Ch.

9 Plant and Intangible Assets

P. 9.2 A: Swanson & Hiller, Inc., purchased a new machine on September 1, 2008 at a cost of $108,000.
The machine’s estimated useful life at the time of the purchase was five years, and its residual
value was $ 8,000.

Instructions
a. Prepare a complete depreciation schedule, beginning with calendar year 2008, under each of
the methods listed below (assume that the half-year convention is used):

1. Straight-line.
2. 200 percent declining-balance.
3. 150 percent declining-balance, switching to straight-line when that maximizes the expense.

b. Which of the three methods computed in part a is most common for financial reporting
purposes? Explain.

c. Assume that Swanson & Hiller sells the machine on December 31, 2011, for $28,000 cash.
Compute the resulting gain or loss from this sale under each of the depreciation methods
used in part a. Does the gain or loss reported in the company’s income statement have
any direct cash effects? Explain.
 Ch. 9 Plant and Intangible Assets
• Solution (a) : (1) Straight line Method:

Year Dep. Exp. Accumulated dep. Book Value = Cost - Acc. dep.
2008 10,000 10,000 98,000
2009 20,000 30,000 78,000
2010 20,000 50,000 58,000
2011 20,000 70,000 38,000
2012 20,000 90,000 18,000
2013 10,000 100,000 8,000

(Working: Dep. Exp. = 108,000 - 8,000 = 20,000)

5
(Working: 108,000 - 10,000 = 98,000; 108,000 - 30,000 = 78,000;
108,000 - 50,000 = 58,000; 108,000 - 70,000 = 38,000;
108,000 - 90,000 = 18,000; 108,000 - 100,000 = 8,000)
 Ch. 9 Plant and Intangible Assets
(2) 200 percent declining balance:

Year Dep. Exp. Accumulated Dep. Book Value = Cost – Acc. dep.
2008 21,600 21,600 86,400
2009 34,560 56,160 51,840
2010 20,736 76,896 31,104
2011 12,442 89,338 18,662
2012 7,465 96,803 11,197
2013 3,197 100,000 8,000

(Working: St. Line Dep. Rate = (1/n) * 100 = (1/5) *100 = 20 %; Double Declining Rate = 2*20% = 40%)

(Working: 108,000 *.4 = 43,200. 43,200/2 = 21,600; 86,400 * .4 = 34,560;

51,840 * .4 = 20,736; 31,104 * .4 = 12,442; 18,662 * .4 = 7,465;
11,197 - 8,000 = 3,197)
1

(Working: (31,104 - 8,000) = 7,701.33; (18,662 - 8,000) = 5,331)

3 2

(Working: 108,000 – 21,600 = 86,400; 108,000 – 56,160 = 51,840; 108,000 – 76,896 = 31,104;
108,000- 89,338 = 18,662; 108,000 – 96,803 = 11,197; 108,000 – 100,000 = 8,000)
 Ch. 9 Plant and Intangible Assets
(3) 150 percent declining balance:

Year Dep. Exp. Accumulated Dep. Book Value = Cost – Acc. dep.
2008 16,200 16,200 91,800
2009 27,540 43,740 64,260
2010 19,278 63,018 44,982
2011 13,495 76,513 31,487
2012 11,743.5 88,256.5 19,743.5
2013 11,743.5 100,000 8,000

(Working: St. Line Dep. Rate = (1/n) * 100 = (1/5) * 100 = 20 %; 150% Declining Rate = 1.5 * 20% = 30%)

(Working: 108,000*.3 = 32,400; 32,400/2 = 16,200; 91,800 * .3 = 27,540;

64,260 * .3 = 19,278; 44,982 * .3 = 13,495; 31,487 * .3 = 9,446.1)

(Working: (44,982 - 8,000)= 12,327.33; (31,487 - 8,000) = 11,743.5)

3 2

Working: 108,000 – 16,200 = 91,800; 108,000 – 43,740 = 64,260; 108,000 – 63,018 = 44,982;
108,000- 76,513 = 31,487; 108,000 – 88,256.5= 19,743.5; 108,000 – 100,000 = 8,000)
 Ch. 9 Plant and Intangible Assets
• (b): Swanson & Hiller will probably use the straight-line method for financial
reporting purposes, as this method results in the least amount of
depreciation expense in the early years of the asset’s useful life. Also, it is
easier to use.

• (c): (1) Straight Line:

Cash Received = $ 28,000
Book Value = 38,000
Loss = $(10,000)

(2) 200 percent Declining balance:

Cash Received = $ 28,000
Book Value = 18,662
Gain = $ 9,338
 Ch. 9 Plant and Intangible Assets
(3) 150 percent Declining balance:
Cash Received = $ 28,000
Book Value = 31,487
Loss = $ (3,487)

The reported gain or loss on the sale of an asset has no direct cash effects. The only
direct cash effect associated with the sale of this machine is the $28,000 received by
Swanson & Hiller, Inc. from the sale of the machine.
• P. 9.4 A: During the current year, Ramirez Developers disposed of plant assets in the
following transactions:
Feb. 10 Office equipment costing $ 26,000 was given to a scrap dealer at no charge. At
the date of disposal, accumulated depreciation on the office equipment amounted to
$ 25,800.

Apr. 1 Ramirez sold land and a building to Claypool Associates for $ 900,000, receiving
$ 100,000 cash and a five-year, 9 percent note receivable for the remaining balance.
Ramirez’s records showed the following amounts: Land, $ 50,000; Building, $ 550,000;
Accumulated Depreciation: Building (at the date of disposal), $ 250,000.
 Ch. 9 Plant and Intangible Assets
Aug. 15 Ramirez traded in an old truck for a new one. The old truck had cost $ 26,000,
and its accumulated depreciation amounted to $18,000. The list price of the new truck
was $ 39,000, but Ramirez received a $10,000 trade-in allowance for the old truck and
paid only $ 29,000 in cash. Ramirez includes trucks in its Vehicles account.

Oct. 1 Ramirez traded in its old computer system as part of the purchase of a new
system. The old system had cost $15,000, and its accumulated depreciation amounted
to $ 11,000. The new computer’s list price was $ 8,000. Ramirez accepted a trade-in
allowance of $ 500 for the old computer system, paying $ 1,500 down in cash and
issuing a one-year, 8 percent note payable for the $ 6,000 balance owed.
• Instructions
a. Prepare journal entries to record each of the disposal transactions. Assume that
depreciation expense on each asset has been recorded up to the date of disposal.
b. Will the gains and losses recorded in part a above affect the gross profit reported in
Ramirez’s income statement? Explain.
c. Explain how the financial reporting of gains and losses on plant assets differs from
the financial reporting of unrealized gains and losses on marketable securities
discussed in Chapter 7.
 Ch. 9 Plant and Intangible Assets
• Solution: (a)

Feb. 10: Loss on disposal of Asset 200

Acc. Dep.: Office Equipment 25,800
Office Equipment 26,000

Apr. 1: Cash 100,000

Notes Receivable 800,000
Acc. Dep.: Building 250,000
Land 50,000
Building 550,000
Gain on sale of assets 550,000

(Working: Book Value = 26,000 - 25,800 = 200; Loss = 0 - 200 = - 200)

(Working: Book Value of Bldg. = 550,000 - 250,000 = 300,000;

Book Value of Land = 50,000 - 0 = 50,000; Gain = 900,000 - 350,000 = 550,000)
 Ch. 9 Plant and Intangible Assets
Aug 15: Vehicles (New Truck) 39,000
Acc. Dep.: Vehicles (Old Truck) 18,000
Vehicles (Old Truck) 26,000
Cash 29,000
Gain on sale of Assets 2,000

Oct. 1: Office Eqp.(New Computer) 8,000

Acc. Dep.: (Old Computer) 11,000
Loss on disposal of Assets 3,500
Office Eqp. (Old Computer) 15,000
Cash 1,500
Notes Payable 6,000

(Working: Book Value = 26,000 - 18,000 = 8,000; Gain = 10,000 - 8,000 = 2,000)

(Working: Book Value= 15,000 -11,000 = 4,000; Loss = 500 - 4,000 = - 3,500)
 Ch. 9 Plant and Intangible Assets
(b) Gains and losses on asset disposals do not affect gross profit because they
are not part of the cost of goods sold. Such gains and losses do, however,
affect net income reported in a firm’s income statement.

(c) Unlike realized gains and losses on asset disposals, unrealized gains and
losses on marketable securities are not generally reported in a firm’s
income statement. Instead, they are reported in the balance sheet as a
component of stockholders’ equity.
 Ch. 9 Plant and Intangible Assets
• Ex. 9.11: Salter Mining Company purchased the Northern Tier Mine for
$21 million cash. The mine was estimated to contain 2.5 million
tons of ore and to have a residual value of $1 million.

During the first year of mining operations at the Northern Tier Mine,
50,000 tons of ore were mined, of which 40,000 tons were sold.
a. Prepare a journal entry to record depletion during the year.
b. Show how the Northern Tier Mine, and its accumulated depletion,
would appear in Salter Mining Company’s balance sheet after the first
year of operations.
c. Will the entire amount of depletion computed in part a be deducted
from revenue in the determination of income for the year? Explain.
 Ch. 9 Plant and Intangible Assets
• Solution: (a)

Depletion Rate = Cost – Residual Value

Est. Total weight (in tons)
= 21,000,000 – 1,000,000
2,500,000
= $ 8 per ton

 50,000 tons of ore were mined, therefore, we have:

50,000 * 8 = $ 400,000

Inventory 400,000
Acc. Depletion: N.T. Mine 400,000
 Ch. 9 Plant and Intangible Assets
• (b) Property, Plant & Equipment:

Mining Property: N.T. Mine $ 21,000,000

Less: Acc. Depletion: N .T. Mine 400,000
Book Value $ 20,600,000

• (c) No, the $400,000 of depletion of the mine should not all be
deducted from revenue during the first year of operations.
Since only 40,000 of the 50,000 tons of ore mined were sold,
only 80% of the depletion cost ($ 320,000) should be deducted
from revenue as part of the cost of goods sold.
 Ch. 9 Plant and Intangible Assets
• Ex. 9.14:

Dasher Company acquired a truck for use in its business for $25,500
in a cash transaction. The truck is expected to be used over a five-
year period, will be driven approximately 18,000 miles per year, and
is expected to have a value at the end of the five years of $4,500.

a. Compute the amount of depreciation that will be taken in the first

two years of the truck’s useful life if the actual miles driven are
16,000 and 18,200 respectively. Round the depreciation per mile
to the nearest full cent.

b. How does the amount of accumulated depreciation at the end of

the second year compare with what it would have been had the
company chosen the straight-line depreciation method?
 Ch. 9 Plant and Intangible Assets
• Solution: (a)
Units of Output Method:

Total miles covered = 5 * 18,000 = 90,000 miles

Depreciation rate = Cost – Residual Value

Est. Total miles Covered

= $ 25,500 - $ 4,500
90,000 miles

= $ 0.23/mile
• Depreciation for the first two years is calculated as follows:

Year 1 = 16,000 miles x $.23 = $ 3,680

Year 2 = 18,200 miles x $.23 = $ 4,186

Accumulated Depreciation at Year 2 = $ 3,680 + $ 4,186 = $ 7,866

 Ch. 9 Plant and Intangible Assets
• (b) Straight-line method:

Depreciation Exp. = Cost – Residual Value

Est. Useful Life

= $ 25,500 - $ 4,500
5 years

= $ 4,200 per year

After 2 years, accumulated depreciation =$ 4,200 * 2 = $ 8,400

Straight-line depreciation would have exceeded units-of-output

depreciation by:

$ 8,400 - $ 7,866 = $ 534