Chapter 7
Plant Assets, Natural Resources, &
Intangibles
Ethics Check
(5-10 min.) EC 7-1
a. Integrity
Short Exercises
1. Red Rock reported Buildings and leasehold improvements of
$2,219,767 (thousand) and Fixtures and equipment of $1,674,089
2.
Cost = $4,048,650 thousand
Book value = $2,194,687 thousand
Book value is less than cost because accumulated depreciation is
subtracted from cost to compute book value.
(5 min) S 7-2
(10-15 min.) S 7-4
1. First-year depreciation:
Straight-line ($56,700,000 − $4,700,000) / 5 years .............
$ 10,400,000
Units-of-production $10.40/mile* × 775,000 miles ............
$ 8,060,000
Double-declining-balance ($56,700,000 × 40%) ................
$22,680,000
2. Book value:
Straight-
Line
Units-of-
Production
Double-
Declining-
Balance
(10 min.) S 7-5
1. Double-declining-balance (DDB) depreciation offers the tax
2.
DDB depreciation .....................................................
$22,680,000
(5-10 min.) S7-6
$25,000 / 4 years = $6,250 / year, straight-line depreciation
Depreciation Accumulated Book
Expense Depreciation Value
2015: $6,250 $ 6,250 $18,750
2016: 6,250 12,500 12,500
2017: 6,250 18,750 6,250
2018: 6,250 25,000 -0-
(5-10 min.) S 7-7
$25,000 / 200,000 miles = $.125 / mile, units-of-production depreciation
Depreciation Accumulated Book
Miles Expense Depreciation Value
2015: 60,000 $7,500 $ 7,500 $17,500
2016: 65,000 8,125 15,625 9,375
2017: 40,000 5,000 20,625 4,375
2018: 35,000 4,375 25,000 -0-
(5-10 min.) S 7-8
Rate for double-declining-balance depreciation for 4 years = 2/4 or 50%
Depreciation Accumulated Book
Rate Expense Depreciation Value
$25,000
2015: .50 $12,500 $12,500 12,500
2016: .50 6,250 18,750 6,250
2017: .50 3,125 21,875 3,125
2018: .50 3,125* 25,000 -0-
* Remaining book value is the last year depreciation expense, to bring book
value to -0-.
(5-10 min.) S 7-9
($13,000 — $1,000) / 4 years = $3,000 / year, straight-line depreciation
Depreciation Accumulated Book
Expense Depreciation Value
2015: $3,000 $ 3,000 $10,000
2016: 3,000 6,000 7,000
2017: 3,000 9,000 4,000
2018: 3,000 12,000 1,000
(5-10 min.) S 7-10
($13,000 — $1,000) / 120,000 miles = $.10 / mile, units-of-production
depreciation
(5-10 min.) S 7-12
(5-10 min.) S 7-14
1. ($920,000 − $70,000) / 5 years × 2 = $340,000
Loss on sale of machinery:
Sale price of machinery .........................................
$ 250,000
2.
2017
Oil Inventory .........................................................
11.7
(5-10 min.) S 7-16
Cost of goodwill
$4.8
Req. 2
In future years Crunchies, Inc. will determine whether its goodwill has
been impaired. If the goodwill’s value has not been impaired, there is
nothing to record. But if goodwill’s value has been impaired,
Crunchies, Inc. will record a loss and write down the book value of the
goodwill.
(5-10 min.) S 7-17
Asset
Book
Value
Estimated
Future
Cash
Flows
Fair
Value
Impaired?
(Y or N)
Amount
of Loss
a. Equipment
$180,000
$140,000
$100,000
Y
$80,000
b. Trademark
$320,000
$460,000
$375,000
N
–
(5 min.) S7-18
.077
X
1.955
=
15.1%
The net profit margin ratio improved slightly over 2015, and the asset
turnover improved from 2015 to 2016; these improvements caused the
ROA to increase.
(5 min.) S 7-20
Net cash (used in) investing activities ...........................
$(12.9)
Exercises
(5-10 min.) E 7-21A
Land: $150,000 + $170,000 + $3,000 + $4,500 + $7,000 = $334,500
Land improvements: $48,000 + $19,000 + $10,000 = $77,000
Totals
$215,000
1.000
$209,000
Sale price of machine No. 3 ..........................
$21,500
Cost ................................................................
20,900
Gain on sale of machine ...............................
$ 600
(5-10 min.) E 7-23A
(a) Major overhaul
(b) Periodic lubrication
(c) Purchase price
(d) Training of personnel
Capital Expenditure
Immediate Expense
Capital Expenditure
Capital Expenditure
(e) Reinforcement to platform
(f) Transportation and insurance
(g) Ordinary recurring repairs
Capital Expenditure
Capital Expenditure
Immediate Expense
(h) Lubrication before machine is placed in
service
(i) Sales tax
Capital Expenditure
Capital Expenditure
(j) Installation
Capital Expenditure
(k) Income tax
Immediate Expense
(15 min.) E 7-24A
Req. 1
Journal
ACCOUNT TITLES
DEBIT
CREDIT
a.
Land ....................................................................
485,000
Cash ..............................................................
485,000
b.
Building
($1,400 + $15,320 + $690,000 + $28,300) ...........
735,020
Note Payable .................................................
690,000
Cash ($1,400 + $15,320 + $28,300) ...............
45,020
c.
Depreciation Expense – Building .....................
5,686
Accumulated Depreciation – Building
($735,020 − $337,000) / 35 × 6/12 .................
5,686
Req. 2
BALANCE SHEET
Plant assets:
Land ..............................................................
$485,000
Building .........................................................
$735,020
Less Accumulated depreciation..................
(5,686)
Building, net .................................................
729,334
Req. 3
INCOME STATEMENT
Expense:
Depreciation expense ..................................
$ 5,686
(15-20 min.) E 7-25A
Req. 1
Year
Straight-Line
Units-of-
Production
Double-Declining-
Balance
2016
$ 4,450
$ 7,000
$ 9,600
2017
4,450
5,125
4,800
2018
4,450
4,625
2,400
2019
4,450
1,050
1,000
$17,800
$17,800
$17,800
_____
Computations:
Straight-line: ($19,200 − $1,400) ÷ 4 = $4,450 per year.
Units-of-production: ($19,200 − $1,400) ÷ 71,200 miles = $.25 per mile:
2016
28,000
×
$.25
=
$7,000
2017
20,500
×
.25
=
5,125
2018
18,500
×
.25
=
4,625
(continued) E 7-25A
(15 min.) E 7-26A
(10-15 min.) E 7-27A
2. The journal entry on January 1, 2019 to record the sale:
Cash ..........................................................................................
400,000
Accumulated Depreciation – Machine ....................................
425,000
Loss on the Sale of Machine....................................................
95,000
Machine ...............................................................................
920,000
(15-20 min.) E 7-29A
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
2017
Depreciation for 8 months:
Aug.
31
Depreciation Expense – Fixtures ............
1,312*
Accumulated Depreciation —
Fixtures ..............................................
1,312
Sale of fixtures:
31
Cash ..........................................................
2,200
Accumulated Depreciation —
Fixtures ($3,280 + $1,312)......................
4,592
Loss on Sale of Fixtures .........................
1,408**
Fixtures ...............................................
8,200
_____
*2016 depreciation: $8,200 × 2/5 = $3,280
2017 depreciation: ($8,200 − $3,280) × 2/5 × 8/12 = $1,312
**Loss on sale of fixtures:
Sale price of old fixtures ........................................
$ 2,200
Book value of old fixtures:
Cost .....................................................................
$8,200
Less: Accumulated depreciation ($3,280 +
$1,312) ......................................................
(4,592)
(3,608)
Loss on sale ............................................................
$ (1,408)
(10-15 min.) E 7-30A
Cost of old truck ............................................................
$400,000
Less: Accumulated depreciation:
($400,000 − $90,000) ×
85 + 165 + 175 + 41
(144,460)*
1,000
_______
Book value of old truck ................................................
$255,540
_____
aAlternate solution setup for accumulated depreciation:
($400,000 − $90,000)
=
$.31 per mile
1,000,000 miles
85,000 + 165,000 + 175,000 + 41,000 = 466,000 miles driven
Accumulated depreciation
=
466,000 miles × $.31
=
$144,460
Calculation of gain or loss:
Purchase price of Freightliner truck $230,000
Cash paid for Freightliner truck (29,000)
Trade-in value of Mack truck 201,000
Book value of Mack truck (255,540)
Net loss on disposal of Mack truck $ (54,540)
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
(10-15 min.) E 7-31A
(10-15 min.) E 7-32A
(5-10 min.) E 7-33A
Less: Burton Industries’ liabilities .........................
(29)
Market value of Burton Industries’ net assets ......
3
Cost of goodwill ..........................................................
$16
Req. 2
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Current Assets ................................................
15
Long-Term Assets ..........................................
17
Goodwill ..........................................................
16
Liabilities ..................................................
29
(5-10 min.) E 7-34A
=
4.80%
=
4.48%
Net sales
$75,000
$73,600
=
1.25
=
1.24
Average total assets
$60,000
$59,400
or
4.80% x 1.25
=
6.00%*
4.48% x 1.24
=
5.56%*
The return on assets improved from 2014 to 2015; the increase in the
net profit margin ratio was mostly responsible for this.
_____
*difference due to rounding
(10 min.) E 7-35A
a.
Proceeds from sale of building (or disposal of building) ..
$650,000
b.
Insurance proceeds from fire (or disposal of building) .....
180,000
c.
Renovation of store (or capital expenditures) ....................
(190,000)
Totals
$150,000
1.000
$148,000
Sale price of machine no. 3 ..........................
$ 45,000
Cost ................................................................
(44,400)
Gain on sale of machine ...............................
$ 600
(5-10 min.) E 7-38B
(a) Major overhaul
(b) Periodic lubrication
(c) Purchase price
(d) Installation
Capital Expenditure
Immediate Expense
Capital Expenditure
Capital Expenditure
(e) Lubrication before machine is placed in
service
(f) Training of personnel
(g) Reinforcement to platform
Capital Expenditure
Capital Expenditure
Capital Expenditure
(h) Ordinary recurring repairs
(i) Transportation and insurance
Immediate Expense
Capital Expenditure
(j) Sales tax
Capital Expenditure
(k) Income tax
Immediate Expense
(15 min.) E 7-39B
Req. 1
Journal
ACCOUNT TITLES
DEBIT
CREDIT
a.
Land ....................................................................
484,000
Cash ..............................................................
484,000
b.
Building
($1,300 + $15,300 + $685,000 + $28,220) ...........
729,820
Note Payable .................................................
685,000
Cash ($1,300 + $15,300 + $28,220) ...............
44,820
c.
Depreciation Expense – Building .....................
5,626
Accumulated Depreciation – Building
($729,820 − $336,000) / 35 × 6/12 .................
5,626
Req. 2
BALANCE SHEET
Plant assets:
Land ..............................................................
$484,000
Building ........................................................
$729,820
Less: Accumulated depreciation ................
(5,626)
Building, net .................................................
724,194
Req. 3
INCOME STATEMENT
Expense:
Depreciation expense – Building ................
$ 5,626
(15-20 min.) E 7-40B
Req. 1
Year
Straight-Line
Units-of-
Production
Double-Declining-
Balance
2016
$ 4,275
$ 6,150
$ 9,300
2017
4,275
4,800
4,650
2018
4,275
4,620
2,325
2019
4,275
1,530
825
$17,100
$17,100
$17,100
_____
Computations:
Straight-line: ($18,600 − $1,500) ÷ 4 = $4,275 per year.
Units-of-production: ($18,600 − $1,500) ÷ 57,000 miles = $.30 per mile:
(continued) E 7-40B
(15 min.) E 7-41B
(10-15 min.) E 7-42B
2. The journal entry on January 1, 2020 to record the sale:
Cash ..........................................................................................
325,000
Accumulated Depreciation – Machine ....................................
506,250
Loss on the Sale of Machine ....................................................
18,750
Machine ...............................................................................
850,000
(15-20 min.) E 7-44B
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
2017
Depreciation for 9 months:
Sept.
30
Depreciation Expense – Fixtures ............
1,440*
Accumulated Depreciation —
Fixtures ............................................
1,440
Sale of fixtures:
30
Cash ..........................................................
2,200
Accumulated Depreciation —
Fixtures ($3,200 + $1,440) .....................
4,640
Loss on Sale of Fixtures .........................
1,160**
Fixtures ...............................................
8,000
_____
*2016 depreciation: $8,000 × 2/5 = $3,200
2017 depreciation: ($8,000 − $3,200) × 2/5 × 9/12 = $1,440
**Loss on sale of fixtures:
Sale price of old fixtures ........................................
$ 2,200
Book value of old fixtures:
Cost .....................................................................
$8,000
Less: Accumulated depreciation ($3,200 +
$1,440) ............................................................
(4,640)
(3,360)
Loss on sale ............................................................
$ (1,160)
(10-15 min.) E 7-45B
Cost of old truck ...........................................................
$390,000
Less: Accumulated depreciation:
($390,000 − $70,000) ×
79+ 159 + 189 + 36
(148,160)*
1,000
_______
Book value of old truck ...............................................
$241,840
_____
*Alternate solution setup for accumulated depreciation:
($390,000 − $70,000)
=
$.32 per mile
1,000,000 miles
79,000 + 159,000 + 189,000 + 36,000 = 463,000 miles driven
Accumulated depreciation
=
463,000 miles × $.32
=
$148,160
Calculation of gain or loss:
Purchase price of Freightliner truck ........... $240,000
Cash paid for Freightliner truck .................. (24,000)
Trade-in value of Mack truck ....................... 216,000
Book value of Mack truck ............................ (241,840)
Net loss on disposal of Mack truck ............. $ (25,840)
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
(10-15 min.) E 7-46B
(10-15 min.) E 7-47B
(5-10 min.) E 7-48B
Less: Bailey Industries’ liabilities ..................................
(24)
Market value of Bailey Industries’ net assets ...............
14
Cost of goodwill ...................................................................
$ 4
Req. 2
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Current Assets .......................................................
17
Long-Term Assets .................................................
21
Goodwill .................................................................
4
Liabilities .........................................................
24
(5-10 min.) E 7-49B
=
4.80%
=
4.69%
Net sales
$75,000
$73,600
=
1.25
=
1.24
Average total assets
$60,000
$59,300
or
4.80% x 1.25
=
6.00%*
4.69% x 1.24
=
5.82%
The return on assets improved from 2014 to 2015; the increase in the
net profit margin ratio was mostly responsible for this.
_____
*difference due to rounding
(10 min.) E 7-50B
Q7-65
d
$36,000 / $300,000
Problems
(20-30 min.) P 7-66A
Req. 1
ITEM
LAND
LAND
IMPROVEMENTS
SALES
BUILDING
GARAGE
BUILDING
FURNITURE
(a)
$283,500
$ 76,500
(b)
8,800
(c)
$ 31,100
(d)
600
(e)
5,500
(f)
1,000
(g)
$ 300
(h)
45,220
(i)
510,000
(j)
32,980
(k)
9,200
(l)
6,700*
(m)
52,100
(n)
7,300
(o)
4,200
35,280
2,520
(p)
$79,600
(q)
800
Totals
$298,400
$102,400
$600,000
$112,000
$80,400
Computations:
(a) Land: $315,000 / $400,000 × $360,000 = $283,500
Garage building: $ 85,000 / $400,000 × $360,000 = $76,500
(o) Land improvements: $ 42,000 × .10 = $4,200
Sales building: $ 42,000 × .84 = $35,280
Garage building: $ 42,000 × .06 = $2,520
_____
*Some accountants would debit this cost to the Land account.
(continued) P 7-66A
Req. 2
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Dec.
31
Depreciation Expense — Land
Improvements ($102,400 / 15 × 9/12) ...........
5,120*
Accumulated Depreciation —
Land Improvements ..............................
5,120
31
Depreciation Expense — Sales Building
($600,000 / 30 × 9/12) ....................................
15,000
Accumulated Depreciation —
Sales Building .......................................
15,000
31
Depreciation Expense — Garage
Building ($112,000 / 30 × 9/12) .....................
2,800
Accumulated Depreciation —
Garage Building ....................................
2,800
31
Depreciation Expense — Furniture
($80,400 / 12 × 9/12) ......................................
5,025
Accumulated Depreciation —
Furniture ................................................
5,025
____
*$4,785 ($95,700 / 15 × 9/12) if $6,700 (l in Req. 1) is debited to Land.
(continued) P 7-66A
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
(15 min.) P 7-67A
(25-35 min.) P 7-68A
(30-40 min.) P 7-69A
12-31-2020
1/5
282,000
56,400
282,000
35,500
Asset cost: $280,000 + $1,900 + $7,000 + $28,600 = $317,500
Depreciation for each year: ($317,500 − $35,500) / 5 years = $56,400
(continued) P 7-69A
12-31-2020
2.82
15,000
42,300
282,000
35,500
Total documents
100,000
Depreciation per document: ($317,500 − $35,500) / 100,000 documents = $2.82
(continued) P 7-69A
12-31-2020
41,148
5,648**
282,000
35,500
*DDB rate = (1/5 years × 2) = 2/5 = .40
**Depreciation for 2020: $41,148 − $35,500 = $5,648
(continued) P 7-69A
Req. 2
The depreciation method that maximizes reported income in the first
year of the computer’s life is the straight-line method. Straight-line
produces the lowest depreciation for that year ($56,400).
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 ($127,000).
Req. 3
DEPRECIATION METHOD
THAT IN THE EARLY
YEARS
MAXIMIZES
REPORTED
INCOME
MINIMIZES
INCOME TAX
PAYMENTS
(20-25 min.) P 7-70A
3. Statement of cash flows reports “Additions to property, plant, and
equipment.”
Req. 3
Property, Plant, and Equipment
Accumulated Depreciation
3/31/15 Bal.
4,194
Cost of
Accum. depr.
3/31/15 Bal.
1,726
Purchased
assets sold
of assets sold
Depr. during
during 2016
720
in 2016
78
in 2016
64
2016
459
3/31/16 Bal.
4,836
3/31/16 Bal.
2,121
Goodwill
3/31/15 Bal.
515
Purchased
during 2016
38*
3/31/16 Bal.
553
_____
*Determined by deduction, since there was no loss on goodwill.
(continued) P 7-70A
Req. 4
2016
Cash .......................................................
145
Accumulated Depreciation—Property,
Plant and Equipment ............................
Gain on Sale of Property, Plant and
Equipment .......................................
Property, Plant & Equipment ..........
64
131
78
(20-30 min.) P 7-71A
Req. 1
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Iron Ore Rights .............................................
2,200,000
Cash .........................................................
2,200,000
Iron Ore Rights .............................................
61,000
Cash .........................................................
61,000
Iron Ore Rights .............................................
71,000
Cash .........................................................
71,000
Iron Ore Rights .............................................
24,000
(continued) P 7-71A
(30-40 min.) P 7-72A
Property, plant, and equipment, net (book value) .....................
$ 1.8
Sales of property, plant, and equipment .....................................
0.3
(20-30 min.) P 7-73A
margin ratio
= 3.24%
= 3.63%
= Asset turnover
= 1.30
= 1.45
= Return on assets
= 4.20%
= 5.25%
Req. 4
The following contributed to the decrease in ROA during the most
recent year.
• Cost of goods sold (as a percent of sales) increased, causing
gross profit (as a percent of sales) to decrease. Net profit margin
ratio decreased.
• Cost of goods sold grew faster than sales.
• Total asset turnover decreased.
- Acc. Depr.
-310
= Loss on sale
$(257)
There is a loss because the sales price (proceeds) is less than the book
value.
(continued) P 7-74A
Req. 3
Cash ..........................................................................................
43
Accumulated Depreciation – Prop. & Equipment ...................
310
Loss on the Sale of Prop. & Equipment ..................................
257
Property & Equipment .........................................................
610
Assets decrease, liabilities unaffected, and stockholders’ equity
decreases; revenues unaffected, expenses (losses) increase, and net
income decreases.
The total book value of $300 ($610− $310) is $257 more than the sales
price of $43. This is the same calculation as in Req. 2.
Req. 4
Property & Equipment, net
12/31/15 Bal.
9,010
300
Book value, assets sold
Purchases
2,820
1,145
Depreciation
12/31/16 Bal.
10,385
(20-30 min.) P 7-75B
Req. 1
ITEM
LAND
LAND
IMPROVEMENTS
SALES
BUILDING
GARAGE
FURNITURE
(a)
$283,500
$ 76,500
(b)
8,100
(c)
$ 31,900
(d)
700
(e)
5,100
(f)
1,100
(g)
$ 500
(h)
26,050
(i)
513,000
(j)
31,650
(k)
9,000
(l)
6,600*
(m)
52,300
(n)
7,000
(o)
3,700
31,450
1,850
(p)
$79,800
(q)
2,600
Totals
$297,400
$102,600
$580,000
$110,000
$82,400
Computations:
(a) Land: $315,000 / $400,000 × $360,000 = $283,500
Garage: $85,000 / $400,000 × $360,000 = $76,500
(o) Land improvements: $37,000 × .10 = $3,700
Sales building: $37,000 × .85 = $31,450
Garage: $37,000 × .05 = $1,850
_____
*Some accountants would debit this cost to the Land account.
(continued) P 7-75B
Req. 2
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Dec.
31
Depreciation Expense — Land
Improvements ($102,600 / 25 × 9/12) ............
3,078*
Accumulated Depreciation —
Land Improvements ..................................
3,078
31
Depreciation Expense —Sales
Building ($580,000 / 50 × 9/12) ......................
8,700
Accumulated Depreciation —
Sales Building ...........................................
8,700
31
Depreciation Expense — Garage
($110,000 / 50 × 9/12) .....................................
1,650
Accumulated Depreciation —
Garage .......................................................
1,650
31
Depreciation Expense — Furniture
($82,400 / 12 × 9/12) .......................................
5,150
Accumulated Depreciation —
Furniture ....................................................
5,150
_____
*$2,880 ($96,000 / 25 × 9/12) if $6,600 (l in Req. 1) is debited to Land.
(15 min.) P7-76B
(25-35 min.) P 7-77B
(30-40 min.) P 7-78B
12-31-2020
1/5
265,000
53,000
265,000
30,000
Asset cost: $255,000 + $1,500 + $6,600 + $31,900 = $295,000
Depreciation for each year: ($295,000 − $30,000) / 5 years = $53,000
12-31-2020
1.06
45,000
47,700
265,000
30,000
Total documents
250,000
Depreciation per document: ($295,000 − $30,000) / 250,000 documents = $1.06 per document
(continued) P 7-78B
12-31-2020
38,232
8,232**
265,000
30,000
* DDB rate: (1/5 years × 2) = 2/5 = .40
** Depreciation for 2020: $38,232 − $30,000 = $8,232
(continued) P 7-78B
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 ($53,000). 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 ($118,000).
Req. 3
DEPRECIATION METHOD THAT
IN THE EARLY YEARS
MAXIMIZES
REPORTED
INCOME
MINIMIZES
INCOME TAX
PAYMENTS
Net income for first year:
SL
DDB
(20-25 min.) P 7-79B
3. Statement of cash flows reports “Additions to property, plant and
equipment.”
Req. 3
Property, Plant, and Equipment
Accumulated Depreciation
4/30/15 Bal.
4,198
Cost of
Accum. depr.
4/30/15 Bal.
1,725
Purchased
assets sold
of assets sold
Depr. during
during 2016
712
in 2016
77
in 2016
66
2016
462
4/30/16 Bal.
4,833
4/30/16 Bal.
2,121
Goodwill
4/30/15 Bal.
510
Purchased
during 2016
49*
4/30/16 Bal.
559
_____
*Determined by deduction, since there was no loss on goodwill.
(continued) P 7-79B
Req. 4
2016
Cash .......................................................
135
Accumulated Depreciation—Property,
Plant & Equipment ................................
Gain on Sale of Property, Plant &
Equipment ......................................
Property, Plant & Equipment ..........
66
124
77
(20-30 min.) P 7-80B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Iron Ore Rights .........................................
2,900,000
Cash.....................................................
2,900,000
Iron Ore Rights .........................................
68,000
Cash.....................................................
68,000
Iron Ore Rights .........................................
78,000
Cash.....................................................
78,000
Iron Ore Rights .........................................
38,750
(continued) P 7-80B
(30-40 min.) P 7-81B
Sales of property, plant, and equipment .................................
0.9
(20-30 min.) P 7-82B
margin ratio
= 3.24%
= 3.63%
= Asset turnover
= 1.30
= 1.49
= Return on assets
4.20%
5.41%
Req. 4
All of the following contributed to the decrease in ROA during the most
recent year:
• Net profit margin ratio decreased.
• While net income increased slightly, the gross profit percentage
decreased, thus decreasing the net profit margin ratio.
• Assets increased, decreasing the asset turnover.
- Acc. Depr.
-280
= Book value of assets sold
$360
Sales price
$ 56
Book value
360
= Loss on sale
$304
There is a loss because the sales price (proceeds) is less than the book
value.
(continued) P 7-83B
Req. 3
Cash ..........................................................................................
56
Accumulated Depreciation – Prop. & Equipment ...................
280
Loss on the Sale of Prop. & Equipment ..................................
304
Property & Equipment .........................................................
640
Assets decrease, liabilities unaffected, and stockholders’ equity
Challenge Exercises and Problem
Decrease in net income ...............................................
(14)
Net income Yentun can expect for 2017
if the company uses DDB depreciation .................
$48
DDB depreciation by year:
Millions
(15-25 min.) E 7-85
€1.25 O
_____
U = Understated
O = Overstated
* Cost (€5.0 million) − Depreciation expense (€1.25 million)
= €3.75 million
** Cost (€5.0 million) − Two years’ depreciation (€2.5 million)
= €2.5 million
(20-30 min.) P 7-86
(All amounts in millions)
Req.1
Property and Equipment
Bal 5/31/2014 (BS) 40,691
Capital expenditures (SCF) 4,347
276 Impairment loss
1,898 Original cost of plant and
equipment sold (plug)
Bal.5/31/2015 (BS) 42,864
Accumulated Depreciation
Acc. Depr. on assets sold 1,752
(plug)
21,141 Bal. 5/31/2014 (BS)
2,600 Depr. exp. (note)
21,989 Bal 5/31/2015 (BS)
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Property and Equipment .......................
4,347
Cash ...................................................
4,347
Depreciation Expense—Prop. & Equip.
2,600
Accumulated Depreciation—Prop. &
Equip.
2,600
Loss on Impairment of Prop & Equip ...
276
Property and Equipment ..................
276
Cash (SCF) .............................................
24
Accumulated Depreciation—Prop. &
Equip.......................................................
1,752
Loss on Sale of Prop & Equip ...............
122
Property and Equipment ...............
1,898
Decision Cases
(30-45 min.) Decision Case 1
Req. 1
La Petite France Bakery and Burgers Ahoy!
(continued) Decision Case 1
(continued) Decision Case 1
1. La Petite France’s income statement reports a net income of $95,400
compared to $72,600 for Burgers Ahoy!. On the surface La Petite
France appears to be more profitable. This difference is illusory,
2. Burgers Ahoy! reports a lower net income than La Petite France, but
Burgers has more cash to invest in promising projects because
Burgers pays less in income taxes. Burgers uses the LIFO method for
(continued) Decision Case 1
3. Over the long run we favor Burgers Ahoy! because Burgers will have
more cash to invest. That should result in higher real profits even if
(20-30 min.) Decision Case 2
3. We support the recording and reporting of intangible assets at cost,
less accumulated amortization, in accordance with GAAP because the
business paid a price for intangibles like any other asset. The
argument for recording intangibles at $1 or $0 is consistent with the
perspective of a lender, who might reason that, in the liquidation of a
business, most of its intangibles are worthless. However, accounting
serves other users besides lenders. Also, someone who evaluates a
company and believes its intangibles are worthless can simply
subtract the intangibles’ cost from total assets and from total owners’
equity to compute revised totals for analytical purposes. But the
reverse is not true. If intangibles were not reported on the balance
sheet, a user of the statements who believes the intangibles have
value could not add the unknown amount to compute revised total
assets and total owner equity.
Student responses will vary.
Ethical Issue
Req. 1
The ethical issue in this case is “What is the proper amount of the
purchase price to allocate to the land and the proper amount to allocate to
the building?” The taxpayer wants to allocate as much of the purchase
price as possible to the building because tax laws allow a deduction from
taxable income for depreciation expense on plant assets other than land.
The greater the allocation to the building, the greater the depreciation
deduction, and therefore the lower the tax payments because there is no
tax deduction on the land. The cost of the land is not depreciated.
Req. 2 and Req. 3
The stakeholders in this situation include Dellroy National Bank, their
management, their shareholders, the Internal Revenue Service, creditors,
and taxpayers in general. The immediate economic consequences of the
Focus on Financials: Apple Inc.
$6.9 billion includes the straight-line amount of buildings, machinery,
software, and leasehold improvement increases. Accumulated
depreciation and amortization exceeds depreciation and amortization
expense because the expense is for only the current year. Accumulated
depreciation and amortization is the sum of the depreciation and
(continued) Apple Inc.
amortization amounts for all years the company has used its property
and equipment.
Req. 4
Apple Inc. reports goodwill of $4,616 million on its 2014 balance sheet,
and acquired intangible assets on the balance sheet, of $4,142 million.
As explained in Notes 1 and 4 to the Consolidated Financial Statements,
the company does not amortize goodwill and other indefinite-lived
assets. It evaluates the assets that are not being amortized to determine
whether circumstances or events suggest impairment of the assets.
Apple Inc. performs an annual (or sooner if events suggest impairment)
impairment test for goodwill and indefinite-life intangible assets and
writes them down when their value is impaired.
Apple Inc. amortizes the cost of the other definite-life intangibles over
their estimated useful lives, usually three to seven years. The definite-
life intangibles are also reviewed for impairment.
Focus on Analysis: Under Armour, Inc.
(20-30 min.)
(continued) Under Armour, Inc.
=
41.5%
=
= 43.5%
Based on this ratio, the property and equipment is slightly newer in 2014
when compared to 2013. At December 31, 2013, 43.5% of the assets are
used up. At December 31, 2014, 41.5% of the assets are used up.
Req. 4
Under Armour records intangibles when it acquires technology,
customer relationships, or another business. An increase in goodwill in
2014 came from an acquisition in other foreign countries (not North
American) of $1 million. The company lists definite-lived intangible
assets that include technology, trade name, customer relationships,
(continued) Under Armour, Inc.
=
6.74%
=
= 6.95%
Return on assets
=
6.74% x 1.68=11.32%
=
6.95% x 1.71=11.88%
From this analysis, we can see that both the net profit margin ratio and
the asset turnover ratio declined in 2014. So, both ratios are responsible
for the decrease in the return on assets of 0.56%. The company
Group Projects