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Using Financial Accounting Information The Alternative To Debits and Credits 8th Edition Porter Solutions Manual
Using Financial Accounting Information The Alternative To Debits and Credits 8th Edition Porter Solutions Manual
Using Financial Accounting Information The Alternative To Debits and Credits 8th Edition Porter Solutions Manual
11. Explain the impact that long-term assets have on the statement 9 5 Mod
of cash flows. 10 5 Mod
8-1
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website, in whole or in part.
8-2 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Problems Estimated
and Time in
Learning Outcomes Alternates Minutes Level
1. Understand balance sheet disclosures for
operating assets. 6* 30 Mod
11. Explain the impact that long-term assets have on the statement 4 15 Mod
of cash flows. 5 40 Diff
10* 35 Mod
11* 20 Diff
12. Understand how investors can analyze a company’s
operating assets.
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-3
Estimated
Time in
Learning Outcomes Cases Minutes Level
1. Understand balance sheet disclosures for 1* 20 Mod
operating assets. 2* 20 Mod
3* 20 Mod
11. Explain the impact that long-term assets have on the statement
of cash flows.
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website, in whole or in part.
8-4 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
QUESTIONS
1. Operating assets include property, plant, and equipment and intangibles. They are
generally presented in two categories on the balance sheet: (1) Property, Plant, and
Equipment and (2) Intangible Assets. Examples of assets considered operating as-
sets are buildings, equipment, land, land improvements, patents, copyrights, and
goodwill. Operating assets are important to the long-term future of the company be-
cause 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 operating 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 allo-
cating the purchase price on the basis of the proportion of the fair market value to
the total fair market value. Market value is best established by an independent ap-
praisal of the property. If such appraisal is not possible, the accountant must rely on
the market value of other similar assets, on the value of the assets in tax records, or
on other available evidence.
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. Land is not a depreciable asset.
5. Generally, interest on borrowed money should be treated as an expense of the
period. If a company buys an asset and borrows money to finance the purchase, the
interest on the borrowed money is not considered part of the asset’s cost. Therefore,
interest is treated as a period cost and should appear on the income statement as
interest expense in the period incurred. There is one exception to this general guide-
line. If a company constructs an asset over a period of time and borrows money to
finance the construction, the interest incurred during the construction period is not
treated as interest expense. Instead, the interest must be included as part of the ac-
quisition cost of the asset.
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. A company should use a de-
preciation method that allocates the original cost of the asset to the periods benefit-
ed and that allows the company to accurately match the expense to the revenue
generated by the asset. However, the company is not required to use the same
method for all depreciable assets. Actually, it is not unusual for a company to use
two different depreciation methods for the same asset, one for financial reporting
purposes and another one for tax purposes.
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-5
7. The straight-line method is the most popular method of depreciation for several rea-
sons, 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 or units-of-production 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 de-
cline 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 pro-
spectively over the remaining life of the asset. Past amounts recorded for deprecia-
tion 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 ex-
pense in the year incurred. An item should be treated as a capital expenditure if it in-
creases 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 be-
tween the selling price and the book value of the asset as of the date of sale. In or-
der to calculate the correct gain or loss on the sale of the asset, depreciation must
be recorded up to the date of the sale. A gain occurs when the selling price of the
asset exceeds its book value. A loss occurs when the selling price of the asset is
less than its book value. The account Gain on Sale of Asset or Loss on Sale of As-
set 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 ac-
quired. Goodwill can be recorded as an asset only when one company acquires an-
other. 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
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website, in whole or in part.
8-6 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-7
BRIEF EXERCISES
All of these accounts would be in the Property, Plant, and Equipment category except
for Patent which would be in the Intangibles category.
Transportation costs—yes
Installation costs—yes
Repair costs incurred at time of purchase—yes, if it was known at the time of purchase
that the item needed repair
Repair costs incurred after the asset has been installed and used—no
Interest on loan to purchase the asset—no
Land $ 700,000
Building 300,000
Total $1,000,000
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website, in whole or in part.
8-8 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-9
Hint: This machine had to be sold for $20,000, which is the book value at the time of the
sale in order to have no loss or gain on the sale.
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website, in whole or in part.
8-10 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Amortization for 2010 and 2011: $12,000/12 years = $1,000 per year
Amortization for 2012: $10,000*/5 years = $2,000
*In 2012 patent = $12,000 – $2,000 = $10,000
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-11
EXERCISES
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website, in whole or in part.
8-12 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
2. The amount of depreciation expense that should be recorded for 2012 is as follows:
Land = $0
Building $130,000/20 years = $6,500
Equipment $216,667/20 years = $10,833
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-13
Depreciation, accumulated depreciation, and book value for the straight-line method
should be as follows:
Annual Accumulated Book
Year Depreciation Depreciation Value
2012 $10,800* $10,800 $49,200
2013 10,800 21,600 38,400
2014 10,800 32,400 27,600
2015 10,800 43,200 16,800
2016 10,800 54,000 6,000
*($60,000 – $6,000)/5 years = $10,800 per year
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 be-
cause of the pattern of usage of the asset.
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website, in whole or in part.
8-14 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
2. The effect of the transaction for depreciation can be identified and analyzed as
follows:
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.
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-15
1. Depreciation, accumulated depreciation, and book value for the straight-line method
should be as follows:
Accumulated
Year Depreciation Depreciation Book Value
2012 $ 8,000* $ 8,000 $72,000
2013 8,000 16,000 64,000
2014 15,500** 31,500 48,500
2015 15,500 47,000 33,000
2016 15,500 62,500 17,500
2017 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 2012 and 2013 was not wrong. The company used the best infor-
mation available at that time to develop its estimate of depreciation. The information
available in 2014 made it necessary to revise the estimate of depreciation. This illus-
trates the difference between a change in estimate and a correction of an error.
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website, in whole or in part.
8-16 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
1. The effect of the transaction for depreciation can be identified and analyzed as
follows:
The effect of the transaction for the sale can be identified and analyzed as follows:
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-17
2. The gain or loss should appear in the Other Income category of the income state-
ment to indicate that it is not part of the normal operating activity of the company. A
gain occurs when the selling price of the asset exceeds its book value. A loss occurs
when the selling price of the asset is less than its book value. The account Gain on
Sale of Asset or Loss on Sale of Asset should appear on the income statement in
the Other Income/Expense category because it is not part of the normal operating
activity of the company.
1. The effect of the transaction for depreciation can be identified and analyzed as
follows:
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website, in whole or in part.
8-18 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
The effect of the transaction for the sale can be identified and analyzed as follows:
2. The gain or loss should appear in the Other Income category of the income state-
ment to indicate that it is not part of the normal operating activity of the company. A
gain occurs when the selling price of the asset exceeds its book value. A loss occurs
when the selling price of the asset is less than its book value. The account Gain on
Sale of Asset or Loss on Sale of Asset should appear on the income statement in
the Other Income/Expense category because it is not part of the normal operating
activity of the company.
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-19
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
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website, in whole or in part.
8-20 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
MULTI-CONCEPT PROBLEMS
1. The effect of the capitalized cost for the new conveyor system can be identified and
analyzed as follows:
The effect of the capitalized cost for the new hydraulic lift system can be identified
and analyzed as follows:
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.
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-21
2. The effect of the transaction for depreciation can be identified and analyzed as
follows:
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website, in whole or in part.
8-22 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
a. All research and development costs should be treated as an expense. The 2012 in-
come statement should reflect an expense of $20,000.
b. Patent costs should be treated as an asset. The 2012 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 2013 balance sheet.
2012 amortization = $10,000/5 years = $2,000
2013 amortization = $10,000 – $2,000 amortization from 2012 + $8,000 infringement
= $16,000
$16,000/4 years = $4,000 amortization for 2013
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-23
PROBLEMS
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) de-
clines 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 as-
signed to the buildings in order to depreciate them and take advantage of the 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 pur-
chase 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.
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website, in whole or in part.
8-24 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
2. The president is correct that a total of $33,600 will be deducted as depreciation un-
der 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 (time value of money).
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 de-
preciation method for tax purposes.
The memo should also stress to the president that not only is it legal, but it is also
not a violation of GAAP to use one method of depreciation for the books and a dif-
ferent 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.
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-25
1. O’HARE COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2012
Service revenue ........................................................................... $100,000
Depreciation expense .................................................................. 15,000
Net income ................................................................................... $ 85,000
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website, in whole or in part.
8-26 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
2. Net book value of property, plant, and equipment at December 31, 2011:
Net book value at 12/31/11 .......................................... $ X
Plus purchases during 2012 ........................................ 292,000
Less book value of equipment sold during 2012.......... (350,000)*
Less 2012 depreciation ............................................... (672,000)
Net book value at 12/31/12 .......................................... $4,459,000
X + $292,000 – $350,000 – $672,000 = $4,459,000
X = $5,189,000
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-27
MULTI-CONCEPT PROBLEMS
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website, in whole or in part.
8-28 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
1. The effect of the transaction for depreciation can be identified and analyzed as
follows:
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-29
2. The pollution control equipment extended the life of the asset and should be capital-
ized 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: 2011 depreciation...................................................... (14,000)
2012 depreciation...................................................... (12,600)
Book value 1/1/2013 .................................................................... $379,400
Less: 2013 depreciation ($12,600 × 3/12) .......................... 3,150
Book value at sale........................................................................ $376,250
Sale proceeds .............................................................................. 392,000
Gain on sale ................................................................................. $ 15,750
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 4/1/2013 ........................................................... $332,500
Sale proceeds......................................................................... 392,000
Gain on sale ........................................................................... $ 59,500
2. Reynosa should record $595 of amortization expense each fiscal year, for a total of
$2,975 ($595 per year × 5 years) = $2,975.*
$11,900/20 years = $595 per year
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website, in whole or in part.
8-30 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-31
2. Acquisition cost:
Cost of patent ................................................................... $ X
Less accumulated amortization at 12/31/12 ................ (119,000)
Carrying value at 12/31/12 .......................................... $ 170,000
X – $119,000 = $170,000
X = $289,000
Year acquired:
Accumulated amortization at 12/31/12 $ 119,000
Divided by annual amortization ÷ 17,000
Years owned 7 years
It was acquired in 2006.
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 In-
vesting Activities section of the 2006 statement of cash flows.
3. Assuming the indirect method is used, the amortization expense relating to the pa-
tent 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 in-
come in the Cash Flows from Operating Activities section of the statement of cash
flows.
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website, in whole or in part.
8-32 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ALTERNATE PROBLEMS
2. The purchase does not affect total assets; it affects only the composition of the as-
sets. Cash is a current asset; equipment is a long-term asset.
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-33
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website, in whole or in part.
8-34 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
2. Net book value of property, plant, and equipment at December 31, 2011:
Net book value at 12/31/11 .......................................... $ X
Plus purchases during 2012 ........................................ 277,000
Less: Book value of land sold during 2012 ................. (204,000)*
2012 Depreciation ............................................. (205,000)
Net book value at 12/31/12 .......................................... $1,555,000
X + $277,000 – $204,000 – $205,000 = $1,555,000
X = $1,687,000
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-35
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website, in whole or in part.
8-36 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
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 at end of year 2012
c. Depreciation:
($8,000 – $1,000)/8 × 3/12 = $219 for 3 months (January 1 to April 1, 2012)
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* amortization expense for 2012 (6 months)
Book value:
$14,000 – $1,750* = $12,250
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-37
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 erroneously reported in Year 1 was $21,640* ($216,400/10). Deprecia-
tion 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 in-
come 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 bal-
ance sheet. The effect of this error is to overstate assets on the balance sheet and
also overstate net income.
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 ad-
vantage 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 in-
curred to generate that revenue.
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website, in whole or in part.
8-38 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
1. The $350,000 of cost that represents research and development should be treated
as an expense in the year of acquisition, 2007. 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 five 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.
Original cost of patent .................................................................. $23,800
Less: Amortization for 5 years ................................................ 5,950
Book value, 10/1/2012 ............................................................ $17,850
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CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-39
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 reve-
nues 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.
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8-40 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
2. Acquisition cost:
Cost of patent ......................................................................... $ X
Less: Accumulated amortization at 12/31/12 .......................... (1,661,000)
Carrying value at 12/31/12 ..................................................... $ 1,357,000
X – $1,661,000 = $1,357,000
X = $3,018,000
Year acquired:
Accumulated amortization at 12/31/12 ................................... $ 1,661,000
Divided by annual amortization............................................... ÷ 151,000
Years owned........................................................................... 11 years
It was acquired in 2002.
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 2002 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 Activi-
ties section of the statement of cash flows.
4. The proceeds from the sale of the patent for $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 selling price –
$1,357,000 book value at 1/1/13) would be deducted from net income in the Cash
Flows from Operating Activities section of the statement of cash flows.
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-41
DECISION CASES
1. A note to the statements indicates the company has the following classes of assets
in the category: land, buildings, buildings under capital lease, equipment, equipment
under capital lease, capitalized software, and construction in progress.
2. The company uses the straight-line method of depreciation.
3. Buildings are usually depreciated over 40 to 50 years, and equipment, furniture, and
software are usually depreciated over 3 to 10 years.
4. The company discloses the total amount of property, plant, and equipment before
depreciation of $6,949.7 million, accumulated depreciation of $3,822.0 million, and
the total net of depreciation of $3,127.7 million.
5. The statement of cash flows indicates purchases of $649.9 million and cash re-
ceived from disposal of property and equipment of $7.4 million.
LO 1,9 DECISION CASE 8-2 COMPARING TWO COMPANIES IN THE SAME INDUSTRY:
GENERAL MILLS AND KELLOGG’S
1. Kellogg’s lists the following items in property, plant, and equipment: land, buildings,
machinery and equipment, and construction in progress. General Mills indicates the
company has the following classes of assets in the category: land, buildings, build-
ings under capital lease, equipment, equipment under capital lease, capitalized
software, and construction in progress.
2. Both companies use the straight-line method of depreciation. In most cases, the
straight-line method is chosen because of its simplicity and because it results in an
even pattern of expense over the life of the assets.
3. General Mills discloses the total amount of property, plant, and equipment before
depreciation of $6,949.7 million, accumulated depreciation of $3,822.0 million, and
total net of depreciation of $3,127.7 million. Kellogg’s discloses the net amount of
property, plant, and equipment of $3,128 million and accumulated depreciation of
$4,690 million so the amount of property, plant and equipment before depreciation
can be calculated as $7,818 million.
4. General Mills disclosed accumulated depreciation of $3,822.0 million and deprecia-
tion expense of $457.1 million so the approximate age of the assets can be calculat-
ed as $3,822.0/$457.1 = 8.4 years. Kellogg’s disclosed accumulated depreciation of
$4,690 million and depreciation expense of $392 million so the approximate age of
the assets can be calculated as $4,690/$392 = 12.0 years.
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8-42 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
5. Kellogg’s purchased property, plant, and equipment of $474 million during 2010. The
statement does not indicate that any cash was received from sales of property,
plant, and equipment. General Mills indicates purchases of $649.9 million and cash
received from disposal of property and equipment of $7.4 million. For both compa-
nies, information about whether a gain or loss occurred from the sale of assets is
provided in the Operating Activities section of the statement of cash flows.
ACCELERATED COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2012
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 using the
double-declining-balance method is as follows:
2011: $600,000 × 40% = $240,000
2012: $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.
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CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-43
For accounting purposes, the company should use straight-line depreciation because it
will better match the cost of 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 result in a cash inflow because of reduced tax liability.
Students should be asked to determine the impact of using the first appraisal versus the
second appraisal. The appraisals differ in the amount of the purchase cost that will be
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 ap-
praisal 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 possi-
ble 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 opin-
ion? The instructor may wish to draw a parallel to “opinion-shopping” on the part of cli-
ents 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.
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8-44 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
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 preferable be-
cause 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/her superior and/or the company’s
auditors.
Nike had property, plant, and equipment, net of depreciation, of $1,931.9 million as of
May 31, 2010. The company does not show the amount of accumulated depreciation on
the balance sheet, but that amount is disclosed in the notes to the financial statements.
The amount of depreciation expense for the current year is not shown on the balance
sheet. It is shown on the income statement.
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-45
1. PEK COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2012
Sales revenue ......................................................... $1,250,000
Cost of goods sold .................................................. 636,500
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
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2012
Cash flows from operating activities:
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.
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website, in whole or in part.
8-46 USING FINANCIAL ACCOUNTING SOLUTIONS MANUAL
2. PEK COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2012
Sales ....................................................................... $1,250,000
Cost of goods sold .................................................. 636,500
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
Net income .............................................................. $ 248,366
*$58,400 + $49,091
PEK COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2012
Cash flows from operating activities:
Net income .................................................................................. $248,366
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.
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website, in whole or in part.
CHAPTER 8 • OPERATING ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLES 8-47
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website, in whole or in part.