Solutions manual intermediate accounting 18e by stice and stice ch11

No gains or losses are recognized at the time of the retirement of individual assets; accumulated depreciation is reduced for the difference between the asset cost and the cash retireme

425

CHAPTER 11 QUESTIONS

1 Depreciation refers to the cost allocation of

tangible long-term assets, depletion refers

to the cost allocation of natural resources,

and amortization refers to the cost

alloca-tion of intangible assets All three terms

have similar underlying principles

govern-ing their use

2 Four separate factors must be considered

in determining the periodic depreciation

charges that should be made for a

com-pany’s assets They are (1) asset cost, (2)

residual or salvage value, (3) useful life,

and (4) pattern of use These factors, when

considered together, help determine which

of the common methods is most

appropri-ate for the circumstances

3 Residual or salvage value is included in the

formulas for all tifactor depreciation

thods except for the declining-balance

me-thods In practice, residual value is often

ignored if it is the practice of a company to

retain assets for most of their useful lives

In the case of declining-balance methods,

although residual value is not included in

the formulas, it is considered when an

as-set is near the end of its useful life

Gener-ally, the book value should not be reduced

below its expected residual value

4 Functional factors include inadequacy and

obsolescence that reduce the usefulness of

the asset Physical factors include wear

and tear, deterioration and decay, and

damage or destruction reducing the

useful-ness of the asset

5 Time-factor methods of depreciation base

cost allocation on time according to either

straight-line or accelerated depreciation In

theory, the pattern selected should be

re-lated to the pattern of benefits expected

from the asset Because the pattern of

benefits is very subjective, the selection of

a specific time-factor method is usually an

arbitrary decision

Use-factor methods of depreciation base

cost allocation on some measure that

re-lates more directly to the use of the asset

Most commonly, the allocation is based on

productive output or service hours In ory, the use-factor methods provide a much better matching of costs against revenues than do time-factor methods However, be- cause use-factor methods require more ex- tensive accounting records, they are not as common as the time-factor methods

the-6 With group depreciation, periodic

deprecia-tion expense is computed on a whole group

of assets as if the group were one single asset The weighted-average life of the group is used to determine how much of the aggregate asset cost should be depre- ciated each year No gains or losses are recognized at the time of the retirement of individual assets; accumulated depreciation

is reduced for the difference between the asset cost and the cash retirement pro- ceeds

7 Some items of property, plant, and equipment

are composed of identifiable subitems, or components, with substantially different use- ful lives or usage patterns The component approach to depreciation is to depreciate each component separately The component approach is allowed in the United States and

is required under IAS 16.

8 The amount of an asset retirement

obliga-tion is added to the cost of the associated asset Accordingly, the asset retirement ob- ligation increases periodic depreciation In addition, the amount of the asset retirement obligation itself increases each year as the time until the obligation must be satisfied decreases However, this increase, which conceptually is exactly the same as interest

expense, is not accounted for as interest expense Instead, it is called accretion ex- pense

9 When a useful-life estimate is changed, the

remaining book value of the asset is ciated over the revised remaining useful life

depre-In other words, the estimate impacts only the current and future periods No attempt is made to go back and “fix” the depreciation amount recognized in prior periods

10 When new estimates of recoverable natural

resources are obtained, a new depletion

cost per basic unit is computed from the

beginning of the period in which the new

estimate is made No adjustment is made

to prior periods It is a change in estimate

and therefore prospective in nature

11 A company should recognize an

impair-ment loss when the undiscounted sum of

expected future cash flows from the asset

is less than the recorded book value of the

asset The impairment loss is measured as

the difference between the book value of

the asset and the asset’s fair value Fair

value can be estimated as the discounted

sum of expected future cash flows

12 IAS 36 differs from U.S GAAP in that the

discounted sum of future cash flows, rather

than the undiscounted sum, is used to

de-termine whether an impairment loss exists

13 If a non-U.S company chooses to revalue

a long-term operating asset upward in

ac-cordance with IAS 16, the unrealized

“gain” on the revaluation is recognized as

a revaluation equity reserve This equity

reserve increases the reported amount of

equity but is not shown as a gain in the

in-come statement

14 For accounting purposes, recorded

intangi-ble assets come in three varieties:

a Intangible assets that are amortized

The impairment test for these

intangi-bles is the same as the 2-step test

used for tangible long-term operating

assets

b Intangible assets that are not

amor-tized The impairment test for these

in-tangibles involves a simple 1-step

comparison of the book value to the fair

value

c Goodwill, which is not amortized The

goodwill impairment test is a 4-step

process that first involves estimating

the fair value of the entire reporting unit

to which the goodwill is allocated

15 a Compute the fair value of each

report-ing unit to which goodwill has been

as-signed

b If the fair value of the reporting unit

ex-ceeds the net book value of the assets and liabilities of the reporting unit, the goodwill is assumed to not be impaired and no impairment loss is recognized

c If the fair value of the reporting unit is

less than the net book value of the sets and liabilities of the reporting unit,

as-a new fas-air vas-alue of goodwill is puted The goodwill value is the amount of fair value of a reporting unit that is left over after the values of all identifiable assets and liabilities of the reporting unit have been considered

d If the implied amount of goodwill

com-puted in (c) is less than the amount tially recorded, a goodwill impairment loss is recognized for the difference

ini-16 Under IAS 36, the general structure of the

impairment test for intangible assets is that the recorded amount of the intangible asset

is compared to its “recoverable amount.”

17 a No depreciation is to be recognized

b The asset is to be reported at the lower

of its book value or its fair value (less the estimated cost to sell)

18 A gain or loss is recognized whenever an

exchange of assets takes place unless the exchange does not affect the risk, timing, or amount of a company’s cash flows In those instances where the transaction lacks

“commercial substance,” indicated gains are not recognized unless a small amount

of cash is received Indicated losses are always recognized

19. ‡ Depreciation is an estimate, and the effort necessary to compute depreciation ex- pense for the exact number of days an as- set is owned usually exceeds any benefit derived For companies that acquire and dispose of many assets during a year, de- tailed tracking of daily depreciation is al- most impossible A variety of simplifying assumptions are used, including rounding

to the nearest whole month and the year convention in which one-half of a year’s depreciation is taken on any asset acquired or disposed of during the year

half-‡

Relates to Expanded Material

20. ‡ The original reasons for the development of

the ACRS income tax depreciation method

were simplification of the tax depreciation

computations and acceleration of tax

de-preciation deductions to reduce income

taxes and stimulate investment

Simplifica-tion comes through the grouping of assets

in just a few classes and through the ing of salvage values Acceleration of tax depreciation deductions comes through shortened asset lives and use of acceler- ated depreciation methods like double- declining-balance

ignor-‡

Relates to Expanded Material

PRACTICE EXERCISES PRACTICE 11–1 RECORDING DEPRECIATION EXPENSE

Depreciation Expense 1,000

Accumulated Depreciation 1,000

PRACTICE 11–2 COMPUTING STRAIGHT-LINE DEPRECIATION

1 ($108,000 – $20,000)/5 years = $17,600 annual depreciation expense

Year Computation Amount Depreciation Value

Double-declining-balance percentage: (100%/4 years) × 2 = 50%

Year Computation Amount Depreciation Value

1 $100,000 × 0.50 $50,000 $50,000 $50,000

The depreciation amount in the final year is the amount that reduces the machine’s

book value to equal the estimated residual value

PRACTICE 11–5 COMPUTING SERVICE-HOURS DEPRECIATION

1 and 2

Rate per service hour: [($81,000 – $15,000)/20,000 hours] = $3.30 per hour

Year Computation Amount Depreciation Value

1 9,000 hours × $3.30 per hour $29,700 $29,700 $51,300

2 5,000 hours × $3.30 per hour 16,500 46,200 34,800

3 4,000 hours × $3.30 per hour 13,200 59,400 21,600

4 2,000 hours × $3.30 per hour 6,600 66,000 15,000

PRACTICE 11–6 COMPUTING PRODUCTIVE-OUTPUT DEPRECIATION

1 and 2

Rate per unit: [($70,000 – $5,000)/13,000 units)] = $5 per unit

Year Computation Amount Depreciation Value

1 3,000 units × $5 per unit $15,000 $15,000 $55,000

2 5,000 units × $5 per unit 25,000 40,000 30,000

3 2,000 units × $5 per unit 10,000 50,000 20,000

4 3,000 units × $5 per unit 15,000 65,000 5,000

PRACTICE 11–7 COMPUTING GROUP DEPRECIATION

PRACTICE 11–8 GROUP DEPRECIATION: RECORDING ASSET SALES

1 With group depreciation, gains and losses are typically not recognized on the sale

of individual assets

Cash 22,000

Accumulated Depreciation 20,000

Asset 3 42,000

Accumulated Depreciation is the plug figure in this entry We assume that the

overall depreciation policy is accurate, so no gains or losses are recorded when

disposing of group assets

2 The group rate percentage is normally left the same unless there is persuasive

evidence for the need of a change

($64,000 + $90,000 + $30,000 + $50,000) × 0.12389 = $28,990

PRACTICE 11–9 ASSET RETIREMENT OBLIGATION

The present value of the asset retirement obligation is computed as follows:

Business calculator keystrokes:

FV = $250,000; I = 6%; N = 12 years → $124,242

The total cost of the landfill site is $649,242 = $525,000 + $124,242

Depreciation expense: $649,242/12 years = $54,104

Accretion expense: $124,242 × 0.06 = $7,455

PRACTICE 11–10 COMPUTING DEPLETION EXPENSE

1 Depletion rate = (January 1 cost – Residual value)/January 1 tons

($100,000 – $20,000)/5,000 tons = $16.00 per ton

900 tons × $16.00 per ton = $14,400 depletion expense

2 Depletion Expense 14,400

Accumulated Depletion (or Mine) 14,400

PRACTICE 11–11 CHANGE IN ESTIMATED LIFE

Annual depreciation using the original estimates:

($40,000 – $4,000)/9 years = $4,000 annual depreciation expense

Total accumulated depreciation after three years:

$4,000 annual depreciation expense × 3 years = $12,000

PRACTICE 11–11 (Concluded)

Remaining useful life after three years:

New estimate of 7 years – 3 years already elapsed = 4 years remaining

Annual depreciation using the revised estimates in the fourth year:

[($40,000 – $12,000 accumulated depreciation) – $8,000]/4 years = $5,000 annual depreciation expense

PRACTICE 11–12 CHANGE IN ESTIMATED UNITS OF PRODUCTION

1 Depletion rate for Year 1 = January 1 cost/January 1 tons

$300,000/2,000 tons = $150.00 per ton

900 tons × $150.00 per ton = $135,000 depletion expense

2 Depletion rate for Year 2 = January 1 cost/January 1 tons

($300,000 – $135,000 + $120,000)/(600 tons + 700 tons) = $219.23 per ton

600 tons × $219.23 per ton = $131,538

PRACTICE 11–13 CHANGE IN DEPRECIATION METHOD

Annual depreciation using the original estimates:

($80,000 – $8,000)/8 years = $9,000 annual depreciation expense

Total accumulated depreciation after three years:

$9,000 annual depreciation expense × 3 years = $27,000

Book value at the end of three years:

$80,000 – $27,000 = $53,000

Straight-line rate – 100%/5 = 20%

Double the straight-line rate: 20% × 2 = 40%

Year 4 depreciation expense: $53,000 × 40% = $21,200

PRACTICE 11–14 DETERMINING WHETHER A TANGIBLE ASSET IS IMPAIRED

The equipment is not impaired The relevant comparison is the book value of the

asset to the sum of the expected future cash flows

Sum of future cash flows ($65,000 × 14 years) $910,000

Book value ($1,500,000 – $600,000) 900,000

Because the sum of future cash inflows is more than the book value of the asset, no impairment has occurred In testing for impairment, the current value of the asset is not used Therefore, the equipment should continue to be reported in the company’s books at its net book value of $900,000

PRACTICE 11–15 RECORDING A TANGIBLE ASSET IMPAIRMENT

1 The building is impaired The relevant comparison is the book value of the building

to the sum of the expected future cash flows

Sum of future cash flows ($40,000 × 30 years) $1,200,000

Book value ($1,500,000 – $250,000) 1,250,000

Because the sum of future cash inflows is less than the book value of the asset,

the building is impaired

Revaluation Equity Reserve 270,000

PRACTICE 11–17 RECORDING AMORTIZATION EXPENSE

Amortization Expense 62,500

Accumulated Amortization 62,500

$250,000/4 years = $62,500 annual amortization expense

(Note: Straight-line amortization is used unless there is compelling evidence for

using another method.)

PRACTICE 11–18 GOODWILL IMPAIRMENT

Estimated fair value of the Manufacturing reporting unit:

Present value of $700 per year for 10 years at 10% = $4,301

With a business calculator:

Make sure to toggle so that the payments are assumed

to occur at the end (END) of the period

PMT = $700; N = 10; I = 10% → PV = $4,301

Net book value of the assets and liabilities of the Manufacturing reporting unit:

Assets ($7,000 + $2,000) – Liabilities ($4,000) = $5,000

Because the estimated fair value of the reporting unit ($4,301) is less than the net book

value of the reporting unit ($5,000), further computations are needed to determine the

amount of a goodwill impairment loss, if any

PRACTICE 11–18 (Concluded)

Implied fair value of goodwill as of December 31:

Fair value of identifiable assets + Fair value of goodwill – Fair value of liabilities =

Total fair value

$8,000 + Fair value of goodwill – $4,000 = $4,301

Fair value of goodwill = $301

Journal entry necessary to recognize the goodwill impairment loss:

Goodwill Impairment Loss 1,699

Goodwill ($2,000 – $301) 1,699 PRACTICE 11–19 EXCHANGE OF ASSETS

1 Land 400,000

Accumulated Depreciation 340,000

Gain on Exchange ($400,000 – $360,000) 40,000 Building 700,000

2 Land 200,000

Accumulated Depreciation 340,000

Loss on Exchange ($360,000 – $200,000) 160,000

Building 700,000 PRACTICE 11–20 CLASSIFYING AN ASSET AS HELD FOR SALE

1 Building—Held for Sale ($145,000 – $9,000) 136,000

Loss on Held-for-Sale Classification 14,000

Accumulated Depreciation—Building 225,000

Building 375,000

2 Building Held for Sale 14,000

Gain on Recovery of Value—Held for Sale 14,000

Computation of gain: ($170,000 – $9,000) – $136,000 = $25,000; maximum gain that

can be recognized is the amount of the initial loss recognized upon classification

as held for sale = $14,000

PRACTICE 11–21 EXCHANGE OF ASSETS

1 New Asset 150

Accumulated Depreciation (old asset) 850

Old Asset 1,000

PRACTICE 11–21 (Concluded)

2 Cash 300

New Asset 100

Accumulated Depreciation (old asset) 850

Gain on Exchange ($400 – $150 book value) 250

Old Asset 1,000 3 Cash 80

New Asset 120

Accumulated Depreciation (old asset) 850

Gain on Exchange 50

Old Asset 1,000

Market value of old asset = $400

Indicated gain on exchange of old asset = $400 – $150 book value = $250 implied

gain

Recognized gain = [$80/($80 + $320)] × $250 = $50

Recorded asset value = $320 less deferred gain of $200 = $120

PRACTICE 11–22 ‡ DEPRECIATION FOR PARTIAL PERIODS

1 Depreciation expense this year:

($100,000 – $15,000) × (5/15) × (9/12) = $21,250

Depreciation expense next year:

($100,000 – $15,000) × (4.25/15) = $24,083

2 Double-declining-balance percentage: (100%/5 years) × 2 = 40%

Depreciation expense this year:

$100,000 × 0.40 × (9/12) = $30,000

Depreciation expense next year:

($100,000 – $30,000) × 0.40 = $28,000

PRACTICE 11–23 ‡ INCOME TAX DEPRECIATION

According to the MACRS class-life definitions, ships are 10-year property, and 200%

declining-balance depreciation, with a half-year convention, is used

Double-declining-balance percentage: (1.00/10 years) × 2 = 0.20, or 20%

Depreciation deduction this year:

$850,000 × 0.20 × (6/12) = $85,000

Depreciation deduction next year:

($850,000 – $85,000) × 0.20 = $153,000

‡

Relates to Expanded Material

EXERCISES

11–24 1 Purchase price $38,400

Freight costs 3,000 Installation costs 1,600 Machine cost $43,000

2 (a) Straight-line method: ($43,000 – $600) × 1/8 = $5,300

(b) Service-hours method: ($43,000 – $600) = $1.33 * per hr × 3,000 hrs

32,000 hours used = $3,990 *Rounded

To record purchase of mixer

Dec 31 Depreciation Expense 6,750*

11–26 1 Equipment:

Total depreciable cost Annual depreciation expense = Average useful life

$160,000) ($250,000

$68,000) ($680,000

11–28 1 Depreciation rate per

thousand units produced: $100, 000 300−$4, 000 = $320

Year Output Depreciation Expense Depreciation Book Value

11–29 Description Cost Salvage Base Life Depr

Delivery truck $37,000 $8,000 $29,000 7 yrs $4,143

Accumulated Depreciation—Furniture 19,000

Furniture 27,000 Depreciation Expense 27,930*

*[($125,000 + $35,000 – $27,000) × 0.21 = $27,930]

2014 Furniture 27,600 Cash 27,600 Cash 6,000

Accumulated Depreciation—Furniture 9,000

Furniture 15,000 Depreciation Expense 30,576*

*[($133,000 + $27,600 – $15,000) × 0.21 = $30,576]

2015 Furniture 24,500 Cash 24,500 Cash 8,000

Accumulated Depreciation—Furniture 24,000

Furniture 32,000 Depreciation Expense 29,001*

*[($145,600 + $24,500 – $32,000) × 0.21 = $29,001]

Accumulated depreciation—furniture account:

(4,500,000 estimated at year-end + 265,000 extracted during the year)

Depletion cost per ton—$9,725,250/4,765,000 $ 2.04 Depletion expense—2013 (265,000 × $2.04) $ 540,600

11–34 Depreciation for the first 5 years:

$250,000/20 = $12,500 per year $12,500 × 5 = $62,500 depreciation for first 5 years

Remaining amount to be depreciated:

$250,000 – $62,500 = $187,500 Annual rate for remaining 10 years:

$187,500/10 = $18,750 Depreciation expense in 2013 is $18,750

11–35 Depreciation for the first 2 1/2 years:

$225,000 – $15,000 = $210,000/12 = $17,500 × 2 1/2 = $43,750 Book value at December 31, 2012:

$225,000 – $43,750 = $181,250 Remaining life is 5 years

Charge for 2013: $181,250/5 = $36,250

11–36 Depreciation for the first 2 years:

($150,000 – $30,000)/8 years = $15,000 per year

$15,000 × 2 = $30,000 for the first 2 years

Remaining amount to be depreciated:

$150,000 – $30,000 = $120,000

Depreciation for 2012:

($120,000 – $30,000) × 6/21 = $25,714

11–37 1 Annual depreciation for the building has been $78,000 [($2,600,000 –

$260,000)/30 years] The current book value of the building is computed

as follows:

Original cost $2,600,000 Accumulated depreciation ($78,000 × 10 years) 780,000 Book value $1,820,000 The book value of $1,820,000 is compared to the $1,500,000 ($100,000 × 15 years) undiscounted sum of future cash flows to determine whether the building is impaired The sum of future cash flows is less, so an impair- ment loss should be recognized

2 The impairment loss is equal to the $1,060,000 ($1,820,000 – $760,000)

dif-ference between the book value of the building and its fair value The pairment loss would be recorded as follows:

Accumulated Depreciation—Building 780,000

Loss on Impairment of Building 1,060,000 Building ($2,600,000 – $760,000) 1,840,000

3 The answer to (1) is unaffected by the fair value of the asset The

exis-tence of an impairment loss is determined solely using the undiscounted

sum of estimated future cash flows, not the fair value of the asset

11–38 1 Annual depreciation for the building has been 78,000 [($2,600,000 –

$260,000)/30 years] The current book value of the building is computed

as follows:

Original cost $2,600,000 Accumulated depreciation ($78,000 × 10 years) 780,000 Book value $1,820,000 According to IAS 36, the existence of impairment is determined by com-

paring the book value of $1,820,000 to the fair value of $760,000 The fair value is lower, so an impairment loss should be recognized In this case, the determination of whether an impairment loss exists is based on a comparison of book value and fair value; under U.S GAAP, the test is based on a comparison of book value and the undiscounted sum of fu- ture cash flows

2 The impairment loss is equal to the $1,060,000 ($1,820,000 − $760,000)

dif-ference between the book value of the building and its fair value The pairment loss would be recorded as follows:

im-Accumulated Depreciation—Building 780,000 Loss on Impairment of Building 1,060,000 Building ($2,600,000 – $760,000) 1,840,000

3 Because the fair value of $2,500,000 is greater than the book value of

$1,820,000, Della Bee will recognize $680,000 ($2,500,000 – $1,820,000) as

an upward asset revaluation The upward revaluation is recorded as lows:

fol-Accumulated Depreciation—Building 780,000 Revaluation Equity Reserve 680,000 Building ($2,600,000 – $2,500,000) 100,000

Book value: $300,000 – $30,000 = $270,000 Undiscounted future cash flows = $25,000 × 9 years = $225,000 Because the undiscounted future cash flows are less than the book value ($225,000 < $270,000), the asset is impaired The asset should be written down to its fair value

Estimated fair value:

Business calculator keystrokes:

PMT = $25,000; I = 5%; N = 9 years → $177,696

Impairment Loss ($270,000 – $177,696) 92,304 Accumulated Amortization 30,000

Intangible Asset ($300,000 – $177,696) 122,304

$25,000/0.05 → $500,000

Because the estimated fair value is higher than the book value ($500,000

> $300,000), the asset is not impaired No journal entry is necessary 11–41

Estimated fair value of the Production reporting unit:

Revenues $13,000 × 1.60 = $20,800 estimated fair value

Net book value of the assets and liabilities of the Production reporting unit: Assets ($21,300 + $10,000) – Liabilities ($7,600) = $23,700

Because the estimated fair value of the reporting unit ($20,800) is less than the net book value of the reporting unit ($23,700), further computations are needed to determine the amount of a goodwill impairment loss, if any

Implied fair value of goodwill as of December 31:

Estimated fair value of Production reporting unit $20,800

Fair value of identifiable assets – fair value of liabilities

($20,500 – $7,600) 12,900

Implied fair value of goodwill $ 7,900

Journal entry necessary to recognize the goodwill impairment loss:

Goodwill Impairment Loss 2,100 Goodwill ($10,000 – $7,900) 2,100

In addition to the goodwill impairment, the fact that the fair value of the tifiable assets is less than the book value of those assets suggests that there may be other impaired assets

iden-11–42 2013

Dec 31 Cash 3,000

Notes Receivable 12,000 Accumulated Depreciation—Equipment 75,000 Equipment 84,000

Discount on Notes Receivable 1,300*

Gain on Sale of Equipment 4,700 †

*Discount on notes receivable:

Present value of an ordinary annuity of $1 for 2 periods at 8% (from Table IV of the Time Value

of Money module) = 1.7833 1.7833 × $6,000 = $10,700 present value of note

$12,000 face value of note – $10,700 present value = $1,300 discount

Using business calculator keystrokes:

PMT = $6,000, N = 2, I = 8% → PV = $10,700

† Gain on sale of equipment:

Down payment $ 3,000

Present value of note receivable 10,700 Selling price (present value) of equipment $ 13,700 Less: Book value of equipment 9,000 Gain on sale of equipment $ 4,700

11–43

1 Machine—Held for Sale ($10,000 – $1,000) 9,000

Loss on Held-for-Sale Classification 16,000

Accumulated Depreciation—Machine 75,000

Machine 100,000

2 No depreciation expense is recognized on assets classified as held for sale

3 Machine Held for Sale 4,400

Gain on Recovery of Value—Held for Sale 4,400 Computation of gain: ($15,000 – $1,600) – $9,000 = $4,400

The maximum gain that can be recognized is the amount of the initial loss

recognized upon classification as held for sale = $16,000 In this case, the

entire increase can be recognized

11–44 (a) The truck should be valued at $40,000 because in a nonmonetary exchange

not involving similar assets, the new asset should be recorded at the fair

value of the asset surrendered, if determinable List price is not necessarily

the same as fair value

(b) The new machine should be valued at $35,000, the book value of the old

machine Because this exchange was for similar productive assets with a

company in the same line of business with no cash involved, the indicated

gain would be deferred This treatment is consistent with the FASB’s

asser-tion that the exchange has no commercial substance

(c) The new machine should be valued at $55,000 ($40,000 + $15,000) Because

the exchange involves cash that is considered a “large” amount (25% or

greater of the transaction amount), it is a monetary transaction, and the

as-set is recorded at the fair value of the old machine plus the cash paid A

gain of $5,000 would be recognized by Coaltown The list price of $62,000 is

not used because it does not represent fair value

(d) On Coaltown’s books, the new machine should be valued at $38,000 ($35,000 + $3,000) Because the exchange is made with a company in the

same line of business and involves similar assets and cash paid is

consid-ered a “small” amount (less than 25% of the transaction amount), there is

no culmination of the earnings process The asset is thus recorded at the

book value of the old machine plus the cash paid

11–44 (Concluded)

Coaltown Corporation Machinery (new) 38,000

Accumulated Depreciation—Machinery 17,000

Machinery (old) 52,000 Cash 3,000

To record exchange of old machinery costing $52,000 with accumulated depreciation of $17,000 for new machinery recorded at $38,000, the carrying value of the old machinery plus cash paid

Gain on Exchange of Machinery 2,093*

To record exchange of old machinery costing $55,000 with accumulated depre- ciation of $42,000 for new machinery (fair value, $40,000) and $3,000 cash

New machinery recorded at $12,093, or $13,000 – $3,000 + $2,093

*Indicated gain: $43,000 – $13,000 = $30,000 Recognized gain: $3,

*Book value of trade-in $3,750 Less: Amount allowed on trade-in

($23,100 – $20,900) 2,200

Loss recognized on trade-in $1,550

11–45 (Concluded)

2 Truck (new) 23,100

Accumulated Depreciation—Truck 19,000 Truck (old) 22,750 Cash 18,000 Gain on Trade-ln of Truck 1,350*

*Amount allowed on trade-in ($23,100 – $18,000) $5,100

Less: Book value of trade-in 3,750

Gain recognized on trade-in $1,350

(Note: Because the exchange involved a “large” amount of cash, the

ex-change is considered to have commercial substance and the gain is ognized.)

($180,000 – $18,000)/750,000 units = $0.22* per unit

21,000 units × $0.22* per unit = $4,620

11–47 ‡ 1 (a) Double-declining-balance method:

2012: $110,000 × 0.167* × 6/12 = $ 9,185

2013: $100,815 × 0.167 = $16,836

*1/12 = 0.0833; 0.0833 × 2 = 0.167 (b) Sum-of-the-years’-digits (SYD) method:

$110,000 – $17,000 = $93,000 depreciable base [(12 + 1)/2] × 12 = 78—SYD fraction denominator

12/78 × $93,000 = $14,308 × 6/12 = $ 7,154 11/78 × 93,000 = 13,115 × 6/12 = 6,558

*Switched to straight-line depreciation because depreciation of

$2,606 exceeds the double-declining-balance depreciation of

$1,862 ($6,516 × 0.2857)

‡

Relates to Expanded Material

PROBLEMS 11–49

(a) Straight-line method:

Year Depreciation Depreciation Book Value

Year Depreciation Depreciation Book Value

would cause asset book value to fall below residual value ($20,000)

Therefore, depreciate the $6,640 difference between the book value

and residual value

‡ No additional depreciation because asset book value equals the

residual value of $20,000

11–50 Cost of tractor and front-end loader:

Tractor $ 100,000 Front-end loader 7,000 Shipping 600 Installation 800 Total cost $ 108,400

Year Computation Amount Depreciation Book Value

1 End Additional Accumulated Asset

of Depreciation Depreciation Depreciation Book Maintenance Total

Year Expense Expense Balance Value Expense Expense

Accumulated depreciation related to the motor at time of replacement:

$645 per year × 3 years = $1,935

Remaining book value related to the motor at time of replacement:

$7,100 – $1,935 = $5,165

† ($61,700 – $21,992) + $7,800 = $47,508

§ $47,508/8 = $5,939

11–51 (Concluded)

2 Depreciation Additional Depreciation

Expense— Depreciation Expense— Maintenance Total

Year Motor of Motor Frame Expense Expense

Retirement of six machines at $7,500 each

*Closing group asset requires closing group allowance balance