Solution manual financial accounting 9th harrison ch07

Cost = $44,793 million Book value = $29,893 million Book value is less than cost because accumulated depreciation is subtracted from cost to compute book value... E 7-17A a Sales tax b

Less: Accumulated depreciation……… (14,900)

2 Cost = $44,793 million

Book value = $29,893 million

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

Units-of- Production

Double- Declining- Balance Cost……… $44,400,000 $44,400,000 $44,400,000

Less: Accumulated

Depreciation………… (7,800,000) (4,350,000) (17,760,000) Book value, Year 1…… $36,600,000 $40,050,000 $26,640,000

(10 min.) S 7-5

1 Double-declining-balance (DDB) depreciation offers the tax advantage for the first year of an asset’s use Because DDB’s first- year depreciation is greater than first-year depreciation under other methods, net income is lower Lower net income results in lower taxes and more cash that the taxpayer can invest to earn a return

2

Straight-line depreciation……… (7,800,000) Excess depreciation tax deduction……… $ 9,960,000 Income tax rate……… × .36 Income tax savings for first year……… $ 3,585,600

(5-10 min.) S 7-6 First-year depreciation (for a partial year):

a Straight-line (€41,000,000 − €5,200,000) / 5 years

b Units-of-production (€41,000,000 − €5,200,000) /

€2,685,000

(10 min.) S 7-7

Depreciation Expense — Concession Stand……… 15,000

Accumulated Depreciation — Concession Stand… 15,000

Depreciation for years 1-5:

$90,000 / 10 years = $ 9,000 per year

$ 9,000 × 5 years = $45,000 for years 1-5

(5-10 min.) S 7-9

1 Units-of-production depreciation method is similar to the method

used to calculate depletion

Market value of Seacoast Snacks’ assets $12.0

Less: Seacoast Snack’s liabilities (10.0)

Market value of Seacoast Snacks’ net assets 2.0

(5 min.) S 7-11 (Dollar amounts in millions)

Return on assets = Net income ÷ Average total assets

Southeast Satellite Systems, Inc

Statement of Cash Flows For the Year Ended December 31, 2012

Capital expenditures……….… (8.0) Proceeds from sale of North American operations 13.0 Net cash (used for) investing activities………… $(10.0)

Fair Value

Exercises

(5-10 min.) E 7-15A Land: $330,000 + $2,500 + $5,500 + $5,000 = $343,000

Land improvements: $51,000 + $11,000 + $2,000 = $64,000

Building: $54,000 + $750,000 = $804,000

(10-15 min.) E 7-16A Allocation of cost to individual machines:

Machine

Appraised

Value

Percentage of Total Appraised (Market) Value

Total Cost

Cost of Each Machine

(5-10 min.) E 7-17A (a) Sales tax

(b) Transportation and insurance

(c) Purchase price

(d) Installation

Capital Expenditure Capital Expenditure Capital Expenditure Capital Expenditure (e) Training of personnel

(f) Reinforcement to platform

(g) Income tax

Capital Expenditure Capital Expenditure Immediate Expense (h) Major overhaul

(i) Ordinary recurring repairs

Capital Expenditure Immediate Expense (j) Lubrication before machine is placed in

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

Req 1

Production

Units-of-Double-Declining- Balance

Straight-line: ($18,600 − $2,500) ÷ 4 = $4,025 per year

Units-of-production: ($18,600 − $2,500) ÷ 35,000 miles = $.46 per mile;

Less: Accumulated depreciation………… (8,300) $213,700

Furniture and fixtures……… 59,000

Less: Accumulated depreciation………… (23,600) 35,400

STATEMENT OF CASH FLOWS

Cash flows from investing activities:

Purchase of buildings ($53,000* + $66,000) $(119,000)

Purchase of furniture and fixtures (59,000)

_

*Does not include the $103,000 note payable because Sunshine Bakery

paid no cash on the note

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

Journal

Year 20 Depreciation Expense ($355,000 ÷ 40)…… 8,875

Accumulated Depreciation — Building 8,875

Year 21 Depreciation Expense……… 16,840*

Accumulated Depreciation — Building 16,840 _

*Computations:

Depreciable cost: $445,000 − $90,000 = $355,000

Depreciation through year 20: = $8,875 × 20 = $177,500

Asset’s remaining depreciable book value:

$445,000 − $177,500 − $14,900 (new residual value) = $252,600

New annual depreciation:

$252,600 ÷ 15 (revised life remaining) = $16,840

(15-20 min.) E 7-22A

Journal

2013 Depreciation for 9 months:

Sept 30 Depreciation Expense 1,566 a

Accumulated Depreciation — Fixtures 1,566

Sale of fixtures:

Accumulated Depreciation — Store Fixtures ($3,480 + $1,566)…… 5,046 Loss on Sale of Fixtures……… 1,054 b

Loss on sale of fixtures:

(10-15 min.) E 7-23A

Less: Accumulated depreciation:

($360,000 − $50,000) × 75 + 85 + 135 + 39

(103,540) a 1,000

75,000 + 85,000 + 135,000 + 39,000 = 334,000 miles driven

Accumulated depreciation = 334,000 miles × $.31

= $103,540 Calculation of gain or loss:

Purchase price of Freightliner truck $210,000

Cash paid for Freightliner truck (20,000)

Trade-in value of Mack truck 190,000

Book value of Mack truck (256,460)

Net loss on disposal of Mack truck $ (66,460)

Journal

(10-15 min.) E 7-24A Journal

(a) Purchase of mineral assets:

(c) Depletion for the first year

Mineral Asset Inventory………… 67,550*

(d) Sale of ore

Cost of Mineral Asset Sold …… 57,900

(10-15 min.) E 7-25A Journal

Req 1

(a) Purchase of patent:

Patents 1,500,000 Cash 1,500,000

(b) Amortization for each year:

Amortization Expense — Patents ($1,500,000 ÷ 15) 100,000 Patents 100,000

Req 2

Impairment of patent in year 10:

Impairment Loss on Patents 500,000**

Patents 500,000

Yes, the asset is impaired because its net book value ($500,000*) is

greater than the estimated future cash flows ($400,000)

_

*Asset remaining book value: $1,500,000 − ($100,000 × 10) = $500,000 **Impairment loss: $500,000 [$500,000 (book value) - $0 (fair value)]

(5-10 min.) E 7-26A

Req 1

Cost of goodwill purchased:

Millions

Purchase price paid for HarborSide.com $20

Market value of HarborSide’s net assets: Market value of HarborSide’s assets ($15 + $21) $36 Less: HarborSide’s liabilities (28)

Market value of HarborSide’s net assets 8

Cost of goodwill $ 12

Req 2 Journal DATE ACCOUNT TITLES DEBIT CREDIT Current Assets 15

Long-Term Assets 21

Goodwill 12

Liabilities 28

Cash 20

Req 3

Caltron will determine whether its goodwill has been impaired in value

If the goodwill’s value has not been impaired, there is nothing to record But if goodwill’s value has been impaired, Caltron will record a loss and write down the book value of the goodwill

_

*difference due to rounding

(10 min.) E 7-28A

a Sale of building

(or disposal of building)……… $ 680,000

b Insurance proceeds from fire

(or disposal of building)……… 190,000

c Renovation of store

(or capital expenditures)……… (130,000)

d Purchase of store fixtures

(or capital expenditures)……… (60,000)

(5-10 min.) E 7-29B Land: $160,000 + $150,000 + $5,000 + $2,000 + $3,000 = $320,000

Total Cost

Cost of Each Machine

(5-10 min.) E 7-31B

(a) Sales tax

(b) Transportation and insurance

(c) Purchase price

(d) Installation

Capital Expenditure Capital Expenditure Capital Expenditure Capital Expenditure (e) Training of personnel

(f) Reinforcement to platform

(g) Income tax

Capital Expenditure Capital Expenditure Immediate Expense (h) Major overhaul

(i) Ordinary recurring repairs

Capital Expenditure Immediate Expense (j) Lubrication before machine is placed in

Less: Accumulated depreciation (3,928)

Building, net 748,512

Req 3

INCOME STATEMENT

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

Req 1

Production

Units-of-Double-Declining- Balance

Straight-line: ($22,000 − $3,900) ÷ 4 = $4,525 per year

Units-of-production: ($22,000 − $3,900) ÷ 113,125 miles = $.16 per mile;

Less: Accumulated depreciation………… (8,650) $214,350

Furniture and fixtures……… 51,000

Less: Accumulated depreciation………… (20,400) 30,600

STATEMENT OF CASH FLOWS

Cash flows from investing activities:

Purchase of buildings ($54,000* + $65,000)……… $(119,000)

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

Journal

Year 20 Depreciation Expense ($357,000 ÷ 40) 8,925

Accumulated Depreciation — Building 8,925

Year 21 Depreciation Expense 17,080*

Accumulated Depreciation — Building 17,080 _

(15-20 min.) E 7-36B

Journal

2013 Depreciation for 10 months:

Oct 31 Depreciation Expense……… 1,640 a

Loss on sale of fixtures:

Book value of old fixtures:

Less: Accumulated depreciation……… (4,920) (3,280)

(10-15 min.) E 7-37B

Less: Accumulated depreciation:

($430,000 − $20,000) × 81+ 111 + 141 + 41

(153,340) a 1,000

81,000 + 111,000 + 141,000 + 41,000 = 374,000 miles driven

Accumulated depreciation = 374,000 miles × $.41

= $153,340 Calculation of gain or loss:

Purchase price of Freightliner truck…… $250,000

Cash paid for Freightliner truck….……… (24,000)

Trade-in value of Mack truck…….……… 226,000

Book value of Mack truck.……… (276,660)

Net loss on disposal of Mack truck …… $ (50,660)

(10-15 min.) E 7-38B Journal

(a) Purchase of mineral assets:

(c) Depletion for the year

Mineral Asset Inventory.………… 76,500*

(d) Sales of ore

Cost of Mineral Asset Sold……… 61,200**

_

*$428,000 + $2,430 + $66,820 = $497,250

(10-15 min.) E 7-39B Journal

Req 1

(a) Purchase of patent:

Patents 1,200,000 Cash 1,200,000

(b) Amortization for each year:

Amortization Expense — Patents ($1,200,000 ÷ 12) 100,000 Patents 100,000

Req 2 Impairment loss:

Impairment Loss on Patents 400,000 Patents 400,000 The asset is impaired because the net book value ($400,000) is greater than the estimated future cash flows ($350,000) The amount of the impairment loss is $400,000 (net book value minus fair value of $-0-)

(5-10 min.) E 7-40B

Req 1

Cost of goodwill purchased:

Millions

Market value of Northeast’s net assets:

Market value of Northeast’s assets ($11 + $25) $36

Less: Northeast’s liabilities……… (22)

Market value of Northeast’s net assets………… 14

_

*difference due to rounding

(10 min.) E 7-42B

a Sale of building

(or disposal of building)……… $ 620,000

b Insurance proceeds from fire

(or disposal of building)……… 100,000

c Renovation of store

(or capital expenditures)……… (140,000)

d Purchase of store fixtures

(or capital expenditures)……… (80,000)

SALES BUILDING

GARAGE BUILDING FURNITURE

(continued) P 7-58A

Req 2

Journal

Dec 31 Depreciation Expense — Land

*$3,664 ($97,700 / 20 × 9/12) if $6,900 (l in Req 1) is debited to Land

(continued) P 7-58A

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 Depreciation affects net income Managers need to 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……… 30,700

Depreciation Expense — Equipment………… 40,000

Accumulated Depreciation — Equipment… 40,000**

Less: Accumulated Depreciation

($263,000 + $40,000) (303,000) 214,000

(25-35 min.) P 7-60A Journal

Oct 30 Land* 144,000

Building** 216,000

(continued) P 7-60A Journal

31 Depreciation Expense — Buildings 630

Accumulated Depreciation —

Buildings 630 [$216,000 − (30% ×$216,000)] / 40 ×

2/12

(30-40 min.) P 7-61A

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 7-61A

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 7-61A

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 7-61A

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 ($50,400) The method that maximizes cash flow by minimizing income tax payments in the first year is the double-declining-balance method (or MACRS depreciation when used for tax purposes) which produces the highest depreciation amount for that year ($110,800)

Req 3

DEPRECIATION METHOD THAT

IN THE EARLY YEARS MAXIMIZES

REPORTED INCOME

MINIMIZES INCOME TAX PAYMENTS

Cash provided by operations

$ 73,168 $ 32,096 Net income advantage of SL over DDB $41,072

Cash flow analysis for first year:

Cash provided by operations before

Cash provided by operations

(20-25 min.) P 7-62A

Req 1

Millions

Cost of plant assets……… $4,831

Less: Accumulated depreciation……… (2,124)

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

equipment.‖

Req 3

2/28/11 Bal 4,197 Cost of Accum depr 2/28/11 Bal 1,729 Purchased assets sold of assets sold Depr during

during 2012 713 in 2012 79 in 2012 65 2012 460 2/29/12 Bal 4,831 2/29/12 Bal 2,124

Goodwill 2/28/11 Bal 512

Purchased

during 2012 43*

Cost of Iron Ore Sold (25,000 x $13.18)… 329,500

Operating Expenses……… 246,000

Income Tax Expense (see Req 2)……… 69,860

Cost of iron ore sold ……… $329,500

Other operating expenses……… 246,000 575,500

Book value of asset sold:

Less: Accumulated depreciation……… (1.0) ( 0.6 )

Req 2

Balance sheet at December 31, 2012:

Property, plant, and equipment ($4.9 + $1.3 − $1.6)……… $ 4.6 Less: Accumulated depreciation ($2.6 + $1.8 − $1.0)……… (3.4) Property, plant, and equipment, net (book value)……… $ 1.2

Req 3

Statement of cash flows for 2012:

Cash flows from operating activities:

Reconciliation of net income to

net cash provided by operations:

Cash flows from investing activities:

Purchases of property, plant, and equipment……… (1.3) Sales of property, plant, and equipment ……… 0.8