To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Reporting and Analyzing Long-Term Assets QUESTIONS 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 cost of a plant asset includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use 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 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 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 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 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 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) 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 unitsof-production depreciation ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 421 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11 No, depletion expense should be calculated on the units that are extracted (similar to the 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 ©McGraw-Hill Companies, 2008 422 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 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) 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 The main difference between plant assets and inventory is that inventory is held for resale and plant assets are not 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 Quick Study 8-3 (10 minutes) Straight-line ($65,800 - $2,000) / years = $15,950 depreciation per year Units-of-production ($65,800 - $2,000) / 200 concerts = $ 319 depreciation per concert x 45 concerts in 2008 $14,355 depreciation in 2008 Quick Study 8-4 (10 minutes) $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 ÷ Years of life remaining $23,925 Depreciation per year for years and ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 423 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 8-5 (10 minutes) Note: Double-declining-balance rate = (100% / years) x = 25% First year: $830,000 x 25% = $207,500 Second year: ($830,000 - $207,500) x 25% = $155,625 Third year: ($830,000 - $207,500 - $155,625) x 25% = $116,719* (rounded) * 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) Quick Study 8-6 (10 minutes) (a) Capital expenditure (b) Revenue expenditure (c) Revenue expenditure (d) Capital expenditure (a) Equipment Cash 40,000 40,000 To record addition of a new wing (d) Building 225,000 Cash 225,000 To record an extraordinary repair ©McGraw-Hill Companies, 2008 424 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 8-7 (15 minutes) Book value of old machine = $76,800 - $40,800 = $36,000 Cash Accumulated depreciation 47,000 40,800 Equipment Gain on sale of equipment* To record the sale of equipment *(Gain = $47,000 - $36,000) Cash Accumulated depreciation 76,800 11,000 36,000 40,800 Equipment To record the sale of equipment Cash Accumulated depreciation Loss on sale of equipment 76,800 31,000 40,800 5,000 Equipment To record the sale of equipment *(Loss = $31,000 - $36,000) 76,800 Quick Study 8-8 (10 minutes) Ore Mine 1,800,000 Cash 1,800,000 To record cost of ore mine Depletion per unit = $1,800,000 - $200,000 1,000,000 tons = $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) Quick Study 8-9 (10 minutes) Intangible Assets: b) Trademark c) Leasehold f) Copyright g) Franchise Natural Resources: a) Oil well Note: d) Gold mine h) Timberland Building is reported under plant assets ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 425 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 8-10 (10 minutes) Jan Leasehold Improvements 105,000 Cash 105,000 To record leasehold improvements Dec 31 Amortization Expense–Leasehold Improvements 13,125 Accumulated Amortization—Leasehold Improvements 13,125 To record amortization of leasehold over the remaining life of the lease.* * Amortization = $105,000 / 8-year-lease-term = $13,125 per year Quick Study 8-11 (10 minutes) Total asset turnover = ($ millions) $14,880 ($15,869 + $17,819) / = 0.88 times 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 8-12A (10 minutes) Book value of old machine = $42,400 - $18,400 = $24,000 Machinery (new) Accumulated Depreciation–Machinery (old) Loss on Exchange of Assets* Machinery (old) Cash 52,000 18,400 2,000 42,400 30,000 To record asset exchange assuming commercial substance *$52,000 – ($24,000 + $30,000) = $(2,000) Machinery (new)* Accumulated Depreciation–Machinery (old) Machinery (old) Cash 46,000 18,400 42,400 22,000 To record asset exchange assuming lack of commercial substance *Book value of old asset + cash given = $24,000 + $22,000 ©McGraw-Hill Companies, 2008 426 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 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 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 427 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 8-3 (20 minutes) Purchase price Closing costs Total cost of acquisition $375,280 20,100 $395,380 Allocation of total cost Appraised Value Land $157,040 Land improvements 58,890 Building 176,670 Totals $392,600 Percent of Total Applying % to Cost Apportioned Cost 40% 15 45 100% $395,380 x 40 $395,380 x 15 $395,380 x 45 $158,152 59,307 177,921 $395,380 Journal entry Land 158,152 Land Improvements 59,307 Building 177,921 Cash 395,380 To record costs of lump-sum purchase Exercise 8-4 (20 minutes) Straight-line depreciation: ($154,000 - $25,000) / years = $32,250 per year Year Annual Depreciation Year-End Book Value 2007 $ 32,250 $121,750 2008 32,250 89,500 2009 32,250 57,250 2010 32,250 25,000 Total $129,000 Double-declining-balance depreciation Depreciation rate: 100% / years = 25% x = 50% Beginning-Year Depreciation Annual Year Book Value Rate Depreciation 2007 $154,000 50% $ 77,000 2008 77,000 50 38,500 2009 38,500 50 13,500* 2010 25,000 Total $129,000 Year-End Book Value $77,000 38,500 25,000 25,000 * Do not depreciate more than $13,500 in the third year since the salvage value is not subject to depreciation ©McGraw-Hill Companies, 2008 428 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 8-5 (15 minutes) Straight-line ($43,500 - $5,000) / 10 years = $3,850 Units-of-production Depreciation per unit = ($43,500 - $5,000) / 385,000 units = $0.10 per unit For 32,500 units in second year: Depreciation = 32,500 x $0.10 = $3,250 Double-declining-balance Double-declining-balance rate = (100% / 10 years) x = 20% per year First year‘s depreciation = $43,500 x 20% = $8,700 Book value at beginning of second year = $43,500 - $8,700 = $34,800 Second year‘s depreciation = $34,800 x 20% = $6,960 Exercise 8-6 (15 minutes) Straight-line depreciation for 2008 ($280,000 - $40,000) / years = $48,000 Double-declining-balance depreciation for 2008 Rate = (100% / years) x = 40% 2008 depreciation ($280,000 x 40% x 9/12) $ 84,000 Book value at January 1, 2008 ($280,000 - $84,000) $196,000 Depreciation for 2008 ($196,000 x 40%) $ 78,400 Alternate calculation 2007 depreciation ($280,000 x 40% x 9/12) $ 2008 depreciation $280,000 x 40% x 3/12 $ ($280,000 - $84,000 - $28,000) x 40% x 9/12 Total 2008 depreciation $ 84,000 28,000 50,400 78,400 Exercise 8-7 (15 minutes) Original cost of machine .$ 23,860 Less two years' accumulated depreciation [($23,860 - $2,400) / years] x years (10,730) Book value at end of second year $ 13,130 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 / years = $3,710 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 429 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 8-8 (30 minutes) Straight-line depreciation Income before Depreciation Year Year Year Year Year Totals $ 88,500 88,500 88,500 88,500 88,500 $442,500 Depreciation Expense* $ 38,960 38,960 38,960 38,960 38,960 $194,800 Net Income $ 49,540 49,540 49,540 49,540 49,540 $247,700 *($238,400 - $43,600) / years = $38,960 Double-declining-balance depreciation Year Year Year Year Year Totals Income before Depreciation Depreciation Expense* Net Income $ 88,500 88,500 88,500 88,500 88,500 $442,500 $ 95,360 57,216 34,330 7,894 $194,800 $ (6,860) 31,284 54,170 80,606 88,500 $247,700 Supporting calculations for depreciation expense *Note: (100% / years) x = 40% depreciation rate Annual Accumulated Beginning Depreciation Depreciation at Book (40% of the End of the Value Book Value) Year Year $238,400 $ 95,360 $ 95,360 Year 143,040 57,216 152,576 Year 85,824 34,330** 186,906 Year 51,494 7,894*** 194,800 Year 43,600 194,800 Total $194,800 Ending Book Value ($238,400 Cost Less Accumulated Depreciation) $143,040 85,824 51,494 43,600 43,600 ** rounded *** Must not use $20,598; instead take only enough depreciation in Year to reduce book value to the $43,600 salvage value ©McGraw-Hill Companies, 2008 430 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-4B (40 minutes) 2007 Jan Machinery 114,270 Cash 114,270 To record costs of machinery ($107,800 +$6,470) Dec 31 Depreciation Expense—Machinery 17,425 Accumulated Depreciation—Machinery 17,425 To record depreciation [($114,270-$9,720)/6] 2008 Dec 31 Depreciation Expense—Machinery 27,500* Accum Depreciation—Machinery 27,500 To record depreciation * 2008 depreciation: Total cost $114,270 Less accumulated depreciation (from 2007) 17,425 Book value 96,845 Less revised salvage value 14,345 Remaining cost to be depreciated $ 82,500 Revised useful life yrs Less year in 2004 yrs Revised remaining useful life yrs Total depreciation for 2008 ($82,500/ yrs) $ 27,500 2009 Dec 31 Depreciation Expense—Machinery 27,500 Accumulated Depreciation—Machinery 27,500 To record depreciation Dec 31 Cash 25,240 Accumulated Depreciation—Machinery 72,425** Loss on Disposal of Machinery 16,605*** Machinery 114,270 To record sale of machine ** Accumulated depreciation on machine at 12/31/2009: 2007 2008 2009 Total *** Book value of machine at 12/31/2009: Total cost Less accumulated depreciation Book value $ 17,425 27,500 27,500 $ 72,425 $114,270 (72,425) $ 41,845 Loss ($25,240 cash received - $41,845 book value) $ 16,605 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 447 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-5B (25 minutes) Cost of machine $324,000 Less estimated salvage value 30,000 Total depreciable cost $294,000 Straight-Linea Year Totals Units-of-Productionb $ 58,800 58,800 58,800 58,800 58,800 $294,000 Double-DecliningBalancec $ 71,120 64,080 63,400 68,720 26,680 $294,000 $129,600 77,760 46,656 27,994 11,990 $294,000 a Straight- line: Cost per year = $294,000/5 years = $58,800 per year b Units-of-production: Cost per unit = $294,000/1,470,000 units = $0.20 per unit Year Total * Units 355,600 320,400 317,000 343,600 138,500 Unit Cost $0.20 0.20 0.20 0.20 0.20 Depreciation $ 71,120 64,080 63,400 68,720 26,680* $294,000 Take only enough depreciation in Year to reduce book value to the asset‘s $30,000 salvage value c Double-declining-balance (amounts rounded to the nearest dollar): (100%/5) x = 40% depreciation rate Year Total Beginning Book Value $324,000 194,400 116,640 69,984 41,990 Annual Depreciation (40% of Book Value) $129,600 77,760 46,656 27,994* 11,990** $294,000 Accumulated Depreciation at the End of the Year Ending Book Value ($324,000 Cost less Accumulated Depreciation) $129,600 207,360 254,016 282,010 294,000 $194,400 116,640 69,984 41,990 30,000 * rounded ** Take only enough depreciation in Year to reduce book value to the asset‘s $30,000 salvage value ©McGraw-Hill Companies, 2008 448 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-6B (20 minutes) Jan Machinery 150,000 Cash 150,000 To record machinery costs Jan Machinery Cash 3,510 3,510 To record machinery costs Jan Machinery Cash 4,600 4,600 To record machinery costs a First year Dec 31 Depreciation Expense—Machinery 20,000 Accumulated Depreciation—Machinery 20,000 To record depreciation [($158,110-$18,110)/7 = $20,000] b Sixth year Dec 31 Depreciation Expense—Machinery 20,000 Accumulated Depreciation—Machinery 20,000 To record the sixth year’s depreciation Accumulated depreciation at the date of disposal First six years' depreciation (6 x $20,000) .$120,000 Book value at the date of disposal Original total cost $158,110 Accumulated depreciation (120,000) Total $ 38,110 a Sold for $28,000 cash Dec 31 Cash 28,000 Loss on Sale of Machinery 10,110 Accumulated Depreciation—Machinery 120,000 Machinery 158,110 b Sold for $52,000 cash Dec 31 Cash 52,000 Accumulated Depreciation—Machinery 120,000 Machinery 158,110 Gain on Sale of Machinery 13,890 c Destroyed in fire and collected $25,000 cash from insurance Dec 31 Cash 25,000 Loss from Fire 13,110 Accumulated Depreciation—Machinery 120,000 Machinery 158,110 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 449 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-7B (20 minutes) a Feb 19 Mineral Deposit 5,400,000 Cash 5,400,000 To record purchase of mineral deposit b Mar 21 Machinery 400,000 Cash 400,000 To record costs of machinery c Dec 31 Depletion Expense—Mineral Deposit 342,900 Accum Depletion—Mineral Deposit 342,900 To record depletion [$5,400,000/ 4,000,000 tons = $1.35 per ton 254,000 tons x $1.35 = $342,900] d Dec 31 Depreciation Expense—Machinery 25,400 Accum Depreciation—Machinery 25,400 To record depreciation [$400,000/ 4,000,000 tons = $0.10 per ton 254,000 tons x $0.10 = $25,400] Analysis Component Similarities—Amortization, depletion, and depreciation are similar in that they are all methods of allocating costs of long-term assets to the periods that benefit from their use Differences—They are different in that they apply to different types of long-term assets: amortization applies to intangible assets (with definite useful lives); depletion applies to natural resources; and depreciation applies to plant assets Also, amortization is typically computed using the straight-line method, whereas the units-ofproduction method is routinely used in depletion ©McGraw-Hill Companies, 2008 450 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-8B (20 minutes) 2008 (a) Jan Leasehold .40,000 Cash 40,000 To record payment for sublease (b) Jan Prepaid Rent .36,000 Cash 36,000 To record prepaid annual lease rental (c) Jan Leasehold Improvements 20,000 Cash 20,000 To record costs of leasehold improvements 2008 (a) Dec 31 Rent Expense 8,000 Accumulated Amortization—Leasehold 8,000 To record leasehold amortization ($40,000/5) (b) Dec 31 Amortization Expense—Leasehold Improvements 4,000 Accumulated Amortization—Leasehold Improvements To record leasehold improvement amortization ($20,000/5 years remaining on lease) (c) Dec 31 Rent Expense .36,000 Prepaid Rent 4,000 36,000 To record annual lease rental ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 451 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP Serial Problem — SP 8, Success Systems (45 minutes) For the three months ended March 31, 2008, depreciation expense was $625 for office equipment and $1,250 for the computer equipment Annualizing (multiplying quarterly results by four) these three month totals yield the following annual amounts for depreciation expense: Depreciation Expense—Office Equipment ($625 x 4) $2,500 Depreciation Expense—Computer Equipment ($1,250 x 4) $5,000 December 31, 2007 Office Equipment $10,000 Accumulated Depreciation–Office Equipment 625 Office Equipment (book value) $ 9,375 December 31, 2008 $10,000 December 31, 2007 Computer Equipment $25,000 Accumulated Depreciation– Computer Equipment 1,250 Computer Equipment (book value) $23,750 December 31, 2008 $25,000 3,125 $ 6,875 6,250 $18,750 Total asset turnover = Net sales / Average total assets The 3-month total asset turnover for Success Systems at March 31, 2008 $51,195 / [($122,625 + $147,621)/2] = 0.38 times An estimate of its annual total asset turnover is 1.52 (0.38 x quarters) This value for the total asset turnover is lower than usual for companies competing in this industry (2.5) However, Success Systems is in its first year of operations, and its turnover will improve if it can generate increased sales throughout the year while maintaining a similar asset level ©McGraw-Hill Companies, 2008 452 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Reporting in Action — BTN 8-1 The percent of original cost remaining to be depreciated is computed by taking the ratio of the book value of property, plant, and equipment to their original cost ($ millions): As of 02/26/05: $2,464 / $4,192 = 58.8% As of 02/28/04: $2,244 / $3,574 = 62.8% Its "Summary of Significant Accounting Policies" (Note 1) reports that it has three main categories of intangible assets: Goodwill, Tradename, and Lease Rights Goodwill has an indefinite life, but must be evaluated each year for impairment of value Best Buy has a Tradename – Future Shop – that is included in their international segment The tradename is not amortized, as it has an indefinite life, but its value has fluctuated due to fluctuations in foreign currency exchange rates Lease rights are amortized over the term of the lease, ranging up to 16 years The change in total property, plant and equipment before accumulated depreciation for the year ended February 26, 2005, is an increase of $618 ($4,192 – 3,574) In comparison, according to the statement of cash flows, $502 is used for the purchase of property, plant and equipment (all amounts in $ millions) One possible explanation for the difference in these amounts is that Best Buy acquired plant assets for something other than cash—for example, it acquired certain plant assets for a promise (note agreement) to pay later Total asset turnover for year ended ($ millions): 2/26/05: $27,433 ($10,294 + $8,652)/2 = 2.9 times 2/28/04: $24,548 ($8,652 + $7,694)/2 = 3.0 times Solution depends on the financial statement data obtained ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 453 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comparative Analysis — BTN 8-2 Note: Total asset turnover = Net sales / Average total assets Total asset turnover for Best Buy ($ millions) Current Year: $27,433 / [($10,294 + $8,652)/2] = 2.90 times One Year Prior: $24,548 / [($8,652 + $7,694)/2] = 3.00 times Total asset turnover for Circuit City ($ millions) Current Year: $10,472 / [($3,789 + $3,731)/2] = 2.79 times One Year Prior: $9,857 / [($3,731 + $3,945)/2] = 2.57 times Each dollar of Best Buy‘s assets produces $2.90 in net sales for the current year and $3.00 in net sales for the prior year Best Buy experienced a decline in asset efficiency for the current year Each dollar of Circuit City‘s assets produces $2.79 in net sales for the current year and $2.57 in net sales for the prior year Circuit City experienced an increase in asset efficiency for the current year Best Buy employs its assets more efficiently than does Circuit City for both years In addition, both companies‘ total asset turnover exceeds the industry average of 2.4 ©McGraw-Hill Companies, 2008 454 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethics Challenge — BTN 8-3 When managers acquire new assets a number of decisions relative to depreciation must be made Specifically, the asset must be assigned a useful life, a salvage value, and a method of depreciation When assets are placed in use on a day other than the first day of the month an assumption is often made that the assets are placed in use on the first day of the month nearest to the date of the purchase For example, for assets purchased on the 1st through 15th days of the month, the first day of the month is assumed to be the purchase date For assets purchased on the 16th through month-end, the first day of the next month is assumed to be the purchase date By selecting the first day of the following month, Choi is getting a onetime deferral of some partial months of depreciation She is still employing a systematic and rational method of allocating costs if she consistently chooses the first day of the following month However, since she appears to be using this method only with respect to current year additions, it appears that she is using accounting rules to reduce depreciation expense this year Also, her practice is not in keeping with general business practices as described above The facts of the situation seem to suggest an ethical violation rather than a legitimate depreciation decision rule By always assuming the first day of the following month as the date of purchase, less depreciation is (initially) accrued for the assets employed This means depreciation expense will be less than if assets were considered employed on the first of the month closest to the date of purchase With reduced depreciation charges, net income will be higher for this current year Therefore, this practice will result in a higher profit margin for her company for this year Communicating in Practice — BTN 8-4 The solution to this activity will vary based on the industry and the companies chosen for analysis Many instructors find it useful to report the results from the teams to the class for purposes of classroom discussion and analysis ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 455 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Taking It to the Net — BTN 8-5 Yahoo! has Goodwill in the amount of ($ thousands) $2,550,957 at December 31, 2004 Goodwill represents 27.8% ($2,550,957 / $9,178,201) of Yahoo!‘s total assets This is a very significant asset for Yahoo! $ thousands Amount Balance, January 1, 2003 $ 415,225 Balance, December 31, 2003 1,805,561 Balance, December 31, 2004 2,550,957 Total increase over two year period $ Change from Prior % Year Change $1,390,336 334.8% 745,396 41.3% 2,135,732 514.4% Goodwill has increased markedly over the two-year period The increase is due to the acquisitions that Yahoo! has made over these two years, in particular during 2003 Yahoo!‘s other intangible assets include Trademark, trade name and domain name; Customer, affiliate, and advertiser related relationships; and Developed technology and patents These intangibles represent 5.2% ($480,666 / $9,178,201) of total assets Note indicates that Trademark, trade name, and domain name have original estimated economic lives of four to seven years If the trademark and trade name have been registered with the government‘s Patent Office, their legal life is probably much more than four to seven years Since the economic life of these intangibles is difficult to determine, Yahoo! must choose an economic life it feels is reasonable ©McGraw-Hill Companies, 2008 456 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action — BTN 8-6 Annual depreciation for each year of the asset‘s useful life: Year 2007 Straight-line Double-Declining-Balance Units-of-Production ($44,000-2,000)/4 (100%/4) x = 50% is ($44,000-$2,000)/60,000 miles = $10,500 declining-balance rate = $.70 per mile BV x rate = $44,000 x 50% 12,000 miles x $.70 = $ 8,400 = $22,000 2008 $10,500 $22,000 x 50%= $11,000 18,000 miles x $.70 = $12,600 2009 $10,500 $11,000 x 50% = $5,500 21,000 miles x $.70 = $14,700 2010 $10,500 $5,500 (depreciate to salvage) = $3,500 9,000* miles x $.70 = $ 6,300 * Depreciation is based on the estimated capacity of 60,000 miles Even though the van is driven 10,000 miles in the last year, depreciation can only be taken for the remaining 9,000 miles of estimated capacity This will record depreciation to the estimated salvage value Depreciation is recorded in an adjusting entry at the end of each period The entry is: Depreciation Expense Accumulated Depreciation xxxx* xxxx* *Amount varies by method and year (see part 1) Each expert‘s presentation of the comparison of methods will be slightly different The experts should make the following points: The straight-line method reduces net income by the same amount each year The declining-balance method reduces net income the largest in 2007 (first year of use) and by a lesser amount in each subsequent year The impact of the units-of-production method varies year to year according to the amount of estimated capacity consumed (miles driven) ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 457 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action — BTN 8-6 - continued Book value at the end of each year = Cost - Accumulated depreciation = $44,000 – (amount varies by method—see part for annual amounts) Year Straight-line 2007 $33,500 2008 23,000 2009 12,500 2010 2,000 Double-DecliningBalance $22,000 11,000 5,500 2,000 Units of Production $35,600 23,000 8,300 2,000 For reporting purposes, each expert will have different results But each should show: Plant Assets: Transport Van Less: Accumulated Depreciation $44,000 XXXX* XXXX* * Amounts vary by the method and the year selected for illustration Experts should explain the amounts shown ©McGraw-Hill Companies, 2008 458 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com BusinessWeek Activity — BTN 8-7 Business Week, along with Interbrand Corp., determines the value of a brand by calculating five years of earnings and sales for a brand then deducting operating costs, taxes and a charge for operating capital employed This provides ―intangible earnings.‖ These ―intangible earnings‖ are reduced by earnings attributable to items such as patents and customer convenience to determine the earnings attributable to the brand These earnings are discounted using a rate based on the risk profile of the earnings forecast (Note: Appendix B describes discounting.) The brands that have increased the most from 2004 to 2005 are eBay (21% increase), HSBC (20% increase), Samsung (19% increase), Apple (16% increase), and UBS (16% increase) These brand values not appear on the companies‘ balance sheets These values have been created by the companies through their efforts to build customer loyalty Intangibles such as these not appear on the companies‘ balance sheets In the instance of Apple, we can see that Apple has intangible assets (including Goodwill) of $97 million ($80 million + $17 million), which is far less than the brand value of $7.99 billion ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 459 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Entrepreneurial Decision — BTN 8-8 Part (a) Under current conditions, the total asset turnover is 3.2 This is computed as net sales of $8,000,000 divided by its average total assets of $2,500,000.* This means the company turns its assets over 3.2 times per year or, stated differently, each $1 of assets produces $3.20 of net sales per year * Total asset turnover = Net sales Average total assets (b) Under this proposal, its asset turnover would increase to This is computed by taking its net sales of $12,000,000 ($8,000,000 + $4,000,000) and dividing by its average total assets of $3,000,000 This means the company would now turn its assets over times per year or, stated differently, each $1 of assets would now produce $4.00 of net sales per year Part The proposal would yield an improved total asset turnover of vis-à-vis the current total asset turnover of 3.2 However, we need to recognize that this proposal depends on our confidence in both maintaining current sales, meeting future sales expectations, and not losing or alienating current and/or future customers due to the expanded operations Assuming all of our estimates are reasonable, we need to focus on any potential customer concern and the impact on other dimensions of analysis that such a proposal can bring about.* *We must remember that total asset turnover is only one dimension of a complete analysis of this proposal For example, we would want to explore the impact of this proposal on net income and other activities Hitting the Road — BTN 8-9 No formal solution exists for this activity It is usually interesting for the class to exchange their discoveries via class discussion This is particularly the case with respect to patents, copyrights, and trademarks ©McGraw-Hill Companies, 2008 460 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Global Decision — BTN 8-10 Note: Total asset turnover = Net sales / Average total assets Total asset turnover for Dixons (₤ million): Current Year: ₤6,982.7 / [(₤3,980.5 + ₤3,873.8)/2] = 1.78 times One Year Prior: ₤6,491.7 / [(₤3,873.8 + ₤4,158.0)/2] = 1.62 times Dixons was less efficient in using its assets to generate net sales than both Best Buy and Circuit City Specifically, in the current year each pound (₤) worth of assets generated 1.78 times that in net sales, compared to 2.90 times each dollar in net assets for Best Buy and 2.79 times each dollar in net assets for Circuit City Similarly, in the prior year, each pound‘s worth of Dixons‘ assets generated 1.62 times that in net sales, compared to Best Buy‘s 3.00 turnover and Circuit City‘s 2.57 in turnover ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 461 ... 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... Goodwill; Acquired intangible assets ©McGraw-Hill Companies, 2008 422 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com... Depreciation per year for years and ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 423 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com