Solution manual financial accounting 4e by wild chapter08

A plant asset is tangible; it is used in the production or sale of other assets or services; and it has a useful life longer than one accounting period.. The balance of the Accumulated

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Chapter 8

Reporting and Analyzing

Long-Term Assets

QUESTIONS

1 A plant asset is tangible; it is used in the production or sale of other assets or services; and

it has a useful life longer than one accounting period

2 The cost of a plant asset includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.

3 Land is an asset with an unlimited life and, therefore, is not subject to depreciation Land improvements have limited lives and are subject to depreciation

4 Often the lump-sum or basket purchase includes assets with different lives that must be depreciated separately Sometimes the purchase may include land, which is never depreciated

5 The Accumulated Depreciation—Machinery account is a contra asset account with a credit balance that cannot be used to buy anything The balance of the Accumulated Depreciation—Machinery account reflects that portion of the machinery's original cost that has been charged to depreciation expense It also gives some indication of the asset‘s age and how soon it will need to be replaced Any funds available for buying machinery are shown on the balance sheet as liquid assets with debit balances

6 The Modified Accelerated Cost Recovery System is not generally acceptable for financial accounting purposes because it allocates depreciation over an arbitrary period that is usually much shorter than the predicted useful life of the asset

7 The materiality principle justifies charging low-cost plant asset purchases to expense because such amounts are unlikely to impact the decisions of financial statement users

8 Ordinary repairs are made to keep a plant asset in normal, good operating condition, and should be charged to expense of the current period Extraordinary repairs are made to extend the life of a plant asset beyond the original estimated life; they are recorded as capital expenditures (and added to the asset account)

9 A company might sell or exchange an asset when it reaches the end of its useful life, or if it becomes inadequate or obsolete, or if the company has changed its business plans An asset also can be damaged or destroyed by fire or some other accident that would require its disposal

10 The process of allocating the cost of natural resources to expense over the periods when they are consumed is called depletion The method to compute depletion is similar to units- of-production depreciation

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units-of-production basis) and sold

12 An intangible asset: (1) has no physical existence; (2) derives value from the unique legal and contractual rights held by its owner; and (3) is used in the company‘s operations

13 Intangible assets are generally recorded at their cost and amortized over their predicted useful life (However, some costs are not included, such as the research and development costs leading up to a patent.) The costs of intangible assets are generally allocated to amortization expense using the straight-line method over their useful lives If the useful life

of an intangible asset is indefinite, then it is not amortized—instead, it is annually tested for impairment

14 A company has goodwill when its value exceeds the value of its individual assets and liabilities Goodwill appears in the balance sheet when one company acquires another company or separate segment and pays a price that exceeds the combined values of all its net assets (assets less liabilities) excluding goodwill

15 No; this type of goodwill would not be amortized Instead, the FASB (SFAS 142) requires that goodwill be annually tested for impairment If the book value of goodwill does not exceed its

fair (market) value, goodwill is not impaired However, if the book value of goodwill exceeds its fair value, an impairment loss is recorded equal to that excess (Details of this two-step test are in advanced courses.)

16 Total asset turnover is calculated by dividing net sales by average total assets Financial statement users can use total asset turnover to evaluate the efficiency of a company in using its assets to generate sales

17 Best Buy lists Land and buildings; Leasehold improvements; Fixtures and equipment; Property under master and capital lease The book value of these assets is $2,464,000,000

18 Circuit City calls its plant assets ―Property and equipment, net.‖ The book value of the property and equipment is $738,802,000

19 Apple‘s Long term assets discussed in this chapter are: Property, plant, and equipment, net; Goodwill; Acquired intangible assets

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QUICK STUDIES Quick Study 8-1 (10 minutes)

Recorded cost = $190,000 + $20,000 + $4,000 + $13,700 = $227,700

Note: The $1,850 repair charge is an expense because it is not a normal and reasonable expenditure necessary to get the asset in place and ready for its intended use

Quick Study 8-2 (10 minutes)

1 The main difference between plant assets and current assets is that current assets are consumed or converted into cash within a short period of time, while plant assets have a useful life of more than one accounting period

2 The main difference between plant assets and inventory is that inventory is held for resale and plant assets are not

3 The main difference between plant assets and long-term investments is that plant assets are used in the primary operation of the business and investments are not

$65,800 Cost

- 15,950 Accumulated depreciation (first year)

49,850 Book value at point of revision

- 2,000 Salvage value

47,850 Remaining depreciable cost

÷ 2 Years of life remaining

$23,925 Depreciation per year for years 2 and 3

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Note: Double-declining-balance rate = (100% / 8 years) x 2 = 25%

* Total accumulated depreciation of $479,844 ($207,500 + $155,625 + $116,719)

does not exceed the depreciable cost of $755,000 ($830,000 - $75,000)

1 (a) Capital expenditure

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Book value of old machine = $76,800 - $40,800 = $36,000

1 Cash 47,000

Accumulated depreciation 40,800

Equipment 76,800 Gain on sale of equipment* 11,000

To record the sale of equipment

Depletion per unit = = $1.60 per ton

Depletion Expense—Ore Mine 288,000

Accumulated Depletion—Ore Mine 288,000

To record depletion of ore mine (180,000 x $1.60)

Intangible Assets: b) Trademark c) Leasehold f) Copyright g) Franchise Natural Resources: a) Oil well d) Gold mine h) Timberland

Note: Building is reported under plant assets

$1,800,000 - $200,000 1,000,000 tons

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To record amortization of leasehold over

the remaining life of the lease *

*

Amortization = $105,000 / 8-year-lease-term = $13,125 per year

($ millions)

Interpretation: The company‘s turnover of 0.88 times is markedly lower than its competitors‘ turnover of 2.0 This company must perform better if it is to

be successful in the long run

Quick Study 8-12 A (10 minutes)

Book value of old machine = $42,400 - $18,400 = $24,000

1 Machinery (new) 52,000

Accumulated Depreciation–Machinery (old) 18,400

Loss on Exchange of Assets* 2,000

Machinery (old) 42,400 Cash 30,000

To record asset exchange assuming commercial

substance *$52,000 – ($24,000 + $30,000) = $(2,000)

2 Machinery (new)* 46,000

Accumulated Depreciation–Machinery (old) 18,400

Machinery (old) 42,400 Cash 22,000

To record asset exchange assuming lack of

commercial substance

$14,880 ($15,869 + $17,819) / 2

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EXERCISES Exercise 8-1 (15 minutes)

Invoice price of machine $ 12,500

Less discount (.02 x $12,500) (250)

Net purchase price 12,250 Freight charges (transportation-in) 360

Mounting and power connections 895

Assembly 475

Materials used in adjusting 40

Total cost to be recorded $ 14,020

Exercise 8-2 (15 minutes)

Cost of land

Purchase price for land $ 280,000

Purchase price for old building 110,000

Demolition costs for old building 33,500

Costs to fill and level lot 47,000

Total cost of land $ 470,500

Cost of new building and land improvements

Cost of new building $1,452,200

Cost of land improvements 87,800

Total construction costs $1,540,000

Journal entry

Land 470,500

Land Improvements 87,800

Building 1,452,200

Cash 2,010,500

To record costs of plant assets

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Purchase price $375,280

Closing costs 20,100

Total cost of acquisition $395,380

Allocation of total cost

Appraised Value

Land $157,040 40% $395,380 x 40 $158,152

Land improvements 58,890 15 $395,380 x 15 59,307 Building 176,670 45 $395,380 x 45 177,921 Totals $392,600 100% $395,380

1 Straight-line depreciation: ($154,000 - $25,000) / 4 years = $32,250 per year

Year Annual Depreciation Year-End Book Value

Depreciation Rate

Annual Depreciation

Year-End Book Value

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Alternate calculation

2007 depreciation ($280,000 x 40% x 9/12) $ 84,000

2008 depreciation

$280,000 x 40% x 3/12 $ 28,000 ($280,000 - $84,000 - $28,000) x 40% x 9/12 50,400 Total 2008 depreciation $ 78,400

1 Original cost of machine $ 23,860 Less two years' accumulated depreciation

[($23,860 - $2,400) / 4 years] x 2 years (10,730) Book value at end of second year $ 13,130

2 Book value at end of second year $ 13,130 Less revised salvage value (2,000) Remaining depreciable cost $ 11,130 Revised annual depreciation = $11,130 / 3 years = $3,710

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1 Straight-line depreciation

Income before Depreciation

Depreciation Expense *

Net Income

Depreciation Expense *

Net Income

Supporting calculations for depreciation expense

*Note: (100% / 5 years) x 2 = 40% depreciation rate

Beginning Book Value

Annual Depreciation (40% of Book Value)

Accumulated Depreciation at the End of the Year

Ending Book Value ($238,400 Cost Less Accumulated Depreciation) Year 1 $238,400 $ 95,360 $ 95,360 $143,040

*** Must not use $20,598; instead take only enough depreciation in Year 4 to

reduce book value to the $43,600 salvage value

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1 Annual depreciation = $572,000 / 20 years = $28,600 per year

Age of the building = Accumulated depreciation / Annual depreciation = $429,000 / $28,600 = 15 years

2 Entry to record the extraordinary repairs

4 Revised book value of building (part 3) $211,350 New estimate of useful life (20 - 15 + 7) 12 years Revised annual depreciation $17,612.5

Journal entry

Depreciation Expense* 17,612.5

Accumulated Depreciation–Building 17,612.5

To record depreciation * Students may round this

amount to 17,613, which is fine.

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Note: Book value of milling machine = $250,000 - $182,000 = $68,000

1 Disposed at no value

Jan 3 Loss on Sale of Milling Machine 68,000

Accumulated Depreciation—Milling Machine 182,000

Milling Machine 250,000

To record disposal of milling machine

2 Sold for $35,000 cash

Jan 3 Cash 35,000

Loss on Sale of Milling Machine 33,000

To record cash sale of milling machine

Jan 2 Cash 68,000

Jan 2 Cash 80,000

Gain on Sale of Milling Machine 12,000 Milling Machine 250,000

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2011

July 1 Depreciation Expense 7,500

Accumulated Depreciation Machinery 7,500

To record one-half year depreciation.*

*Annual depreciation = $105,000 / 7 years = $15,000

Depreciation for 6 months in 2011 = $15,000 x 6/12 = $7,500

July 1 Cash 45,500

Accumulated Depreciation—Machinery 67,500

Gain on Sale of Machinery 8,000 Machinery 105,000

To record sale of machinery.*

*Total accumulated depreciation at date of disposal:

Four years 2007-2010 (4 x $15,000) $60,000

Partial year 2011 (6/12 x $15,000) 7,500

Total accumulated depreciation $67,500

Book value of machinery = $105,000 - $67,500 = $37,500

2 Destroyed by fire with $25,000 cash insurance settlement

Dec 31 Depletion Expense—Mineral Deposit 405,528

Accumulated Depletion—Mineral Deposit 405,528

To record depletion [$3,721,000/1,525,000 tons =

$2.44 per ton; 166,200 tons x $2.44 = $405,528]

Dec 31 Depreciation Expense—Machinery 23,268

Accumulated Depreciation—Machinery 23,268

To record depreciation [$213,500/1,525,000 tons=

$0.14 per ton; 166,200 tons x $0.14 = $23,268]

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Jan 1 Copyright 418,000

Cash 418,000

00

To record purchase of copyright

Dec 31 Amortization Expense—Copyright 41,800

3 Goodwill is only recorded when it is purchased Goodwill is not

recorded by the company that has created it

1 $269,166,000 for property and equipment

2 $154,788,000 for depreciation and amortization

3 $81,039,000 used in investing activities

Analysis comments Based on these calculations, Lok turned its assets over 1.23

(4.59 – 3.36) more times in 2008 than in 2007 This increase indicates that Lok became more efficient in using its assets Moreover, Lok has improved its efficiency in using assets relative to its competitors who average 3.0 Together, these results based on total asset turnover indicate that Lok has markedly improved its performance and is currently superior to its competitors

$5,865,000 ($1,686,000 + $1,800,000)/2

$8,689,000 ($1,800,000 + $1,982,000)/2

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Exercise 8-18 A (15 minutes)

1 Book value of the old tractor ($96,000 - $52,500) $ 43,500

2 Loss on the exchange

Book value - Trade-in allowance ($43,500 - $29,000) $ 14,500

3 Debit to new Tractor account

Cash paid + Trade-in allowance ($83,000 + $29,000) $112,000

Alternatively, answers can be taken from the following journal entry:

Tractor (new)* 112,000

Loss on Exchange of Assets 14,500

Accumulated Depreciation–Tractor 52,500

Tractor (old) 96,000 Cash 83,000

To record asset exchange *($29,000 + $83,000)

Exercise 8-19 A (25 minutes)

Note: Book value of Machine equals $44,000 - $24,625 = $19,375

Jan 2 Cash 18,250

Loss on Sale of Machinery 1,125

Accumulated Depreciation—Machinery (old) 24,625

Machinery (old) 44,000

To record cash sale of machine

2 $25,000 trade-in allowance exceeds book value; but no gain is

recognized on an asset exchange that lacks commercial substance

($5,625 gain is ‗buried‘ in the cost of the new machinery)

Jan 2 Machinery (new)* 54,575

Machinery (old) 44,000 Cash** 35,200

To record asset exchange

*[$60,200 - ($25,000 - $19,375)] **($60,200 - $25,000)

3 $15,000 trade-in allowance is less than book value (yielding a loss)

Jan 2 Machinery (new) 60,200

Loss on Exchange of Machinery 4,375

Machinery (old) 44,000 Cash* 45,200

To record asset exchange *($60,200 - $15,000)

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PROBLEM SET A Problem 8-1A (50 minutes)

Part 1

Estimated Market Value

Percent

of Total

Apportioned Cost Building $508,800 53% $477,000 Land 297,600 31 279,000

Vehicles 124,800 13 117,000 Total $960,000 100% $900,000

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Problem 8-2A (45 minutes)

Land Improvements

Percent

of Total

Apportioned Cost**

To record costs of plant assets

31 Depreciation Expense—Land Improv 1 32,500

Accum Depreciation—Land Improv 1 32,500

To record depreciation [$390,000/12]

31 Depreciation Expense—Land Improv 2 8,200

Accum Depreciation—Land Improv 2 8,200

To record depreciation [$164,000/20]

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To record betterment of loader

Dec 31 Depreciation Expense—Equipment 70,850 *

2008

Jan 1 Equipment 5,400

Cash 5,400

To record extraordinary repair on loader

Feb 17 Repairs Expense—Equipment 820

Cash 820

To record ordinary repair on loader

Dec 31 Depreciation Expense—Equipment 43,590*

Accumulated Depreciation—Equipment 43,590

To record depreciation

*2008 depreciation after January 1 st extraordinary repair Total cost ($305,400 + $5,400) $310,800 Less accumulated depreciation 70,850 Book value 239,950 Less salvage 22,000 Remaining cost to be depreciated $217,950

Revised remaining useful life (Original 4 years - 1yr + 2yrs.) 5 yrs Revised annual depreciation ($217,950 / 5 yrs) $ 43,590

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2007

Jan 1 Trucks 22,000

Cash 22,000

To record cost of truck ($20,515 + $1,485)

Dec 31 Depreciation Expense—Trucks 4,000

To record sale of truck

** Accumulated depreciation on truck at 12/31/2009

2007 $ 4,000

2008 5,200

2009 5,200 Total $14,400

*** Book value of truck at 12/31/2009 Total cost $22,000 Less accumulated depreciation (14,400) Book value $ 7,600 Loss ($5,300 cash received - $7,600 book value) $ 2,300

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Cost of machine $257,500

Less estimated salvage value 20,000

Total depreciable cost $237,500

Year Straight-Line a Units-of-Production b

Double-Declining- Balance c

Cost per unit = $237,500/475,000 units = $0.50 per unit

Take only enough depreciation in Year 4 to reduce book

value to the asset‘s $20,000 salvage value

c Double-declining-balance:

(100%/4) x 2 = 50% depreciation rate

Year

Beginning Book Value

Annual Depreciation (50% of Book Value)

Accumulated Depreciation

at the End of the Year

Ending Book Value ($257,500 Cost Less Accumulated Depreciation)

**Take only enough depreciation in Year 4 to reduce book value to

the asset‘s $20,000 salvage value

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