Solution manual accounting 25th editon warren chapter 10

Capital expenditures include the cost of acquiring fixed assets and the cost of improving an asset.. An accelerated depreciation method is most appropriate for situations in which the d

FIXED ASSETS AND INTANGIBLE ASSETS

DISCUSSION QUESTIONS

1 a Property, plant, and equipment or Fixed assets

b Current assets (merchandise inventory)

2 Real estate acquired as speculation should be listed in the balance sheet under the caption

“Investments,” below the Current Assets section

3 $1,100,000

4 Capital expenditures include the cost of acquiring fixed assets and the cost of improving an

asset These costs are recorded by increasing (debiting) a fixed asset account Capital

expenditures also include the costs of extraordinary repairs, which are recorded by decreasing (debiting) the asset’s accumulated depreciation account Revenue expenditures are recorded as expenses and are costs that benefit only the current period and are incurred for normal

maintenance and repairs of fixed assets

8 a. An accelerated depreciation method is most appropriate for situations in which the decline

in productivity or earning power of the asset is proportionately greater in the early years ofuse than in later years, and the repairs tend to increase with the age of the asset

b. An accelerated depreciation method reduces income tax payable to the IRS in the earlierperiods of an asset’s life Thus, cash is freed up in the earlier periods to be used for otherbusiness purposes

c. MACRS was enacted by the Tax Reform Act of 1986 It is used for depreciation for

fixed assets acquired after 1986

9 a. No, the accumulated depreciation for an asset cannot exceed the cost of the asset To do so

would create a negative book value, which is meaningless

b. The cost and accumulated depreciation should be removed from the accounts when the asset is no longer useful and is removed from service Presumably, the asset will then be sold, traded in, or discarded

Gain on sale ($480,000 – $459,375) = $20,625

c.

PE 10–7A

a $0.30 per ton = $127,500,000 ÷ 425,000,000 tons

b $12,600,000 = 42,000,000 tons × $0.30 per ton

c.

PE 10–7B

a $1.04 per ton = $494,000,000 ÷ 475,000,000 tons

b $32,760,000 = 31,500,000 tons × $1.04 per ton

c.

Depletion of mineral deposit.

Depletion of mineral deposit.

CHAPTER 10 Fixed Assets and Intangible Assets

b The decrease in the fixed asset turnover ratio from 3.2 to 2.9 indicates an

unfavorable trend in the efficiency of using fixed assets to generate sales.

Ex 10–1

a New printing press: 1, 2, 3, 5, 6

b Used printing press: 7, 8, 9, 11

Ex 10–2

a Yes All expenditures incurred for the purpose of making the land suitable for

its intended use should be debited to the land account.

b No Land is not depreciated.

a No The $44,500,000 represents the original cost of the equipment Its

replacement cost, which may be more or less than $44,500,000, is not

reported in the financial statements.

b No The $29,800,000 is the accumulation of the past depreciation charges on

the equipment The recognition of depreciation expense has no relationship

to the cash account or accumulation of cash funds.

50,000 hours = $3.68 depreciation per hour

175 hours at $3.68 = $644 depreciation for January

a Depreciation Rate per Mile:

1,860 * 6,300

* Mileage depreciation of $2,480 (31 cents × 8,000) is limited to $1,860, which reduces

the book value of the truck to $10,900, its residual value.

b.

Ex 10–12

a.

First Year 5% of $90,000 = $4,500

or

$90,000 ÷ 20 = $4,500

Second Year 5% of $90,000 = $4,500

Accumulated depreciation at December 31, 2014

a $21,750,000 ÷ 15,000,000 tons = $1.45 depletion per ton

3,600,000 tons × $1.45 = $5,220,000 depletion expense

Ex 10–21

a Property, Plant, and Equipment (in millions):

Current Preceding

Machinery, equipment, and internal-use software……… 3,589 1,932

Other fixed assets related to leases……… 2,030 1,665

Less accumulated depreciation and amortization……… 2,466 1,713

A comparison of the book values of the current and preceding years

indicates that they increased A comparison of the total cost and

accumulated depreciation reveals that Apple purchased $2,567 million

($7,234 – $4,667) of additional fixed assets, which was offset by the

additional depreciation expense of $753 million ($2,466 – $1,713) taken

during the current year.

b We would expect Apple’s book value of fixed assets to increase during the

year as its sales increase Although additional depreciation expense will

reduce the book value, most companies, such as Apple, invest in new assets

in an amount that is at least equal to the depreciation expense However,

during periods of economic downturn, companies purchase fewer fixed

assets, and the book value of their fixed assets may decline.

Ex 10–22

1 Fixed assets should be reported at cost and not replacement cost.

2 Land does not depreciate.

3 Patents and goodwill are intangible assets that should be listed in a separate

section following the Fixed Assets section Patents should be reported at

their net book values (cost less amortization to date) Goodwill should not be

amortized, but should be only written down upon impairment.

a Fixed Asset Turnover Ratio = Average Book Value of Fixed Assets Revenue

Fixed Asset Turnover Ratio = $106,565

($87,711 + $91,985) ÷ 2 Fixed Asset Turnover Ratio = 1.19

b Verizon earns $1.19 revenue for every dollar of fixed assets This is a low

fixed asset turnover ratio, reflecting the high fixed asset intensity in a

telecommunications company The industry average fixed asset turnover

ratio is slightly lower at 1.10 Thus, Verizon is using its fixed assets

more efficiently than the industry as a whole.

Ex 10–24

a Best Buy: 12.74 ($50,272 ÷ $3,947)

RadioShack: 16.09 ($4,473 ÷ $278)

b RadioShack’s fixed asset turnover ratio of 16.09 is higher than Best Buy’s

fixed asset turnover ratio of 12.74 Thus, RadioShack is generating $3.35

($16.09 – $12.74) more revenue for each dollar of fixed assets than is Best

Buy On this basis, RadioShack is managing its fixed assets more

efficiently than is Best Buy.

Appendix Ex 10–25

b Fair market value (trade-in allowance) of old equipment………… $ 90,000

or

Less assets given up in exchange:

Book value of old equipment……… $ 68,000

Cash paid on the exchange……… 185,000 253,000

Appendix Ex 10–26

b Fair market value (trade-in allowance) of old equipment………… $ 90,000

or

Less assets given up in exchange:

Cash paid on the exchange……… 185,000 293,500

services as time passes and are therefore depreciated.

4 Since Land Improvements are depreciated, depreciation expense of $1,200

($12,000 × 1/20 × 2) would be overstated and net income would be understated

by $1,200 on the income statement On the balance sheet, Land would be

understated by $12,000, Land Improvements would be overstated by $10,800

($12,000 – $1,200), and Owner’s Capital would be understated by $1,200.

Prob 10–2A

* Book value should not be reduced below the residual value of $13,500.

2 The double-declining-balance method yields the most depreciation expense in

* Book value should not be reduced below $9,000, the residual value.

Prob 10–4A

1.

Depreciation

Accumulated Depreciation, Book Value,

Delivery truck depreciation.

[$28,000 × (1/4 × 2)]

2013

Delivery truck depreciation.

[($28,000 – $14,000) × (1/4 × 2) × 3/12]

Delivery truck depreciation.

[$48,000 × (1/5 × 2)]

Prob 10–5A (Concluded)

2014

Delivery truck depreciation.

[($48,000 – $19,200) × (1/5 × 2) × 9/12]

Delivery truck depreciation.

[$54,000 × (1/8 × 2) × 1/2]

1 a $1,600,000 ÷ 5,000,000 board feet = $0.32 per board foot;

1,100,000 board feet × $0.32 per board foot = $352,000

b Loss from impaired goodwill, $3,750,000

Depletion of timber rights.

services as time passes and are therefore depreciated.

4 Since Land Improvements are depreciated, depreciation expense of $4,320

($21,600 × 1/10 × 2) would be understated and net income would be overstated

by $4,320 on the income statement On the balance sheet, Land would be

overstated by $21,600, Land Improvements would be understated by $17,280

($21,600 – $4,320), and Owner’s Capital would be overstated by $4,320.

1 Depreciation Expense

* Book value should not be reduced below the residual value of $35,000.

2 The double-declining-balance method yields the most depreciation expense in

Depreciation

Accumulated Depreciation, Book Value,

Delivery truck depreciation.

Delivery truck depreciation.

Delivery truck depreciation.

[$50,000 × (1/8 × 2)]

Delivery truck depreciation.

[($50,000 – $12,500) × (1/8 × 2) × 8/12]

Delivery truck depreciation.

[$58,500 × (1/10 × 2) × 4/12]

c $2,975,000 ÷ 12,500,000 board feet = $0.238 per board foot;

4,150,000 board feet × $0.238 per board foot = $987,700

CP 10–1

It is considered unprofessional for employees to use company assets for personal reasons, because such use reduces the useful life of the assets for normal business purposes Thus, it is unethical for Dave Elliott to use Lyric Consulting Co.’s

computers and laser printers to service his part-time accounting business, even on

an after-hours basis In addition, it is improper for Dave’s clients to call him during regular working hours Such calls may interrupt or interfere with Dave’s ability to carry out his assigned duties for Lyric Consulting Co.

CP 10–2

You should explain to Nolan and Stacy that it is acceptable to maintain two sets of records for tax and financial reporting purposes This can happen when a company uses one method for financial statement purposes, such as straight-line

depreciation, and another method for tax purposes, such as MACRS depreciation This should not be surprising, since the methods for taxes and financial statements are established by two different groups with different objectives That is, tax laws and related accounting methods are established by Congress The Internal

Revenue Service then applies the laws and, in some cases, issues interpretations of the law and congressional intent The primary objective of the tax laws is to

generate revenue in an equitable manner for government use Generally accepted accounting principles, on the other hand, are established primarily by the Financial Accounting Standards Board The objective of generally accepted accounting

principles is the preparation and reporting of true economic conditions and results

of operations of business entities.

You might note, however, that companies are required in their tax returns to

reconcile differences in accounting methods For example, income reported on the company’s financial statements must be reconciled with taxable income.

Finally, you might also indicate to Nolan and Stacy that even generally accepted accounting principles allow for alternative methods of accounting for the same transactions or economic events For example, a company could use straight-line depreciation for some assets and double-declining-balance depreciation for other assets.

CHAPTER 10 Fixed Assets and Intangible Assets

CP 10–3 (Concluded)

3 For financial reporting purposes, Tim should select the method that provides

the net income figure that best represents the results of operations.

Note to Instructors: The concept of matching revenues and expenses is discussed

in Chapter 3 However, for income tax purposes, Tim should consider selecting the method that will minimize taxes Based on the analyses in (2), both methods

of depreciation will yield the same total amount of taxes over the useful life of the equipment MACRS results in fewer taxes paid in the early years of useful

life and more in the later years For example, in 2012 the income tax expense

using MACRS is $268,000, which is $16,000 ($284,000 – $268,000) less than the income tax expense using the straight-line depreciation of $284,000 Tuttle

Construction Co can invest such differences in the early years and earn

income.

In some situations, it may be more beneficial for a taxpayer not to choose

MACRS These situations usually occur when a taxpayer is expected to be

subject to a low tax rate in the early years of use of an asset and a higher tax

rate in the later years of the asset’s useful life In this case, the taxpayer may

be better off to defer the larger deductions to offset the higher tax rate.

CP 10–4

Note to Instructors: The purpose of this activity is to familiarize students with the

procedures involved in acquiring a patent, a copyright, and a trademark You may

wish to divide the class into three groups to report back on patents, copyrights,

and trademarks separately.

The following is some information on patents, copyrights, and trademarks that you may find helpful in your discussions.

Patents

A patent is requested by filing a written application at the relevant patent office

The person or company filing the application is referred to as “the applicant.”

The applicant may be the inventor or its assignee The application contains a

description of how to make and use the invention that must provide sufficient detail for a person skilled in the art (i.e., the relevant area of technology) to make and use the invention In some countries, there are requirements for providing specific

information such as the usefulness of the invention, the best mode of performing

the invention known to the inventor, or the technical problem or problems solved

by the invention Drawings illustrating the invention may also be provided.

10-32

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CP 10–4 (Concluded)

The application also includes one or more claims, although it is not always a

requirement to submit these when first filing the application The claims set out what the applicant is seeking to protect in that they define what the patent owner has a right to exclude others from making, using, or selling, as the case may be In other words, the claims define what a patent covers or the “scope of protection.” After filing, an application is often referred to as “patent pending.” While this term does not confer legal protection, and a patent cannot be enforced until granted, it serves to provide warning to potential infringers that if the patent is issued, they may be liable for damages.

Source: http://en.wikipedia.org/wiki/Patent#Application_and_prosecution.

Copyright

While copyright in the United States automatically attaches upon the creation of an original work of authorship, registration with the Copyright Office puts a copyright holder in a better position if litigation arises over the copyright A copyright holder desiring to register his or her copyright should do the following:

1 Obtain and complete appropriate form.

2 Prepare clear rendition of material being submitted for copyright.

3 Send both documents to the U.S Copyright Office in Washington, D.C.

Source: http://en.wikipedia.org/wiki/United_States_copyright_law#Procedural_issues.

Trademark

The law considers a trademark to be a form of property Proprietary rights in

relation to a trademark may be established through actual use in the marketplace,

or through registration of the mark with the trademarks office (or “trademarks registry”) of a particular jurisdiction In some jurisdictions, trademark rights can

be established through either or both means Certain jurisdictions generally do not recognize trademarks rights arising through use In the United States, the only way to qualify for a federally registered trademark is to first use the trademark in commerce If trademark owners do not hold registrations for their marks in such jurisdictions, the extent to which they will be able to enforce their rights through trademark infringement proceedings will therefore be limited In cases of dispute, this disparity of rights is often referred to as “first to file” as opposed to “first to use.” Other countries such as Germany offer a limited amount of common law rights for unregistered marks where, to gain protection, the goods or services must

occupy a highly significant position in the marketplace—where this could be 40%

or more market share for sales in the particular class of goods or services.

Source: http://en.wikipedia.org/wiki/Trademark#Maintaining_rights.