Operating Assets: Property, Plant, and Equipment, Natural Resources, and Intangibles

CHAPTER 8
Operating Assets: Property, Plant,

and Equipment, Natural Resources,
and Intangibles
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Outcomes Exercises Minutes Level
1. Understand the balance sheet disclosures for 11* 30 Mod
operating assets.
2. Determine the acquisition cost of an operating asset. 1 10 Easy
3. Explain how to calculate the acquisition cost of assets 2 20 Mod

purchased for a lump sum.
4. Describe the impact of capitalizing interest as part of the 12* 5 Easy

acquisition cost of an asset.
5. Compare depreciation methods and understand the factors 3 20 Mod

affecting the choice of method. 4 15 Mod
12* 5 Easy
6. Understand the impact of a change in the estimate of the asset 5 15 Mod

life or residual value.
7. Determine which expenditures should be capitalized as asset costs 11* 30 Mod

and which should be treated as expenses.
8. Analyze the effect of the disposal of an asset at a gain or loss. 6 15 Mod

7 15 Mod
9. Understand the balance sheet presentation of intangible assets. 13* 10 Mod
10. Describe the proper amortization of intangible assets. 8 15 Easy

13* 10 Mod
11. Explain the impact that long-term assets have on the statement 9 5 Mod
of cash flows. 10 5 Mod
12. Understand how investors can analyze a company’s

operating assets.
*Exercise, problem, or case covers two or more learning outcomes

Level = Difficulty levels: Easy; Moderate (Mod); Difficult (Diff)
8-1
8-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Problems Estimated
and Time in
Learning Outcomes Alternates Minutes Level
1. Understand the balance sheet disclosures for
operating assets. 6* 30 Mod
2. Determine the acquisition cost of an operating asset. 7* 15 Diff

purchased for a lump sum. 5 40 Diff
6* 30 Mod
4. Describe the impact of capitalizing interest as part of the

5. Compare depreciation methods and understand the factors 2 10 Easy

6* 30 Mod
7* 15 Diff
8* 20 Mod
6. Understand the impact of a change in the estimate of the asset 9* 10 Mod

7. Determine which expenditures should be capitalized as asset costs 6* 20 Mod

and which should be treated as expenses. 8* 20 Mod
8. Analyze the effect of the disposal of an asset at a gain or loss. 6* 30 Mod

8* 20 Mod
10* 35 Mod
9. Understand the balance sheet presentation of intangible assets. 6# 30 Mod

11* 20 Diff
10. Describe the proper amortization of intangible assets. 4# 15 Mod

6# 30 Mod
9* 10 Mod
11* 20 Mod
of cash flows. 5 40 Diff
10* 35 Mod
11* 20 Diff
operating assets.

# Alternative problem only
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, NATURAL RESOURCES, AND INTANGIBLES 8-3
Estimated
Time in
Learning Outcomes Cases Minutes Level
1. Understand the balance sheet disclosures for 1* 20 Mod
operating assets. 3* 25 Mod
2. Determine the acquisition cost of an operating asset.

purchased for a lump sum.
4. Describe the impact of capitalizing interest as part of the

5. Compare depreciation methods and understand the factors 3* 25 Mod

6 10 Mod
6. Understand the impact of a change in the estimate of the asset

7. Determine which expenditures should be capitalized as asset costs

and which should be treated as expenses.
8. Analyze the effect of the disposal of an asset at a gain or loss.
9. Understand the balance sheet presentation of intangible assets. 1* 20 Mod
10. Describe the proper amortization of intangible assets
of cash flows.

operating assets.

QUESTIONS
1. Operating assets include property, plant, and equipment and intangibles. Examples
of assets considered operating assets are buildings, equipment, land, land
improvements, patents, copyrights, and goodwill. Operating assets are important to
the long-term future of the company because they are the assets used to produce a
product or service sold to customers. The operating assets allow a company to
produce a product efficiently and remain competitive with other firms.
2. The acquisition cost of an asset includes all the costs normally necessary to acquire
the asset and prepare it for its intended use. Acquisition costs include the purchase
price, freight costs, installation costs, taxes paid at the time of purchase, and repairs
made to prepare the asset for use.
3. The acquisition cost of assets purchased as a group should be determined by
allocating the purchase price on the basis of the proportions of the fair market values
to the total fair market value.
4. It is important to separately account for the cost of land and building because the
amount allocated to a building represents a depreciable amount, while the amount
allocated to land does not.
5. Interest should be capitalized when an asset is constructed by the acquiring
company over time, and the asset is not an item of inventory.
6. The decline in usefulness of an operating asset is related to physical deterioration
factors, such as wear and tear. It is also related to obsolescence and technological
factors and to the repair and maintenance of the asset. The depreciation method
chosen should match the decline in usefulness of the asset to the periods benefited
by the asset after all factors have been taken into account. However, the company is
not required to use the same method for all depreciable assets.
7. The straight-line method is the most popular method of depreciation for several
reasons, including its simplicity and ease of application. It is most appropriate for
assets that experience a decline in usefulness related to the passage of time. It may
also be used by companies that wish to report a stable income over time.
8. When the straight-line method is used, the residual value should be deducted from
the acquisition cost to determine the depreciable amount to be allocated over the
useful life of the asset. When the double-declining-balance method is used, the
residual value is not deducted. However, the asset should not be depreciated to an
amount that is lower than the residual value.
9. Companies may use one method of depreciation for financial reporting and another
method for tax purposes because the objectives are different. The accountant’s
purpose in recording depreciation for financial reporting purposes is to allocate the
original cost of the asset to the periods benefited in a manner that matches the
decline in usefulness of the asset. The accountant’s purpose in recording
depreciation for tax purposes is to minimize the amount of income tax that must be
paid.
10. If an estimate must be changed, the change in estimate should be recorded
prospectively over the remaining life of the asset. Past amounts recorded for
depreciation are not changed or altered. The remaining depreciable amount should
be recorded over the remaining life of the asset, using the revised estimate or
estimates of residual value and asset life.
11. A capital expenditure is an amount that must be capitalized or added to the value of
the asset. A revenue expenditure is an outlay that should be recorded as an
expense in the year incurred. An item should be treated as a capital expenditure if it
increases the life or productivity of the asset. Otherwise, the amount should be
treated as a revenue expenditure.
12. The gain or loss on the sale of an asset should be calculated as the difference
between the selling price and the book value of the asset as of the date of sale. The
account Gain on Sale of Asset should appear on the income statement in the other
income/expense category.
13. Patents, copyrights, trademarks, and goodwill are examples of intangible assets.
Some companies have a separate category on the balance sheet titled Intangibles
for such assets. Other companies include intangibles in a category titled Long-Term
Assets or in the Other Assets category of the balance sheet.
14. Goodwill represents the difference between the acquisition price paid to acquire a
business and the total of the fair market values of the identifiable net assets
acquired. Goodwill can be recorded as an asset only when one company acquires
another. It cannot be recorded on the basis of internally generated factors that some
may refer to as goodwill.
15. An argument in favor of expensing R&D is that it allows comparability among firms,
since all firms must record the item as an expense. Also, it is argued that R&D
should be expensed because it is very difficult to determine whether an asset exists
and, if it does exist, what periods are benefited by the asset. On the other hand,
many argue that R&D is an asset and should be recorded on the balance sheet.
They believe that if R&D is not recorded, the balance sheet is seriously understated.
16. The current view of the FASB is that some intangible assets have a limited life and
should be amortized over their legal life or useful life whichever is shorter. However,
some intangible assets are thought to have an “indefinite life” and should not be
amortized. This treatment of intangibles has been debated extensively and many
disagree with the current view. Some would argue that the value of almost all
intangible assets eventually becomes diminished and therefore amortization should
be recognized.
17. Amortization should occur over the shorter of the legal life or useful life. For
example, a patent has a legal life of 20 years. But if the invention under patent will
be useful over only 10 years, then the patent should be amortized over the shorter
10-year period.
18. If an intangible becomes worthless, the asset should be written off as an expense in
the period when the decline in value occurs. If the intangible continues to have value
but will provide benefit over a period shorter than was originally estimated, the event
should be treated as a change in estimate. The portion of the intangible that is
unamortized should be amortized over the remaining life of the asset.
EXERCISES
LO 2 EXERCISE 8-1 ACQUISITION COST
The acquisition cost of the asset should be computed as follows:
List price $ 60,000

Less: Discount (1,200)
Freight 1,000
Pollution device 2,500
Architect’s fee 6,000
Total acquisition cost $ 68,300
Note: Repair costs of $4,000 are not included because they are not normal or
necessary to the acquisition.
Insurance cost of $8,000 should be treated as prepaid insurance.
Interest cost of $3,000 is not included unless an asset is constructed over time.
LO 2 EXERCISE 8-2 LUMP-SUM PURCHASE
1. The total market value is

Land $200,000
Building 150,000
Equipment 250,000
Total $600,000
Amount allocated to each account should be

Land $200,000/$600,000 × $520,000 = $173,333
Building $150,000/$600,000 × $520,000 = $130,000
Equipment $250,000/$600,000 × $520,000 = $216,667
The journal entry would be as follows:
Jan. 1 Land 173,333

Building 130,000
Equipment 216,667
Cash 520,000
To record the purchase of assets for
a lump-sum amount.
Assets = Liabilities + Owners’ Equity
+173,333
+130,000
+216,667
–520,000
2. The amount of depreciation expense that should be recorded for 2007 is as follows:
Land = $0
Building$130,000/20 years = $6,500
Equipment$216,667/20 years = $10,833
3. The assets would appear on the balance sheet as follows:

Long-term assets:
Land $173,333
Building $130,000
Less: Accumulated depreciation 6,500 123,500
Equipment $216,667
Total long-term assets $502,667
LO 5 EXERCISE 8-3 STRAIGHT-LINE AND UNITS-OF-PRODUCTION METHODS
Depreciation, accumulated depreciation, and book value for the straight-line method
should be as follows:
Accumulated
Year Depreciation Depreciation Book Value
2007 $10,800* $10,800 $49,200
2008 10,800 21,600 38,400
2009 10,800 32,400 27,600
2010 10,800 43,200 16,800
2011 10,800 54,000 6,000
*($60,000 – $6,000)/5 years = $10,800 per year
The estimated total number of units to be produced is

10,000 + 20,000 + 30,000 + 40,000 + 50,000 = 150,000 units.
Depreciation expense per unit = ($60,000 – $6,000)/150,000 units

= $0.36 per unit
Depreciation, accumulated depreciation, and book value for the units of production
Accumulated
2007 10,000 × $0.36 = $ 3,600 $ 3,600 $56,400
2008 20,000 × $0.36 = 7,200 10,800 49,200
2009 30,000 × $0.36 = 10,800 21,600 38,400
2010 40,000 × $0.36 = 14,400 36,000 24,000
2011 50,000 × $0.36 = 18,000 54,000 6,000
Students may note that the units of production method results in a depreciation pattern
in this exercise that is the opposite of accelerated depreciation. That is appropriate
because of the pattern of usage of the asset.
LO 5 EXERCISE 8-4 ACCELERATED DEPRECIATION
1. Accumulated
2007 40%* × $6,000 = $2,400 $2,400 $3,600
2008 40% × 3,600 = 1,440 3,840 2,160
2009 40% × 2,160 = 864 4,704 1,296
2010 40% × 1,296 = 518 5,222 778
2011 178** 5,400 600
*Straight-line rate: 100%/5 years = 20%; double the straight-line rate = 40%.
**Since the asset should not be depreciated below residual value, the amount to be
recorded is $6,000 – $5,222 – $600 = $178.
2. Dec. 31 Depreciation Expense 2,400

Accumulated Depreciation 2,400
To record depreciation for 2007.
–2,400 –2,400
3. Koffman may believe that the double-declining-balance method best matches the
decline in usefulness of the asset with the revenues produced by the asset. Koffman
may also choose this method because it allows more depreciation to be taken in the
early years of the asset life and thus delays taxes until the later years.
LO 6 EXERCISE 8-5 CHANGE IN ESTIMATE
1. Depreciation, accumulated depreciation, and book value for the straight-line method
Accumulated
2007 $ 8,000* $ 8,000 $72,000
2008 8,000 16,000 64,000
2009 15,500** 31,500 48,500
2010 15,500 47,000 33,000
2011 15,500 62,500 17,500
2012 15,500 78,000 2,000
*($80,000 – $8,000)/9 years = $8,000.
**$64,000 – $2,000 = $62,000.
$62,000/4 years = $15,500.
2. Depreciation for 2007 and 2008 was not wrong. The company used the best
information available at that time to develop its estimate of depreciation. The
information available in 2009 made it necessary to revise the estimate of
depreciation. This illustrates the difference between a change in estimate and a
correction of an error.
LO 8 EXERCISE 8-6 ASSET DISPOSAL
1. July 1 Depreciation Expense 4,500

Accumulated Depreciation—Asset 4,500
To record depreciation of asset.
($60,000 – $6,000)/6 years = $9,000 per year.
$9,000 × 6/12 = $4,500.
–4,500 –4,500
July 1 Cash 40,000
Accumulated Depreciation—Asset 22,500*
Asset 60,000
Gain on Sale of Asset 2,500**
To record sale of the asset.
+40,000 +2,500
+22,500
–60,000
*Accumulated depreciation at time of sale:
Depreciation for 2005 and 2006—($9,000 × 2) $18,000
Depreciation for 2007 4,500
Total $22,500
**Gain on sale is calculated as follows:
Asset cost $60,000
Less: Accumulated depreciation 22,500
Book value $37,500
Sale price 40,000
Gain on sale $ 2,500
2. The gain or loss should appear in the Other Income category of the income
statement to indicate that it is not part of the normal operating activity of the
company.
LO 8 EXERCISE 8-7 ASSET DISPOSAL
1. July 1 Depreciation Expense 4,500

To record depreciation to July 1.
($60,000 – $6,000)/6 years = $9,000
per year. $9,000 × 6/12 = $4,500.
–4,500 –4,500
July 1 Cash 15,000
Note Receivable 15,000
Loss on Sale of Asset 7,500*
Asset 60,000
To record sale of the asset.
+15,000 –7,500
+15,000
+22,500
–60,000
*The loss on sale is calculated as follows:
Asset cost $60,000
Less: Accumulated depreciation 22,500
Book value $37,500
Sale price 30,000
Loss on sale $ 7,500
2. The gain or loss should appear in the Other Expense category of the income
statement to indicate it is not part of the normal operating activity of the company.
LO 10 EXERCISE 8-8 AMORTIZATION OF INTANGIBLES
Trademark is not amortized because it has an indefinite life

Amortization expense = $0
Accumulated amortization = $0
Patent amortization = $50,000/10 years = $ 5,000

Accumulated amortization = $5,000 × 6 years = $30,000
Copyright amortization = $80,000/20 years = $ 4,000

Accumulated amortization = $4,000 × 3 years = $12,000
LO 11 EXERCISE 8-9 IMPACT OF TRANSACTIONS INVOLVING OPERATING ASSETS ON

STATEMENT OF CASH FLOWS
Purchase of land: I
Proceeds from sale of land: I
Gain on sale of land: O
Purchase of equipment: I
Depreciation expense: O
Proceeds from sale of equipment: I
Loss on sale of equipment: O
LO 11 EXERCISE 8-10 IMPACT OF TRANSACTIONS INVOLVING INTANGIBLE ASSETS

ON STATEMENT OF CASH FLOWS
Cost incurred to acquire copyright: I

Proceeds from sale of patent: I
Gain on sale of patent: O
Research and development costs: N
(not separately reported as an operating activity)
Amortization of patent: O
MULTI-CONCEPT EXERCISES
LO 1,7 EXERCISE 8-11 CAPITAL VERSUS REVENUE EXPENDITURES
1. The following entries should be made to capitalize costs:

Jan. 1 Building 40,000
Cash 40,000
To record cost of new conveyor system.
+40,000
–40,000
Delivery Truck 5,000
Cash 5,000
To record cost of hydraulic lift installed in truck.
+5,000
–5,000
Note: Some may choose to capitalize the engine overhaul costs of $4,000 and the
window repair costs of $10,000. However, both costs appear to keep the asset in its
normal operating condition and are more properly treated as expenses.
2. The entry to record depreciation should be as follows:

Dec. 31 Depreciation Expense 14,322
Accumulated Depreciation—Building 9,739
Accumulated Depreciation—Truck 4,583
To record 2007 depreciation.
–9,739 –14,322
–4,583
Building Truck
Original cost $200,000 $20,000
Less: Depreciation for 2005 and 2006 16,000 6,667
Book value $184,000 $13,333
Plus: Capitalized costs 40,000 5,000
Depreciable amount $224,000 $18,333
Depreciation per year on building =
$224,000/23 years = $ 9,739
Depreciation per year on truck =
$18,333/4 years = $ 4,583
3. The assets should appear on the 2007 balance sheet as follows:

Building $240,000
Less: Accumulated depreciation 25,739 $214,261
Truck $ 25,000
Total property, plant, and equipment $228,011
LO 4,5 EXERCISE 8-12 CAPITALIZATION OF INTEREST AND DEPRECIATION
1. $200,000 + $8,000 = $208,000.

2. The amount of depreciation expense for 2007 is zero because the asset was not
completed and put into use until January 1, 2008. The amount of depreciation
expense for 2008 is $200,000 + $8,000 – $5,000 = $203,000/20 years = $10,150.
LO 9,10 EXERCISE 8-13 RESEARCH AND DEVELOPMENT AND PATENTS
a. All research and development costs should be treated as an expense. The 2007
income statement should reflect an expense of $20,000.
b. Patent costs should be treated as an asset. The 2007 balance sheet should reflect a
Patent account of $10,000 – ($10,000/5 years) = $8,000.
c. The $8,000 cost of defending the patent should be added to the patent account and
reflected in the 2008 balance sheet.
2007 amortization = $10,000/5 years = $2,000
2008 amortization = $10,000 – $2,000 + $8,000 = $16,000
$16,000/4 years = $ 4,000
PROBLEMS
LO 3 PROBLEM 8-1 LUMP-SUM PURCHASE OF ASSETS AND SUBSEQUENT EVENTS
1. Relative fair values:

Section 1 $ 630,000 50%
Section 2 378,000 30
Section 3 252,000 20
Total $1,260,000 100%
Section
1 2 3
50% 30% 20%
(a) $1,260,000 $630,000 $378,000 $252,000
(b) 1,560,000 780,000 468,000 312,000
(c) 1,000,000 500,000 300,000 200,000
2. The purchase of the land has no effect on total assets. Current assets (cash)
declines and long-term assets (land) increases and therefore only the composition of
assets on the balance sheet is changed.
3. Carter would be concerned with the value assigned to each section if it intended to
sell one or two sections and keep others. Carter would want the section it intended
to sell to be assigned the highest value in order to defer a gain. The value assigned
to buildings would be depreciated; therefore, Carter would want more value
assigned to the buildings in order to depreciate them and take advantage of the tax
shield.
LO 5 PROBLEM 8-2 DEPRECIATION AS A TAX SHIELD
If the asset is not purchased, the company must pay income tax of $50,000 × 35% =
$17,500.
If the asset is purchased, the company should record depreciation of $20,000 per
year. The amount of income tax the company must pay is $50,000 – $20,000 = $30,000
× 35% = $10,500.
The amount of the depreciation tax shield is the amount of income tax saved by
purchase of the asset, or $17,500 – $10,500 = $7,000. The depreciation tax shield can
also be expressed as the amount of depreciation each year times the tax rate, or
$20,000 × 35% = $7,000.
LO 5 PROBLEM 8-3 BOOK VERSUS TAX DEPREICATION
1. Year Straight-Line – MACRS = Difference

1 $ 5,600* $ 6,720 $(1,120)
2 5,600 10,750 (5,150)
3 5,600 6,450 (850)
4 5,600 3,870 1,730
5 5,600 3,870 1,730
6 5,600 1,940 3,660
$33,600 $33,600 $ 0
*$33,600/6 years = $5,600 per year
2. The president is correct that a total of $33,600 will be deducted as depreciation
under either method over the six-year life. However, the memo should stress that all
other things being equal, Griffith should prefer MACRS for taxes, since it results in
the payment of less income tax during the early years in the life of the truck. Money
received earlier is preferable to money received later.
The memo should also stress that it is important to analyze the tax position of
Griffith carefully. A variety of other factors may be important in the choice of a
depreciation method for tax purposes.
The memo should also stress to the president that not only is it legal, but also it is
not a violation of GAAP, to use one method of depreciation for the books and a
different one for tax purposes. Using straight-line depreciation for the books will tend
to even out the income over the life of the asset and will report higher income in the
earlier years than would be reported if an accelerated method, such as MACRS, is
used.
LO 11 PROBLEM 8-4 DEPRECIATION AND CASH FLOW
1. O’HARE COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2007
Service Revenue $100,000
Depreciation Expense 15,000
Net Income $ 85,000
2. The amount of the net cash inflow for 2007 is $100,000.

3. The amount of the net income ($85,000) does not equal the amount of the net cash
inflow ($100,000) because of depreciation expense. Depreciation is an expense on
the income statement but does not involve a cash outlay. For that reason,
depreciation must be “added back” to net income to determine the amount of the net
cash inflow.
4. If O’Hare develops a cash flow statement using the indirect method, the operating
category should appear as follows:
Cash Flow from Operating Activities:
Net income $ 85,000
Plus: Depreciation 15,000
Net cash from operations $100,000
LO 11 PROBLEM 8-5 RECONSTRUCT NET BOOK VALUES USING STATEMENT OF CASH

FLOWS
1. Book value of equipment at time of sale:

Book value $ X
Sales proceeds 315,000
Loss (gain) on sale $ 35,000
X – $315,000 = $ 35,000
X= $ 350,000
Book value of copyright at time of sale:
Book value $ X
Loss (gain) on sale $ (55,000)
X – $75,000 = $ (55,000)
X= $ 20,000
2. Net book value of property, plant, and equipment at December 31, 2006:
Net book value at 12/31/06 $ X
Plus purchases during 2007 292,000
Less book value of equipment sold during 2007 (350,000)
Less 2007 depreciation (672,000)
Net book value at 12/31/06 $4,459,000
X + $292,000 – $350,000 – $672,000 = $4,459,000
X= $5,189,000
3. Net book value of intangibles at December 31, 2006:

Plus payment of legal fees during 2007 15,000
Less book value of copyright sold during 2007 (20,000)
Less 2007 amortization (33,000)
Net book value at 12/31/06 $673,000
X + $15,000 – $20,000 – $33,000 = $673,000

X= $711,000
MULTI-CONCEPT PROBLEMS
LO 1,3,5,7,8 PROBLEM 8-6 COST OF ASSETS, SUBSEQUENT BOOK VALUES, AND

BALANCE SHEET PRESENTATION
1. Values assigned to each asset:

a. Value at time of purchase: $14,000 + $4,800 = $18,800
b. Allocation of purchase price:
Supplies expense $200/$3,200 × $2,400 = $ 150
Office furniture $600/$3,200 × $2,400 = $ 450
Equipment $2,400/$3,200 × $2,400 = $1,800
c. Value of this Prepaid License Expense: $1,500
d. Cost of truck $12,000
Less: accumulated depreciation at time
of sale [(12,000 – 800) × 5/8] 7,000
Book value $ 5,000
2. Depreciation or other expense recorded for each asset during 2007:

a. ($18,800 – $800)/4 years = $4,500
b. Supplies expense $150
Depreciation of office furniture $450/9 years = $ 50
Depreciation of equipment $1,800/4 years = $450
c. $1,500/3 years = $500 × 11/12 = $458
d. Depreciation $11,200/8 years = $1,400 × 8/12 = $933
Book value at the time of sale $5,000
Sale price 4,800
Loss on sale of truck $ (200)
3. Balance Sheet Presentation:

Current assets:
Prepaid license expense ($1,500 – $458) $ 1,042
Property, plant, and equipment:
Truck $18,800
Office furniture 450
Equipment 1,800
$21,050
Less: accumulated depreciation
($4,500 + $50 + $450) (5,000)
Property, plant, and equipment, net $16,050
LO 2,5 PROBLEM 8-7 COST OF ASSETS AND THE EFFECT ON DEPRECIATION
1. $165,000/10 years = $16,500 depreciation. The correct amount of depreciation is

$19,700 [($150,000 + $15,000 + $4,000 + $25,000 + $3,000)/10 years].
2. Reported income in year 1 is $51,500 ($100,000 – $16,500 – $25,000 – $4,000 –
$3,000). Reported income should be $80,300 ($100,000 – $19,700).
3. A cost is the amount incurred to acquire an asset or pay an expense, and an
expense is the amount of an expired asset or a cost that is incurred to generate
revenue.
LO 5,7,8 PROBLEM 8-8 CAPITAL EXPENDITURES, DEPREICATION, AND DISPOSAL
1. The entry to record depreciation for 2006 is

($364,000 – $14,000)/25 = $14,000.
–14,000 –14,000
The entries for 2007 are
Jan. 1 Repairs Expense 21,000
Cash, Payables, etc. 21,000
To record repairs in 2007.
–21,000 –21,000
Jan. 1 Building 42,000
Cash 42,000
To record pollution control equipment.
+42,000
–42,000
The depreciation for 2007 should be calculated as follows:
Original cost $364,000
Less: 2006 depreciation (14,000)
Less: residual value (14,000)
Plus 2007 capitalized costs 42,000
Depreciable amount $378,000
Remaining asset life 30 years
Depreciation $378,000/30 years = $ 12,600
–12,600 –12,600
2. The pollution control equipment extended the life of the asset and should be
capitalized rather than expensed. It is difficult to determine whether Merton would
rather expense or capitalize the equipment. If the company can expense the
equipment for tax purposes, it would normally desire to do so.
3. Original cost of building $364,000
Pollution device capitalized 42,000
Less: 2006 depreciation (14,000)
2007 depreciation (12,600)
Book value 1/1/2008 $379,400
Less: 2008 depreciation ($12,600 × 3/12) 3,150
Book value at sale $376,250
Sale proceeds 392,000
If the pollution equipment had been expensed (and original life of 25 years was used
for depreciation purposes):
Original cost $364,000
Less: Accumulated depreciation ($14,000 × 2 1/4 years) 31,500
Book value at 4/1/2008 $332,500
Sale proceeds 392,000
LO 6,10 PROBLEM 8-9 AMORTIZATION OF INTANGIBLE, REVISION OF RATE
1. The $85,000 should be recorded as an expense. The $11,900 should be capitalized

in a patent account.
2. Reynosa should record $595 of amortization expense each fiscal year: a total of
$2,975 ($595 per year × 5 years) = $2,975.
$11,900/20 years = $595.
3. Reynosa should record a loss of $8,925 the year ended September 30, 2008.
Original cost of patent $11,900
Less: depreciation for 5 years 2,975
Book value, 10/1/07 $ 8,925
LO 8,11 PROBLEM 8-10 PURCHASE AND DISPOSAL OF OPERATING ASSET AND

EFFECTS ON STATEMENT OF CASH FLOWS
1. Partial statements of cash flows for 2007:

Cash flows from operating activities:
Net income $ XX,XXX
Plus depreciation expense 12,000
Cash flows from investing activities:
Purchase of machinery (104,000)
Partial statements of cash flows for 2008:
Net income $ XX,XXX
Plus: Depreciation expense 12,000
Loss on sale of machinery 5,000
Purchase of machinery (205,000)
Proceeds from sale of machinery (see below) 75,000
Book value at time of sale ($104,000 – $12,000 – $12,000) $ 80,000
Sale price X
Loss on sale of machinery $ 5,000
$80,000 – X = $ 5,000
X= $ 75,000
2. Castlewood would replace machinery if the replacement would result in additional

net income in the future. Any additional revenues generated as a result of a possible
increase in production capacity (that is, the ability to make and thus sell more
product) and any costs that could be saved by automating the production process
(for example, lower wages) would increase net income. On the other hand, this
increase would be offset by the costs of acquiring and operating the new machinery.
LO 9,10,11 PROBLEM 8-11 AMORTIZATION OF INTANGIBLES AND EFFECTS ON

1. 2007 amortization expense:

Accumulated amortization at 12/31/06 $ 102,000
Plus 2007 amortization expense X
$102,000 + X = $ 119,000
X= $ 17,000
2. Acquisition cost:
Cost of patent $ X
Less accumulated amortization at 12/31/07 (119,000)
Carrying value at 12/31/07 $ 170,000
X – $119,000 = $ 170,000
X= $ 289,000
Year acquired:
Divided by annual amortization 17,000
Years owned 7 years
It was acquired in 2001
Estimated useful life:
Cost of patent $ 289,000
Divided by estimated useful life X years
Annual amortization $ 17,000
$289,000/X = $ 17,000
X= 17 years
The acquisition cost of $289,000 would have been reported as an outflow in the
investing activities section of the 2001 statement of cash flows.
3. Assuming the indirect method is used, the amortization expense relating to the
patent would be added back to net income in the cash flows from operating activities
section of the statement of cash flows.
4. The proceeds from the sale of $200,000 would be reported as an inflow in the cash
flows from investing activities section of the statement of cash flows. In addition, the
gain on the sale of $30,000 ($200,000 – $170,000) would be subtracted from net
income in the cash flows from operating activities section of the statement of cash
flows.
ALTERNATE PROBLEMS
LO 3 PROBLEM 8-1A LUMP-SUM PURCHASE OF ASSETS AND SUBSEQUENT EVENTS
1. Relative fair values:

Piece 1 $ 200,000 23.8%
Piece 2 200,000 23.8
Piece 3 440,000 52.4
Total $ 840,000 100.0%
Piece
1 2 3
23.8% 23.8% 52.4%
(a) $480,000 $114,240 $114,240 $251,250
(b) 680,000 161,840 161,840 356,320
(c) 800,000 190,400 190,400 419,200
2. The purchase does not affect total assets; it affects only the composition of the
assets. Cash is a current asset; equipment is a long-term asset.
LO 5 PROBLEM 8-2A DEPRECIATION AS A TAX SHIELD
If asset is not purchased:

Annual income tax is $62,000 × 30% = $18,600
If asset is purchased:
Income before tax Depreciation Income Tax
and depreciation expense before tax 30%
2007 $62,000 $24,000* $38,000 $11,400
2008 62,000 14,400 47,600 14,280
2009 62,000 8,640 53,360 16,008
2010 62,000 5,184 56,816 17,045
2011 62,000 7,776** 54,224 16,267
Total $75,000
*Straight-line rate = 1/5 or 20%; double-declining-balance rate = 2 × 20% = 40%,
2007 depreciation = 40% × $60,000 = $24,000.
**To bring accumulated depreciation to $60,000.
Total tax if not purchased:

$18,600 × 5 years = $93,000
Total tax if purchased = 75,000
Depreciation tax shield $18,000
The tax shield if Rummy uses the straight-line method is $60,000 × 30%, or $18,000.
Rummy would choose accelerated depreciation because the company would save
tax earlier.
LO 5 PROBLEM 8-3A BOOK VERSUS TAX DEPRECIATION
1. Year Straight-Line – MACRS = Difference

1 $ 4,700* $ 5,650 $ (950)
2 4,700 9,025 (4,325)
3 4,700 5,400 (700)
4 4,700 3,250 1,450
5 4,700 3,250 1,450
6 4,700 1,625 3,075
$28,200 $28,200 $ 0
*$28,200/6 years = $4,700 per year
2. The president is correct that a total of $28,200 will be deducted as depreciation
under either method over the six-year life. However, the memo should note that all
other things being equal, Payton should prefer MACRS for taxes, since it results in
lower taxes during the early years in the life of the truck. Money received earlier is
preferable to money received later.
LO 11 PROBLEM 8-4A AMORTIZATION AND CASH FLOW
1. 2007 income = $500,000 – $62,500 – $50,000 = $387,500.

2. Cash on hand, December 31, 2007 = $500,000 – $62,500 = $437,500.
3. Cash increased from revenue and decreased by cash expenses. The amount is
different than income for 2007 because amortization, like depreciation, is an
expense but not a cash outflow. The cost of long-term assets like a copyright is a
cash outflow when it is purchased.
LO 11 PROBLEM 8-5A RECONSTRUCT NET BOOK VALUES USING STATEMENT OF

CASH FLOWS
1. Book value of land at time of sale:

Book value $ X
Loss (gain) on sale $ 17,000
X – $187,000 = $ 17,000
X= $ 204,000
Book value of trademark at time of sale:
Book value $ X
Loss (gain) on sale $ (7,000)
X – $121,000 = $ (7,000)
X= $ 114,000
2. Net book value of property, plant, and equipment at December 31, 2006:
Plus purchases during 2007 277,000
Less book value of land sold during 2007 (204,000)
Less 2007 depreciation (205,000)
Net book value at 12/31/07 $1,555,000
X + $277,000 – $204,000 – $205,000 = $1,555,000
X= $1,687,000
3. Net book value of intangibles at December 31, 2006:

Plus payment of legal fees during 2007 6,000
Less book value of trademark sold during 2007 (114,000)
Less 2007 amortization (3,000)
Net book value at 12/31/07 $ 34,000
X + $6,000 – $114,000 – $3,000 = $ 34,000
X= $ 145,000
ALTERNATE MULTI-CONCEPT PROBLEMS
LO 1,5,8,9,10 PROBLEM 8-6A COST OF ASSETS, SUBSEQUENT BOOK VALUES, AND

BALANCE SHEET PRESENTATION
Depreciation or amortization and book values
a. Depreciation should be calculated as follows:

Original cost $ 16,000
Add: cab/oven 10,900
Total cost $ 26,900
Less: Residual value 300
Depreciable amount $ 26,600
Depreciation expense $26,600/5 years $ 5,320
Book value:
Total cost $ 26,900
Accumulated depreciation 5,320
Book value $ 21,580
b. Depreciation:
$2,700 × 66 2/3%* = $1,800
*Straight-line rate = 100%/3 = 33 1/3%, double-declining-balance rate = 66 2/3%.
Book value:
$2,700 – $1,800 = $900
c. Depreciation:
($8,000 – 1,000)/8 × 3/12 = $219
Book value at time of sale:
Accumulated depreciation = ($8,000 – $1,000) × 5/8 = $4,375
Book value = $8,000 – $4,375 = $3,625
Book value $3,625
Sale price 1,500
Loss on sale $2,125
d. Amortization:
$14,000/4 years = $3,500
$3,500 × 6/12 = $1,750
Book value:
$14,000 – $1,750 = $12,250
LO 2,5 PROBLEM 8-7A COST OF ASSETS AND EFFECT ON DEPRECIATION
1. The proper cost to record for the acquisition is $190,000 ($168,000 + $16,500 +
$4,400 + $1,100). All costs, except the operating costs for the first year, should be
capitalized as part of the cost of the equipment. The operating costs of $26,400
should be expensed.
2. Depreciation reported in year 1 is $21,640 ($216,400/10). Depreciation that should
have been reported is $19,000 [($168,000 + $16,500 + $4,400 + $1,100)/10].
Operating costs are not included in the cost of the asset.
3. Key reported income of $55,000 – $21,640, or $33,360. The correct amount of
income should be as follows:
Income before equipment cost $ 55,000
Depreciation (19,000)
Operating expenses (26,400)
Net income $ 9,600
4. Key should not include operating costs in the value of the asset recorded on the
balance sheet. The effect of this error is to overstate assets on the balance sheet.
LO 7,8 PROBLEM 8-8A CAPITAL EXPENDITURES, DEPRECIATION, AND DISPOSAL
1. 2006 Depreciation = [($612,000 – $12,000)/25 years)] = $24,000

2007 Depreciation = [($612,000 + $87,600 – $30,000 – $24,000)/24)] = $26,900
2. The cost of the fire equipment increased the value of an asset that will last for more
than one year. The cost would have been expensed if it was maintenance. Wagner
would prefer to expense the cost of the fire equipment for taxes in order to take
advantage of the tax shield immediately. However, Wagner would prefer to capitalize
the cost for accounting purposes in order to better match revenue with the costs
incurred to generate that revenue.
3. Loss at sale = $612,000 + $87,600 – $24,000 – $26,900 – $360,000 = $288,700
Loss on sale if fire equipment is expensed = $612,000 – $24,000 – $24,000 –
$360,000 = $204,000
LO 6,10 PROBLEM 8-9A AMORTIZATION OF INTANGIBLE, REVISION OF RATE
1. The $350,000 of cost that represents research and development should be treated
as an expense in the year of acquisition, 2002. The $23,800 of costs that represents
the patent should be treated as an intangible asset and amortized over the 20-year
time period.
2. Maciel should record amortization expense of $23,800/20 years, or $1,190 per year.
3. The book value of the patent after 5 years of amortization is:
$23,800 – (5 × $1,190) = $17,850. Since the patent is worthless, the amount of
$17,850 should be recorded as a loss.
LO 8,11 PROBLEM 8-10A PURCHASE AND DISPOSAL OF OPERATING ASSET AND

EFFECTS ON STATEMENT OF CASH FLOWS
1. Partial statements of cash flows for 2007:

Net income $XX,XXX
Purchase of delivery truck (45,000)
Partial statements of cash flows for 2008:
Net income $XX,XXX
Loss on sale 12,000
Purchase of delivery truck (80,000)
Proceeds from sale of machinery (see below) 17,000
Book value at time of sale ($45,000 – $8,000 – $8,000) $ 29,000
Sale price X
Loss on sale of machinery $ 12,000
$29,000 – X = $ 12,000
X= $ 17,000
2. Mansfield would replace the medium-sized delivery truck with a larger truck if the
replacement would result in additional net income in the future. Any additional
revenues generated as a result of Mansfield’s ability to deliver and sell more product
would increase net income. On the other hand, this increase would be offset by the
costs of acquiring and operating the new delivery truck.
LO 9,10,11 PROBLEM 8-11A AMORTIZATION OF INTANGIBLES AND EFFECTS ON

1. 2007 amortization expense:

Accumulated amortization at 12/31/06 $ 1,510,000
Plus 2007 amortization expense X
$1,510,000 + X = $ 1,661,000
X= $ 151,000
2. Acquisition cost:
Cost of patent $ X
Less accumulated amortization at 12/31/07 (1,661,000)
Carrying value at 12/31/07 $ 1,357,000
X – $1,661,000 = $ 1,357,000
X= $ 3,018,000
Year acquired:
Divided by annual amortization 151,000
Years owned 11 years
It was acquired in 1997
Estimated useful life:
Cost of patent $ 3,018,000
Divided by estimated useful life X years
Annual amortization $ 151,000
$3,018,000/X = $ 151,000
X= 20 years
The acquisition cost of $3,018,000 would have been reported as an outflow in the
Investing Activities section of the 1997 statement of cash flows.
3. Assuming that the indirect method is used, the amortization expense relating to the
patent would be added back to net income in the Cash Flows from Operating
Activities section of the statement of cash flows.
4. The proceeds from the sale of $1,700,000 would be reported as an inflow in the
Cash Flows from Investing Activities section of the statement of cash flows. In
addition, the gain on the sale of $343,000 ($1,700,000 – $1,357,000) would be
deducted from net income in the Cash Flows from Operating Activities section of the
statement of cash flows.
CASES
READING AND INTERPRETING FINANCIAL STATEMENTS
LO 1,9 CASE 8-1 LIFE TIME FITNESS
1. A note to the statements indicates the company has land, buildings, leasehold
improvements, construction in progress, and equipment. The equipment account is
broken into various types of equipment.
2. The company uses the straight-line method of depreciation.
3. The estimated useful life varies from 3 to 5 years for some types of equipment to 40
years for some buildings.
4. The property and equipment has accumulated depreciation of $102,341,000 at
December 31, 2004, and book value of $503,690,000 at that date.
5. The statement of cash flows indicates purchases of $156,674,000 and cash received
from sales of property and equipment of $2,139,000.
LO 11 CASE 8-2 LIFE TIME FITNESS’S STATEMENT OF CASH FLOWS
1. The statement of cash flows indicates purchases of property and equipment of

$156,674,000.
2. The statement of cash flows indicates sales of property and equipment of
$2,139,000.
3. Depreciation and amortization is indicated in the cash flows statement as
$29,665,000. Depreciation is not a cash flow. It is listed in the operating activities
category of the cash flows statement when using the indirect method because it is
necessary to eliminate the items that did not involve cash.
MAKING FINANCIAL DECISIONS
LO 1,5 CASE 8-3 COMPARING COMPANIES
ACCELERATED COMPANY
INCOME STATEMENT
Sales $720,000
Cost of goods sold 360,000
Gross profit $360,000
Administrative costs $ 96,000
Depreciation expense 144,000
Operating expenses 240,000
Income before tax $120,000
Tax expense (40%) 48,000
Net income $ 72,000
Since the balance of the Accumulated Depreciation account for Straight Company is
$240,000 and the depreciation expense is $120,000 per year, the assets must be two
years old. The amount of depreciation expense for Accelerated Company on the
double-declining-balance method is as follows:
2003: $600,000 × 40% = $240,000.
2004: $600,000 – $240,000 = $360,000 × 40% = $144,000.
The analyst should consider the difference in the cash flows of the two companies.
Accelerated Company has a lower net income but actually has a higher cash inflow.
This occurs because the depreciation expense results in a tax savings. It is not entirely
accurate to say that depreciation is a “noncash” expense because it results in a real
cash savings in the form of lower income tax.
LO 5 CASE 8-4 DEPREICATION ALTERNATIVES
For accounting purposes, the company should use straight-line depreciation because it
will better match the cost using the asset with the equal production levels. For taxes, the
company should also use the straight-line method because the increasing tax rates will
yield a higher cash savings from the tax shield. Depreciation is not a cash outflow, but
the tax savings results in a cash inflow because of reduced tax liability.
ETHICAL DECISION MAKING
LO 3 CASE 8-5 VALUING ASSETS
Students should be asked to determine the impact of using the first appraisal versus the
second appraisal. Both appraisals result in a total increase in assets of $20,000
($220,000 – $200,000), but they differ in the amount allocated to the land account.
Students should see that a second opinion may have been necessary to accurately
appraise the property, but, on the other hand, the appraisal may have been requested
to maximize the amount allocated to the depreciable asset, the building.
Students should be asked about the nature of the appraisal process. Is it possible for
two appraisers to have different estimates of the fair market value? Should the
accountant always accept the first appraisal? When is it acceptable to seek another
opinion? Are Terry and Tammy unethical simply because they sought a separate
opinion? The instructor may wish to draw a parallel to “opinion-shopping” on the part of
clients who seek an opinion of auditors or public accountants.
It appears that the concept of neutrality has been violated in this case. It is not wrong
for Terry and Tammy to seek a second appraisal if their motive was to develop an
accurate, unbiased measure of the land and building. However, if their motive was to
minimize the amount allocated to the land account, their actions must be questioned.
LO 5 CASE 8-6 DEPRECIATION ESTIMATES
Both methods will result in the total cost of the asset being recorded on the income
statement over the life of the asset. However, depreciating the asset is much more
preferable because it matches the cost evenly over the asset’s life. You should try to
convince the manager that it is not correct to depreciate the asset over a longer life and
then record a large loss in the third year. If the manager is not convinced, you may have
to consider whether the matter should be discussed with his superior and/or the
company’s auditors.
REAL WORLD PRACTICE 8.1
Depreciation and amortization is indicated in the cash flows statement as $29,665,000.

The notes indicate the company uses the straight-line method.
SOLUTION TO INTEGRATIVE PROBLEM
Part 2
1. PEK COMPANY
INCOME STATEMENT
Sales $1,250,000
Gross profit $ 613,500
Depreciation on plant equipment $85,400*
Depreciation on buildings 12,000
Interest expense 55,400**
Other expenses 83,800 236,600
Income before taxes $ 376,900
Income tax expense (30% rate) 113,070
Net income $ 263,830
*$58,400 + ($270,000/10 years).
**$33,800 + ($270,000 × 8%).
PEK COMPANY
Net income $263,830
Adjustments to reconcile net income to net
cash provided by operating activities
(includes depreciation expense) 110,200*
Net cash provided by operating activities $374,030
Cash flows from financing activities:
Dividends (35,000)
Net increase in cash $339,030
*$83,200 + $27,000 additional depreciation.
Supplemental Schedule of Noncash Investing and Financing Activities:

Acquisition of equipment in exchange for a note of $270,000.
2. PEK COMPANY
INCOME STATEMENT
Sales $1,250,000
Gross profit $ 613,500
Depreciation on plant equipment $107,491*
Depreciation on buildings 12,000
Interest expense 55,400
Other expenses 83,800 258,691
Income before taxes $ 354,809
Income tax expense (30% rate) 106,443
*$58,400 + $49,091.
PEK COMPANY
Adjustments to reconcile net income to net
cash provided by operating activities
(includes depreciation expense) 132,291*
Net cash provided by operating activities $ 380,657
Cash flows from financing activities:
Dividends (35,000)
Net increase in cash $ 345,657
*$83,200 + $49,091 additional depreciation.
Supplemental Schedule of Noncash Investing and Financing Activities:

Acquisition of equipment in exchange for a note of $270,000.
3. a. LIFO cost of goods sold:

40,000($3.25) = $130,000
60,000($3.10) = 186,000
75,000($3.00) = 225,000
40,000($2.50) = 100,000
30,000($2.20) = 66,000
5,000($2.10) = 10,500
Total LIFO cost of goods sold $717,500
Total FIFO cost of goods sold 636,500
Increase in cost of goods sold $ 81,000
b. Additional cost of goods sold $ 81,000
Times the tax rate 30%
Decrease in income tax expense $ 24,300
c. Additional cost of goods sold $ 81,000
Decrease in income taxes 24,300
Decrease in net income $ 56,700
4. a. Sales on account $800,000

Times estimated uncollectibles 3%
Increase in other expenses $ 24,000
b. Increase in other expenses $ 24,000
Times the tax rate 30%
Decrease in income tax expense $ 7,200
c. Increase in other expenses $ 24,000
Decrease in income taxes 7,200
Decrease in net income $ 16,800

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CHAPTER 8

Operating Assets: Property, Plant,

2. Determine the acquisition cost of an operating asset. 1 10 Easy

3. Explain how to calculate the acquisition cost of assets 2 20 Mod

4. Describe the impact of capitalizing interest as part of the 12* 5 Easy

5. Compare depreciation methods and understand the factors 3 20 Mod

6. Understand the impact of a change in the estimate of the asset 5 15 Mod

7. Determine which expenditures should be capitalized as asset costs 11* 30 Mod

8. Analyze the effect of the disposal of an asset at a gain or loss. 6 15 Mod

9. Understand the balance sheet presentation of intangible assets. 13* 10 Mod

10. Describe the proper amortization of intangible assets. 8 15 Easy

12. Understand how investors can analyze a company’s

*Exercise, problem, or case covers two or more learning outcomes

2. Determine the acquisition cost of an operating asset. 7* 15 Diff

3. Explain how to calculate the acquisition cost of assets 1 20 Mod

4. Describe the impact of capitalizing interest as part of the

5. Compare depreciation methods and understand the factors 2 10 Easy

6. Understand the impact of a change in the estimate of the asset 9* 10 Mod

7. Determine which expenditures should be capitalized as asset costs 6* 20 Mod

8. Analyze the effect of the disposal of an asset at a gain or loss. 6* 30 Mod

9. Understand the balance sheet presentation of intangible assets. 6# 30 Mod

10. Describe the proper amortization of intangible assets. 4# 15 Mod

*Exercise, problem, or case covers two or more learning outcomes

2. Determine the acquisition cost of an operating asset.

3. Explain how to calculate the acquisition cost of assets 5 15 Mod

4. Describe the impact of capitalizing interest as part of the

5. Compare depreciation methods and understand the factors 3* 25 Mod

6. Understand the impact of a change in the estimate of the asset

7. Determine which expenditures should be capitalized as asset costs

8. Analyze the effect of the disposal of an asset at a gain or loss.

9. Understand the balance sheet presentation of intangible assets. 1* 20 Mod

10. Describe the proper amortization of intangible assets

12. Understand how investors can analyze a company’s

*Exercise, problem, or case covers two or more learning outcomes

LO 2 EXERCISE 8-1 ACQUISITION COST

The acquisition cost of the asset should be computed as follows:

List price $ 60,000

LO 2 EXERCISE 8-2 LUMP-SUM PURCHASE

1. The total market value is

Amount allocated to each account should be

The journal entry would be as follows:

Jan. 1 Land 173,333

3. The assets would appear on the balance sheet as follows:

LO 5 EXERCISE 8-3 STRAIGHT-LINE AND UNITS-OF-PRODUCTION METHODS

The estimated total number of units to be produced is

Depreciation expense per unit = ($60,000 – $6,000)/150,000 units

LO 5 EXERCISE 8-4 ACCELERATED DEPRECIATION

2. Dec. 31 Depreciation Expense 2,400

LO 6 EXERCISE 8-5 CHANGE IN ESTIMATE

LO 8 EXERCISE 8-6 ASSET DISPOSAL

1. July 1 Depreciation Expense 4,500

LO 8 EXERCISE 8-7 ASSET DISPOSAL

1. July 1 Depreciation Expense 4,500

LO 10 EXERCISE 8-8 AMORTIZATION OF INTANGIBLES

Trademark is not amortized because it has an indefinite life

Patent amortization = $50,000/10 years = $ 5,000

Copyright amortization = $80,000/20 years = $ 4,000

LO 11 EXERCISE 8-9 IMPACT OF TRANSACTIONS INVOLVING OPERATING ASSETS ON