Solution manual intermediate accounting 9e by nicolai ch10

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 10 DEPRECIATION AND DEPLETION CONTENT ANALYSIS OF EXERCISES AND PROBLEMS Number Content Time Range (minutes) E10-1 Depreciation Methods Straight-line, hours worked, units of output 5-10 E10-2 Depreciation Methods Straight-line, sum-of-the-years'-digits, double-declining balance Return on assets 5-10 E10-3 Acquisition Cost and Depreciation Computation of acquisition cost and annual depreciation under units of production and sum-of-the-years'-digits methods 10-15 E10-4 Depreciation Methods Recognition of method used given the expense Computation of expense 5-10 E10-5 Rate of Return Determination under straight-line and doubledeclining balance methods 5-10 E10-6 Acquisition Cost Computation under straight-line, sum-of-theyears'-digits, and double-declining-balance methods 5-10 E10-7 Group Depreciation Straight-line Journal entries to record transactions 5-15 E10-8 Composite Depreciation Straight-line Journal entries to record transactions 5-15 E10-9 Retirement/Replacement Methods Journal entries to record transactions 5-10 E10-10 (AICPA adapted) Depreciation Determination of amount to be capitalized and expensed 10-15 E10-11 Partial Periods Straight-line to nearest day, to nearest month, to nearest whole year, to one-half year 10-15 E10-12 Asset Impairment Determine if asset impaired Compute impairment loss Journal entry 15-20 E10-13 Depreciation Financial statements, income taxes, straight-line, double-declining balance, ACRS 15-20 10-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Number Content Time Range (minutes) E10-14 Changes and Corrections Straight-line to sum-of-the-years'digits Increased asset life Residual value ignored Journal entries 15-20 E10-15 (AICPA adapted) Change in Depreciation Method Compute book value under straight-line depreciation and effect of switch to sum-of-years'-digits method 15-20 E10-16 Depletion Determination of depletion cost per unit, inventory cost, and cost of goods sold 10-15 E10-17 (AICPA adapted) Depletion Expense determination P10-1 Depreciation Methods Straight-line, hours worked, units of output, sum-of-the-years'-digits, double-declining-balance, 150% declining-balance Return on assets 20-25 P10-2 Depreciation Methods Straight-line, hours worked, units of output 15-20 P10-3 Depreciation Methods Straight-line, sum-of-the-years'-digits, double-declining-balance, 150% declining-balance Return on assets 20-25 P10-4 Declining Balance Fixed percentage Computation of depreciation rate and yearly deduction 10-15 P10-5 Changing Depreciation Double-declining-balance to straightline at varying points in asset's life 20-30 P10-6 Cost of Asset 150% declining-balance Determination of acquisition cost and depreciation expense 10-20 P10-7 Partial Periods Depreciation computed to one-half year Journal entries to record depreciation and sale 20-30 P10-8 Group and Composite Depreciation Straight-line Journal entries to record various transactions (depreciation, retirement) 30-40 P10-9 Composite Depreciation Straight-line Journal entries to record various transactions (depreciation, acquisition, retirement) 15-20 P10-10 Asset Impairment Determine if asset impaired Compute impairment loss Journal entry Effects of changed assumptions 20-30 P10-11 Depreciation and Income Taxes Straight-line and ACRS Prepare income statements for financial reporting and income tax purposes 20-30 10-2 5-10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Number Content Time Range (minutes) P10-12 Depletion FIFO Calculation of depletion amount in ending inventory and the income statement Balance sheet preparation 20-30 P10-13 Depletion FIFO Calculation of expense and cost of inventory Recalculation of per unit amount and expense 20-30 P10-14 Changes and Corrections Double-declining-balance to straight-line Change in service life Residual value included in depreciation computation Journal entries 20-30 P10-15 (AICPA adapted) Adjusting Entries Straight-line depreciation to one-half year Construction, donation, parking lot Journal entries 40-60 P10-16 Comprehensive: Various Issues Journal entries to record various transactions Determination of account balances Includes topics from Chapter 40-60 P10-17 (AICPA adapted) Comprehensive: Capitalized Costs and Depreciation Prepare schedules to determine land and building costs, and depreciation expense 30-40 P10-18 (AICPA adapted) Comprehensive: Depreciation Completion of the fixed asset and depreciation schedule Acquisition, exchange, construction, donation, sale 40-60 P10-19 Errors Calculate increase or decrease in prior four years earnings resulting from errors Group depreciation Sale, exchange, acquisition, retirement Journal entry to correct the books 40-60 P10-20 (AICPA adapted) Comprehensive: Depreciation and PPE Schedules for depreciation and amortization expense, accumulated depreciation and amortization, and gain or loss from disposal Balance sheet disclosure 40-60 P10-21 (AICPA adapted) Comprehensive: Acquisitions, Disposals, Depreciation Schedules for changes in plant assets, depreciation expense, and gain or loss on asset disposal 40-60 P10-22 Comprehensive: Financial Statements Preparation of income statement, statement of retained earnings, and balance sheet based on journal entries for various transactions (including material from previous chapters) 40-60 10-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO QUESTIONS Q10-1 All three terms depreciation, depletion, and amortization refer to the process of allocating the cost of an asset to the periods in which the benefits are recognized as revenues It is the nature of the asset that distinguishes the three terms Depreciation is used in reference to tangible assets; depletion refers to natural resources such as oil or gas; and amortization is the allocation of the cost of intangible assets such as goodwill or leased property Amortization is sometimes used as the general term to describe the periodic allocation of costs Q10-2 The four factors used in a company’s computation of the periodic depreciation amount are: Asset cost - all the costs necessary to acquire, install, and prepare the asset for use Service life - the time of useful service or units of production expected from an asset Residual (salvage) value - the net amount expected to be obtained from the disposition of the asset at the end of its service life Method of cost allocation - the "systematic and rational" means to assign the cost of the asset to the periods benefitted Q10-3 The depreciation base is the cost of an asset less the estimated residual value This is the amount that is allocated over the estimated service life of the asset Q10-4 The objective of accounting for depreciation is to match the cost of an asset with the revenues, or benefits, derived from the asset in a systematic and rational manner Since the cost of an asset less any expected residual value is the total lifetime expense, it is recognized systematically against the revenues, or benefits, received Q10-5 Note: Part c involves an understanding of cash flow concepts discussed briefly in Chapter The recording of depreciation affects a company’s financial statements as follows: a Income statement - the company expenses depreciation directly or through cost of goods sold (for manufacturing assets) In either case, it decreases income before income taxes, income tax expense, and net income b Balance sheet - the Accumulated Depreciation account offsets the related asset account Thus, recording depreciation reduces the book value of a company's assets Depreciation included in manufacturing costs on unsold inventory affects the cost of the inventory on the balance sheet Since net income is reduced, retained earnings are also reduced c Statement of cash flows - depreciation is an expense that does not require an outlay of cash Consequently, it is added back to net income to show net cash provided by operating activities under the indirect method Under the direct method, it is omitted from the statement 10-4 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q10-6 Depreciation is not a means of generating funds for the replacement of an asset It is only a method of allocating the cost of an asset over its life The availability of funds for replacement is a separate consideration Q10-7 By definition, a cost is considered variable if it changes in proportion to changes in production Thus, when depreciation is based on activity levels, such as hours worked or output produced, it is a variable cost In contrast, depreciation based on time is a fixed cost Q10-8 Depreciation results primarily from physical causes and functional causes Wear and tear, which is due to operational usage, suggests the use of an activity method of depreciation Deterioration and decay are more dependent upon time and thus a time method of depreciation, such as the straight-line, declining-balance, or sum-ofthe-years'-digits method, is more appropriate The functional causes of depreciation-obsolescence or inadequacy seem to relate more to time methods of depreciation However, each situation must be evaluated separately because there are no steadfast rules for a depreciation method only that it be "systematic and rational." The requirement that all companies use the same method of depreciation is not desirable because different patterns of benefits exist for different types of assets If the purpose of such a requirement is to reduce the differences in financial statements, this would not accomplish it Even if two companies are using the same method of depreciation, by assuming different useful lives or salvage values, the depreciation amount can be markedly different Such a requirement would be an example of form over economic substance Q10-9 Accelerated methods of depreciation are the most appropriate when it can be assumed that the benefits derived from the asset will be declining each year during its service life Q10-10 The group and composite methods of depreciation are similar in that they are both applied to a combination of assets The group method is used when the assets are similar in nature and are expected to have similar service lives and residual values The composite method is for assets that are heterogeneous; they have similar purposes or characteristics but not necessarily have similar service lives or residual values Under both methods gains or losses on disposal are not recognized until all the assets are retired Q10-11 Both the retirement and replacement methods of expense recognition record the expense when an asset is retired The retirement method expenses the cost of the old asset, less any residual value, at the time of retirement Under the replacement method, it is the cost of the new asset, again less any residual value, that is expensed Q10-12 A manufacturing company debits depreciation on manufacturing assets to a Goods in Process account (an inventory account) In this way, it recognizes the expense of depreciation when it sells the inventory rather than when it records the depreciation Thus, if a company manufactures more goods than it sells and these goods remain in inventory, the depreciation included in the income statement is less than the asset's depreciation amount 10-5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q10-13 The depreciation on an asset is not intended to produce a book value equal to the market value It is a method of cost allocation Therefore, even though the cost of replacement goes up, a company records depreciation as long as the estimated residual value is less than the book value Q10-14 Depreciation of an asset is not an attempt to measure the value of an asset Thus, a company should use an accelerated method of depreciation if the benefits of the asset are greater in the early years and decline in later years, not because of the loss in value during the early years Q10-15 The manager seems to be using the term "depreciate" in another sense With regular repairs and maintenance, perhaps the transmission lines have extended useful lives and not lose their value In the accounting sense, depreciation is the allocation of the cost of an asset Unless the lines have an unlimited useful life, or an estimated residual value greater than their cost, the cost should be allocated over the service life Depreciation is not a means of valuing an asset and does not represent a decline in the value of an asset Q10-16 The required disclosures for depreciation as set forth in APB Opinion No 12 are as follows: Depreciation expense for the period Balances of depreciable assets, classified by nature or function, at balance sheet date Accumulated depreciation, by major classification or total, at balance sheet date A description of the method(s) used in computing depreciation with respect to the major classes of depreciable assets Q10-17 Because the underlying purposes behind depreciation are different for financial reporting and for income tax reporting, the method for each is different Accounting principles require the depreciation method to be "systematic and rational" and that it match the depreciation amounts to the benefits received from the assets For income tax purposes, a company uses the Accelerated Cost Recovery System (ACRS) for assets purchased from 1981 through 1986, and uses the Modified ACRS for assets purchased in 1987 and later years (For assets purchased before 1981, it uses accelerated depreciation methods) The MACRS allows the expensing of more of the cost early in the life of the asset and thus increases the net benefits to the company (on a present value basis) The acceleration of the expensing under MACRS results from the use of a shorter life, the accelerated methods (for assets with lives of 3, 5, 7, 10, 15, and 20 years), and the use of a zero residual value Q10-18 A company’s depletion for income tax purposes and financial reporting are the same if it uses the cost method for both However, for income tax purposes it may use the percentage-depletion method, which departs from the concept of cost allocation Under this tax method, the company may deduct a stated percentage of gross income as depletion expense over the life of the asset In addition, the total depletion expense during the asset's life may exceed the cost of that asset 10-6 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO CASES C10-1 (AICPA adapted solution) a The unit method of recording depreciation involves the treatment of fixed assets or substantial additions thereto as individual items The method entails maintaining detailed records of the costs of specific assets and related allowances for depreciation Computation of depreciation is based on the estimated useful life of the individual asset The method is distinguished from group and composite-life methods under which the cost and estimated life of the assets are commingled Depreciation may be recorded by straight-line, accelerated, or other accepted computation methods b Under the group or composite-life methods, assets are aggregated into accounting units Such grouping might be horizontal, vertical, or geographical Horizontal grouping assembles together all assets of similar physical characteristics, such as trucks, presses, or returnable containers A vertical or functional grouping comprises all assets contributing to a common economic function, such as a sugar refinery or service station The geographical grouping includes all assets in a district or region, such as telegraph poles Depreciation under these methods requires development of a weighted average rate from the assets' depreciable cost and estimated life Separate accounts are established for the total cost of each asset grouping and its related allowance for depreciation The asset grouping should be composed of a large number of units to obtain a reliable average life Arguments for the use of the unit method of computing depreciation include: (1) The method is simple in that it does not require involved mathematical computations (2) The gain or loss on the retirement of a particular asset can be computed (3) For cost purposes, depreciation on idle equipment can be isolated (4) The method results in a more accurately computed depreciation provision in any given year, as the total depreciation amount represents the best estimate of the depreciation of each asset and is not the result of averaging the cost over a longer period of time Arguments against the unit method are as follows: (1) Considerable additional bookkeeping is necessary to account for each asset and its related depreciation (The advent of computer accounting methods reduces the work burden, however.) (2) There is a point of diminishing returns in the accumulation of accounting data under this method; that is, additional accuracy may not justify the additional cost of record keeping 10-7 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com C10-1 (continued) (continued) (3) Under a decentralized financial control system where a measure of the division's efficiency is the rate of return on the gross book value of the investment, a division manager might scrap fully or nearly fully depreciated equipment to improve a division's rate of return even though the equipment is still serviceable (4) There may be reluctance on the part of a division manager to replace equipment not fully depreciated with more efficient equipment because of the effect of the loss on the division's profits in the year of replacement Among arguments for the use of the group and composite-life methods are the following: (1) The methods require less detailed bookkeeping (2) The application of depreciation to the whole group tends to average out or offset errors, economic or operating, caused by underdepreciation or overdepreciation (3) Periodic income is not distorted by gains or losses on disposal of assets (4) A more useful deduction from income is derived from these methods because of their recognition that depreciation estimates are based on averages and that gains and losses on individual assets are of little significance Arguments against the use of the group and composite-life methods would include: (1) The methods would conceal faulty estimates for a long period of time (2) When there is an early heavy retirement of assets a debit balance might appear in the Allowance for Depreciation account and present an accounting problem (3) Information is not available regarding a particular machine for cost-calculation purposes (4) Under a decentralized financial control system where a measure of the division's efficiency is the rate of return on the gross book value of the investment, to improve a division's financial reports a division manager might scrap idle but serviceable equipment or equipment that is not earning a satisfactory return on book value The company would sustain an actual loss in the amount of the value of the equipment scrapped (5) Under the same situation as in argument 4, except that net book value is used, where the assets, although serviceable, are fully or almost fully depreciated, the division manager might hesitate to replace them because of the high rate of return on investment Under the unit method, retirements are recorded by removing from the accounts the cost of the asset and its related accumulated depreciation The difference between the two accounts, adjusted for salvage and disposal costs, if any, is recognized as a gain or loss 10-8 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com C10-1 (continued) (continued) Under the group and composite-life methods, the cost of the retired asset is removed from the Asset account, and the Accumulated Depreciation account is reduced by the amount of the cost of the retired asset, adjusted for salvage, salvage costs, and removal costs Accordingly, there is no periodic recognition of gain or loss; the Depreciation Allowance account serves as a suspense account for the recognition of gain or loss until the final asset retirement C10-2 (AICPA adapted solution) The costs that should be capitalized when equipment is purchased for cash include the gross invoice price of the equipment less discounts plus all incidental costs relating to its purchase or preparation for use Any available discounts whether taken or not should be deducted from the gross invoice price of the equipment For equipment purchased under a long-term payment plan, the amount capitalized is the same as for equipment purchased for cash, i.e., the capitalizable cost represents the cash equivalent price The interest amounts should not be capitalized The physical factors that cause the equipment to depreciate are wear and tear from operation, action of time and other elements, and deterioration and decay The functional factors that cause the equipment to depreciate are inadequacy, obsolescence, and supersession The factors that should be considered in computing depreciation expense are the cost of the asset, the estimated residual (salvage) value, and the allocation over the estimated service life of the asset by a systematic and rational allocation procedure Accelerated depreciation methods are justified based on the following assumptions: a An asset is more efficient in the earlier years of its estimated useful life Therefore, larger depreciation amounts in the earlier years would be matched against the larger revenues generated in the earlier years b Repair expenses on an asset increase in the later years of its estimated useful life Therefore, smaller depreciation amounts in the later years would be combined with the larger repair expenses incurred in the later years resulting in a smooth or level pattern of these expenses C10-3 (AICPA adapted solution) a The capitalized cost for the computer includes all costs reasonable and necessary to prepare it for its intended use Examples of such costs are the cash purchase price, delivery, installation, testing, and set up b The objective of depreciation accounting is to allocate the depreciable cost of an asset over its estimated useful life in a systematic and rational manner This process matches the depreciable cost of the asset with revenues generated from its use Depreciable cost is the capitalized cost less its estimated residual (salvage) value 10-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com C10-3 (continued) The rationale for using accelerated depreciation methods is based on the following assumptions: An asset is more productive in the earlier years of its estimated useful life Therefore, larger depreciation amounts in the earlier years are matched against the larger revenues generated in the earlier years An asset may become technologically obsolete prior to the end of its originally estimated useful life The risk associated with estimated long-term cash flows is greater than the risk associated with near-term cash flows Accelerated depreciation recognizes this condition Patrick should record depreciation expense to the date of disposal Recording depreciation updates the carrying amount of the automobile If the carrying amount of the automobile (capitalized cost less accumulated depreciation) differs from the cash proceeds from the disposal, a gain or loss results Patrick should report gain or loss on disposal as part of income from continuing operations C10-4 (AICPA adapted solution) Portland should have selected the straight-line depreciation method when approximately the same amount of an asset's service potential is used up each period If the reasons for the decline in service potential are unclear, then the selection of the straight-line method could be influenced by the ease of recordkeeping, its use for similar assets, and its use by others in the industry Portland should record depreciation expense to the date of the exchange If the original truck's carrying amount is greater than its fair value, a loss results The truck's capitalized cost and accumulated depreciation are eliminated, and the loss on trade-in is reported as part of income from continuing operations The newly acquired truck is recorded at fair value If the original truck's carrying amount is less than its fair value at trade-in, then there is an unrecognized gain The newly acquired truck is recorded at fair value less the unrecognized gain Cash is decreased by the amount paid a By associating depreciation with a group of machines instead of each individual machine, Portland's bookkeeping process is greatly simplified Also, since actual machine lives vary from the average depreciable life, unrecognized net losses on early dispositions are expected to be offset by continuing depreciation on machines usable beyond the average depreciable life Periodic income does not fluctuate as a result of recognizing gains and losses on manufacturing machine dispositions b Portland should divide the depreciable cost (capitalized cost less residual value) of each machine by its estimated life to obtain its annual depreciation The sum of the individual annual depreciation amounts should then be divided by the sum of the individual capitalized costs to obtain the annual composite depreciation rate 10-10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P10-16 (continued) (continued) Dec 31 Amortization Expense Patent 700a 700 aTo record amortization of patent (acquired in the first half of the year) over the estimated economic life of 10 years Accumulated Depreciation: Building Bal.12/31/04 12/31/95 3,750 2,061 Bal.12/31/05 5,811 Accumulated Depreciation: Office Machinery 3/7/05 1,952 Bal.12/31/04 12/31/05 9,760 2,390 Bal.12/31/05 10,198 Accumulated Depreciation: Office Fixtures 8/10/05 467 Bal.12/31/04 8/10/05 12/31/05 10,000 67 5,064 Bal.12/31/05 24,464 P10-17 (AICPA adapted solution) BROCK CORPORATION Land Account (Site Number 101) As of September 30, 2005 Acquisition cost Real estate broker's commission Legal fees Title guarantee insurance Cost of razing existing building Balance, September 30, 2005 $600,000 36,000 6,000 18,000 75,000 $735,000 10-64 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P10-17 (continued) BROCK CORPORATION Capitalized Cost of Office Building As of September 30, 2005 Contract cost Plan, specifications, and blueprints Architects' fees for design and supervision Capitalized interest 2004 ($900,000 x 14% x 10/12) Capitalized interest 2005 ($2,300,000 x 14% x 9/12) Total capitalized cost, September 30, 2005 $3,000,000 12,000 95,000 105,000 241,500 $3,453,500 BROCK CORPORATION Computation of Depreciation of Office Building Using 150% Declining Balance Method For the Year Ended December 31, 2005 Capitalized cost 150% declining balance rate (100% 40 years = 2.5% x 1.5) Annual depreciation $3,453,500 x 3.75% $ 129,506 Depreciation October to December 31, 2005 ($129,506 x 3/12) $ 32,377 P10-18 (AICPA adapted solution) $ 65,000 Allocated in proportion to appraised values (72/900 x $812,500) $747,500 Allocated in proportion to appraised values (828/900 x $812,500) 50 years Cost less salvage ($747,500 - $47,500) divided by annual depreciation ($14,000) $ 14,000 Same as prior year since it is straight-line depreciation $ 85,400 [Number of shares (3,000) times fair value ($25)] plus demolition cost of existing building ($10,400) None No depreciation before use $ 16,000 Fair market value 10-65 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P10-18 (continued) $ 2,400 Cost ($16,000) times percentage (15%) $ 2,040 Cost ($16,000) less prior year's depreciation ($2,400) equals $13,600 Multiply $13,600 by 15% 10 $ 99,000 Total cost ($110,000) less repairs and maintenance ($11,000) 11 $ 17,000 Cost less salvage ($99,000 - $5,500) times 10/55 12 $ 5,100 Cost less salvage ($99,000 - $5,500) times 9/55 times one-third of a year 13 $ 28,580 Annual payment ($4,000) times present value of annuity at 10% for 10 years (6.145) plus down payment ($4,000) This can be computed from an annuity due table since the payments are at the beginning of each year To convert from an annuity in arrears to an annuity due factor, proceed as follows: For 11 payments use the present value in arrears for 10 years (6.145) plus 1.00 Multiply this factor (7.145) by $4,000 annual payment 14 $ 1,905 Cost ($28,580) divided by estimated life (15 years) P10-19 Accumulated depreciation on the trucks, January 1, 2001 Truck Cost $12,000 10,400 12,800 15,000 Life 5 5 Annual Depreciation $2,400 2,080 2,560 3,000 Years Owned 2½ ½ Accumulated Depreciation $ 7,200 5,200 2,560 1,500 $16,460 Note: This schedule is used to help determine the accumulated depreciation to date for each correcting entry Also see correct depreciation schedule later in solution 10-66 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P10-19 (continued) July 1, 2001 Correct entry: Cash Accumulated Depreciation: Trucks [$7,200 + ($2,400 x ½)] Loss Trucks 1,000 8,400 2,600 12,000 Entry made: Cash Trucks 1,000 Correcting entry: Accumulated Depreciation: Trucks Retained Earnings Trucks 8,400 2,600 1,000 January 1, 2002 Correct entry: Accumulated Depreciation: Trucks ($2,560 + $2,560) Trucks (new) Cash Trucks (old) 11,000 5,120 9,460 1,780 12,800 Entry made: Trucks Cash 1,780 Correcting entry: Accumulated Depreciation: Trucks Trucks 5,120 1,780 5,120 Note: This is an exchange of similar productive assets July 1, 2003 Correct entry: Accumulated Depreciation: Trucks ($1,500 + $3,000 + $3,000 + $1,500) Cash Loss Trucks 10-67 9,000 1,000 5,000 15,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P10-19 (continued) (continued) Entry made: Cash Miscellaneous Revenue Trucks 1,000 50 950 Correcting entry: Accumulated Depreciation: Trucks Retained Earnings Trucks 9,000 5,050 14,050 Correct depreciation: Truck Total Depreciation Correction 2001 $1,200 $2,080 $2,560 $3,000 – – $8,840 2002 – $2,080 – $3,000 $1,892 – $6,972 2003 – $1,040 – $1,500 $1,892 $1,200 $5,632 2004 – – – – $1,892 $2,400 $4,292 (8,840) – (5,436) $1,536 (4,146) $1,486 (2,856) $1,436 ($9,460 ($12,000 = $1,892) = $2,400) Effect of errors on earnings (all reductions) 2001 2002 2003 2004 $2,600 $1,536 $5,050 + $1,486 = $6,536 $1,436 Correcting journal entry Retained Earnings ($2,600 + $1,536 + $6,536) Depreciation Expense Accumulated Depreciation: Trucks ($8,400 + $5,120 + $9,000 - $1,436 - $1,536 - $1,436) Trucks ($11,000 + $5,120 + $14,050) 10-68 10,672 1,436 18,062 30,170 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P10-20 (AICPA adapted solution) BLAKE CORPORATION Depreciation and Amortization Expense For the Year Ended December 31, 2004 Building: Book value 1/1/04 ($1,200,000 - $263,100) 150% declining balance rate [(100% 25) x 1.5)] Total depreciation on building $936,900 x 6% $ 56,214 Machinery and equipment: Balance, 1/1/04 Deduct: Machine destroyed by fire Depreciation $900,000 (23,000) Machine destroyed by fire, 4/1/04 Depreciation from 1/1 to 4/1/04 (10% x 3/12) $877,000 x 10% 87,700 $ 23,000 x 2.5% Purchased 7/1/04 Depreciation from 7/1 to 12/31/04 (10% x 6/12) Total depreciation on machinery and equipment 575 $310,000 x 5% 15,500 103,775 Automotive equipment: Depreciation on $115,000 balance, 1/1/04 Deduct: Depreciation on car traded in 1/2/04 (SYD 3rd year 2/10 x $9,000) $ 18,000 (1,800) Car purchased, 1/2/04 Depreciation SYD 1st year Total depreciation on automotive equipment $ 12,000 x 4/10 16,200 4,800 21,000 10-69 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P10-20 (continued) (continued) Leasehold improvements: Cost, 5/1/04 Amortization period (5/1/04 to 12/31/10) Amortization per month Amortization for 2004 (5/1 to 12/31/04) Total amortization on leasehold improvements Total depreciation and amortization expense for 2004 $168,000 80 mos $ 2,100 x mos 16,800 $197,789 BLAKE CORPORATION Accumulated Depreciation and Amortization December 31, 2004 Accumulated depreciation: Building at 12/31/04 Balance, 1/1/04 Depreciation for 2004 Balance, 12/31/04 Accumulated depreciation: Machinery and equipment at 12/31/04 Balance, 1/1/04 Depreciation for 2004 Deduct: Machine destroyed by fire (5 x 10% x $23,000) Balance, 12/31/04 $263,100 56,214 $319,314 $250,000 103,775 $353,775 (11,500) 342,275 Accumulated depreciation: Automotive equipment at 12/31/04 Balance, 1/1/04 Depreciation for 2004 Deduct: Car traded in ($9,000 - $2,700) Balance, 12/31/04 Accumulated amortization: Leasehold improvements at 12/31/04 Amortization for 2004 Balance, 12/31/04 Total accumulated depreciation and amortization at 12/31/04 10-70 $ 84,600 21,000 $105,600 (6,300) 99,300 $ 16,800 16,800 $777,689 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P10-20 (continued) BLAKE CORPORATION Gain or Loss from Disposal of Assets For the Year Ended December 31, 2004 Gain on machine destroyed by fire: Insurance recovery Book value of machine destroyed [$23,000 - (5 x 10% x $23,000)] $ 15,500 (11,500) Loss on car traded in on new car purchase: Book value of car traded in Trade-in allowed ($12,000 - $10,000) Net gain on asset disposals for 2004 $ 2,700 (2,000) $ 4,000 (700) 3,300 BLAKE CORPORATION Property, Plant, and Equipment Section of Balance Sheet December 31, 2004 Land Building Machinery and equipment Automotive equipment Leasehold improvements Totals Cost $ 150,000 1,200,000 1,187,0001 118,0002 168,000 $2,823,000 Accumulated Depreciation and Amortization $ – 319,314 342,275 99,300 16,800 $777,689 Book Value $ 150,000 880,686 844,725 18,700 151,200 $2,045,311 Explanations of Amounts: 1Machinery and equipment at 12/31/04 Balance, 1/1/04 Purchased, 7/1/04 ($280,000 + $5,000 + $25,000) Deduct: Machine destroyed by fire 4/1/04 Balance, 12/31/04 equipment at 12/31/04 Balance, 1/1/04 Car purchased, 1/2/04 $ 900,000 310,000 $1,210,000 (23,000) $1,187,000 2Automotive $ 115,000 12,000 $ 127,000 (9,000) $ 118,000 Deduct: Car traded in Balance, 12/31/04 10-71 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P10-21 (AICPA adapted solution) PELL CORPORATION Analysis of Changes in Plant Assets For the Year Ended December 31, 2004 Balance 12/31/03 Land $ 350,000 Land improvements 180,000 Building 1,500,000 Machinery and equipment 1,158,000 Automobiles 150,000 Totals $3,338,000 Increase $438,000 [1] – – 287,000 [2] 19,000 [3] $744,000 Decrease $ – – – 58,000 18,000 $76,000 Balance 12/31/04 $ 788,000 180,000 1,500,000 1,387,000 151,000 $4,006,000 Explanations of Amounts: [1] Cost of land acquired 11/2/04 Pell stock exchanged (10,000 x $38) Legal fees and title insurance Razing existing building [2] Cost of machinery and equipment purchased 1/2/04 Invoice cost Installation cost [3] Cost recorded for new automobile 12/31/04 Carrying amount of trade-in [$18,000 - $13,500 (depreciation 150% declining balance at rate of 50% for years)] Cash paid Subtotal Loss on trade-in Cost recorded for new automobile 10-72 $380,000 23,000 35,000 $438,000 $260,000 27,000 $287,000 $ 4,500 15,250 $19,750 (750) $19,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P10-21 (continued) PELL CORPORATION Depreciation Expense For the Year Ended December 31, 2004 Land improvements: Cost Straight-line rate [100% 15] Total depreciation on land improvements $ 180,000 x 2/3% Building: Carrying amount 12/31/03 ($1,500,000 - $350,000) 150% declining balance rate [(100% 20) x 1½] Total depreciation on building $1,150,000 x 1/2% Machinery and equipment: Balance, 12/31/03 Deduct machine sold 3/31/04 Depreciation straight-line rate Purchased 1/2/04 Depreciation Machine sold 3/31/04 Depreciation from 1/1/ to 3/31/04 (10% x ¼) Total depreciation on machinery and equipment $ 12,000 $1,158,000 (58,000) 86,250 $1,100,000 x 10% $ 287,000 x 0% $ 58,000 x 2.5% 110,000 28,700 1,450 140,150 Automobiles: Carrying amount 12/31/03 ($150,000 - $112,000) 150% declining balance rate [100% x 1½] Total depreciation on automobiles Total depreciation expense for 2004 P10-21 (continued) $ 38,000 x 50% 19,000 $257,400 10-73 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com PELL CORPORATION Gain or Loss from Plant Asset Disposals That Would Be Recognized in Income Statement For the Year Ended December 31, 2004 Gain or (loss) Sale of machine 3/31/04: Selling price Carrying amount of machine sold [$58,000 - $24,650 (Depreciation 4¼ years x 10%)] Gain on sale Trade-in of automobile 12/31/04: Carrying amount of trade-in Trade-in allowed ($19,000 - $15,250) Loss on trade-in $36,500 (33,350) $ 3,150 $ 4,500 [3] (3,750) $ (750) Gain from asset disposals $ 2,400 P10-22 Note to Instructor: This problem includes material from previous chapters Journal entries during 2004: (1) Land Common Stock, $10 par Additional Paid-in Capital a$25 150,000a 60,000 90,000 x 6,000 Cash Notes Payable 500,000 Building Cash 700,000 500,000 700,000 (2) Machine Accumulated Depreciation Machine Cash aCost 415,000a 135,000 500,000 50,000 = BV of asset surrendered + Boot paid = $365,000 + $50,000 10-74 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P10-22 (continued) (3) Cash Sales Revenue 700,000 700,000 Cost of Goods Sold Inventory 350,000 Accounts Payable Cash 400,000 Inventory Accounts Payable 480,000 350,000 400,000 480,000 (4) Dividends Distributed (or Retained Earnings) Cash a36,000 90,000 90,000a x $2.50 Adjustments at End of 2004: Interest Expense Building Interest Payable a$500,000 b[($0 18,000 42,000b 60,000a x 12% + $700,000) 2] x 12% Depreciation Expense Accumulated Depreciation a($415,000 - $55,000) 72,000a 72,000 Rent Expense Prepaid Rent 60,000 Income Tax Expense Income Taxes Payable 60,000a aSee 60,000 60,000 income statement 10-75 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P10-22 (continued) Financial Statements for 2004: LURCH COMPANY Income Statement For Year Ended December 31, 2004 Sales revenue Less: Expenses Cost of goods sold Interest expense Depreciation expense Rent expense Income before income taxes Income tax expense (30%) Net Income $700,000 $350,000 18,000 72,000 60,000 Earnings per share (36,000 shares) (500,000) $200,000 (60,000) $140,000 $ LURCH COMPANY Statement of Retained Earnings For Year Ended December 31, 2004 Beginning retained earnings Add: Net income $200,000 140,000 $340,000 (90,000) $250,000 Less: Dividends Ending retained earnings 10-76 3.89 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P10-22 (continued) LURCH COMPANY Balance Sheet December 31, 2004 Assets 500,000a Cash $ Inventory 580,000b Land 150,000 Building 742,000 Machine $415,000 Less: Acc depr (72,000) 343,000 Totals $2,315,000 Liabilities and Equities Accounts payable $ 480,000c Notes payable 500,000 Interest payable 60,000 Income taxes payable 60,000 Total liabilities $1,100,000 Common stock, $10 par Additional paid-in cap Retained earnings Total stock equity Totals a$540,000 + $500,000 - $700,000 - $50,000 + $700,000 - $400,000 - $90,000 b$450,000 - $350,000 + $480,000 c$400,000 - $400,000 + $480,000 d$300,000 + $60,000 e$515,000 + $90,000 10-77 360,000d 605,000e 250,000 $1,215,000 $2,315,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 10-78 ... download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com C10-8 (AICPA adapted solution) Accounting for depreciation is a system of accounting to distribute the... through income tax savings C10-6 (AICPA adapted solution) a The conventional concept of depreciation accounting usually is defined as a system of accounting that aims to distribute the cost or... have been amortized Depreciation is the accounting process of allocating an asset's historical cost (recorded amount) to the accounting periods benefitted by the use of the asset It is a process