Solution manual financial accounting 9th harrison ch07

Find more at www.downloadslide.com Chapter Plant Assets & Intangibles Short Exercises (5 min.) S 7-1 Property and Equipment, at Cost Millions Aircraft………………………………………………… $ 2,392 Package handling and ground support equipment………………………………………… 12,229 Computer and electronic equipment…………… 28,159 Vehicles……………………………………………… 581 Facilities and other………………………………… 1,432 Total cost………………………………………… 44,793 Less: Accumulated depreciation………………… Net property and equipment…………………… Cost Book value (14,900) $29,893 = $44,793 million = $29,893 million Book value is less than cost because accumulated depreciation is subtracted from cost to compute book value Chapter Plant Assets & Intangibles Find more at www.downloadslide.com (5 min) S 7-2 Land ($210,000 × 30*)…………………………… Building ($210,000 × 10)………………………… Equipment ($210,000 × 60)……………………… Note Payable…………………………………… 63,000 21,000 126,000 210,000 *Supporting computations: Current Market Value Percent of Total Land………………… $ 66,000 $66,000 / $220,000 = 30.0% Building…………… 22,000 $22,000 / $220,000 = 10.0% Equipment………… 132,000 $132,000 / $220,000 = 60.0% Total……………….… $220,000 100.0% (5 min.) S 7-3 Income Statement Revenues CORRECT Expenses UNDERSTATED Net income Financial Accounting 9/e Solutions Manual OVERSTATED Find more at www.downloadslide.com (10 min.) S 7-4 First-year depreciation: Straight-line ($44,400,000 − $5,400,000) / years……… $ 7,800,000 Units-of-production [($44,400,000 − $5,400,000) / 6,500,000 miles] × 725,000 miles…………………… $ 4,350,000 Double-declining-balance ($44,400,000 × 40%)……… $17,760,000 Second-year depreciation: Straight-line ($44,400,000 − $5,400,000) / years……… $ 7,800,000 Units-of-production [($44,400,000 − $5,400,000) / 6,500,000 miles] × 1,225,000 miles………………… $ 7,350,000 Double-declining-balance [($44,400,000 − $17,760,000) × 40%]……………………………………………………… $10,656,000 Book value: Cost……………………… Less: Accumulated Depreciation………… Book value, Year 1…… StraightLine Units-ofProduction DoubleDecliningBalance $44,400,000 $44,400,000 $44,400,000 (7,800,000) $36,600,000 Chapter (4,350,000) $40,050,000 (17,760,000) $26,640,000 Plant Assets & Intangibles Find more at www.downloadslide.com (10 min.) S 7-5 Double-declining-balance (DDB) depreciation offers the tax advantage for the first year of an asset’s use Because DDB’s firstyear depreciation is greater than first-year depreciation under other methods, net income is lower Lower net income results in lower taxes and more cash that the taxpayer can invest to earn a return DDB depreciation………………………………… Straight-line depreciation……………………… Excess depreciation tax deduction…………… $17,760,000 (7,800,000) $ 9,960,000 Income tax rate…………………………………… Income tax savings for first year……………… × 36 $ 3,585,600 (5-10 min.) S 7-6 First-year depreciation (for a partial year): a Straight-line (€41,000,000 − €5,200,000) / years × 3/12……………………………………………… €1,790,000 b Units-of-production (€41,000,000 − €5,200,000) / 5,200,000 miles × 390,000 miles) or €2,683,200 if depletion per unit is rounded €2,685,000 c Double-declining-balance (€41,000,000 × 2/5 × 3/12)….………………………………………… €4,100,000 SL depreciation produces the highest net income (lowest depreciation) DDB depreciation produces the depreciation) Financial Accounting 9/e Solutions Manual lowest net income (highest Find more at www.downloadslide.com (10 min.) S 7-7 Depreciation Expense — Concession Stand……… Accumulated Depreciation — Concession Stand… 15,000 15,000 Depreciation for years 1-5: $90,000 / 10 years = $ 9,000 per year $ 9,000 × years = $45,000 for years 1-5 Asset’s remaining depreciable book value ÷ (New) Estimated useful life remaining = (New) Annual depreciation $90,000 − $45,000 ÷ years = $15,000 per year $45,000 (5-10 min.) S 7-8 ($67,850,000 − $2,950,000) / 11 years × = $29,500,000 2017 Jan Cash……………………………… Accumulated Depreciation………… Loss on Sale of Airplane…………… Airplane……………………………… Chapter 8,000,000 29,500,000 30,350,000 67,850,000 Plant Assets & Intangibles Find more at www.downloadslide.com (5-10 min.) S 7-9 Units-of-production depreciation method is similar to the method used to calculate depletion Oil Inventory ($18* × 8)………………… Oil Reserves… ……………………… *$18 = $234 / 13 Cost of Oil Sold ($18 × 2)……………… Oil Inventory… ……………………… Billions 14.4 14.4 Billions 3.6 3.6 (5-10 min.) S 7-10 Req Cost of goodwill purchased: Purchase price paid for Seacoast Snacks, Inc Market value of Seacoast Snack’s net assets: Market value of Seacoast Snacks’ assets Less: Seacoast Snack’s liabilities Millions $8.2 $12.0 (10.0) Market value of Seacoast Snacks’ net assets Cost of goodwill 2.0 $6.2 Req In future years PTL, 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, PTL, Inc will record a loss and write down the book value of the goodwill Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (5 min.) S 7-11 (Dollar amounts in millions) Return on assets 15% = Net income = $18 ÷ Average total assets ÷ $120 (5 min.) S 7-12 2012 Return on assets = Net income ÷ Average total assets 17.7% = $42,500 ÷ $240,000 2013 Return on assets = Net income ÷ Average total assets 18.0% = $45,000 ÷ $250,000 (5 min.) S 7-13 Southeast Satellite Systems, Inc Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from investing activities: Millions Purchase of other companies…………………………… $(15.0) Capital expenditures……………………………….… (8.0) Proceeds from sale of North American operations 13.0 Net cash (used for) investing activities………… Chapter $(10.0) Plant Assets & Intangibles Find more at www.downloadslide.com (5 min.) S 7-14 Asset Book Value a Equipment $160,000 b Trademark c Land d Factory building Estimated Future Cash Flows Fair Value Impaired? (Y or N) Amount of Loss $120,000 $100,000 Y $60,000 $320,000 $420,000 $380,000 N $56,000 $30,000 $28,000 Y $28,000 $3 million $2 million N $3 million Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Exercises (5-10 min.) E 7-15A Land: $330,000 + $2,500 + $5,500 + $5,000 = $343,000 Land improvements: $51,000 + $11,000 + $2,000 = $64,000 Building: $54,000 + $750,000 = $804,000 (10-15 min.) E 7-16A Allocation of cost to individual machines: Appraised Percentage of Total Machine Value Appraised (Market) Value Cost of Each Machine Total Cost $ 63,000 $63,000 / $210,000 = 30 $204,000 × 30 = $ 61,200 107,100 107,100 / 210,000 = 51 204,000 × 51 = 104,040 39,900 39,900 / 210,000 = 19 204,000 × 19 = 38,760 Totals $210,000 1.00 Sale price of machine No 1…………… Cost………………………………………… Gain on sale of machine………………… Chapter $204,000 $63,000 61,200 $ 1,800 Plant Assets & Intangibles Find more at www.downloadslide.com (5-10 min.) E 7-17A (a) Sales tax Capital Expenditure (b) Transportation and insurance Capital Expenditure (c) Purchase price Capital Expenditure (d) Installation Capital Expenditure (e) Training of personnel Capital Expenditure (f) Reinforcement to platform Capital Expenditure (g) Income tax Immediate Expense (h) Major overhaul Capital Expenditure (i) Ordinary recurring repairs Immediate Expense (j) Lubrication before machine is placed in service (k) Periodic lubrication 10 Financial Accounting 9/e Solutions Manual Capital Expenditure Immediate Expense Find more at www.downloadslide.com Challenge Exercises and Problem (10-15 min.) E 7-74 Req Current Assets……………………………… Assets of Discontinued Operations……… Property and Equipment …………………… Goodwill………………………….…………… Intangible Assets…………………………… Other Assets………………………………… Liabilities………………………………… Cash and Common Stock……………… (in millions) 5,288 2,264 6,579 8,946 679 31 12,038 11,749 Req Loss from Impairment……………………… Goodwill………………………… ……… Chapter 5,382 Plant Assets & Intangibles 5,382 65 Find more at www.downloadslide.com (15-20 min.) E 7-75 Net income under straight-line depreciation… Millions $64 Difference in depreciation for 2013 (year of 8): Straight line depreciation, as reported…… $30 DDB depreciation for year (see below)…… 45 Increase in depreciation expense………… 15 Decrease in net income………………………… (15) Net income Kerusi can expect for 2013 if the company uses DDB depreciation…… $49 DDB depreciation by year: Year $240 × 2/8…………………………………… ($240 − $60) × 2/8…………………… 66 Financial Accounting 9/e Solutions Manual Millions $60 45 Find more at www.downloadslide.com (15-25 min.) E 7-76 Year 1 Total current assets Equipment, net Net income €15.0 U* €15.0 U* Millions of Euros (€) No effect €10.0 U** €5.0 U €5.0 O €5.0 O Correct €5.0 O _ U = Understated O = Overstated * Cost (€20.0 million) − Depreciation expense (€5 million) = €15 million ** Cost (€20.0 million) − Two years’ depreciation (€10.0 million) = €10.0 million Chapter Plant Assets & Intangibles 67 Find more at www.downloadslide.com (20-30 min.) P 7-77 Req.1 Property and Equipment Bal 5/31/2008 (BS) 29,305 Capital expenditures (SCF) 2,459 202 2,302 Bal.5/31/2009 (BS) Impairment (note) Original cost of plant and equipment sold (plug) 29,260 Accumulated Depreciation Acc Depr on assets sold 1,784 (plug) 15,827 Bal 5/31/2008 (BS) 1,800 Depr exp.(note) 15,843 Bal 5/31/2009 (BS) Req Journal DATE ACCOUNT TITLES AND EXPLANATION Property and Equipment Cash 68 DEBIT 2,459 2,459 Depreciation Expense Accumulated Depreciation 1,800 Loss on Impairment of Assets Property and Equipment 202 Cash (SCF) Accumulated Depreciation Loss on Sale of Assets Property and Equipment 79 1,784 439 Financial Accounting 9/e Solutions Manual CREDIT 1,800 202 2,302 Find more at www.downloadslide.com Decision Cases (30-45 min.) Decision Case Req La Petite France Bakery and Burgers Ahoy! Income Statements For the Year Ended December 31 La Petite France Burgers Ahoy! ACCOUNT TITLE (FIFO and SL) (LIFO and DDB) Sales revenue…………………… $350,000 $350,000 Cost of goods sold…………… Gross margin……………… 128,000* 222,000 Operating expenses……… $50,000 Depreciation expense La Petite (SL): [($150,000 − $20,000) / 10] 13,000 Burgers (DDB): ($150,000 × 1/10 × 2)…… Total expenses………………… 63,000 Income before tax………… 159,000 Income tax expense (40%)…… 63,600 Net income……………………… $ 95,400 Chapter 149,000* 201,000 $50,000 30,000 80,000 121,000 48,400 $ 72,600 Plant Assets & Intangibles 69 Find more at www.downloadslide.com (continued) Decision Case Req *Cost of goods sold: La Petite (FIFO): Units 10,000 5,000 7,000 3,000 25,000 Burgers (LIFO): 10,000 7,000 5,000 3,000 25,000 70 Financial Accounting 9/e Solutions Manual × × × × $4 = = = = × × × × $7 = = = = Cost $ 40,000 25,000 42,000 21,000 $128,000 $ 70,000 42,000 25,000 12,000 $149,000 Find more at www.downloadslide.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 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 double-declining-balance method for depreciation These methods result in lower net incomes More Chapter Plant Assets & Intangibles 71 Find more at www.downloadslide.com (continued) Decision Case 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 72 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.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 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 73 Find more at www.downloadslide.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 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 74 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.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 Note states that the depreciation method used for the financial statements is the straight-line method Note does not state the method used for income-tax purposes, but Amazon.com most likely uses the Modified Accelerated Cost Recovery System (MACRS) This method 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 Req Millions Depreciation and amortization expense……………………… $ 552 Accumulated depreciation and amortization……………… $ 842 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 amortization amounts for all years the company has used its property and equipment Chapter Plant Assets & Intangibles 75 Find more at www.downloadslide.com Req During 2010, Amazon.com, Inc paid $979 million to purchase fixed assets, including internal-use software and website development These expenditures increased significantly from $373 million in 2009 This is good news The company increased its investment in these types of assets by about 162% in 2010, indicating that they were expanding their operations Req Amazon.com, Inc reports goodwill of $1,349 million on its 2010 balance sheet, and acquired intangible assets, included within ―Other Assets‖ on the balance sheet, of $745 million As explained in Notes and to the Consolidated Financial Statements, the company does not amortize goodwill and other indefinite-lived assets It 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 76 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Focus on Analysis: RadioShack, Corp (20-30 min.) Req RadioShack Corporation paid $80.1 million for capital expenditures during fiscal 2010 This information is found in the investing activities section of the cash flows statement Req Property and equipment are recorded at cost less accumulated depreciation and amortization Major additions and betterments that substantially extend the useful life of an asset are capitalized and depreciated Expenditures for normal maintenance and repairs are charged directly to expense as incurred Req Depreciation and amortization are calculated using the straight-line method over the following useful lives: 10-40 years for buildings; 2-15 years for furniture, fixtures, equipment and software; leasehold improvements are amortized over the shorter of the terms of the underlying leases, including certain renewal periods, or the estimated useful lives of the improvements Req Gross property, plant and equipment (from Note 3) at the end of fiscal 2010 was $1,094.4 million It was $1,081.7 million at the end of fiscal 2009 Accumulated depreciation and amortization (from Note 3) was $820.1 million at the end of fiscal 2010 and $799.4 million at the end of Chapter Plant Assets & Intangibles 77 Find more at www.downloadslide.com (continued) RadioShack, Corp fiscal 2009 Accordingly, the book value of property, plant, and equipment (net assets) was $274.3 million at the end of fiscal 2010 and $282.3 million at the end of fiscal 2009 Gross PPE increased slightly during 2010 but net PPE still declined slightly during 2010 This change indicates that the major cause for the change in property, plant, and equipment was an additional year depreciation recorded because the assets were used an additional year Req 2010 Net income 2009 $ 206.1 $ 205.0 ÷ Average total assets ÷ (2,175.4 +$2,429.3) / ÷ $2,429.3 + $2,254.0 / = Return on assets = 8.95% = = 8.75% Radio Shack’s performance was slightly better in 2010 than in 2009 Return on Assets is slightly higher in 2010 than in 2009 78 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Group Projects Student responses will vary Chapter Plant Assets & Intangibles 79 ... min.) S 7-3 Income Statement Revenues CORRECT Expenses UNDERSTATED Net income Financial Accounting 9/e Solutions Manual OVERSTATED Find more at www.downloadslide.com (10 min.) S 7-4 First-year... highest net income (lowest depreciation) DDB depreciation produces the depreciation) Financial Accounting 9/e Solutions Manual lowest net income (highest Find more at www.downloadslide.com (10 min.)... impaired, PTL, Inc will record a loss and write down the book value of the goodwill Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (5 min.) S 7-11 (Dollar amounts in millions)