1.1.

REDMOND

(a) $279,000 – $15,000 = $264,000; $264,000 ÷ 10 yrs. = $26,400

(b) $264,000 ÷ 240,000 units = $1.10; 25,500 units X $1.10 = $28,050

n(n + 1) 10(11)
(c) 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55, or = = 55
2 2

10
X $264,000 X 1/3 = $16,000
55

9
X $264,000 X 2/3 = 28,800
55

Total for 20x2 $44,800

(d) $279,000 X 20% X 1/3 = $18,600

[$279,000 – ($279,000 X 20%)] X 20% X 2/3 = 29,760

Total for 20x2 $48,360

[May also be computed as 20% of ($279,000 – 2/3 of 20% of $279,000)

1.2. DUNSTABLE

1. Computation of the gain or loss on the sale of fixed asset

Depreciable basis 1,000

Depreciation rate 20%

Accumulated depreciation until the date of sale

. Year 1 -200
. Year 2 -400
. Year 3 -600
. Year 4 (6 months) -700

Book value at the date of sale 300

Selling price of fixed assets sold 320

- Book value of fixed assets sold 300
= Gain on sale 20

2. Recording the sale

Several alternative methods can be used. We provide the solution for the three alternative
methods.

Method 1 (one entry – gain or loss recorded in one account)

Income statement Balance sheet

Expenses Revenues Assets Liabilities

Gain on sale of fixed

assets Equipment

20 1,000
1,000

Accumulated depreciation

700
700

In italics: opening balance Cash at bank

320

BS (A+) Cash 320

BS (A+) Accumulated 700

depreciation
BS (A-) Equipment 1,000

IS (R+) Gain on sale of fixed 20

assets

• Accumulated depreciation: see depreciation schedule (straight-line method – end of Year 4).
• Book value = 1,000 (acquisition cost) – 700 (accumulated depreciation) = 300
• Gain on sale = 320 (selling price) – 300 (book value) = 20
Method 2 (two entries – gain or loss recorded in two accounts)

First step : cancellation of the fixed asset

Second step : proceeds from the sale

Income statement Balance sheet

Expenses Revenues Assets Liabilities

Book value of fixed Sales price of fixed

assets sold assets sold Equipment

320 1,000
300 1,000

Accumulated
depreciation
700
700

Cash at bank

In italics: opening balance

320


First step: cancellation of the fixed asset

BS (A+) Accumulated depreciation 700

IS (E+) Book value of fixed assets 300
sold
BS (A-) Equipment 1,000

Second step: proceeds from the sale

BS (A+) Cash at bank 320

IS (R+) Sales price of fixed assets 320
sold

Gain = Revenue - expense = 320 - 300.

Method 3 (use of an intermediary account ‘Disposal account’)

First step : cancellation of the acquisition cost of the tangible asset

Second step : cancellation of the accumulated depreciation of the tangible asset
Third step : proceeds from the sale.
Fourth step : transfer to the income statement

Income statement Balance sheet

Expenses Revenues Assets Liabilities

Profit on disposals of
fixed assets Equipment

20 1,000
1,000

Accumulated
depreciation
700
700
 
Disposal account

In italics: opening balance
1,000 700
20 320

Cash at bank

320

First step: cancellation of the acquisition cost of the tangible asset

BS (A+) Disposal account 1,000

BS (A-) Equipment 1,000

Second step: cancellation of the accumulated depreciation of the tangible asset

BS (A-) Accumulated depreciation 700

BS (A-) Disposal account 700

Third step: proceeds from the sale

BS (A+) Cash at bank 320

BS (A-) Disposal account 320

Gain = balance of the Disposal account (- 1,000 + 700 + 320 = 20 [credit]).

Fourth step: transfer to the income statement

BS (A+) Disposal account 20

IS (R+) Profit on disposals of fixed 20
assets
1.3. CAMINBISSA

5893-TRS

Period Depreciation of the period Accum..depr as of Net value as of

end of period end of period
1-7-x6//31-12-x6 6/12*20%*(40,000-10,000)
=3,000 3,000 37,000
1-1-x7//31-11-x7 11/12*20%*(40,000-10,000)
=5,500 8,500 31,500

8542-LLB

Period Depreciation of the period Accum..depr as of Net value as of

end of period end of period
1-3-x4//31-12-x4 10/12*20%*(50,000-20,000)
=5,000 5,000 45,000
20x5 20%*(50,000-20,000)
=6,000 11,000 39,000
20x6 20%*(50,000-20,000)
=6,000 17,000 33,000
1-1-x7/30-11-x7 11/12*20%*(50,000-20,000)
=5,500 22,500 27,500

Garage

Period Depreciation of the period Accum..depr as of Net value as of

end of period end of period
1-9-x4//31-12-x4 4/12*5%*(200,000)
=3333.33 3333.33 196,666.67
20x5 5%*200,000
=10,000 13,333.33 186,666.67
20x6 5%*20000000
=10,000 23,333.33 176,666.67
1-1-x7//30-11-x7 11/12*5%*(20000000)
=9166.67 32,500 167,500.00

Hardware

Period Depreciation of the period Accum..depr as of Net value as of

end of period end of period
20x4 30%*(200,000)
=60,000 60,000 140,000
20x5 30%*(140,000)
=42,000 102,000 98,000
20x6 30%*(98,000)
=29,400 131,400 68,600
1-1-x7//30-11-x7 11/12*30%*(68,600)
=18,865 150,265 49,735

Assumptions: Most often, assets are not acquired exactly at the beginning or end of a given accounting period. For the
sake of simplification, we have used the following working assumptions:

• annual depreciation has been divided uniformly across the twelve months of the year, regardless of the
method used for figuring out annual depreciation
• only those assets who have been owned by the firm from day 1 till day 30 or 31 of a given month are
depreciated during that month

Other assumptions may be acceptable. The assumptions must be reasonable and consistently applied.
 6/12/x7

Depreciation of tangible fixed assets (P&L) 5,500

Accumulated depreciation: vehicles (BS) 5.500

6/12/x7

Accumulated depreciation: vehicles (BS) 8,500

Cash (BS) 12,500
Long-term credits for disposal of fixed assets (BS) 12,500
Losses on the disposal of tangible fixed assets (P&L) 6,500

Vehicles (BS) 40,000

11/12/x7

Depreciation of tangible fixed assets 5,500

Accumulated depreciation: vehicles 5,500

11/12/x7

Accumulated depreciation: vehicles 22,500

Losses from casualties and accidents (or Extraordinary expenses, if 27,500
allowed)(P&L)

Vehicles 50,000

13/12/x7

Cash 26,000

Insurance received from casualties (or Extraordinary 26,000

income, if allowed) (P&L)

14/12/x7

Depreciation of tangible fixed assets 9,166,7

Accumulated depreciation: buildings 9,166,7

14/12/x7

Accumulated depreciation: buildings 32,500

Land (BS) 107,000
Buildings (BS) 160,500

Land 100,000
Buildings 200,000

16/12/x7

Depreciation of tangible fixed assets 18,665

Accumulated depreciation: computer hardware 18,665

16/12/x7

Accumulated depreciation: computer hardware 150,260

Losses from casualties and accidents (or Extraordinary 49,735
expenses, if allowed)

Computer hardware 200,000

1.5. LOGITECH

20x3 20x2 20x1

Return on sales 8.98% 7.94% 6.13%
Amortization expense on intangibles (new rules) 6,300 6,000
Amortization expense on intangibles (old rules) 1,000
Net income before adjustment 98,843 74,956 45,068
Net income adjusted (new => old rules) 92,543 68,956 45,068
Return on sales adjusted (new => old rules) 8.41% 7.31% 6.13%
Net income adjusted (old => new rules) 98,843 74,956 46,068
Return on sales adjusted (old => new rules) 8.98% 7.94% 6.26%

The first way to restate the net income is to calculate a new net income that
includes amortization expense of goodwill in 20x3 and 20x2. The other method
would be to restate the net income of 20x1 and to add back the amortization
expense. (We remind that we neglect the income tax effect of the restatement).

With the restatement, especially the first one, we clearly notice that the increase
in the return on sales is not as high as it computed on the basis of the reported
income statement.
1.6. DEPRECIATION METHODS

1. The DDB rate is 40%. Depreciation for 20x3 is 40%*50,000 = $20,000 and for
20x4 is 40% *(50,000 -20,000) = $12,000. When switching to the straight line
method, the book value (50,000 - 18,000 = 32,000) will be depreciated over
the remaining 3 years. Therefore, 20x5 depreciation is 6,000 and 31/12/x5
accumulated depreciation is 38,000.

2. The 12/31/19 and 12/31/20 balances of the accumulated depreciation T-

account were given in the schedule. The 2020 depreciation expense would be
recorded by debiting the expense account and crediting the accumulated
depreciation. The accumulated depreciation would be debited for the
retirements of fixed assets.
As the accumulated depreciation T-account is credited by 370,000 and 55,000
and has a final credit balance of 400,000, there is a debit entry missing for
25,000 which represents the accumulated depreciation associated to
retirements.

3. Straight-line depreciation.

4. SYD Depreciation Year 1 = 18,000 * 4 / 10 = 7,200

SYD Depreciation Year 2 = 18,000 * 3 / 10 = 5,400
SYD Depreciation Year 3 = 18,000 * 2/ 10 = 3,600

On Dec 31, 20x8, the carrying amount of the assets is 3,800 (20,000 minus
acc deprec of 16,200)
1.8. INTANGIBLE ASSETS

(a) 10, 15, 16, 17, 19, 20, 23

13 does not strictly qualify as intangible asset, even if often it is presented
together with intangible assets.

(b) 1. Long-term investments in the statement of financial position.

2. Property, plant, and equipment in the statement of financial position.
3. Research and development expense in the income statement.
4. Current asset (prepaid rent) in the statement of financial position.
5. Property, plant, and equipment in the statement of financial position.
6. Research and development expense in the income statement.
7. Charge as expense in the income statement.
8. Operating losses in the income statement.
9. Charge as expense in the income statement.
11. Not recorded; any costs related to creating goodwill incurred
internally must be expensed.
12. Research and development expense in the income statement.
14. Research and development expense in the income statement.
18. Research and development expense in the income statement.
21. Long-term investments, or other assets, in the statement of financial
position.
22. Expensed in the income statement.
1.9. KAWAKUBO

Net assets of Isogawa as reported

($575,000 – $350,000) ................................................................ $225,000
Adjustments to fair value
Increase in land value .......................................................... 50,000
Decrease in equipment value .............................................. (5,000) 45,000
Net assets of Isogawa at fair value................................................. (270,000)
Selling price .................................................................................... 380,000
Amount of goodwill to be recorded ................................................. $110,000

The journal entry to record this transaction is as follows:

Building .......................................................................................... 200,000

Equipment ($175,000 – $5,000) ..................................................... 170,000
Copyright ........................................................................................ 30,000
Land ($70,000 + $50,000) .............................................................. 120,000
Cash ............................................................................................... 100,000
Goodwill ......................................................................................... 110,000
Accounts Payable ................................................................ 50,000
Long-term Notes Payable .................................................... 300,000
Cash .................................................................................... 380,000