

Fixed Asset Turnover Ratio =

Revenue Average Book Value of Fixed Assets

$93,469 ($85,294 + $82,356)/2

Fixed Asset Turnover Ratio = 1.12 b. Verizon earns $1.12 revenue for every dollar of fixed assets. This is a low fixed asset turnover ratio, reflecting the high fixed asset intensity in a telecommunications company. The industry average fixed turnover ratio is slightly lower at 1.10. Thus, Verizon is using its fixed assets slightly more efficiently than the industry as a whole.

Ex. 10–31 a.

Best Buy: 12.72 ($35,934/$2,825) Circuit City Stores, Inc.: 14.13 ($12,430/$880)

b. Circuit City’s fixed asset turnover ratio of 14.13 is higher than Best Buy’s ...