CHAPTER 8 ADDITIONAL PROBLEMS

MULTI-CONCEPT PROBLEMS LO 1,3,5,7,8

PROBLEM 8-6 COST OF ASSETS, SUBSEQUENT BOOK VALUES, AND BALANCE SHEET PRESENTATION

1. Values assigned to each asset: a. Value at time of purchase: $14,000 + $4,800 = $18,800 b. Allocation of purchase price: Supplies expense $200/$3,200 $2,400 = Office furniture $600/$3,200 $2,400 = Equipment $2,400/$3,200 $2,400 = c. Value of this Prepaid License Expense: $1,500 d. Cost of truck Less: accumulated depreciation at time of sale [(12,000 800) 5/8] Book value 2. Depreciation or other expense recorded for each asset during 2007: a. ($18,800 $800)/4 years = $4,500 b. Supplies expense Depreciation of office furniture $450/9 years = Depreciation of equipment $1,800/4 years = 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 Sale price Loss on sale of truck 3. Balance Sheet Presentation: Current assets: Prepaid license expense ($1,500 $458) Property, plant, and equipment: Truck Office furniture Equipment Less: accumulated depreciation 8-1 $5,000 4,800 $ (200) $150 $ 50 $450 $12,000 7,000 $ 5,000 $ 150 $ 450 $1,800

$ 1,042 $18,800 450 1,800 $21,050

($4,500 + $50 + $450) Property, plant, and equipment, net

(5,000) $16,050

LO 2,5

PROBLEM 8-7 COST OF ASSETS AND THE EFFECT ON DEPRECIATION

1. $165,000/10 years = $16,500 depreciation. The correct amount of depreciation is $19,700 [($150,000 + $15,000 + $4,000 + $25,000 + $3,000)/10 years]. 2. Reported income in year 1 is $51,500 ($100,000 $16,500 $25,000 $4,000 $3,000). Reported income should be $80,300 ($100,000 $19,700). 3. A cost is the amount incurred to acquire an asset or pay an expense, and an expense is the amount of an expired asset or a cost that is incurred to generate revenue. LO 5,7,8
PROBLEM 8-8 CAPITAL EXPENDITURES, DEPREICATION, AND DISPOSAL

1. The entry to record depreciation for 2006 is Dec. 31 Depreciation Expense Accumulated DepreciationBuilding To record depreciation for 2006. ($364,000 $14,000)/25 = $14,000. Assets 14,000 The entries for 2007 are Jan. 1 Repairs Expense Cash, Payables, etc. To record repairs in 2007. Assets 21,000 Jan. 1 = Liabilities + 21,000 21,000 Owners Equity 21,000 42,000 42,000 + Owners Equity = Liabilities + 14,000 14,000

Owners Equity 14,000

Building Cash To record pollution control equipment. Assets +42,000 42,000 = Liabilities

The depreciation for 2007 should be calculated as follows: Original cost Less: 2006 depreciation Less: residual value $364,000 (14,000) (14,000)

Plus 2007 capitalized costs Depreciable amount Remaining asset life Depreciation $378,000/30 years = Dec. 31 Depreciation Expense Accumulated DepreciationBuilding To record depreciation for 2007. Assets 12,600 = Liabilities + 12,600

42,000 $378,000 30 years $ 12,600 12,600 Owners Equity 12,600

2. The pollution control equipment extended the life of the asset and should be capitalized rather than expensed. It is difficult to determine whether Merton would rather expense or capitalize the equipment. If the company can expense the equipment for tax purposes, it would normally desire to do so. 3. Original cost of building Pollution device capitalized Less: 2006 depreciation 2007 depreciation Book value 1/1/2008 Less: 2008 depreciation ($12,600 3/12) Book value at sale Sale proceeds Gain on sale $364,000 42,000 (14,000) (12,600) $379,400 3,150 $376,250 392,000 $ 15,750

If the pollution equipment had been expensed (and original life of 25 years was used for depreciation purposes): Original cost Less: Accumulated depreciation ($14,000 2 1/4 years) Book value at 4/1/2008 Sale proceeds Gain on sale $364,000 31,500 $332,500 392,000 $ 59,500

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 Add: cab/oven Total cost Less: Residual value Depreciable amount Depreciation expense $26,600/5 years Book value: Total cost Accumulated depreciation Book value b. Depreciation: $2,700 66 2/3%* = $1,800 *Straight-line rate = 100%/3 = 33 1/3%, double-declining-balance rate = 66 2/3%. Book value: $2,700 $1,800 = $900 c. Depreciation: ($8,000 1,000)/8 3/12 = $219 Book value at time of sale: Accumulated depreciation = ($8,000 $1,000) 5/8 = $4,375 Book value = $8,000 $4,375 = $3,625 Book value Sale price Loss on sale d. Amortization: $14,000/4 years = $3,500 $3,500 6/12 = $1,750 Book value: $14,000 $1,750 = $12,250 $3,625 1,500 $2,125 $ 16,000 10,900 $ 26,900 300 $ 26,600 $ 5,320 $ 26,900 5,320 $ 21,580

LO 2,5

PROBLEM 8-7A COST OF ASSETS AND EFFECT ON DEPRECIATION

1. The proper cost to record for the acquisition is $190,000 ($168,000 + $16,500 + $4,400 + $1,100). All costs, except the operating costs for the first year, should be capitalized as part of the cost of the equipment. The operating costs of $26,400 should be expensed. 2. Depreciation reported in year 1 is $21,640 ($216,400/10). Depreciation that should have been reported is $19,000 [($168,000 + $16,500 + $4,400 + $1,100)/10]. Operating costs are not included in the cost of the asset. 3. Key reported income of $55,000 $21,640, or $33,360. The correct amount of income should be as follows: Income before equipment cost Depreciation Operating expenses Net income $ 55,000 (19,000) (26,400) $ 9,600

4. Key should not include operating costs in the value of the asset recorded on the balance sheet. The effect of this error is to overstate assets on the balance sheet. LO 7,8
PROBLEM 8-8A CAPITAL EXPENDITURES, DEPRECIATION, AND DISPOSAL

1. 2006 Depreciation = [($612,000 $12,000)/25 years)] = $24,000 2007 Depreciation = [($612,000 + $87,600 $30,000 $24,000)/24)] = $26,900 2. The cost of the fire equipment increased the value of an asset that will last for more than one year. The cost would have been expensed if it was maintenance. Wagner would prefer to expense the cost of the fire equipment for taxes in order to take advantage of the tax shield immediately. However, Wagner would prefer to capitalize the cost for accounting purposes in order to better match revenue with the costs incurred to generate that revenue. 3. Loss at sale = $612,000 + $87,600 $24,000 $26,900 $360,000 = $288,700 Loss on sale if fire equipment is expensed = $612,000 $24,000 $24,000 $360,000 = $204,000