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CHAPTER 8
Operating Assets: Property, Plant,
and Equipment, and Intangibles
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Outcomes Exercises Minutes Level
1. Understand 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. Understand 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
© 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.
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
2. Determine the acquisition cost of an operating asset. 7* 15 Diff

purchased for a lump sum. 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. Understand the proper amortization of intangible assets. 6# 30 Mod

9* 10 Mod
11* 20 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
operating assets.

#Alternative problem only
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
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* 20 Mod

6 15 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

2* 20 Mod
10. Understand the proper amortization of intangible assets.
11. Explain the impact that long-term assets have on the statement
of cash flows.

operating assets.

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.
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
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 intan-
gible 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 exam-
ple, a patent has a legal life of 20 years. But if the invention under patent will be
useful over only ten years, then the patent should be amortized over the shorter ten-
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.
BRIEF EXERCISES
LO 1 BRIEF EXERCISE 8-1 PROPERTY, PLANT, AND EQUIPMENT CLASSIFICATION
All of these accounts would be in the Property, Plant, and Equipment category except
for Patent which would be in the Intangibles category.
LO 2 BRIEF EXERCISE 8-2 DETERMINE ACQUISITION COST
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
LO 3 BRIEF EXERCISE 8-3 LUMP-SUM PURCHASE
Land $ 700,000
Building 300,000
Total $1,000,000
Land: $800,000 × ($700,000/$1,000,000) = $560,000

Building: $800,000 × ($300,000/$1,000,000) = $240,000
LO 4 BRIEF EXERCISE 8-4 CAPITALIZATION OF INTEREST
$1,000,000 × 12/12 $1,000,000

$2,000,000 × 6/12 1,000,000
$1,000,000 × 1/12 83,333
Average accumulated expenditures $2,083,333
LO 5 BRIEF EXERCISE 8-5 DEPRECIATION METHODS
1. Straight-line rate of 1/10 × 2 = 20%*

2. First-year depreciation: $40,000 × 20%* = $8,000
Second-year depreciation: ($40,000 – $8,000) × 20%* = $6,400
3. The maximum amount that can be treated as depreciation over ten years is $36,000.
(*$40,000 – $4,000** residual value = $36,000).
*This rate, 1/10 × 2= 20%, will be applied in all years to the asset’s book value at the
beginning of each year. As depreciation is recorded, the book value declines. Thus,
a constant rate is applied to a declining amount. This constant rate is applied to the
full cost or initial book value, not to cost minus residual value as in the other
methods. However, the machine cannot be depreciated below its residual value of
$4,000.**
LO 6 BRIEF EXERCISE 8-6 CHANGE IN DEPRECIATION ESTIMATE
Depreciation for 2010 and 2011:

($10,000 – $1,000)/10 years = $900 per year × 2 years = $1,800
Depreciation for 2012:
Remaining depreciable amount $8,200 – $1,000 = $ 7,200
Divided by remaining life ÷ 5 years
Depreciation $ 1,440
Acquisition cost, January 1, 2010 $ 10,000
Less: Accumulated depreciation (2 years at $900 per year) 1,800
Book value, January 1, 2012 $ 8,200
Less: Residual value 1,000
Remaining depreciable amount $ 7,200
Depreciation = Remaining Depreciable Amount/Remaining Life
Depreciation = $7,200/5 years
= $1,440
LO 7 BRIEF EXERCISE 8-7 CAPITAL EXPENDITURE
Original cost, January 1, 2010 ........................................................... $ 10,000

Less: Accumulated depreciation (2 years at $900 per year) ............. 1,800
Book value, January 1, 2012 ............................................................. $ 8,200
Plus: Major overhaul.......................................................................... 5,000
Less: Residual value ......................................................................... (1,000)
Remaining depreciable amount ......................................................... $ 12,200
Depreciation per Year = $12,200/10 years
= $1,220
LO 8 BRIEF EXERCISE 8-8 SALE OF ASSET
Loss = Book Value – Sales Price

$6,000 = $20,000 – X
Solving for X indicates sales price, and cash received was $14,000.
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.
LO 9 BRIEF EXERCISE 8-9 CLASSIFICATION OF INTANGIBLE ASSETS
Patents—intangible asset and amortized*

Copyrights—intangible asset and amortized*
Research and development—not an intangible asset
Goodwill—intangible asset and not amortized
The company’s advantageous location—not an intangible asset that is recognized on
the balance sheet
Broadcast rights—intangible asset and may be amortized if it has a finite life*
Hint: Intangible assets are long-lived and have no physical properties but provide rights
or privileges. An intangible asset with a limited life should be amortized over the shorter
of its legal life or useful life. Intangibles with an indefinite life should not be amortized.
Research and development costs are not considered to be an intangible asset and are
treated as an expense instead. Goodwill is an intangible asset. It is not amortized but
must be evaluated every year to determine any impairment in value.
*Since these intangibles have a limited life, they should be amortized.
LO 10 BRIEF EXERCISE 8-10 AMORTIZATION OF INTANGIBLE
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
LO 11 BRIEF EXERCISE 8-11 OPERATING ASSETS AND CASH FLOWS
Depreciation of an operating asset—Operating category

Gain on the sale of an asset—Operating category
Amortization of an intangible—Operating category
Loss on the sale of an asset—Operating category
Amount paid to purchase an asset—Investing category
Amount received upon sale of an asset—Investing category
LO 12 BRIEF EXERCISE 8-12 ANALYSIS OF OPERATING ASSETS
Average Life of the Assets = Property, Plant, and Equipment/Depreciation Expense

= $10,000/$1,000 = 10 years
Average Age of the Assets = Accumulated Depreciation/Depreciation Expense
= $5,000/$1,000 = 5 years
Asset Turnover = Sales/Average Total Assets
Average Total Assets = ($30,000 + $40,000)/2 = $35,000
Asset Turnover = $62,000/$35,000 = 1.77
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 of 2% ................................................................... (1,200)
Freight.......................................................................................... 1,000
Pollution control 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 neces-
sary 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 3 EXERCISE 8-2 LUMP-SUM PURCHASE
1. The total market value is calculated as follows:

Land ............................................................................................. $200,000
Building ........................................................................................ 150,000
Equipment .................................................................................... 250,000
Total ............................................................................................. $600,000
Amount allocated to each account should be as follows:
Land $520,000 × $200,000/$600,000 = $173,333
Building $520,000 × $150,000/$600,000 = $130,000
Equipment $520,000 × $250,000/$600,000 = $216,667
EXERCISE 8-2 (Concluded)
The effect of the transaction can be identified and analyzed as follows:
Identify ACTIVITY: Investing

and ACCOUNTS: Land Increase Building Increase
Analyze Equipment Increase Cash Decrease
STATEMENT[S]: Balance Sheet
Balance Sheet Income Statement
STOCKHOLDERS’ NET
ASSETS = LIABILITIES + EQUITY REVENUES – EXPENSES = INCOME
Land 173,333
Build-
ing 130,000
Equip-
ment
216,667
Cash
(520,000)
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
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
Less: Accumulated depreciation .................. 10,833 205,834
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:
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
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 = (Acquisition Cost – Residual Value)/Life in Units

= ($60,000 – $6,000)/150,000 units
= $0.36 per unit
Depreciation, accumulated depreciation, and book value for the units-of-production
method should be as follows:
Annual Accumulated Book
Year Depreciation Depreciation Value
2012 10,000 × $0.36 = $ 3,600 $ 3,600 $56,400
2013 20,000 × $0.36 = 7,200 10,800 49,200
2014 30,000 × $0.36 = 10,800 21,600 38,400
2015 40,000 × $0.36 = 14,400 36,000 24,000
2016 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 be-
cause of the pattern of usage of the asset.
LO 5 EXERCISE 8-4 ACCELERATED DEPRECIATION
1. Accumulated Book Value

Year Annual Depreciation Depreciation at end of Yr. 1 becomes
beginning Yr. 2 and so on
2012 40%* × $6,000 = $2,400 $2,400 $3,600
2013 40% × 3,600 = 1,440 3,840 2,160
2014 40% × 2,160 = 864 4,704 1,296
2015 40% × 1,296 = 518 5,222 778
2016 178** 5,400 600
*Straight-line rate: 100%/5 years = 20%; double the straight-line rate = 40%. This
40% rate will be applied in all years to the asset’s book value at the beginning of
each year. As depreciation is recorded, the book value declines. Thus, a constant
rate is applied to a declining amount. This constant rate is applied to the full cost or
initial book value, not to cost minus residual value as in the other methods. How-
ever, the machine cannot be depreciated below its residual value of $600.
**Since the asset should not be depreciated below residual value, the amount to be
recorded the last year 2016 is $6,000 – $5,222 – $600 = $178.
2. The effect of the transaction for depreciation can be identified and analyzed as
follows:
Identify ACTIVITY: Operating

and ACCOUNTS: Depreciation Expense Increase
Analyze Accumulated Depreciation Increase
STATEMENT[S]: Balance Sheet and Income Statement
STOCKHOLDERS’ NET
Accumulated
Deprecia- Depreciation
tion* (2,400) (2,400) Expense 2,400 (2,400)
*The Accumulated Depreciation account has increased. It is shown as a decrease in the equation above because it is a contra account and
causes total assets to decrease.
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
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
Acquisition cost, January 1, 2012 ................................................ $80,000

Less: Accumulated depreciation
(2 years at $8,000 per year) ................................................... 16,000
Book value, January 1, 2014 ....................................................... $64,000
Less: Residual value .................................................................... 2,000
Remaining depreciable amount ................................................... $62,000
Depreciation = $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.
LO 8 EXERCISE 8-6 ASSET DISPOSAL
follows:

STOCKHOLDERS’ NET
Accum. Depr.
—Asset* Depreciation
(4,500) (4,500) Expense 4,500 (4,500)
The effect of the transaction for the sale can be identified and analyzed as follows:

and ACCOUNTS: Accumulated Depreciation—Asset Decrease
Analyze Cash Increase Asset Decrease
Gain on Sale of Asset Increase
STOCKHOLDERS’ NET
Accum. Depr. Gain on Sale
—Asset of Asset
22,500* 2,500 2,500** 2,500
Cash 40,000
Asset
(60,000)
*The Accumulated Depreciation account has decreased. It is shown as an increase in the equation above because it is a contra account
and causes total assets to decrease.
The depreciation for 2012 is calculated as follows:

($60,000 – $6,000)/6 years = $9,000 per year
$9,000 × 6/12 = $4,500 for 2012
*Accumulated depreciation at time of sale:
Depreciation for 2010 and 2011—($9,000 × 2) $18,000
Depreciation for 2012...................................... 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 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.
LO 8 EXERCISE 8-7 ASSET DISPOSAL
follows:

STOCKHOLDERS’ NET
Accum. Depr.
—Asset* Depreciation
(4,500) (4,500) Expense 4,500 (4,500)
The effect of the transaction for the sale can be identified and analyzed as follows:

and ACCOUNTS: Accumulated Depreciation—Asset Decrease
Analyze Cash Increase Asset Decrease
Note Receivable Increase
Loss on Sale of Asset Increase
STOCKHOLDERS’ NET
Cash 15,000 Loss on Sale
Note Receiv- (7,500) of Asset 7,500** (7,500)
able 15,000
Asset
(60,000)
Accum. Depr.
—Asset
22,500*
*The Accumulated Depreciation account has decreased. It is shown as an increase in the equation above because it is a contra account
and causes total assets to decrease.
**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 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.
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 PROBLEMS
LO 1,7 EXERCISE 8-11 CAPITAL VERSUS REVENUE EXPENDITURES
1. The effect of the capitalized cost for the new conveyor system can be identified and
analyzed as follows:

and ACCOUNTS: Building Increase Cash Decrease
Analyze STATEMENT[S]: Balance Sheet
STOCKHOLDERS’ NET
Build-
ing 40,000
Cash (40,000)
The effect of the capitalized cost for the new hydraulic lift system can be identified
and analyzed as follows:

and ACCOUNTS: Delivery Truck Increase Cash Decrease
Analyze STATEMENT[S]: Balance Sheet
STOCKHOLDERS’ NET
Delivery
Truck 5,000
Cash (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.
follows:

Analyze Accumulated Depreciation—Building Increase
Accumulated Depreciation—Truck Increase
STOCKHOLDERS’ NET
Accum. Depr. Depreciation
—Building (14,322) Expense 14,322 (14,322)
(9,739)*
Accum. Depr.
—Truck
(4,583)*
*The Accumulated Depreciation accounts have increased. They are shown as decreases in the equation above because they are contra
accounts and cause total assets to decrease.
The depreciation for 2012 should be calculated as follows:

Building Truck
Original cost ............................................................ $200,000 $20,000
Less: Depreciation for 2010 and 2011 .................... 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 left) .................................... $ 9,739
Depreciation per year on truck
($18,333/4 years left)......................................... $ 4,583
*$200,000/25 years =$8,000 depreciation per year × 2 years = $16,000
**$20,000/6 years = $3,333 depreciation per year × 2 years = $6,667
3. The assets should appear on the 2012 balance sheet as follows:

Building ................................................................... $240,000
Less: Accumulated depreciation ............................. 25,739* $214,261
Truck ....................................................................... $ 25,000
Less: Accumulated depreciation ............................. 11,250** 13,750
Total property, plant, and equipment ...................... $228,011
*$8,000 + $8,000 + $9,739 = $25,739
**$3,333.50 + $3,333.50 + $4,583 = $11,250
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 2012 is zero because the asset was not
completed and put into use until January 1, 2013. The amount of depreciation ex-
pense for 2013 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 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
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) 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.
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 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.
LO 5 PROBLEM 8-3 BOOK VERSUS TAX DEPRECIATION
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 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.
LO 11 PROBLEM 8-4 DEPRECIATION AND CASH FLOW
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
2. The amount of the net cash inflow for 2012 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, deprecia-
tion must be “added back” to net income to determine the amount of the net cash in-
flow.
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
Sales proceeds ............................................................ 75,000
Loss (gain) on sale ...................................................... $ (55,000)
X – $75,000 = $(55,000)
X = $20,000**
PROBLEM 8-5 (Concluded)
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
3. Net book value of intangibles at December 31, 2011:

Plus payment of legal fees during 2012 ....................... 15,000
Less book value of copyright sold during 2012 ............ (20,000)**
Less 2012 amortization ............................................... (33,000)
Net book value at 12/31/12 .......................................... $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 $2,400 × $200/$3,200* = $ 150
Office furniture $2,400 × $600/$3,200* = 450
Equipment $2,400 × $2,400/$3,200* = 1,800
*Market value for purchases = $200 + $600 + $2,400 = $3,200
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 2012:

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 rev-
enue.
LO 5,7,8 PROBLEM 8-8 CAPITAL EXPENDITURES, DEPRECIATION, AND DISPOSAL
follows:

STOCKHOLDERS’ NET
Accum. Depr.
—Building* Depreciation
(14,000) (14,000) Expense 14,000 (14,000)

($364,000 – $14,000)/25 years = $14,000 for 2011.
Original cost ........................................................... $ 364,000
Less: 2011 depreciation ......................................... (14,000)
Less: Residual value .............................................. (14,000)
Plus 2012 capitalized costs .................................... 42,000
Depreciable amount ............................................... $ 378,000
Remaining asset life ............................................... ÷ 30 years
Depreciation ........................................................... $ 12,600
PROBLEM 8-8 (Concluded)
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
LO 6,10 PROBLEM 8-9 AMORTIZATION OF INTANGIBLE, REVISION OF RATE
1. The $85,000 of research and development costs should be recorded as an expense.

The $11,900 legal cost to acquire the patent should be capitalized in a Patent ac-
count.
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
3. Reynosa should record a loss of $8,925.

Original cost of patent .................................................................. $11,900
Less: Amortization for 5 years ................................................ 2,975*
Book value, 10/1/2012 ............................................................ $ 8,925
LO 8,11 PROBLEM 8-10 PURCHASE AND DISPOSAL OF OPERATING ASSET AND

EFFECTS ON STATEMENT OF CASH FLOWS
1. Partial statement of cash flows for 2012:

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 statement of cash flows for 2013:
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 prod-
uct) 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. 2012 amortization expense:

Accumulated amortization at 12/31/11 ........................ $ 102,000
Plus 2012 amortization expense.................................. X
Accumulated amortization at 12/31/12 ........................ $ 119,000
$102,000 + X = $119,000
X = $17,000
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.
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 $251,520
(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 as-
sets. 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%
2012 $62,000 $24,000* $38,000 $11,400
2013 62,000 14,400 47,600 14,280
2014 62,000 8,640 53,360 16,008
2015 62,000 5,184 56,816 17,045
2016 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%, 2012
depreciation = 40% × $60,000 = $24,000
**To bring accumulated depreciation to $60,000.
PROBLEM 8-2A (Concluded)
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 (time value of money).
The memo should also stress that it is important to analyze the tax position of
Payton Delivery Service 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 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.
LO 11 PROBLEM 8-4A AMORTIZATION AND CASH FLOW
1. 2012 income = $500,000 – $62,500 – $50,000 = $387,500

2. Cash on hand, December 31, 2012 = $500,000 – $62,500 = $437,500
3. Cash increased from revenue and decreased by cash expenses. The amount is dif-
ferent than income for 2012 because amortization, like depreciation, is an expense
but not a cash outflow. The cost of long-term assets like a copyright is a cash out-
flow 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
Sales proceeds ............................................................ 187,000
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
Sales proceeds ............................................................ 121,000
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, 2011:
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
3. Net book value of intangibles at December 31, 2011:

Plus payment of legal fees during 2012 ....................... 6,000
Less: Book value of trademark sold during 2012........ (114,000)**
2012 Amortization ............................................. (3,000)
Net book value at 12/31/12 .......................................... $ 34,000
X + $6,000 – $114,000 – $3,000 = $34,000
X = $145,000
ALTERNATE MULTI-CONCEPT PROBLEM
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 at end of year 2012.............................. $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 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
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 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.
LO 7,8 PROBLEM 8-8A CAPITAL EXPENDITURES, DEPRECIATION, AND DISPOSAL
1. 2011 Depreciation = [($612,000 – $12,000)/25 years)] = $24,000

2012 Depreciation = [($612,000 + $87,600 – $30,000 – $24,000)/24)] = $26,900
Original cost, January 1, 2011 ........................................ $612,000
Less: Accumulated depreciation (1 year, $24,000) ....... 24,000
Book value, January 1, 2012 .......................................... $588,000
Plus: Major overhaul in 2012 .......................................... 87,600
Less: New residual value ................................................ (30,000)
Remaining depreciable amount ..................................... $645,600
Depreciation per Year = $645,600/24 years = $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 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.
3. Loss at sale = $612,000 + $87,600 – $24,000 – $26,900 – $360,000 = $288,700

Asset cost .................................................................................... $612,000
Plus: Major overhaul in 2012 ....................................................... 87,600
Less: Accumulated depreciation .................................................. 50,900*
Book value ................................................................................... $648,700
Sale price ..................................................................................... 360,000
Loss on sale of asset ................................................................... $288,700
*Depreciation for 2011 = $24,000 + Depreciation for 2012 = $26,900
Loss on sale if fire equipment is expensed = $612,000 – $24,000 (2011 Deprecia-
tion) – $24,000 (2012 Depreciation) – $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, 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
LO 8,11 PROBLEM 8-10A PURCHASE AND DISPOSAL OF OPERATING ASSET AND

EFFECTS ON STATEMENT OF CASH FLOWS
1. Partial statement of cash flows for 2012:

Net income ........................................................................ $XX,XXX
Purchase of delivery truck ................................................. (45,000)
Partial statement of cash flows for 2013:
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 = Sales price = $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 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.
LO 9,10,11 PROBLEM 8-11A AMORTIZATION OF INTANGIBLES AND EFFECTS ON

1. 2012 amortization expense:

Accumulated amortization at 12/31/11 ................................... $ 1,510,000
Plus: 2012 Amortization expense ........................................... X
$1,510,000 + X = $1,661,000
X = $151,000
2. Acquisition cost:
Cost of patent ......................................................................... $ X
Less: Accumulated amortization at 12/31/12 .......................... (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:
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.
DECISION CASES
READING AND INTERPRETING FINANCIAL STATEMENTS
LO 1,9 DECISION CASE 8-1 GENERAL MILLS
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.
DECISION CASE 8-2 (Concluded)
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.
MAKING FINANCIAL DECISIONS
LO 1,5 DECISION 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 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.
LO 5 DECISION CASE 8-4 DEPRECIATION ALTERNATIVES
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.
ETHICAL DECISION MAKING
LO 3 DECISION CASE 8-5 VALUING ASSETS
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.
LO 5 DECISION 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 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.
REAL WORLD PRACTICE 8.1
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.
SOLUTION TO INTEGRATIVE PROBLEM
1. PEK COMPANY
INCOME STATEMENT
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
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
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
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.
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 XVI.
A DEADLY STRIFE.
“Your arrival is well-timed,” said Jewan, turning to Zeemit.

“I see that it is so,” she answered. “I soon discovered in Delhi that
you had left, and I determined to follow you, for poor old Zeemit is
alone in the world now. I was lucky in meeting with Wanna. Some
years ago I was in Cawnpore, and I knew her then. When she learnt
that I had followed you, she lost no time in conducting me here.”
“I am glad of it,” said Jewan. “My prize will be safely kept now. Guard
her well, Zeemit; and you, Wanna, if you value your life, look to her!
You understand? She has dared to defy me, and I swear to subdue
her!”
He crossed the room to where Flora still trembled, and crouched
upon the floor. He stooped over, and said, with bitterness—
“I leave you now. Business calls me hence, but I shall return to-night,
and then we will see who conquers.”
He passed out of the room, and Wanna locked the door after him. It
was an inexpressible relief to Flora when he had gone. But when she
raised her head, and her eyes fell upon Wanna’s face, she
shuddered. It was a face scarcely human in its expression of hate.
She turned to Zeemit—she had given her hope in Meerut—why had
she failed her now? She could read little or nothing in the dusky
features. Her heart sank, for the glimmering ray that had supported
her hitherto seemed to fade entirely.
“Come,” said Wanna, spurning the trembling girl with her foot, “here
is food for you; I suppose I must keep life in you until Jewan has
sucked your sweetness. What he can see in you I know not. It is a
mad infatuation, and he will get the better of it; but if I had my way I
would torture you. I would spoil your beauty—I would pluck your
eyes out—I would lop off a limb from your body every day—I would
burn you with hot irons. Ah, ah, ah! it would be sport! Eh, Zeemit,
what say you? We have been ground as corn in a mill by these
accursed Feringhees; and now that our day has come, have we not
a right to be glad?”
She hummed the air of an Indian ditty, and fairly danced about the
room with fiendish glee.
“Oh, woman!” moaned the unhappy Flora, “if you are not altogether
inhuman, have pity, and kill me.”
“Ugh, bah, pish! pity indeed,” cried Wanna, moving about backwards
and forwards in that restless and strange manner peculiar to caged,
wild animals. “Have we ever had pity from your countrymen? Have
you not crushed us into the earth?—subdued us with fire and sword?
And now that our power is coming back we know well how to
retaliate.”
As she spoke she spat upon the floor twice, and made a sort of
hissing sound with her lips.[5]
“Why do you not get up?” asked Zeemit, in a tone that contrasted
strangely with the savageness and cruelty of Wanna.
The ray brightened again for Flora. She caught comfort from that
voice; but when she looked into the face she saw nothing to justify
the inference she had drawn. The kindliness displayed in Zeemit’s
voice did not escape Wanna, who turned sharply upon her country-
woman and cried—
“How is this? You speak to the white-faced cat as if she were your
pet dove, instead of an enemy.”
“Scarcely an enemy, Wanna. Her only crime seems to be that she is
a Feringhee.”
“She is a beast.”
“She is a woman, and I feel as a woman should do for her.”
Zeemit’s words were to Flora like water to the parched earth. They
gave her hope, they gave her joy; she drank them in with avidity, and
gained strength. She rose up and would have clung around the neck
of her ayah, had not the attitude of Wanna appalled her.
The hag stood facing Zeemit. The bangles on her legs and arms
chinked as she shook with passion. She was clawing the air, and
almost foaming at the mouth. She struggled to speak, but her
passion well-nigh choked her. Words came at last.
“You sympathise with this Feringhee woman. I see through you—you
are an enemy to us, a friend to her. But, if you thought to liberate her,
you have set up a trap into which you yourself have blindly walked. I
go for Jewan.”
She made a movement towards the door. To let her go would
frustrate every plan. Zeemit knew that it was no time for reflection. It
was woman to woman—age to age; for on both the years pressed
heavily. With a lithe and agile spring she fastened upon Wanna, who,
with the sudden instinct of self-preservation and the ferocity of the
jungle cat, twisted her bony fingers round and dug her nails deep
into the flesh of the other’s arms.
It was a strange scene. From the wall the picture of the idol seemed
to grin hideously. Speechless with terror, poor Flora stood wringing
her hands. The two women, panting with the first shock of attack,
glared at each other, and over all there fell the weird, flickering light
of the swinging cocoa-lamp.
As in all Indian buildings of this kind, there was a long window in the
room opening on to a verandah. The jalousies were thrown back.
The stars in the heavens were shining, and from below came up the
sounds of the voices of the natives, who were beating their tom-toms
and making merry.
Miss Meredith moved to this verandah. She peered over. She could
see groups of people below. Her first impulse was to call for
assistance, but in an instant she was convinced of the madness of
such a proceeding. On the issue of the struggle her life depended.
She might go free if Zeemit conquered—die if the triumph was
Wanna’s.
“Give me the key of that door,” demanded Zeemit, when she had
recovered breath enough for speech.
“Never while my heart beats,” answered the other.
“Then I will take it from you when your heart has done beating,” said
Zeemit.
Mehal was slightly the taller of the two women, and her arms were
longer. In this respect she, perhaps, had an advantage.
The women struggled furiously. Now they were locked in a deadly
embrace, now parted, only to spring together again with increased
ferocity. Never did wild animals grip and tear, and hiss, and struggle
more savagely than did these two women. But the springs which
moved them both to action were of a totally different nature. A kindly
desire to render assistance to one in distress was Mehal’s motive—a
deadly hatred for the Englishwoman was the other’s.
They dragged each other round the room; they panted with the
extraordinary exertion which each made to gain the victory; their
muslin garments were encrimsoned with blood and rent to shreds.
Now they dashed against the stone walls, then reeled and tottered to
the floor, writhing in the agony of the terrible grip which each had of
the other. Rising again, covered with dust and blood, and their limbs
locked together like snakes—their faces contorted with pain and
passion, and their breath coming thick and fast.
It was an awful moment for Flora. She would have rendered
assistance to Mehal, but that was impracticable, as she found, for
Wanna twisted herself about so rapidly as to frustrate the attempts
which Flora made to grasp her.
It was truly a struggle for life; for, ere it ceased, one of the strugglers
must die. They knew that, and so they fought with the desperate
energy which nerves a human being when dear life is at stake.
The efforts of Wanna were growing gradually weaker. Mehal had
worked one of her hands up to the other’s throat, and she was
pressing her thumb and fingers together, until Wanna’s eyes started.
The hag knew now that only by a desperate effort could she free
herself, and save her life. But even if that were impossible, she was
determined that her antagonist should not live to enjoy her triumph.
She put forth what little strength remained in her withered frame. It
was an upleaping of the dying fire again, and for a moment the battle
raged fiercer than ever. They spun round, and reeled, and
staggered.
The end was coming. Wanna felt that. With an almost superhuman
effort, she managed to drag her foe to the verandah, and, with a
quick and sudden movement, drew the key from her girdle, and,
uttering a cry of ferocious joy, was about to hurl it over the railings.
But a counter-movement of Mehal’s broke the force of the jerk, and
the key fell on the extreme edge.
Flora darted forward, but she could not pass the combatants.
Wanna saw that her chance had gone. But nerving herself for one
final struggle, she dragged Mehal round. They lost their balance—
they fell to the floor—they rolled against the wooden railings, which,
old and rotten with age, broke down with a crash. Away went the key
into space. The two women were on the extreme edge of the
verandah!
Flora rushed forward once more. She made a frantic clutch at their
garments, with a view of dragging them back.
It was too late!
Death let fall his spear, and took the stakes. The fighters rolled over,
and Flora stood petrified with horror, still holding in her hands some
remnants of blood-stained garments.
The wind moaned amongst the ivy on the walls. In its wailing she
seemed to hear a prophetic voice that told her the struggle she had
been an unwilling witness to between the two women, but
represented the greater struggle between two races that had just
commenced; and, before it could end, the soil of India should be
drenched with blood.
The night wind moaned. It sounded in her ears like a requiem for her
slaughtered friends. It seemed like an agonised cry of pain, wrung
from hearts suffering almost more than mortal sorrow.
The night wind moaned—a dirge-like moan, that told that the Angel
of Peace had been beaten, broken-winged, into the dust; and
through the Orient land were stalking the grim demons, War and
Woe.
The night wind spoke. It told her that the catastrophe she had just
witnessed destroyed every hope of escape she might have had, for
with Zeemit her best friend had gone.
She heard Jewan Bukht’s voice in the wind—a voice malignant and
cruel.
“I will return to-night, and then we will see who conquers!”
Those were his parting words. As the wind repeated them to her, it
called her back to a sense of her awful danger. Her almost stilled
heart sprang into life again. It throbbed with the wildness of fear and
horror at what the consequences might be if he returned.
She could foil him yet; in her hands she held her own life. An effort of
will, and she could snap the “silver thread” and break the “golden
bowl.” Three paces forward, and a plunge down into the dark depth,
whence had rolled the bodies of Zeemit and Wanna.
Were it not better to die than to live to shame and misery?
When all hope has fled, when everything that can make life
endurable has gone, has not the time come to die? She thought this.
And the moaning wind answered her, and said “Yes.”
A plunge, a rapid descent, a terrific shock, and then the end.
She looked up to the silent stars. They seemed to look down
pityingly on her. Mentally her gaze wandered beyond the stars, to the
plains of peace, to the White Throne of Mercy and Justice, and she
put up a prayer for forgiveness.
Be still, wild heart! cease, oh, throbbing brain! death is merciful.
She took a step forward—she closed her eyes—she threw up her
arms; and, bending her body, she was about to take the fatal leap,
when a voice reached her.
Not of the wind this time, but a human voice, that cried for help, that
told of pain.
She went down on her knees. She peered over the broken verandah
into the darkness. She could see nothing. The voice had ceased,
and there was silence again, save that the “ivy rustled and the wind
moaned.”
FOOTNOTE:
[5] When the Hindoos wish to express a thorough loathing and
contempt for anything, they spit upon the ground, and make a
peculiar movement with the lips. During the mutiny, and for long
afterwards, it was common for the native servants in the European
houses, when ordered to do anything, to spit upon the ground when
they thought their masters were not looking. The language put into
the mouth of Wanna, and the ferocity depicted, are by no means an
exaggeration. In fact, words would almost fail to accurately express
the inhuman hatred for the English, which the natives—men and
women—took every opportunity of displaying during the revolt.
CHAPTER XVII.
FOR LIFE AND LOVE.
The cry that came up out of the darkness, and stayed Flora Meredith
in the very act of self murder, was uttered by one who had been
miraculously saved from an awful death.
For some minutes Flora continued to strain her eyes before she
could make anything out. Then she became conscious that the figure
of a woman was lying on a verandah about fifteen feet below, and
which projected considerably beyond the lines of the upper one on
which Flora stood. That it was one of the women who had rolled
over, Miss Meredith had no doubt; but which one was a question
difficult to answer. But presently the cry was repeated. Flora fancied
she detected Mehal’s voice, but could not be certain. Everything was
quiet below in the grounds, for the hour was late, and nobody was
about. She bent over the verandah as far as possible, and, in a low
tone, called—
“Mehal—Zeemit—Zeemit.”
She waited with palpitating heart for any reply, for on that reply it
might truly be said her life hung. But the reply did not come—only a
half-stifled moan telling of acute suffering.
Again she called—a little louder, this time; again she waited in
expectancy, to be disappointed once more. She rose to her feet, and
considered what was best to be done. There was little time to lose,
little time for thought.
Hope rose again. If she could manage to reach the lower balcony,
she might be saved. But how was that to be accomplished? Even if
she had been in possession of a rope, she doubted her ability either
to make it fast, or, having succeeded in that, to lower herself down;
for easy as such a thing seems to the uninitiated, it is practically a
task fraught with the utmost danger, and requiring an exertion of
physical strength severe for a man, and ten times more so for a
woman. But though she had possessed the acrobatic skill to have
performed the feat, the rope was not there, nor was there anything in
the room that would have answered as a substitute. What, then, was
to be done?
She stood irresolute, almost distracted by the painful tensity to which
her mental powers were stretched. But as she stood, hovering, as it
were, between life and death, the rustling creepers whispered to her
—
“Here is a way down.”
As the idea flashed upon her, she could have cried out with joy.
She moved to the end of the verandah. The great rope-like stems
were twined and twisted together, and spread out in all directions.
She looked at her hands, delicate and soft, and mentally asked
herself if she had strength of arm and wrist sufficient for the task.
Fear lends strength, as it gives wings, and even a woman, situated
as Flora was, will perform deeds that, under ordinary circumstances,
would seem impossible.
It was the sole chance, and she must avail herself of it. She
hesitated no longer; but mounting the railing of the verandah,
grasped firmly a thick stem of the ivy, and swung herself over.
It was an awful moment. The failure of the power of the arms, the
slightest giddiness, and a fall of fifty feet would close the book of life
for ever. But after the first nervous dread had passed, she found that
the descent was far easier than she had imagined.
The rough angles of the walls, and the thick ivy, gave her tolerable
foothold. But now and again her weight dragged the stems from their
hold of the wall, and she would slip down a little way with a jerk that
sent the blood back upon her heart with a rush.
It was hard work; it was a struggle for life—a life that, a few minutes
ago, she would have sacrificed, for then all hope seemed to have
gone. But since then the star had risen a little once more, by reason
of the pain-wrung cry of a human sufferer.
She struggled with desperate energy to save that life. Lower and
lower she went. It seemed as if she would never reach the goal.
The ivy ripped and gave way, painfully straining and jerking her
arms, and the rough stones lacerated and tore her hands. But there
was no giving up until she reached the wished-for point.
She clung desperately—she struggled bravely, and the reward came
at last—she was abreast of the lower verandah! She got a foothold,
then clutched the railing, and, in a few moments, stood on the floor,
breathless and exhausted, but safe so far.
The figure of the prostrate woman was a few feet off. She moved to
her, bent down, turned her over, and then uttered a silent prayer of
thankfulness, as she recognised the well-known features of her
faithful ayah.
But it was evident that Zeemit was wounded grievously. She was
unconscious, and lay in a pool of blood, which flowed from a deep
wound in the forehead. In her descent she had struck her head on
the railing of the verandah; but this probably saved her life, as it
caused her to roll inward, instead of outward.
Flora endeavoured to staunch the blood. She chafed the hands, and
raised the body to a sitting posture. Her efforts were at length
rewarded, for consciousness slowly returned to the old woman. It
was some time before she could realise her exact position. But, as
the truth dawned upon her, she grasped the hand of Flora, and cried
—
“Allah be praised, missy, you are still safe!”
“We both live,” answered Flora; “but we both stand in deadly peril.
How are we to save ourselves?”
“You must not think of me. You must endeavour to get free of this
place, and save your own life.”
“And leave you here!” cried Flora; “never!”
“You are a brave girl, and Zeemit thanks you; but you must go.
Wanna is, no doubt, dead. If she fell to the ground, which seems
probable, it would have been impossible to have survived such a fall.
Dead people tell no tales; therefore we have nothing to fear from her.
I feel that I cannot rise. For me to go with you would but impede your
flight. Leave me. I shall be discovered. I shall tell Jewan that Wanna
intended to set you free, tempted by a heavy bribe you offered. I
endeavoured to prevent her—we struggled, and fell over the
verandah—and then all is blank to me. This will give me an
opportunity of rendering you still further assistance, because,
however angry Jewan may be, he would scarcely dare to offer me
violence.”
“It is much against my will to have to leave you here, Zeemit, and I
can scarcely reconcile myself to such a course.”
“But it is the only chance there is for me to render you aid. Besides,
there is one below who waits anxiously for you.”
“Ah! tell me, tell me, where he is?” cried Flora, the opportunity
occurring for the first time to speak of him since Zeemit’s
appearance.
“He was safe when I left him,” answered the old woman. “Soon after
leaving Meerut we were attacked in a bungalow, where we had
sought shelter; but we managed to escape, and continue our journey
to Delhi. We gained entrance to the city, and I soon learned from
some of the Palace servants that Jewan had gone to Cawnpore. We
lost no time in following him, and we arrived here last night. In
yonder clump of trees,”—as the old woman spoke, she slightly raised
her head, and pointed with her finger across the compound—“is a
disused bullock-shed. There, on a heap of straw, you will find Mr.
Gordon. He was to remain secreted until I had learned tidings of you.
He was weary and footsore, and sleeping soundly when I came
away.”
“But how am I to reach there unobserved?” asked Flora, scarcely
able to restrain her impatience.
“I think that will be comparatively easy. Go through the room here till
you gain the landing, then down the stairs until you come to the
entrance-hall. The night is dark, and you may easily make your way
to the bullock-shed. Once there, you and Mr. Gordon must lose no
time in hurrying to the protection of the English quarters; but, if
possible, fly from Cawnpore without delay, for there is an awful time
coming for the place. The native troops are pledged to rise, and the
Nana Sahib is thirsting for revenge.”
“God help us all out of our tribulation,” murmured Flora. “I will
endeavour to carry out your directions, Zeemit, but be sure that you
join us. It is against my will to leave you here, but we must bow to
the circumstances that we cannot alter.”
“Go—go,” murmured Mehal; “I am old, and you are young. Join your
lover, and seek safety in flight. I have no doubt we shall meet again;
but be discreet. Jewan is wary, and the moment he discovers your
escape, he will use every endeavour to recapture you.”
“Farewell, Zeemit,” said Flora, as she stooped and kissed the old
woman, “we part in sorrow, but I trust when next we meet, it will be
under happier circumstances. You have been miraculously
preserved from death, and no doubt it is for some wise purpose.
When we reach our English friends, I shall lose no time in sending
for you.”
A hurried shake of the hands, a few final whispered words of parting,
and Zeemit Mehal was left wounded and sick, lying alone under the
stars; and Flora Meredith, like a timid hare, was descending the
stairs.
On the various landings the natives were lying about asleep, a
custom common to the servants in India, who coil themselves up
anywhere. With noiseless tread, and rapidly beating heart, the
fugitive picked her way amongst the sleepers, turning pale with
alarm, as one moved here, and another groaned there, almost
entirely holding her breath, lest even the act of breathing should
awaken those whom she had such cause to dread. But after nearly
half-an-hour of the most painful and intense anxiety, she stood at the
main entrance of the building.
Day was commencing to break; there was sufficient light in the sky to
enable her to see across the compound. Not a soul was in sight.
Without a moment’s delay, she sped towards the clump of trees. The
bullock-shed indicated by Zeemit was soon reached. It was a very
dilapidated structure, built of bamboo and mud. She entered through
the doorway, and advanced cautiously for some paces; then
listened, for there was scarcely sufficient light in the hut to
distinguish anything plainly. The sound of heavy breathing fell upon
her ears. It came from the extreme end, where she could make out a
heap of straw. She went a little farther, and stood again.
“Walter!” she called softly; “Walter!” she repeated, a little louder.
But there was no reply. The sleeper slept, and the heavy breathing
was her only answer. She went nearer. The rustling of her own dress
alarmed her, for her nerves were unstrung.
“Walter!” she whispered again, as she reached the straw. Still no
reply. “He is worn and weary, and he sleeps heavily,” she murmured
to herself.
The light had considerably increased, for the day breaks in India as
suddenly as the night closes in. She was close to the sleeping form.
She stooped down until she knelt on the straw. She stretched
forward to waken the sleeper, but instinctively drew back as she
noticed the muslin garments of a native. She rose to her feet again,
advanced a little, bent down and peered into the face, the dusky face
of, as she thought, a Hindoo. She had come expecting to find her
lover—in his place was a native. She uttered an involuntary cry of
alarm, and, turning round, sped quickly away.
The cry penetrated to the sleeper’s brain. He turned uneasily, then
assumed a sitting posture, and, as Walter Gordon rubbed his eyes,
he muttered—
“Bless my life, how soundly I have been sleeping. I could have
sworn, though, I heard a woman’s cry. It must have been fancy.”
He stretched himself out once more on the straw; for many weary
miles had he travelled, without being able to obtain a moment’s rest,
and nature was thoroughly exhausted.
“Poor Flo,” he thought, as sleep commenced to steal over him again,
“I hope she will come soon. Zeemit is a faithful creature, and I have
no doubt will succeed. God grant it.”
Walter Gordon slept once more, and she for whom he sighed was
speeding from him on the wings of terror, into the very jaws of death.
CHAPTER XVIII.
WITH A LOVE THAT PASSETH UNDERSTANDING.
The signs of dissatisfaction which had alarmed General Wheeler for

the safety of his community gradually increased. The smothered fire
was gaining strength. It muttered and rumbled, and gave evidence
that a tremendous outbreak was imminent.
Sir Hugh was loath to believe in the infidelity of his troops, and
hesitated about taking steps for self-protection. But there were those
about him who had less of the optimist in their natures than he, and
who were loud in their condemnation of his supineness. They urged
him in every possible manner to take instant steps to place the
cantonments in a state of defence, until he could no longer turn a
deaf ear to their entreaties.
But though he had been slow to take this step, it must not be
assumed that Sir Hugh Wheeler was unmindful of the awful
responsibility that rested upon his shoulders. His was as brave a
heart as ever beat in human breast, but out of his very bravery arose
the danger to those under his charge.
He knew the character of the natives well. He knew that they writhed
under a sense of supposed wrong, and that the slightest touch will
cause an open wound to smart. He was, therefore, fearful of letting
them see that the English mistrusted them. He acted upon the old
principle that confidence begets confidence. Moreover, he had firm
faith in Nana Sahib. He knew that as a native the Rajah had infinitely
greater power over the native mind than an European could possibly
have had.
Sir Hugh’s confidence, too, seemed fully justified, for the Nana had
readily complied with the request made to him, and had posted two
hundred of his troops at the Newab-gung. This was a slightly
elevated position, and fully commanded the arsenal and treasury.
A couple of guns on the spot, served by determined and faithful
soldiers, could have kept a regiment at bay; but the fact of the
Nana’s assassins—for no other term is applicable to them—being
placed there was the very irony of fate. Into their hands had been
given a wealthy treasury, and a well-stocked arsenal. All they had to
do when the right moment came was to walk into these places, and
slay the English with their own weapons.
Listening at last—though reluctantly—to the entreaties of his people
General Wheeler looked about for the best means of securing his
position; and it occurred to him, in the emergency, that the only way
of defending the precious lives of the Christians was by throwing up
some defensive works, within which he might gather his people, so
that with their guns they could keep the enemy at bay.
He selected a spot for this purpose about six miles down the river to
the south-east, not far from the Sepoys’ huts, and about a mile from
the banks of the river. He was guided in this choice, to a great
extent, by the fact that on the spot were two long hospital barracks
that would make good quarters for the people. One of the buildings
was a substantial structure built wholly of masonry; but the other had
a heavy thatched roof.
Here, again, the cruel hand of Fate seemed to be, for a time, against
the English, for to the circumstance of the thatched roof some of the
most awful suffering endured by the besieged was due, as will be
hereafter shown. Both buildings were single-storied, and verandahs
ran all round them; they stood in an open and perfectly flat
compound. In the centre of the compound was a well, the only place
from which supplies of water could be drawn; and as will be
disclosed in the subsequent unfoldings of the story, this well was the
scene of almost unparalleled heroic deeds.
Having selected his place, Sir Hugh began to entrench it, and supply
it with a stock of provisions capable of feeding his people for several
weeks.
The so-called fortifications were paltry in the extreme, for the means
were not at hand to render them worthy the name. The earth-works
were only four feet high, and were not even proof against bullets at
the crest. The apertures for the artillery exposed both guns and
gunners; whilst, on all sides, adjacent buildings offered splendid
cover for the enemy. The excessive heat and dryness of the weather
had rendered the ground so hard that it could only be turned with the
greatest amount of difficulty, and by patient labour; and when it was
dug it was so friable that the cohesion necessary for solidity could
not be attained.
The month of May wore on; the expected mutiny did not occur. June
came in, and Sir Hugh then felt confident that all danger had passed;
and Lucknow being threatened, the General sent to the relief of the
neighbouring station a portion of his own little company of soldiers.
As these white troops crossed the bridge of boats, and set their
faces towards Lucknow, the natives fairly shook with suppressed
laughter as they thought what fools the English were. And at this
very time, Jewan Bukht and other agents of the Nana were visiting
the bazaars and the native lines, and fanning the smouldering fire to
flame.
Towards the latter end of May, there entered Cawnpore by the
pontoon bridge, two strangers. It was the close of a more than
usually sultry day, and the travellers, who were on foot, were dust-
stained and worn.
These travellers were Lieutenant Harper and Haidee. They had
come from Delhi—a long weary march; and along their line of route
they had experienced the greatest difficulty in procuring necessary
food and rest.
Nerved by the one all-powerful motive, Haidee had kept up, and
exhibited extraordinary powers of endurance. When her companion
sank exhausted from heat and thirst, this brave and beautiful woman
watched over him, encouraged him, and gave him hope. Her gentle
hand wiped his brow, her soft bosom pillowed his head. Her love for
him grew stronger each day. To lie at his feet, to pillow his head, to
watch him when he slept, was joy inexpressible to her. And yet
during this journey she never by a single word betrayed aught of the
strong passion which filled her heart; but every action, every deed
proclaimed it.
On his part he tried to think of her only as one who had befriended
him, and to whom it was his duty to offer such protection as lay in his
power. But on the road from Delhi he proved the weaker vessel of
the two, for the awful heat, aided by the want of proper rest and
sustenance, sorely tired him. She, on the other hand, inured from
birth to the heat, and strengthened by her great love for him, kept up
when he faltered, and exhibited, comparatively speaking, but little
weariness.
Hers was the devotion of a true woman; it was self-sacrificing, all-
absorbing, undying. Truly she had made him her star that gave her
only light. She had no selfish thought, except such selfishness as is
begotten by true love—for all love is selfish; it is its very nature to be
so. And yet this faithfulness made the man sad. He felt that he could
not return her love, however much he might admire her. However
much he might feel grateful, however great his worship for her
nobleness of nature might be, he must shut his eyes to her charms,
close his senses to her silent outpourings of love, for he was
another’s, and to that one he must be true, or feel that for evermore
the honour which was so very dear to him was sullied, and time
could never wipe out the stain again.
Often as he dragged his weary steps along, with the loving Haidee
by his side, he mentally asked himself if he was not pursuing a
phantom that was luring him to unknown danger. Had he done right
in setting his face towards Cawnpore, and could he justify the course
he had taken by any amount of logical reasoning? He was striving to
do his duty. If he failed, it would be through error of judgment, and
not through want of heart.
As the two travellers stood upon the Cawnpore bank of the river
Ganges, Harper gave vent to a sigh of relief. But Haidee seemed to
be pressed with a weight of sorrow.
“You do not seem well, Haidee,” Harper remarked casually, as he
observed the depressed look of his companion. “Your eyes are dull,
and your cheek is pale. What is the cause?”
She looked at him almost reproachfully, and her only answer was a
long-drawn sigh.
“What is the matter with you?” he asked again, with a good deal of
indifference in his tone; for, to confess the truth, his thoughts were
far away. He was racked with doubts and fears, and half-regretted
that he had yielded consent to come to Cawnpore, instead of
returning to his quarters at Meerut.
Her eyes glowed, and her face and neck crimsoned, as she
struggled to conceal the emotion which almost choked her, and
which his words had caused. Her sensitive nature was wounded by
his indifference, and she shrank away, as it were, like a startled
fawn.
“Why do you sting me?” she exclaimed, when she could speak.
“Sting you, Haidee! What do you mean?” as he turned upon her
quickly, and coming back again to a sense of his true position.
“Why do you ask me what is the matter, in a tone that betrays too
plainly that you take no interest in the question?”
“Nay, Haidee, there you wrong me.”
“Sooner would I wrong myself than you; but your words remain with
Haidee while your heart is far away.”
“My heart is divided, Haidee, and I give you all of it that I dare. You
are my friend. Every sacrifice I can make I will make for you, if it is
necessary. I will protect you with my life. I cannot do more.”
“Ah!” she sighed; “and yet you can ask me what it is that makes me
sad? There is sorrow at my heart; sorrow at the thought our journey
is ended, and you and I must probably part never to meet again.
That is what is the matter with me.”
“Forgive me, Haidee, if I have hurt you by my seeming
thoughtlessness. I assure you I had no intention of doing so. And
though our journey is for the present ended, do not say we shall part
for ever. You have grown precious to me as a noble, generous,
devoted woman; and I vow, by all that I hold sacred, that I will
endeavour never to lose sight of you as long as I live.”
She trembled with a nameless, pleasurable emotion; her nerves
vibrated like unto the strings of a harp that are swept with a strong
wind; for this man’s words were music to her. “I will endeavour not to
lose sight of you as long as I live.” Had he not spoken them? And
they sank to the deeper depths of her nature. They were like an elixir
of life, given to one whose strength was ebbing away. She yearned
for sympathy, and this man gave it to her. Her soul cried out for
kindredship, and it found it in him. What wonder then that she should
be taken captive?—that beat for beat her heart should answer his? It
is given to human beings to feel the burning rapture of love, but not
to solve its mystery; for it is a mystery as strange as the Sphinx of
old; as unsolvable as the cosmical problems which have puzzled
philosophers of all ages.
She loved him. Every look, every action, every tone betrayed that
she loved him with a true woman’s pure love. If it had sprung up
suddenly, it was none the less genuine or strong. She would have
been content to follow him, even if he, like the fabled “Wandering
Jew,” had been doomed to go on and on, restlessly and for
evermore. Still would she have followed, living in his shadow,
drawing her very life from his look and voice, sorrowing when he
sorrowed, laughing when he laughed. Nay, more; she would have
taken upon herself all the pains, however fearful, he might have had
to endure. She would have rendered that last and greatest sacrifice
that one human being can make for another—she would have laid
down her life to save his.
It was a grand love, this love of hers—not the sickly sentiment of a
wayward girl, but the strong, powerful, absorbing passion of a
woman; a love as heroic as any that Homer ever sang of, or that
moved the Roman women of old to follow the youths to the battle-
fields, and die when they died.

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Using Financial Accounting Information

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Financial Accounting The Impact on Decision Makers 8th

Financial Accounting The Impact on Decision Makers 8th

Financial Accounting The Impact on Decision Makers 10th

Financial Accounting The Impact on Decision Makers 9th

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. Understand the proper amortization of intangible assets. 8 15 Easy

12. Understand how investors can analyze a company’s

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. Understand the proper amortization of intangible assets. 6# 30 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 25 Mod

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

5. Compare depreciation methods and understand the factors 3* 20 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. Understand 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

should be expensed because it is very difficult to determine whether an asset exists

LO 1 BRIEF EXERCISE 8-1 PROPERTY, PLANT, AND EQUIPMENT CLASSIFICATION

LO 2 BRIEF EXERCISE 8-2 DETERMINE ACQUISITION COST

LO 3 BRIEF EXERCISE 8-3 LUMP-SUM PURCHASE

Land: $800,000 × ($700,000/$1,000,000) = $560,000

LO 4 BRIEF EXERCISE 8-4 CAPITALIZATION OF INTEREST

$1,000,000 × 12/12 $1,000,000

LO 5 BRIEF EXERCISE 8-5 DEPRECIATION METHODS

1. Straight-line rate of 1/10 × 2 = 20%*

LO 6 BRIEF EXERCISE 8-6 CHANGE IN DEPRECIATION ESTIMATE

Depreciation for 2010 and 2011:

LO 7 BRIEF EXERCISE 8-7 CAPITAL EXPENDITURE

Original cost, January 1, 2010 ........................................................... $ 10,000

LO 8 BRIEF EXERCISE 8-8 SALE OF ASSET

Loss = Book Value – Sales Price

LO 9 BRIEF EXERCISE 8-9 CLASSIFICATION OF INTANGIBLE ASSETS

Patents—intangible asset and amortized*

LO 10 BRIEF EXERCISE 8-10 AMORTIZATION OF INTANGIBLE

LO 11 BRIEF EXERCISE 8-11 OPERATING ASSETS AND CASH FLOWS

Depreciation of an operating asset—Operating category

LO 12 BRIEF EXERCISE 8-12 ANALYSIS OF OPERATING ASSETS

Average Life of the Assets = Property, Plant, and Equipment/Depreciation Expense