Solution manual financial accounting 8th by harrison CH07

1 Cost of goodwill purchased: Millions Market value of Northshore’s net assets: Market value of Northshore’s assets $13 + $18... E 7-37BJournal DATE ACCOUNT TITLES AND EXPLANATION

2 Cost = $44,805 million

Book value = $29,902 million

Book value is less than cost because accumulated depreciation is subtracted from cost to compute book value

(5 min) S 7-2

The related costs (real estate commission, back property tax, removal of a building, and survey fee) are included as part of the cost of the land because the buyer of the land must incur these costs to get the land ready for its intended use

After the land is ready for use, the related costs (listed above) would be expensed

Land……… $ 75,000 $75,000 / $150,000 = 50.0% Building……… 45,000 $45,000 / $150,000 = 30.0% Equipment………… 30,000 $30,000 / $150,000 = 20.0%

2 Book value:

Straight- Line

Units-of- Production

Double- Declining- Balance Cost……… $53,000,000 $53,000,000 $53,000,000

Less Accumulated

Depreciation……… (9,600,000) (6,200,000) (21,200,000) Book value……… $43,400,000 $46,800,000 $31,800,000

(10 min.) S 7-6

Third-year depreciation:

a Straight-line ($53,000,000 − $5,000,000) / 5 years… $9,600,000

b Units-of-production [($53,000,000 − $5,000,000) /

6,000,000 miles] × 1,275,000 miles……… $10,200,000

(10 min.) S 7-7

1 Double-declining-balance (DDB) depreciation offers the tax

advantage results from the greater amount of DDB

during the first year DDB saves cash that the taxpayer can invest to earn a return

2

DDB depreciation……… $21,200,000 Straight-line depreciation……… (9,600,000) Excess depreciation tax deduction……… $ 11,600,000 Income tax rate……… × .32 Income tax savings for first year……… $ 3,712,000

(10 min.) S 7-9

Depreciation Expense — Concession Stand……… 14,167

Accumulated Depreciation — Concession Stand 14,167

Depreciation for years 1-4:

$100,000 / 20 years = $ 5,000 per year

$ 5,000 × 3 years = $15,000 for years 1-3

Asset’s remaining

North Coast’s minerals are less than 36% used up Accumulated depletion is low relative to the cost of the mineral assets

(5-10 min.) S 7-12

Req 1

Cost of goodwill purchased:

Purchase price paid for Concord Snacks, Inc $8,800,000 Market value of Concord Snack’s net assets:

Market value of Concord Snacks’ assets… $15,000,000

Less: Concord Snack’s liabilities………… (8,000,000)

Market value of Concord Snacks’ net assets 7,000,000 Cost of goodwill……… $1,800,000

Req 2

In future years Vector, Inc will determine whether its goodwill has increased or decreased in value If the goodwill’s value has increased, there is nothing to record But if goodwill’s value has decreased, Vector, Inc will record a loss and write down the book value of the goodwill

(10 min.) S 7-13

Solar Automobiles Limited Income Statement Year Ended December 31, 2010

income………

$270,000

Northern Satellite Systems, Inc

Statement of Cash Flows Year Ended December 31, 2010

Purchase of other companies……… $(16.0)

Proceeds from sale of North American operations 14.0

Net cash (used) by investing activities………… $(9.0)

Total Cost

Cost of Each Machine

1 $ 38,250 $38,250 / $170,000 = 225 $167,000 × 225 = $ 37,575

2 73,100 73,100 / 170,000 = 430 167,000 × 430 = 71,810

3 58,650 58,650 / 170,000 = .345 167,000 × 345 = 57,615 Totals $170,000 1.000 $167,000

Sale price of machine No 2……… $73,100

Cost……… 71,810

Gain on sale of machine……… $ 1,290

Capital expenditures:

(a) Sales tax, (b) transportation and insurance, (c) purchase

reinforcement to platform, (h) major overhaul, (j) lubrication before machine is placed in service

Immediate expenses:

(g) Income tax, (i) ordinary recurring repairs, (k) periodic lubrication

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

Production

The units-of production method tracks the wear and tear on

the van most closely

For income tax purposes, the double-declining-balance

method is best because it provides the most depreciation and,

Less Accumulated depreciation………… (8,450) $215,550

Furniture and fixtures……… $ 53,000

STATEMENT OF CASH FLOWS

Cash flows from investing activities:

Purchase of buildings ($56,000* + $61,000)……… $(117,000)

_

*Does not include the $100,000 note payable because Oatmeal

House paid no cash on the note

(10-15 min.) E 7-21A

Depreciation by the two methods……… $12,375* $27,500*

($27,500 − $12,375)……… $15,125 Multiply by the income tax rate……… × .40 Tax saved by using DDB = Extra cash to invest $ 6,050

Depreciation method for income tax:

(10-15 min.) E 7-22A

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Year 20 Depreciation Expense

Year 21 Depreciation Expense……… 14,500*

New estimated useful life remaining: 15 years

New annual depreciation: $217,500÷ 15 = $14,500

(15-20 min.) E 7-23A

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Loss is computed as follows:

Book value of old fixtures:

76,000 + 116,000 + 156,000 + 37,000 = 385,000 miles driven Accumulated depreciation = 385,000 miles × $.28

= $107,800

Calculation of gain or loss:

Purchase price of Freightliner truck $300,000

Cash paid for Freightliner truck 28,000

Trade in value of Mack truck 272,000

Book Value of Mack truck 272,200

Net loss on disposal of Mack truck $ (200)

(10-15 min.) E 7-26A

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Part 1(a) Purchase of patent:

Patents……… 900,000

(b) Amortization for each year:

Amortization Expense — Patents

Amortization Expense — Patents 225,000*

_

*Asset remaining book value:

$900,000 − ($90,000 × 5) = $450,000

New estimated useful life remaining: 2 years

New annual amortization: $450,000 ÷ 2 = $225,000

(5-10 min.) E 7-27A

Req 1

Cost of goodwill purchased:

Millions

Market value of Northshore’s net assets:

Market value of Northshore’s assets ($13 + $18) $31

Less: Northshore’s liabilities……… (25)

(10 min.) E 7-28A

a Sale of building

b Insurance proceeds from fire

c Renovation of store

(or capital expenditures)……… (160,000)

d Purchase of store fixtures

(or capital expenditures)……… (70,000)

Total Cost

Cost of Each Machine

1 $ 77,000 $ 77,000 / $220,000 = 350 $216,000 × 350 = $ 75,600

2 116,600 116,600 / 220,000 = 530 216,000 × 530 = 114,480

3 26,400 26,400 / 220,000 = .120 216,000 × 120 = 25,920 Totals $220,000 1.000 $216,000

Sale price of machine no 2……… $116,600

Cost……… 114,480

Gain on sale of machine……… $ 2,120

Capital expenditures:

(a) Sales tax, (b) transportation and insurance, (c) purchase

reinforcement to platform, (h) major overhaul, (j) lubrication before machine is placed in service

Immediate expenses:

(g) Income tax, (i) ordinary recurring repairs, (k) periodic lubrication

(15-20 min.) E 7-33B

Production

The units-of production method tracks the wear and tear on

the van most closely

For income tax purposes, the double-declining-balance

method is best because it provides the most depreciation and,

Less Accumulated depreciation………… (8,300) $211,700

Furniture and fixtures……… $ 57,000

STATEMENT OF CASH FLOWS

Cash flows from investing activities:

_

*Does not include the $106,000 note payable because

International Eatery paid no cash on the note

(10-15 min.) E 7-35B

Depreciation by the two methods……… $11,250* $25,000*

($25,000 − $11,250)……… $13,750 Multiply by the income tax rate……… × .30 Tax saved by using DDB = Extra cash to invest $ 4,125

Depreciation method for income tax:

(10-15 min.) E 7-36B

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Year 20 Depreciation Expense

Year 21 Depreciation Expense……… 16,000*

New estimated useful life remaining: 15 years

New annual depreciation: $240,000 ÷ 15 = $16,000

(15-20 min.) E 7-37B

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Accumulated Depreciation —

Sale of fixtures:

Accumulated Depreciation — Store Fixtures ($3,320 + $1,494)…… 4,814

Loss is computed as follows:

Book value of old fixtures:

77,000 + 117,000 + 157,000 + 42,000 = 393,000 miles driven Accumulated depreciation = 393,000 miles × $.27

= $106,110

Calculation of gain or loss:

Purchase price of Freightliner truck…… $300,000

Cash paid for Freightliner truck ………… 25,000

Trade in value of Mack truck ……… 275,000

Book Value of Mack truck ……… 263,890

Net gain on disposal of Mack truck …… $ 11,110

(10-15 min.) E 7-40B

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Part 1(a) Purchase of patent:

Patents……… 700,000

(b) Amortization for each year:

Amortization Expense — Patents

Amortization Expense — Patents 175,000*

_

*Asset remaining book value:

$700,000 − ($87,500 × 4) = $350,000

New estimated useful life remaining: 2 years

New annual amortization: $350,000 ÷ 2 = $175,000

(5-10 min.) E 7-41B

Req 1

Cost of goodwill purchased:

Millions

Market value of Southwest’s net assets:

Market value of Southwest’s assets ($10 + $17) $27

Less: Southwest’s liabilities……… (25)

(10 min.) E 7-42B

a Sale of building

b Insurance proceeds from fire

c Renovation of store

(or capital expenditures)……… (120,000)

d Purchase of store fixtures

(or capital expenditures)……… (90,000)

(15-20 min.) E 7-44

Amounts in millions

Property and Equipment

Accumulated Depreciation

Book value sold:

Cost……… $ 448

(Loss) on sale……… $ (73)

(15-20 min.) E 7-45

Millions

Difference in depreciation for 2011 (year 2 of 8):

Straight line depreciation, as reported…… $32

DDB depreciation for year 2 (see below)…… 48

Increase in depreciation expense………… 16

Net income Norzani can expect for 2011

(15-25 min.) E 7-46

Year

Millions of Euros (€)

2011

$7,000)

Q7-60 b ($840,000 − $30,000) × (48,000 / 300,000) = $129,600

$6,000,000

SALES BUILDING

GARAGE BUILDING FURNITURE

(continued) P 7-62A

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

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

Depreciation Expense — Buildings……… 31,000

($709,000 − $89,000) / 20 = $31,000

Depreciation Expense — Equipment………… 38,200

(10-15 min.) P 7-65A

Depreciation is the process of allocating a plant asset’s cost

to expense over the period the asset is used Depreciation procedures are designed to match this expense against revenue over the asset’s life The primary purpose of depreciation accounting is to measure income Of less importance is the need to account for the decline in the asset’s usefulness

The decreasing annual amounts indicate that the company

is using an accelerated depreciation method, which allocates more asset cost to expense during the early years of asset use than during the later years This pattern is not related to changes in the value of the asset, because depreciation is not

a process of asset valuation Even though the property values may be increasing, it is still necessary to record depreciation

on plant assets

(30-40 min.) P 7-66A

Req 1

Straight-Line Depreciation Schedule

Depreciation for the Year

DATE

ASSET COST

DEPRECIATION RATE  COST = DEPRECIABLE

DEPRECIATION EXPENSE

ACCUMULATED DEPRECIATION

ASSET BOOK VALUE

(continued) P 7-66A

Req 1

Units-of-Production Depreciation Schedule

Depreciation for the Year

DATE

ASSET COST

DEPRECIATION PER DOCUMENT  NUMBER OF DOCUMENTS =

DEPRECIATION EXPENSE

ACCUMULATED DEPRECIATION

ASSET BOOK VALUE

(continued) P 7-66A

Req 1

Double-Declining-Balance Depreciation Schedule

Depreciation for the Year

DATE

ASSET COST DDB RATE  VALUE = ASSET BOOK

DEPRECIATION EXPENSE

ACCUMULATED DEPRECIATION

ASSET BOOK VALUE

(continued) P 7-66A

Req 2

The depreciation method that maximizes reported income in the first year of the computer’s life is the straight-line method, which produces the lowest depreciation for that year ($50,000) The method that maximizes cash flow by minimizing income tax payments in the first year is the double-declining- balance* method, which produces the highest depreciation amount for that year ($106,000)

_

*Also, MACRS depreciation

(continued) P 7-66A

Req 3 (comparison of net income and

cash provided by operations)

DEPRECIATION METHOD THAT

IN THE EARLY YEARS

A MAXIMIZES REPORTED INCOME

B MINIMIZES INCOME TAX PAYMENTS

Cash provided by operations

Net income advantage of SL over DDB $40,320

Cash flow analysis for first year:

Cash provided by operations before

Cash provided by operations

Cash flow advantage of DDB over SL $15,680

(20-25 min.) P 7-67A

Req 1

Millions

Cost of plant assets……… $4,830

Less: Accumulated depreciation……… (2,126)

Book value, net……… $2,704

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 Accumulated Depreciation

2/28/09 Bal 4,199 Cost of Accum depr 2/28/09 Bal 1,726 Purchased assets sold of assets sold Depr during

Other operating expenses……… 250,000 705,265

The iron ore operations were very profitable Net income of

$317,720 on sales of $1,172,500 is quite high (27.1% of sales)

(30-40 min.) P 7-69A

Req 1

To determine the gain or loss on the sale of a plant asset, compare the cash received to the asset’s book value, as follows:

All amounts in billions

Book value of asset sold:

Cost……… $ 1.1

Req 2

Balance sheet at December 31, 2010:

Property, plant, and equipment ($4.4 + $1.8 − $1.1)…… $ 5.1 Less: Accumulated depreciation ($3.2 + $1.9 − $0.6)… (4.5) Property, plant, and equipment, net (book value)……… $ 0.6

Req 3

Statement of cash flows for 2010:

Cash flows from operating activities:

Net income ($26.4 − $21.2)……… $ 5.2 Reconciliation of net income to

net cash provided by operations:

Depreciation……… 1.9

Cash flows from investing activities:

Purchases of property, plant, and equipment……… (1.8) Sales of property, plant, and equipment ……… 0.3