Solution manual financial accounting 8th by harrison CH07

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Plant Assets & Intangibles Short Exercises (5 min.) S 7-1 Property and Equipment, at Cost Aircraft………………………………………………… Package handling and ground support equipment………………………………………… Computer and electronic equipment…………… Vehicles……………………………………………… Facilities and other………………………………… Total cost………………………………………… Less: Accumulated depreciation……………… Net property and equipment…………………… Millions $ 2,394 12,225 28,165 586 1,435 44,805 (14,903) $ 29,902 Cost = $44,805 million Book value = $29,902 million Book value is less than cost because accumulated depreciation is subtracted from cost to compute book value Chapter Plant Assets & Intangibles 515 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (5 min) S 7-2 The related costs (real estate commission, back property tax, removal of a building, and survey fee) are included as part of the cost of the land because the buyer of the land must incur these costs to get the land ready for its intended use After the land is ready for use, the related costs (listed above) would be expensed (10 min.) Land ($140,000 × 50)……………………… Building ($140,000 × 30)………………… Equipment ($140,000 × 20)……………… Note Payable……………………………… Land………………… Building…………… Equipment………… Total……………….… 516 Current Market Value $ 75,000 45,000 30,000 $150,000 Financial Accounting 8/e Solutions Manual S 7-3 70,000 42,000 28,000 140,000 Percent of Total $75,000 / $150,000 = 50.0% $45,000 / $150,000 = 30.0% $30,000 / $150,000 = 20.0% 100.0% To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (5 min.) S 7-4 Income Statement Revenues CORRECT Expenses UNDERSTATED Net income OVERSTATED (10 min.) S 7-5 First-year depreciation: Straight-line ($53,000,000 − $5,000,000) / years…… $9,600,000 Units-of-production [($53,000,000 − $5,000,000) / 6,000,000 miles] × 775,000 miles…………………… $6,200,000 Double-declining-balance ($53,000,000 / years × 2) $21,200,000 Book value: StraightLine Units-ofProduction DoubleDecliningBalance Cost…………………… $53,000,000 $53,000,000 $53,000,000 Less Accumulated Depreciation……… (9,600,000) (6,200,000) (21,200,000) Book value…………… $43,400,000 $46,800,000 $31,800,000 Chapter Plant Assets & Intangibles 517 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 7-6 Third-year depreciation: a Straight-line ($53,000,000 − $5,000,000) / years… $9,600,000 b Units-of-production [($53,000,000 − $5,000,000) / 6,000,000 miles] × 1,275,000 miles………………… $10,200,000 c Double-declining-balance: Year ($53,000,000 × 2/5) = $21,200,000 Year ($53,000,000 − $21,200,000) × 2/5 = $12,720,000 Year ($53,000,000 − $21,200,000 − $12,720,000)= $19,080,000; $19,080,000 × 2/5……………………………… $7,632,000 518 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com S 7-7 (10 min.) Double-declining-balance (DDB) depreciation offers the tax advantage for the first year of an asset’s use DDB’s advantage results from the greater amount of DDB depreciation (versus the other methods’ depreciation) during the first year DDB saves cash that the taxpayer can invest to earn a return DDB depreciation………………………………… $21,200,000 Straight-line depreciation……………………… (9,600,000) Excess depreciation tax deduction…………… $ 11,600,000 Income tax rate…………………………………… Income tax savings for first year……………… Chapter × 32 $ 3,712,000 Plant Assets & Intangibles 519 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (5-10 min.) S 7-8 First-year depreciation (for a partial year): a Straight-line (€45,000,000 − €5,400,000) / years × 3/12……………………………………………… €1,650,000 b Units-of-production (€45,000,000 − €5,400,000) / 4,500,000 miles × 410,000 miles…………… €3,608,000 c Double-declining-balance (€45,000,000 × 2/6 × 3/12)….………………………………………… €3,750,000 SL depreciation produces the highest net income (lowest depreciation) DDB depreciation produces the lowest net income (highest depreciation) 520 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 7-9 Depreciation Expense — Concession Stand……… 14,167 Accumulated Depreciation — Concession Stand 14,167 Depreciation for years 1-4: $100,000 / 20 years = $ 5,000 per year $ 5,000 × years = $15,000 for years 1-3 Asset’s remaining depreciable ÷ (New) Estimated = book value useful life remaining $100,000 − $15,000 ÷ years (New) Annual depreciation = $14,167 per year $85,000 Chapter Plant Assets & Intangibles 521 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (5-10 min.) S 7-10 ($37,700,000 − $2,900,000) / years × = $17,400,000 2013 Jan Cash……………………………… 8,300,000 Accumulated Depreciation…… 17,400,000 Loss on Sale of Airplane……… 12,000,000 Airplane………………………… 37,700,000 (5-10 min.) S 7-11 Units-of-production depreciation method is used to compute depletion Depletion Expense [($120 / 10) × 0.4]………… Accumulated Depletion……………………… Billions 4.8 4.8 At December 31, 2011: Cost of mineral assets……………………… Less Accumulated depletion ($38.0 + $4.8) Book value of mineral assets……………… North Coast’s minerals are less than 36% Billions $120.0 (42.8) $ 77.2 used up Accumulated depletion is low relative to the cost of the mineral assets 522 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (5-10 min.) S 7-12 Req Cost of goodwill purchased: Purchase price paid for Concord Snacks, Inc $8,800,000 Market value of Concord Snack’s net assets: Market value of Concord Snacks’ assets… $15,000,000 Less: Concord Snack’s liabilities………… (8,000,000) 7,000,000 Market value of Concord Snacks’ net assets Cost of goodwill………………………………… $1,800,000 Req In future years Vector, Inc will determine whether its goodwill has increased or decreased in value If the goodwill’s value has increased, there is nothing to record But if goodwill’s value has decreased, Vector, Inc will record a loss and write down the book value of the goodwill Chapter Plant Assets & Intangibles 523 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 7-13 Solar Automobiles Limited Income Statement Year Ended December 31, 2010 Revenues: Sales revenue……………………………… Expenses: Cost of goods $3,800,000 sold……………………… Research and development 600,000 expense… Amortization of patent ($350,000 / 50,000 7) Selling 480,000 expenses………………………… Total expenses…………………………… Net income…………………………………… $5,200,000 4,930,000 $270,000 (5 min.) S 7-14 Northern Satellite Systems, Inc Statement of Cash Flows Year Ended December 31, 2010 Cash flows from investing activities: Millions Purchase of other companies………………………… $(16.0) Capital expenditures……………………………….… (7.0) Proceeds from sale of North American operations 14.0 Net cash (used) by investing activities………… $(9.0) 524 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Decision Cases (30-45 min.) Decision Case Req La Petite France Bakery and Burgers Ahoy! Income Statements For the Year Ended December 31, 2011 La Petite France ACCOUNT TITLE (FIFO and SL) Sales revenue………………… $350,000 Cost of goods sold………… Gross margin……………… Burgers Ahoy! (LIFO and DDB) $350,000 128,000* 222,000 Operating expenses……… $50,000 $50,000 Depreciation expense La Petite (SL): [($150,000 − $20,000) / 10] 13,000 Burgers (DDB): ($150,000 × 1/10 × 2)…… 30,000 Total expenses……………… 63,000 Income before tax………… 159,000 Income tax expense (40%)… 63,600 Net income…………………… $ 95,400 594 Financial Accounting 8/e Solutions Manual 149,000* 201,000 80,000 121,000 48,400 $ 72,600 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Decision Case Req *Cost of goods sold: Units La Petite (FIFO): 10,000 5,000 7,000 3,000 25,000 Burgers (LIFO): 10,000 7,000 5,000 3,000 25,000 × × × × $4 = = = = × × × × $7 = = = = Chapter Cost $ 40,000 25,000 42,000 21,000 $128,000 $ 70,000 42,000 25,000 12,000 $149,000 Plant Assets & Intangibles 595 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Decision Case Req INVESTMENT NEWSLETTER TO: Our Clients FROM: Student Name RE: Selecting the stock of La Petite France Bakery or Burgers Ahoy! as a long-term investment In picking a stock we suggest you consider the following factors: La Petite France and Burgers Ahoy! are basically identical companies The two companies started operations at the same time and engaged in essentially the same transactions Their main difference lies in the accounting methods that they use 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, however, because La Petite uses the FIFO method to account for inventories and the straight-line method to account for depreciation of its plant assets If prices continue to rise, use of these methods result in the highest possible reported income However, this may not result in a higher price for La Petite France’s stock 596 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 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 inventories and the doubledeclining-balance method for depreciation These methods result in lower net incomes More importantly, LIFO and DDB result in the lowest amount of income tax and thereby save money that Burgers can invest in new projects 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 those profits don’t show up on the income statement immediately Student responses will vary Chapter Plant Assets & Intangibles 597 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (20-30 min.) Decision Case A dishonest manager might debit the cost of an expense to a plant asset account in order to overstate reported asset and income amounts Remember the WorldCom case discussed in the chapter A dishonest manager might debit an expense account for the cost of a plant asset for two reasons: (1) To obtain a quicker tax deduction for the expense than for depreciation expense over the life of the asset, and (2) To understate reported asset and income amounts 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 598 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 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 Chapter Plant Assets & Intangibles 599 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethical Issue Req 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 and Req The stakeholders in this situation include United Jersey Bank, their management, their shareholders, the Internal Revenue Service, and taxpayers in general The immediate economic consequences of the decision are positive for United Jersey Bank as well as their management However, those consequences, as well as legal consequences, could ultimately turn negative for them if an IRS audit finds them to be unlawfully evading taxes United Jersey Bank’s allocation was 600 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com unethical The nation’s taxpayers — you and I — are robbed of fair and equitable treatment by this dishonest tactic Req United Jersey Bank should change the allocation of their purchase price to 60% building and 40% land In the long run, for fair and equitable treatment for all taxpayers, as well as the best economic and legal outcome, there is nothing like the truth Chapter Plant Assets & Intangibles 601 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Focus on Financials: Amazon.com, Inc (30-40 min.) Req Fixed assets include furniture and fixtures, heavy equipment, technology, infrastructure, internal-use software and website development Req Depreciation method used for the financial statements (Note — Summary of significant accounting policies)………………………… Straight-line Type of depreciation method probably used for income-tax purposes…………………………… Modified Accelerated Cost Recovery System (MACRS) MACRS provides accelerated depreciation for fixed assets under schedules provided by type of asset (computers, computer software, furniture, heavy equipment, etc.) This is preferable for income-tax purposes because it provides the most depreciation expense as quickly as possible This decreases immediate tax payments and saves cash for use in the business 602 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Req Depreciation and amortization expense…………… Accumulated depreciation and amortization……… Accumulated depreciation and amortization Millions $ 287 $ 555 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 amortization amounts for all years the company has used its property and equipment Req During 2008, Amazon.com, Inc paid $333 million to purchase fixed assets, including internal-use software and website development These expenditures increased from $224 million in 2007 This is good news The company increased its investment in these types of assets by about 50% in 2008, indicating that they were growing at a fast rate Req Amazon.com, Inc reports goodwill of $438 million on its 2008 balance sheet, and $720 million of other long-term assets, some of which are intangibles As explained in Notes and to the Consolidated Financial Statements, the company does not amortize goodwill and other indefinite-lived assets It Chapter Plant Assets & Intangibles 603 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com evaluates the remaining useful lives of assets that are not being amortized to determine whether circumstances continue to support an indefinite life Amazon.com, Inc performs an annual impairment test for goodwill and writes goodwill off when its value is impaired Amazon.com, Inc amortizes the cost of the other intangibles over their estimated useful lives 604 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Focus on Analysis: Foot Locker, Inc (30-40 min.) Req Cash paid for capital expenditures (plant assets) (found in investing section of cash flow statement) Cash paid to repay capital lease (found in financing section of cash flow statement) Millions $148 $14 Req Property and equipment are recorded at cost, less accumulated depreciation and amortization Significant improvements to property and equipment are capitalized Maintenance and repairs are charged to current operations (expensed) as incurred Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated Req Owned property and equipment is depreciated on a straightline basis over the estimated useful lives of the assets: maximum of 50 years for buildings and to 10 years for furniture, fixtures and equipment Property and equipment Chapter Plant Assets & Intangibles 605 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com under capital leases and improvements for leased premises are generally amortized on a straight- line basis over the shorter of the estimated useful life of the asset or the remaining lease term Capitalized software reflects certain costs related to software developed for internal use These costs are amortized on a straight-line basis over a to year period Req Net plant and equipment at the end of fiscal 2007 was $521 million It was $654 at the end of fiscal 2006 Therefore, net plant and equipment was proportionately older in 2007 than at the end of fiscal 2006 By referring to note of the Consolidated Financial Statements, we can measure the cost of land, buildings, and furniture, fixtures and equipment used up at the end of fiscal 2007 compared to fiscal 2006.* Those amounts are: 606 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (Dollars in millions) At fiscal year end 2007 2006 Proportion of assets used up = Accumulated depreciation Plant assets, at cost = $903 $1,150 $870 $1,186 = 78.5% used up 73.4% used up = *Alterations to leased and owned buildings, which make up the remainder of the fixed assets, are reported at the net amount, so we cannot make this computation for those assets Chapter Plant Assets & Intangibles 607 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Group Projects Student responses will vary 608 Financial Accounting 8/e Solutions Manual ... American operations 14.0 Net cash (used) by investing activities………… $(9.0) 524 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com... produces the lowest net income (highest depreciation) 520 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com... depletion is low relative to the cost of the mineral assets 522 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com