Chap 010

Chapter 10
Plant Assets, Natural Resources and

Intangibles
QUESTIONS
1.
The cost of a plant asset includes all normal, reasonable, and necessary costs of getting the
asset in place and ready for its intended use.
2.
A plant asset is tangible; it is used in the production or sale of other assets or services; and
it has a useful life longer than one accounting period.
3.
Land held for future expansion is classified as a long-term investment. It is not a plant asset
because it is not being used in the production or sale of other assets or services.
4.
Land is an asset with an unlimited life and, therefore, is not subject to depreciation. Land
improvements have limited lives and are subject to depreciation.
5.
The Modified Accelerated Cost Recovery System is not generally acceptable for financial
accounting purposes because it allocates depreciation over an arbitrary period that is
usually much shorter than the predicted useful life of the asset.
6.
The Accumulated DepreciationMachinery account is a contra asset account with a credit

balance that cannot be used to buy anything. The balance of the Accumulated Depreciation
Machinery account reflects that portion of the machinery's original cost that has been
charged to depreciation expense. It also gives some indication of the assets age and how
soon it will need to be replaced. Any funds available for buying machinery are shown on the
balance sheet as liquid assets with debit balances.
7.
The materiality principle justifies charging low-cost plant asset purchases to expense
because such amounts are unlikely to impact the decisions of financial statement users.
8.
Ordinary repairs are made to keep a plant asset in normal, good operating condition, and
should be charged to expense of the current period. Extraordinary repairs are made to
extend the life of a plant asset beyond the original estimated life; they are recorded as capital
expenditures (and added to the asset account).
9.
A company might sell or exchange an asset when it reaches the end of its useful life, or if it
becomes inadequate or obsolete, or if the company has changed its business plans. An
asset also can be damaged or destroyed by fire or some other accident that would require its
disposal.
10. The process of allocating the cost of natural resources to expense over the periods when
they are consumed is called depletion. The method to compute depletion is similar to unitsof-production depreciation.
11.
An intangible asset: (1) has no physical existence; (2) derives value from the unique legal
and contractual rights held by its owner; and (3) is used in the companys operations.
Solutions Manual, Chapter 10
McGraw-Hill Companies, Inc., 2005

51
12. No, depletion expense should be calculated on the units that are extracted (similar to the
units-of-production basis) and sold.
13. Intangible assets are generally recorded at their cost and amortized over their predicted
useful life. (However, some costs are not included, such as the research and development
costs leading up to a patent.) The costs of intangible assets are generally allocated to
amortization expense using the straight-line method over their useful lives. If the useful life
of an intangible asset is indefinite, then it is not amortizedinstead, it is annually tested for
impairment.
14. A company has goodwill when its income return rate is greater than the income return rate
normally earned in its industry. (Alternatively, goodwill is when the value of a company
exceeds the value of its individual net assets [assets less liabilities].) Goodwill appears in
the balance sheet when one company acquires another company or separate segment and
pays a price that exceeds the combined values of all its net assets (assets less liabilities)
excluding goodwill.
15.
No; this type of goodwill would not be amortized. Instead, the FASB (SFAS 142) requires that
goodwill be annually tested for impairment. If the book value of goodwill does not exceed its
fair (market) value, goodwill is not impaired. However, if the book value of goodwill exceeds
its fair value, an impairment loss is recorded equal to that excess. (Details of this two-step
test are in advanced courses.)
16. The statement of cash flows is potentially impacted in three ways when accounting for longterm assets. If there are (1) additions or (2) disposals of long-term assets, these transactions
(assuming they involve cash) are reported in the investing activities section of the statement
of cash flows. Also, if the indirect method is used to prepare the statement of cash flows
see Chapter 16then depreciation, depletion, and amortization of long-term assets are
reported in the operating section of the statement of cash flows as adjustments to net
income. (3) Cash payments for capital and revenue expenditures can also impact the
statement of cash flows.
17. Total asset turnover is calculated by dividing net sales by average total assets. Financial
statement users can use total asset turnover to evaluate the efficiency of a company in using
its assets to generate sales.
18. Krispy Kreme titles its plant assets "Property and equipment, net." The book value of its
property and equipment as of February 2, 2003, is $202,558,000 and as of February 3, 2002, is
$112,577,000.
19. Tastykakes plant assets are categorized as Property, plant and equipment and are reported
at their gross values separately under Land, Buildings and improvements, and
Machinery and equipment. The accumulated depreciation amount is deducted from the
gross value of the long-term assets. The net value (book value) of the property, plant, and
equipment on its 2002 balance sheet is $58,391,222.
20. The December 31, 2002, long-term assets of Harley-Davidson, Inc., are reported in its Note 2
as follows:
Under property, plant and equipment, at cost (in thousands):
Land and land improvements....................... $ 20,674
Buildings and improvements........................
273,959
Machinery and equipment............................. 1,448,312
Construction-in-progress.............................
263,311
Total property and equipment...................... 2,006,256
Less accumulated depreciation...................
973,660
Property and equipment, net........................ $1,032,596

52
Fundamental Accounting Principles, 17th Edition
QUICK STUDIES
Quick Study 10-1 (10 minutes)
Recorded cost = $180,000 + $18,000 + $3,000 + $12,600 = $213,600
Note: The $2,250 repair charge is an expense because it is not a normal and reasonable
expenditure necessary to get the asset in place and ready for its intended use.

1. The main difference between plant assets and current assets is that
current assets are consumed or converted into cash within a short
period of time while plant assets have a useful life of more than one
accounting period.
2. The main difference between plant assets and inventory is that
inventory is held for resale and plant assets are not.
3. The main difference between plant assets and long-term investments is
that plant assets are used in the primary operation of the business and
investments are not.
1. Straight-line:
($55,900 - $1,900) / 4 years = $13,500 depreciation per year
2. Units-of-production:
($55,900 - $1,900) / 120 concerts =
450 depreciation per concert

x 40 concerts in 2005
$18,000 depreciation in 2005

$55,900 Cost
- 13,500 Accumulated depreciation (first year)
42,400 Book value at point of revision
- 1,900 Salvage value
40,500 Remaining depreciable cost

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2 Years of life remaining

$20,250 Depreciation per year for years 2 and 3

54

Note: Double-declining-balance rate = (100% / 8 years) x 2 = 25%
First year:
$930,000 x 25%
= $232,500
Second year:
($930,000 - $232,500) x 25%
= $174,375
Third year:
($930,000 - $232,500 - $174,375) x 25%
= $130,781* (rounded)
* Total accumulated depreciation of $537,656 ($232,500 + $174,375 + $130,781)

does not exceed the depreciable cost of $780,000 ($930,000 - $150,000).

1. (a)
(b)
(c)
(d)
Capital expenditure
Revenue expenditure
Revenue expenditure
Capital expenditure
2. (a)
Building.................................................................... 250,000
Cash...................................................................
250,000
To record addition of a new wing.
(d) Equipment................................................................ 50,000

Cash...................................................................
50,000
To record an extraordinary repair.

1.
Machinery...................................................................
Accumulated DepreciationMachinery...................
Loss on Exchange of Assets....................................
Machinery..........................................................
Cash...................................................................
48,000
20,400
2,000
38,400
32,000
To record similar asset exchange.
2.
Machinery...................................................................
Accumulated DepreciationMachinery...................
Machinery..........................................................
42,000
20,400
38,400

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Cash...................................................................
24,000

56

1.
Ore Mine..........................................................................
1,500,000
Cash..........................................................................
1,500,000
To record cost of ore mine.
2.
Depletion per unit =
$1,500,000 - $150,000
500,000 tons
= $2.70 per ton
Depletion ExpenseOre Mine........................................

243,000
Accumulated DepletionOre Mine........................
243,000
To record depletion of ore mine (90,000 x $2.70).

Intangible Assets:
b) Trademark c) Leasehold f) Copyright g) Franchise
Natural Resources: a) Oil well

Note:
d) Gold mine h) Timberland
Building is reported under plant assets.

1.
Jan. 4 Leasehold Improvements...............................................95,000
Cash..........................................................................
95,000
To record leasehold improvements.
2.
Dec. 31 Amortization ExpenseLeasehold Improvements.............11,875
Accumulated AmortizationLeasehold
Improvements.........................................................
11,875
To record amortization of leasehold over

the remaining life of the lease.*
*
Amortization = $95,000 / 8-year-lease-term = $11,875 per year.

Total asset turnover =
$13,557
($14,968 + $18,810) / 2
= 0.80 times
57
($ millions)
Interpretation: The companys turnover of 0.80 times is markedly lower than

its competitors turnover of 2.0. This company must perform better if it is to
be successful in the long run.

58
EXERCISES
Exercise 10-1 (15 minutes)
Invoice price of machine........................... $
Less discount (.02 x $11,500)....................
Net purchase price.....................................
Freight charges (transportation-in)..........
Mounting and power connections............
Assembly....................................................
Materials used in adjusting.......................
Total cost to be recorded...........................$
11,500
(230)
11,270
260
795
375
30
12,730

Cost of land
Purchase price for land............................. $ 225,000
Purchase price for old building................ 120,000
Demolition costs for old building.............
34,500
Landscaping...............................................
51,000
Total cost of land........................................$ 430,500
Cost of new building and land improvements
Cost of new building..................................$1,354,500
Cost of land improvements.......................
85,500
Total construction costs............................$1,440,000
Journal entry
Land................................................................................. 430,500
Land Improvements.......................................................
85,500
Building........................................................................... 1,354,500
Cash..........................................................................
1,870,500
To record costs of plant assets.

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Purchase price..................................................
Closing costs....................................................
Total cost of acquisition..................................
$368,250
19,600
$387,850
Allocation of total cost

Appraised
Value
Land............................... $166,320
Land improvements.......
55,440
Building......................... 174,240
Totals............................. $396,000
Percent
of Total
Applying %
to Cost
Apportioned
Cost
42%
14
44
100%
$387,850 x .42
$387,850 x .14
$387,850 x .44
$162,897
54,299
170,654
$387,850
Journal entry
Land.......................................................................... 162,897
Land Improvements................................................. 54,299
Building.................................................................... 170,654
Cash...................................................................
387,850
To record costs of lump-sum purchase.

1. Straight-line depreciation: ($147,000 - $30,000) / 4 years = $29,250 per year
Year
Annual Depreciation Year-End Book Value
2004........
$ 29,250
$117,750
2005........
29,250
88,500
2006........
29,250
59,250
2007........
29,250
30,000
Total.......
$117,000
2. Double-declining-balance depreciation
Depreciation rate: 100% / 4 years = 25% x 2 = 50%
Beginning-Year Depreciatio
Annual
Year
Book Value
n
Depreciation
Rate
2004.......
$147,000
50%
$ 73,500
2005.......
73,500
50
36,750
2006.......
36,750
50
6,750*
2007.......
30,000
--McGraw-Hill Companies, Inc., 2005
60
Year-End
Book Value
$73,500
36,750
30,000
30,000
Total.......
$117,000
* Do not depreciate more than $6,750 in the third year since the salvage
value is not subject to depreciation.

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1. Straight-line
($42,300 - $6,000) / 10 years = $3,630
2. Units-of-production
Depreciation per unit = ($42,300 - $6,000) / 363,000 units = $0.10 per unit
For 35,000 units in second year: Depreciation = 35,000 x $0.10 = $3,500
3. Double-declining-balance
Double-declining-balance rate = (100% / 10 years) x 2 = 20% per year
First years depreciation = $42,300 x 20% = $8,460
Book value at beginning of second year = $42,300 - $8,460 = $33,840
Second years depreciation = $33,840 x 20% = $6,768
1. Straight-line depreciation for 2005
($250,000 - $25,000) / 5 years = $45,000
2. Double-declining-balance depreciation for 2004
Rate = (100% / 5 years) x 2 = 40%
2004 depreciation ($250,000 x 40% x 9/12)......................
$ 75,000
Book value at January 1, 2005 ($250,000 - $75,000).......
$175,000
Depreciation for 2005 ($175,000 x 40%)...........................
$ 70,000
Alternate calculation
2004 depreciation ($250,000 x 40% x 9/12)..................................
2005 depreciation
$250,000 x 40% x 3/12...............................................................
($250,000 - $75,000 - $25,000) x 40% x 9/12............................
Total 2005 depreciation.................................................................
$ 75,000
$ 25,000
45,000
$ 70,000

1. Original cost of machine.........................................
Less two years' accumulated depreciation
[($21,750 - $2,250) / 4 years] x 2 years................
Book value at end of second year..........................
$21,750
2. Book value at end of second year..........................
$12,000

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(9,750)
$12,000
Less revised salvage value.....................................

Remaining depreciable cost...................................
(1,800)
$10,200
Revised annual depreciation = $10,200 / 3 years = $3,400

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1. Straight-line depreciation
Income
before
Depreciation
Year 1.........
Year 2.........
Year 3.........
Year 4.........
Year 5.........
Totals.........
$ 85,500
85,500
85,500
85,500
85,500
$427,500
Depreciation
Expense*
$ 36,540
36,540
36,540
36,540
36,540
$182,700
Net
Income
$ 48,960
48,960
48,960
48,960
48,960
$244,800
*($235,200 - $52,500) / 5 years = $36,540
2. Double-declining-balance depreciation
Year 1........
Year 2.........
Year 3.........
Year 4.........
Year 5.........
Totals.........
Income
before
Depreciation
Depreciation
Expense*
Net
Income
$ 85,500
85,500
85,500
85,500
85,500
$427,500
$ 94,080
56,448
32,172
0
0
$182,700
$ (8,580)
29,052
53,328
85,500
85,500
$244,800
Supporting calculations for depreciation expense

*Note: (100% / 5 years) x 2 = 40% depreciation rate
Annual
Accumulated
Beginning
Depreciation
Depreciation at
Book
(40% of
the End of the
Value
Book Value)
Year
Year 1................ $235,200
$ 94,080
$ 94,080
Year 2................ 141,120
56,448
150,528
Year 3................
84,672
32,172**
182,700
Year 4................
52,500
0
182,700
Year 5................
52,500
0
182,700
Total..................
$182,700
Ending Book Value

($235,200 Cost Less
Accumulated
Depreciation)
$141,120
84,672
52,500
52,500
52,500
**Must not use $33,869; instead take only enough depreciation in Year 3 to reduce
book value to the $52,500 salvage value.

64

1. Annual depreciation = $561,000 / 20 years = $28,050 per year
Age of the building = Accumulated depreciation / Annual depreciation
= $420,750 / $28,050 = 15 years
2. Entry to record the extraordinary repairs
Building...........................................................................
Cash.........................................................................
67,200
67,200
To record extraordinary repairs.
3.
4.
Cost of building
Before repairs...................................................... $561,000
Add cost of repairs..............................................
67,200
Less accumulated depreciation............................
Revised book value of building.............................
$628,200
420,750
$207,450
Revised book value of building (part 3)...............

New estimate of useful life (20 - 15 + 7)................
Revised annual depreciation.................................
$207,450
12 years
$17,287.5
Journal entry
Depreciation Expense.................................................... 17,287.5
Accumulated DepreciationBuilding........................
17,287.5
To record depreciation.

1.
Equipment......................................................................
Cash.........................................................................
21,000
21,000
To record betterment.
2.
Repairs Expense...........................................................
Cash.........................................................................
5,250
5,250
To record ordinary repairs.
3.
Equipment.....................................................................
Cash.........................................................................
13,950
13,950
To record extraordinary repairs.

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1. Book value of the old tractor ($95,000 - $52,500)..........................$ 42,500
2. Loss on the exchange
Book value - Trade-in allowance ($42,500 - $28,000)..............$ 14,500
3. Debit to new Tractor account
Cash paid + Trade-in allowance ($82,000 + $28,000)...............$110,000
Alternatively, answers can be taken from the following journal entry:
Tractor (new)*...............................................................................
110,000
Loss on Exchange of Assets......................................................
14,500
Accumulated DepreciationTractor............................................
52,500
Tractor (old)..........................................................................
Cash......................................................................................
95,000
82,000
To record asset exchange. *($28,000+$82,000)

Note: Book value of Machine equals $42,000 - $22,625 = $19,375
1. Sold for $16,250 cash

Jan. 2
Cash...............................................................................
16,250
Loss on Sale of Machinery..........................................
3,125
Accumulated Depreciation--Machinery......................
22,625
Machinery.................................................................
42,000
To record cash sale of machine.

2. $20,000 trade-in allowance exceeds book value; but no gain is
recognized on similar asset exchange ($625 gain is buried
in the cost of the new machinery)
Jan. 2
Machinery*....................................................................
57,875
22,625
Machinery.................................................................
Cash**.......................................................................
42,000
38,500

*[$58,500 - ($20,000-$19,375)] **($58,500- $20,000)
3. $15,000 trade-in allowance is less than book value (yielding a loss)

Jan. 2
Machinery......................................................................
58,500
Loss on Exchange of Machinery.................................
4,375
22,625
Machinery.................................................................

66
42,000
Cash*.........................................................................
43,500
To record similar asset exchange. *($58,500-$15,000)

67

2008
July 1
Depreciation Expense.............................................
Accumulated Depreciation--Machinery............
6,625
6,625
To record one-half year depreciation.*

*Annual depreciation = $92,750 / 7 years = $13,250
Depreciation for 6 months in 2008 = $13,250 x 6/12 = $6,625
1. Sold for $35,000 cash

July 1
Cash...............................................................................35,000
Accumulated DepreciationMachinery.....................59,625
Gain on Sale of Machinery.......................................
Machinery..................................................................
1,875
92,750
To record disposal of machinery.*
*Total accumulated depreciation at date of disposal:

Four years 2004-2007 (4 x $13,250)......... $53,000
Partial year 2008 (6/12 x $13,250).............
6,625
Total accumulated depreciation............... $59,625
2. Destroyed by fire with $30,000 cash insurance settlement

July 1
Cash...............................................................................30,000
Loss from Fire............................................................... 3,125
Accumulated DepreciationMachinery.....................59,625
Machinery..................................................................
92,750
To record disposal of machinery from fire.

Dec. 31
Depletion ExpenseMineral Deposit.........................

398,310
Accumulated DepletionMineral Deposit............
398,310
To record depletion [$3,633,750/1,425,000 tons=

$2.55 per ton; 156,200 tons x $2.55 = $398,310].
Dec. 31
Depreciation ExpenseMachinery ............................

18,744
Accumulated DepreciationMachinery................
18,744
To record depreciation [$171,000/1,425,000 tons

= $0.12 per ton; 156,200 tons x $0.12 = $18,744].

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Jan.
1 Copyright.......................................................................
236,700
Cash..........................................................................
236,700
To record purchase of copyright.
Dec. 31 Amortization ExpenseCopyright.............................

19,725
Accumulated AmortizationCopyright.................
19,725
To record amortization of copyright

[$236,700 / 12 years].
Exercise 10-16A (15 minutes)

Net assets (excluding goodwill)..............................................
Normal rate of return in this industry.....................................
Normal net income on net assets...........................................
Expected (typical) future net income.....................................
Expected net income above-normal.......................................
$437,000
x 10%
43,700
85,000
$ 41,300
1. Value of goodwill = $41,300 x 10 = $413,000

2. Value of goodwill = $41,300 / 8% = $516,250
Note: These estimates of goodwill assume that Corey Alts departure does not impact
the businesss goodwill.

1. $323,866,000 for capital expenditures
2. $175,778,000 for depreciation and amortization
3. $1,017,992,000 used in investing activities
Total asset turnover for 2004 =
$4,862,000
($1,586,000 + $1,700,000)/2
= 2.96
Total asset turnover for 2005 =
$7,542,000
($1,700,000 + $1,882,000)/2
= 4.21
Analysis comments. Based on these calculations, Joy turned its assets over 1.25
(4.21 2.96) more times in 2005 than in 2004. This increase indicates that Joy
became more efficient in using its assets. Moreover, Joy has improved its
efficiency in using assets relative to its competitors who average 3.0. Together,

69
these results based on total asset turnover indicate that Joy has markedly
improved its performance and is currently superior to its competitors.

70
PROBLEM SET A
Problem 10-1A (50 minutes)
Part 1
Building..........................
Land................................
Land improvements......
Vehicles..........................
Total................................
2005
Jan. 1
Appraised
Value
$408,000
289,000
42,500
110,500
$850,000
Percent
of Total
48%
34
5
13
100%
Apportioned
Cost
$378,000
267,750
39,375
102,375
$787,500
Building...........................................................................
378,000
Land.................................................................................
267,750
39,375
Vehicles...........................................................................
102,375
Cash...........................................................................
787,500
To record asset purchases.
Part 2
Year 2005 straight-line depreciation on building
[($378,000 - $25,650) / 15 years] = $23,490
Part 3
Year 2005 double-declining-balance depreciation on land improvements
(100% / 5 years) x 2 = 40% rate
$39,375 x 40% = $ 15,750
Part 4
Accelerated depreciation does not lower the total amount of taxes paid over
the asset's life. Instead, it defers or postpones taxes to the later years of an
assets useful life. This is because accelerated methods charge a higher
portion of asset costs against revenue in earlier years and a lower portion in
later years. The result is to reduce taxable income more in earlier years but
less in later years. [Note: From a present value perspective, there is a tax

71
savings from use of accelerated depreciation. The company gets to use the
tax deferred amounts for investment purposes until they are due.]

72

Part 1
Building
2
Land
Improvements 1
Building
3
Land
Improvements
2
Land
Purchase price*....... $1,792,000
Demolition................
422,600
Land grading............
167,200
New building............
New improvements.. _________
Totals....................... $2,381,800
_______
$616,000
$2,019,000
_________
$2,019,000
*Allocation of purchase price
Appraised
Value
Percent
of Total
Apportioned
Cost**
64%
22
14
100%
$1,792,000
616,000
392,000
$2,800,000
$616,000
Land.......................................... $1,865,600
Building 2.................................
641,300
Land Improvements 1..............
408,100
Totals........................................ $2,915,000
$392,000
_______
$392,000
$158,000
$158,000
**Multiply the percentages in column 3 by the $2,800,000 purchase price.
Part 2
2005
Jan. 1
Land....................................................................... 2,381,800
Building 2.............................................................. 616,000
Building 3.............................................................. 2,019,000
Land Improvements 1.......................................... 392,000
Land Improvements 2.......................................... 158,000
Cash................................................................
5,566,800
To record costs of plant assets.
Part 3
2005
Dec. 31 Depreciation ExpenseBuilding 2...............................
26,800
Accumulated DepreciationBuilding 2.................
26,800
To record depreciation. [($616,000 - $80,000)/20]
31 Depreciation ExpenseBuilding 3...............................

65,156
Accumulated DepreciationBuilding 3.................
65,156
To record depreciation. [($2,019,000 - $390,100)/25]
31 Depreciation ExpenseLand Improv. 1.......................

28,000
Accum. DepreciationLand Improv. 1...................
28,000
To record depreciation [$392,000/14 = $28,000].
31 Depreciation ExpenseLand Improv. 2.......................

7,900

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Accum. DepreciationLand Improv. 2...................
7,900
To record depreciation [$158,000/20].

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2004
Jan.
1 Equipment .................................................................273,140
Cash.....................................................................
273,140
To record loader costs ($255,440 +$15,200 +$2,500).
Jan.
3 Equipment.....................................................................3,660
Cash.........................................................................
3,660
To record betterment of loader.
Dec. 31 Depreciation ExpenseEquipment...........................

60,238*
Accumulated DepreciationEquipment..............
60,238
*
2004 depreciation after January 3rd betterment

Total original cost.................................................................... $273,140
Plus cost of betterment...........................................................
3,660
Revised cost of equipment...................................................... 276,800
Less revised salvage ($34,740 + $1,110)...............................
35,850
Cost to be depreciated............................................................ 240,950
Annual depreciation ($240,950 / 4 years) (rounded).............. $ 60,238*
2005
Jan. 1 Equipment.....................................................................4,500
Cash.........................................................................
4,500
To record extraordinary repair on loader.
Feb. 17 Repairs ExpenseEquipment.................................... 920

Cash.........................................................................
920
To record ordinary repair on loader.
Dec. 31 Depreciation ExpenseEquipment...........................

37,042*
37,042
*2005 depreciation after January 1st extraordinary repair
Total cost ($276,800 + $4,500)...........................................................................
$281,300
Less accumulated depreciation ......................................................................
60,238
Book value.........................................................................................................
221,062
Less salvage......................................................................................................
35,850
Remaining cost to be depreciated...................................................................
$185,212
Revised remaining useful life (Original 4 years - 1yr. + 2yrs.)..............................
5.0 yrs.
$ 37,042
Revised annual depreciation ($185,212 / 5 yrs) (rounded).............................

75

2004
Jan. 1 Trucks............................................................................20,580
Cash.........................................................................
20,580
To record cost of truck ($19,415 + $1,165).
Dec. 31 Depreciation ExpenseTrucks................................... 3,516

Accumulated DepreciationTrucks.....................
3,516
To record depreciation [($20,580 - $3,000)/5].

2005
Dec. 31 Depreciation ExpenseTrucks...................................4,521*

4,521
*
2005 depreciation
Total cost............................................................................................................
$ 20,580
Less accumulated depreciation (from 2004)...................................................
3,516
Book value.........................................................................................................
17,064
Less revised salvage value...............................................................................
3,500
Remaining cost to be depreciated...................................................................
$ 13,564
Revised useful life.............................................................................................
4.00 yrs.
Less one year used in 2004..............................................................................
1.00 yrs.
Revised remaining useful life...........................................................................
3.00 yrs.
Total depreciation for 2005 ($13,564/3)(rounded)............................................
$ 4,521
2006
Dec. 31 Depreciation ExpenseTrucks................................... 4,521

4,521
To record annual depreciation.
Dec. 31 Cash............................................................................... 6,200

Accumulated DepreciationTrucks...........................12,558**
Loss on Disposal of Trucks......................................... 1,822***
Trucks......................................................................
20,580
To record sale of truck.
**
Accumulated depreciation on truck at 12/31/2006

2004.................................................................................. $ 3,516
2005.................................................................................. 4,521
2006.................................................................................. 4,521
Total................................................................................. $12,558
***
Book value of truck at 12/31/2006
Total cost......................................................................... $20,580
Less accumulated depreciation..................................... (12,558)
Book value ...................................................................... $ 8,022
Loss ($6,200 cash received - $8,022 book value)......... $ 1,822
76
Part 1
Cost of machine................................................................
$210,000
Less estimated salvage value.........................................
20,000
Total depreciable cost......................................................
$190,000
Year
Straight-Linea
1...................... $ 47,500
2...................... 47,500
3...................... 47,500
4...................... 47,500
Totals .........
$190,000
Double-DecliningBalancec
$105,000
52,500
26,250
6,250
$190,000
Units-of-Productionb
$ 48,560
48,960
47,840
44,640
$190,000
Straight- line:
Cost per year = $190,000/4 years = $47,500 per year
Units-of-production:
Cost per unit = $190,000/475,000 units = $0.40 per unit
Year
1................
2................
3................
4................
Total..........
*
Units
121,400
122,400
119,600
118,200
Unit Cost
$0.40
0.40
0.40
0.40
Depreciation
$ 48,560
48,960
47,840
44,640*
$190,000
Take only enough depreciation in Year 4 to reduce book

value to the assets $20,000 salvage value.
Double-declining-balance:
(100%/4) x 2 = 50% depreciation rate
Year
1.........
2.........
3.........
4.........
Total...
Beginning
Book
Value
$210,000
105,000
52,500
26,250
Annual
Depreciation
(50% of
Book Value)
$105,000
52,500
26,250
6,250*
$190,000
Accumulated
Depreciation
at the End of
the Year
$105,000
157,500
183,750
190,000
Ending Book Value

($210,000 Cost Less
Accumulated
Depreciation)
$105,000
52,500
26,250
20,000
*Take only enough depreciation in Year 4 to reduce book value to

the assets $20,000 salvage value.

77
Problem 10-5A (Concluded)

Part 2
a.
Jan. 2 Machinery................................................................. 167,000
Cash....................................................................
167,000
To record machinery purchase.
Jan. 3 Machinery.................................................................
Cash....................................................................
3,420
3,420
To record machinery costs.
Jan. 3 Machinery.................................................................
Cash....................................................................
1,080
1,080
b. First year
Dec. 31 Depreciation ExpenseMachinery............................
26,150
Accumulated DepreciationMachinery..............
26,150
Fifth year
26,150
26,150
To record years depreciation.
c. Accumulated depreciation at the date of disposal

Five years' depreciation (5 x $26,150)..........................$130,750
Book value at the date of disposal
Original total cost...........................................................$171,500
Accumulated depreciation............................................ (130,750)
Book value......................................................................$ 40,750
(i) Sold for $13,500 cash
Dec. 31 Cash...............................................................................
13,500
Loss on Sale of Machinery..........................................
27,250
Accumulated DepreciationMachinery....................
130,750
Machinery.................................................................
171,500
(ii) Sold for $45,000 cash
Dec. 31 Cash...............................................................................
45,000
130,750
Machinery.................................................................
Gain on Sale of Machinery.....................................
171,500
4,250
(iii) Destroyed in fire and collected $24,000 cash from insurance company
Dec. 31 Cash...............................................................................
24,000
78
130,750
Loss from Fire..............................................................
16,750
Machinery.................................................................
171,500

79

Part 1
2005
(a)
June 25 Leasehold......................................................................
185,000
Cash.........................................................................
185,000
To record payment for sublease.
(b)
July 1 Prepaid Rent.................................................................
70,000
Cash.........................................................................
70,000
To record prepaid annual lease rental.
(c)
July 5 Leasehold Improvements............................................
129,840
Cash.........................................................................
129,840
To record costs of leasehold improvements.
(d)
Dec. 31 Rent Expense................................................................9,250
Accumulated AmortizationLeasehold..............
9,250
To record leasehold amortization ($185,000/10 x

6/12).
(e)
Dec. 31 Amortization ExpenseLeasehold Improvements............6,492
Improvements..............................................................
6,492
To record leasehold improvement amortization

($129,840/10 years remaining on lease x 6/12).
(f)
Dec. 31 Rent Expense................................................................
35,000
Prepaid Rent...........................................................
35,000
To record one-half year lease rental ($70,000 x 6/12).

80
Problem 10-6A (Concluded)

Part 2
(a)
July 23 Mineral Deposit.............................................................
4,836,000
Cash.........................................................................
4,836,000
To record purchase of mineral deposit.
(b)
July 25 Machinery......................................................................
390,000
Cash.........................................................................
390,000
To record costs of machinery.
(c)
Dec. 31 Depletion ExpenseMineral Deposit.........................
248,000
Accum. DepletionMineral Deposit....................
248,000
To record depletion [$4,836,000/

7,800,000 tons = $0.62 per ton.
400,000 tons x $0.62 = $248,000].
(d)
20,000
Accum. DepreciationMachinery........................
20,000
To record depreciation [$390,000/

7,800,000 tons = $0.05 per ton.
400,000 tons x $0.05 = $20,000].
Analysis Component:
SimilaritiesAmortization, depletion, and depreciation are similar in that
they are all methods of allocating costs of long-term assets to the periods
that benefit from their use. DifferencesThey are different in that they
apply to different types of long-term assets: amortization applies to
intangible assets with (definite) useful lives; depletion applies to natural
resources; and depreciation applies to plant assets. Also, amortization is
typically computed using the straight-line method, whereas the units-ofproduction method is usually used in depletion.

81
Problem 10-7AA (30 minutes)

Part 1
Equity........................................................................................................... $395,930
Normal return in the industry.................................................................... x 20%
Normal net income..................................................................................... $ 79,186
Expected net income for this company................................................... $100,000
Normal net income (from above)..............................................................
79,186
Above-normal net income......................................................................... $ 20,814
Rent Centers proposal

Goodwill ($20,814 / 15%).................................................................. $138,760
Part 2
Potential Buyers proposal
Goodwill ($20,814 x 5)....................................................................... $104,070
Part 3
Net assets without goodwill (equals equity).................................... $395,930
Cost of goodwill acquired by buyer (from part 1)........................... 138,760
Purchase price (buyers investment)................................................. $534,690
Part 4
Net income divided by buyers
Investment ($100,225 / $534,690)..................................................
18.7%
Goodwill is measured as the excess of the cost of an acquired entity over

the value of the acquired net assets. Goodwill is recorded as an asset and
it is not amortized. Instead, the FASB (SFAS 142) requires that goodwill be
annually tested for impairment. If the book value of goodwill does not
exceed its fair value, goodwill is not impaired. However, if the book value of
goodwill exceeds its fair value, an impairment loss is recorded equal to that
excess. (Details of this test are in advanced courses.)

82
PROBLEM SET B
Problem 10-1B (50 minutes)
Part 1
Building...........................
Land.................................
Land improvements.......
Trucks.............................
Total.................................
2005
Jan. 1
Appraised
Value
$ 784,800
540,640
226,720
191,840
$1,744,000
Percent
of Total
45%
31
13
11
100%
Apportioned
Cost
$ 724,500
499,100
209,300
177,100
$1,610,000
Buildings.........................................................................
724,500
Land.................................................................................
499,100
209,300
Trucks..............................................................................
177,100
Cash...........................................................................
1,610,000
To record asset purchases.
Part 2
Year 2005 straight-line depreciation on building
[($724,500 - $100,500) / 12 years] = $52,000
Part 3
Year 2005 double-declining-balance depreciation on land improvements
(100% / 10 years) x 2 = 20% rate
$209,300 x 20% = $41,860
Part 4
Accelerated depreciation does not increase the total amount of taxes paid
over the assets life. Instead, it defers or postpones taxes to the later years of
an assets useful life. This is because accelerated methods charge a higher
portion of asset costs against revenue in earlier years and a lower portion in
later years. The result is to reduce taxable income more in earlier years and
less in later years. [Note: From a present value perspective, there is a tax
savings from use of accelerated depreciation. The company gets to use the
tax deferred amounts for investment purposes until they are due.]

83

Part 1
Land
Purchase price*......... $ 769,500
Demolition.................
117,000
Land grading.............
172,500
New building..............
New improvements. . . ________
Totals..........................$1,059,000
Building
B
Building
C
Land
Improvements B
$459,000
$121,500
$1,356,000
_______ _________
$459,000 $1,356,000
_______
$121,500
Allocation of
Appraised
purchase price
Value
Land.......................................... $ 792,585
Building B.................................
472,770
Land Improvements B.............
125,145
Totals........................................ $1,390,500
Percent
of Total
57%
34
9
100%
Land
Improvements C
$101,250
$101,250
Apportioned
Cost
$ 769,500
459,000
121,500
$1,350,000
Part 2
2005
Jan. 1
Land......................................................................... 1,059,000
Building B................................................................ 459,000
Building C................................................................ 1,356,000
Land Improvements B............................................ 121,500
Land Improvements C............................................ 101,250
Cash...................................................................
3,096,750
To record cost of plant assets.
Part 3
2005
Dec. 31 Depreciation ExpenseBuilding B........................................

24,600
....................................................................................................
....................................................................................................
Accumulated DepreciationBuilding B.......................... 24,600
31 Depreciation ExpenseBuilding C...........................53,025

Accumulated DepreciationBuilding C..............
53,025
To record depreciation [($1,356,000 - $295,500)/20].
31 Depreciation Expense--Land Improvements B.........20,250

...............................................................................
...............................................................................
...............................................................................
84
Accum. Depreciation--Land Improvements B........
20,250
31 Depreciation Expense--Land Improvements C.........10,125

.......................................................................................
.......................................................................................
Accum. Depreciation--Land Improvements C........
10,125

85

2004
Jan. 1 Equipment.....................................................................26,900
Cash.........................................................................
26,900
To record costs of van ($24,950 + $1,950).
Jan. 3 Equipment..................................................................... 1,550

Cash.........................................................................
1,550
To record betterment of van.
Dec. 31 Depreciation ExpenseEquipment........................... 4,970*

4,970
*
2004 depreciation after January 3rd betterment

Total original cost.....................................................................
$26,900
Plus cost of betterment............................................................
1,550
Revised cost of equipment......................................................
28,450
Less revised salvage ($3,400 + $200))...................................
3,600
Cost to be depreciated.............................................................
$24,850
Annual depreciation ($24,850 / 5 years)..................................
$ 4,970
2005
Jan. 1 Equipment..................................................................... 1,970

Cash.........................................................................
1,970
To record extraordinary repair on van.
May 10 Repairs ExpenseEquipment....................................

Cash.........................................................................
600
600
To record ordinary repair on van.
Dec. 31 Depreciation ExpenseEquipment........................... 3,642*

Accum. DepreciationEquipment.......................
3,642
*2005 depreciation after 1/1 extraordinary repair
Total cost ($28,450 + $1,970).............................................................................
$30,420
Less accumulated depreciation........................................................................
4,970
Book value..........................................................................................................
25,450
Less salvage.......................................................................................................
3,600
Remaining cost to be depreciated....................................................................
$21,850
Revised remaining useful life (Original 5 years - 1yr. + 2yrs.).....................................
6.0 yrs.
Revised annual depreciation ($21,850 / 6 yrs) (rounded)................................
$ 3,642

86

2004
Jan. 1 Machinery......................................................................
113,000
Cash.........................................................................
113,000
To record costs of machinery ($106,600 +$6,400).

17,200
17,200
To record depreciation [($113,000-9,800)/6].
2005
27,583*
27,583
*
2005 depreciation:
Total cost....................................................................................
$113,000
Less accumulated depreciation (from 2004)............................
17,200
Book value..................................................................................
95,800
Less revised salvage value.......................................................
13,050
Remaining cost to be depreciated............................................
$ 82,750
Revised useful life.....................................................................
4.0 yrs.
Less 1 year in 2004....................................................................
1.0 yrs.
Revised remaining useful life...................................................
3.0 yrs.
Total depreciation for 2005 ($82,750/ 3 yrs) [rounded].............

$ 27,583
2006
27,583
27,583
Dec. 31 Cash...............................................................................
25,240
72,366**
Loss on Disposal of Machinery..................................
15,394***
Machinery................................................................
113,000
To record sale of machine.
**
Accumulated depreciation on machine at 12/31/2006:

2004.................................................................................. $ 17,200
2005..................................................................................
27,583
2006..................................................................................
27,583
Total................................................................................. $ 72,366
***
Book value of machine at 12/31/2006:
Total cost......................................................................... $113,000

87
Less accumulated depreciation..................................... (72,366)

Book value ...................................................................... $ 40,634
Loss ($25,240 cash received - $40,634 book value)..... $ 15,394

88

Part 1
Cost of machine............................................................
$312,000
Less estimated salvage value.....................................
28,000
Total depreciable cost..................................................
$284,000
Year
1....................
2....................
3....................
4....................
5....................
Totals............
Straight-Line
Units-of-Production
$ 56,800
56,800
56,800
56,800
56,800
$284,000
Double-DecliningBalancec
$ 61,400
57,600
56,750
58,150
50,100
$284,000
$124,800
74,880
44,928
26,957
12,435
$284,000
Straight- line:
Cost per year = $284,000/5 years = $56,800 per year
Units-of-production:
Cost per unit = $284,000/1,136,000 units = $0.25 per unit
Year
1...............
2...............
3...............
4...............
5...............
Total........
*
Units
245,600
230,400
227,000
232,600
211,200
Unit Cost
$0.25
0.25
0.25
0.25
0.25
Depreciation
$ 61,400
57,600
56,750
58,150
50,100*
$284,000
Take only enough depreciation in Year 5 to reduce book

value to the assets $28,000 salvage value.
Double-declining-balance (amounts rounded to the nearest dollar):

(100%/5) x 2 = 40% depreciation rate
Beginning
Year
Book Value
1............ $312,000
2............ 187,200
3............ 112,320
4............
67,392
5............
40,435
Total......
Annual
Depreciation
(40% of
Book Value)
$124,800
74,880
44,928
26,957
12,435**
$284,000
Accumulated
Depreciation
at the End of
the Year
$124,800
199,680
244,608
271,565
284,000
Ending Book Value

($312,000 Cost less
Accumulated
Depreciation)
$187,200
112,320
67,392
40,435
28,000

89
**
Take only enough depreciation in Year 5 to reduce book value to the assets
$28,000 salvage value.

90
Problem 10-5B (Concluded)

Part 2
a.
Jan. 1 Machinery.................................................................. 130,000
Cash.....................................................................
130,000
Jan. 2 Machinery..................................................................
Cash.....................................................................
3,390
3,390
Jan. 2 Machinery..................................................................
Cash.....................................................................
4,800
4,800
b. First year
Dec. 31 Depreciation ExpenseMachinery............................17,170
17,170
To record depreciation [($138,190-$18,000)/7 =

$17,170].
Sixth year
Dec. 31 Depreciation ExpenseMachinery............................17,170
17,170
To record the sixth years depreciation.
c. Accumulated depreciation at the date of disposal

First six years' depreciation (6 x $17,170)......................$103,020
Book value at the date of disposal
Original total cost.............................................................$138,190
Accumulated depreciation...............................................(103,020)
Total....................................................................................$ 35,170
(i) Sold for $30,000 cash
Dec. 31 Cash...............................................................................
30,000
Loss on Sale of Machinery..........................................5,170
103,020
Machinery................................................................
138,190
(ii) Sold for $50,000 cash
Dec. 31 Cash...............................................................................
50,000
103,020
Machinery................................................................
138,190
Gain on Sale of Machinery....................................
14,830
(iii) Destroyed in fire and collected $20,000 cash from insurance
Dec. 31 Cash...............................................................................
20,000

91
Loss from Fire..............................................................

15,170
103,020
Machinery................................................................
138,190

92

Part 1
2007
(a)
Jan. 1 Leasehold......................................................................
30,000
Cash.........................................................................
30,000
To record payment for sublease.
(b)
Jan. 1 Prepaid Rent.................................................................
26,400
Cash.........................................................................
26,400
To record prepaid annual lease rental.
(c)
Jan. 3 Leasehold Improvements............................................
18,000
Cash.........................................................................
18,000
To record costs of leasehold improvements.
(d)
Dec. 31 Rent Expense................................................................6,000
Accumulated AmortizationLeasehold..............
6,000
To record leasehold amortization ($30,000/5).
(e)
Dec. 31 Amortization ExpenseLeasehold Improvements..........3,600
Improvements.............................................................
To record leasehold improvement amortization
($18,000/5 years remaining on lease).
(f)
Dec. 31 Rent Expense................................................................
26,400
Prepaid Rent...........................................................
3,600
26,400
To record annual lease rental.

93
Problem 10-6B (Concluded)

Part 2
Feb. 19 Mineral Deposit.............................................................
4,450,000
Cash.........................................................................
4,450,000
To record purchase of mineral deposit.
Mar. 21 Machinery......................................................................
200,000
Cash.........................................................................
200,000
To record costs of machinery.
Dec. 31 Depletion ExpenseMineral Deposit.........................

313,280
Accum. DepletionMineral Deposit....................
313,280
To record depletion [$4,450,000/

5,000,000 tons = $0.89 per ton.
352,000 tons x $0.89 = $313,280].

14,080
14,080
To record depreciation [$200,000/

5,000,000 tons = $0.04 per ton.
352,000 tons x $0.04 = $14,080].
Analysis Component:
SimilaritiesAmortization, depletion, and depreciation are similar in that
they are all methods of allocating costs of long-term assets to the periods
that benefit from their use. DifferencesThey are different in that they
apply to different types of long-term assets: amortization applies to
intangible assets (with definite useful lives); depletion applies to natural
resources; and depreciation applies to plant assets. Also, amortization is
typically computed using the straight-line method, whereas the units-ofproduction method is usually used in depletion.

94
Problem 10-7BA (30 minutes)

Part 1
Equity........................................................................................................... $667,375
Normal return in the industry (given)....................................................... x 32%
Normal net income (rounded)................................................................... $213,560
Expected net income for this company................................................... $230,000
Normal net income..................................................................................... 213,560
Above-normal net income......................................................................... $ 16,440
Packs proposal
Goodwill ($16,440 / 10%).................................................................. $164,400
Part 2
Buyers proposal
Goodwill ($16,440 x 8)....................................................................... $131,520
Part 3
Net assets without goodwill............................................................. $667,375
Cost of goodwill acquired by buyer (from part 1)........................... 164,400
Purchase price (buyers investment)................................................. $831,775
Part 4
Net income divided by buyers
investment ($200,175 / $831,775)...................................................
24.1%
Goodwill is measured as the excess of the cost of an acquired entity over

the value of the acquired net assets. Goodwill is recorded as an asset and
it is not amortized. Instead, the FASB (SFAS 142) requires that goodwill be
annually tested for impairment. If the book value of goodwill does not
exceed its fair value, goodwill is not impaired. However, if the book value of
goodwill exceeds its fair value, an impairment loss is recorded equal to that

95
Serial Problem
Serial Problem, Success Systems (45 minutes)
1.
For the three months ended March 31, 2005, depreciation expense was
$400 for office equipment and $1,250 for the computer equipment.
Annualizing these three months results in the following amounts for
depreciation expense:
Depreciation ExpenseOffice Equipment ($400 x 4)......................$1,600
Depreciation ExpenseComputer Equipment ($1,250 x 4)............$5,000
2.
December 31,
2004
Office Equipment........................................ $8,000
Accumulated DepreciationOffice
Equipment..............................................
400
Office Equipment (book value)................. $7,600
December 31,
2005
$8,000
December 31,
2004
Computer Equipment................................. $20,000
Accumulated Depreciation
Computer Equipment...........................
1,250
Computer Equipment (book value)........... $18,750
December 31,
2005
$20,000
2,000
$6,000
6,250
$13,750
3.
Note: Total asset turnover = Net sales / Average total assets
The 3-month total asset turnover for Success Systems at March 31, 2005
$43,853 / [($129,909 + $93,248)/2] = 0.39 times

An estimate of its annual total asset turnover is 1.56 (0.39 x 4 quarters).
This value for the total asset turnover is lower than usual for
companies competing in this industry (2.5). However, Success
Systems is in its first year of operations, and its turnover will improve
if it can generate increased sales throughout the year while
maintaining a similar asset level.
96
Reporting in Action BTN 10-1

1. The percent of original cost remaining to be depreciated is computed
by taking the ratio of the book value of property, plant, and equipment
to their original cost reported in Krispy Kremes Note 5 ($ thousands):
As of 02/02/03: $202,558 / $252,770 = 80.1%
As of 02/03/02: $112,577 / $156,484 = 71.9%
2. Its "Summary of Significant Accounting Policies" (Note 2) reports that
intangible assets and goodwill have been evaluated as having
indefinite lives and, as a result, are not subject to amortization
provisions. For the fiscal year ended February 3, 2002, the Company
recorded an expense of $100,000 to amortize intangible assets related
to an acquisition completed prior to June 30, 2001. The company
believes that no impairment of intangible assets exists as of February
2, 2003. (Instructor note: SFAS 142 has changed the accounting for goodwill
it is no longer amortized. Instead, an annual impairment test is applied to
goodwill. Moreover, intangible assets that are identified with an indefinite life
are no longer amortized, but are subject to an impairment test.)
3. According to Note 5, the change in total property, plant and equipment

before accumulated depreciation for the year ended February 3, 2003,
is an increase of $96,286 ($252,770 - $156,484). In comparison,
according to the statement of cash flows, $83,196 is used for the
purchase of property, plant and equipment, and $701 is received from
the disposal of property, plant and equipment. This gives a net cash
outflow of $82,495 (all $s in thousands).
One possible explanation for the difference in these amounts is that
Krispy Kreme acquired plant assets for something other than cashfor
example, it acquired certain plant assets for a promise (note
agreement) to pay later. Another possible explanation is that Krispy
Kreme disposed of some of its plant assets at a loss during the year.
4. Total asset turnover for year ended ($ thousands):
2/02/03:
$491,549
($410,487 + $255,376)/2
= 1.48 times
2/03/02:
$394,354
($255,376 + $171,493)/2
= 1.85 times
5. Solution depends on the financial statement data obtained.

97
Comparative Analysis
BTN 10-2
1. Total asset turnover for Krispy Kreme ($ thousands)

Current Year:
$491,549 / [($410,487 + $255,376)/2] = 1.48 times
One Year Prior:
$394,354 / [($255,376 + $171,493)/2] = 1.85 times
Total asset turnover for Tastykake ($ thousands)

Current Year:
$162,263 / [($116,560 + $116,137)/2] = 1.39 times
One Year Prior:
$166,245 / [($116,137 + $112,192)/2] = 1.46 times
2. Each dollar of Krispy Kremes assets produces $1.48 in net sales for
the current year and $1.85 in net sales for the prior year. Each dollar of
Tastykakes assets produces $1.39 in net sales for the current year and
$1.46 in net sales for the prior year. Consequently, we see that Krispy
Kreme employs its assets more efficiently than does Tastykake.
However, both companies have experienced a decline in asset
efficiency for the current year.

98
Ethics Challenge
BTN 10-3
1. When managers acquire new assets a number of decisions relative to

depreciation must be made. Specifically, the asset must be assigned a
useful life, a salvage value, and a method of depreciation.
2. When assets are placed in use on a day other than the first day of the
month an assumption is often made that the assets are placed in use on
the first day of the month nearest to the date of the purchase. For
example, for assets purchased on the 1st through 15th days of the month,
the first day of the month is assumed to be the purchase date. For
assets purchased on the 16th through month-end, the first day of the
next month is assumed to be the purchase date.
By selecting the first day of the following month, Choi is getting a onetime deferral of some partial months of depreciation. She is still
employing a systematic and rational method of allocating costs if she
consistently chooses the first day of the following month. However,
since she appears to be using this method only with respect to current
year additions, it appears that she is using accounting rules to reduce
depreciation expense this year. Also, her practice is not in keeping with
general business practices as described above. The facts of the
situation seem to suggest an ethical violation rather than a legitimate
depreciation decision rule.
3. By always assuming the first day of the following month as the date of
purchase, less depreciation is (initially) accrued for the assets
employed. This means depreciation expense will be less than if assets
were considered employed on the first of the month closest to the date
of purchase. With reduced depreciation charges, net income will be
higher for this current year. Therefore, this practice will result in a
higher profit margin for her company for this year.
Communicating in Practice
BTN 10-4
The solution to this activity will vary based on the industry and the
companies chosen for analysis. Many instructors find it useful to report
the results from the teams to the class for purposes of classroom
discussion and analysis.

99
Taking It to the Net
BTN 10-5
1. Adaptec is a technology company that specializes in data storage

solutions. Adaptecs products include software and hardware products
that are designed to move, manage, and protect critical data and digital
content.
2. The company maintains a patent award program that encourages its
engineers to document patentable inventions so that Adaptec can
continue to apply for patents both in the U.S. and in foreign countries.
The company, at times, purchases technology licenses from other
companies rather than develop all needed patents internally.
3. Adaptecs statement of operations (income statement) for 2002 shows
patent settlement revenue of $9.3 million. This likely relates to monies
recovered from other parties who have been ruled (by judges or juries)
to have infringed on Adaptecs patents. In 2001, negative revenues are
shown for patent settlement fees. The negative revenues could be due
to an appeal of the original 2000 court decision with Adaptec having to
return part of the 2000 settlement fee.
Teamwork in Action
BTN 10-6
1. Annual depreciation for each year of the assets useful life:

Year
2004
Straight-line
Double-Declining-Balance
Units-of-Production
($44,000-2,000)/4 (100%/4) x 2 = 50% is

($44,000-$2,000)/60,000 miles
= $10,500
declining-balance rate.
= $.70 per mile.
BV x rate = $44,000 x 50% 12,000 miles x $.70 = $ 8,400
= $22,000
2005
$10,500
$22,000 x 50%= $11,000
18,000 miles x $.70 = $12,600
2006
$10,500
$11,000 x 50% = $5,500
21,000 miles x $.70 = $14,700
2007
$10,500
$5,500 (depreciate to
salvage) = $3,500
9,000* miles x $.70 = $ 6,300
* Depreciation is based on the estimated capacity of 60,000 miles. Even though the van is
driven 10,000 miles in the last year, depreciation can only be taken for the remaining 9,000
miles of estimated capacity. This will record depreciation to the estimated salvage value.

100
Teamwork in Action (Continued)

2. Depreciation is recorded in an adjusting entry at the end of each
period. The entry is:
Depreciation Expense...................................
Accumulated Depreciation..............
xxxx*
xxxx*
*Amount varies by method and year (see part 1).
3. Each experts presentation of the comparison of methods will be

slightly different. The experts should make the following points: The
straight-line method reduces net income by the same amount each
year. The declining-balance method reduces net income the largest in
2004 (first year of use) and by a lesser amount in each subsequent
year. The impact of the units-of-production method varies year to year
according to the amount of estimated capacity consumed (miles
driven).
4. Book value at the end of each year
= Cost - Accumulated depreciation
= $44,000 (amount varies by methodsee part 1 for annual amounts)
Year
Straight-line
2004......... $33,500
2005.........
23,000
..........
..........
2006.........
12,500
2007.........
2,000
Double-DecliningBalance
$22,000
11,000
Units of Production
$35,600
23,000
5,500
2,000
8,300
2,000
For reporting purposes, each expert will have different results. But
each should show:
Plant Assets:
Transport Van.................................................
Less: Accumulated Depreciation
XXXX*
$44,000
XXXX*
* Amounts vary by the method and the year selected for illustration. Experts should explain
the amounts shown.

101
Business Week Activity
BTN 10-7
1. In accounting terms, if a company pays $1 billion for another company

that has tangible assets, such as plant and equipment, valued at $600
million, then the amount of goodwill is calculated to be $400 million.
Therefore, goodwill represents the purchase price of a company that
exceeds the value of the identifiable net assets.
2. Formerly, goodwill was required to be amortized deducting a portion of
it from net income every year for up to 40 years.
3. The FASB has recently adopted a new standard in accounting for
goodwillthese are reflected in SFAS 141 and 142. Specifically, as
before, goodwill is measured as the excess of the cost of an acquired
entity over the value of the acquired net assets. However, in contrast to
the prior standard, goodwill is recorded as an asset and it is not
amortized. Instead, SFAS 142 requires that goodwill be annually tested
for impairment. If the book value of goodwill does not exceed its fair
value, goodwill is not impaired. However, if the book value of goodwill
exceeds its fair value, an impairment loss is recorded equal to that
4. It is a good idea to become familiar with the accounting for goodwill
because goodwill write-downs are widely anticipated by numerous
companies in the coming years. Many of the 1990s mega-mergers have
not lived up to expectations and, therefore, the acquirers often overpaid.
This generated goodwill that must be tested for impairment (and likely
written off against earnings).

102
Entrepreneurial Decision
BTN 10-8
Part 1
(a) Under current conditions, the total asset turnover is 3. This is computed
as net sales of $3,000,000 divided by its average total assets of
$1,000,000.* This means the company turns its assets over 3 times per
year or, stated differently, each $1 of assets produces $3.00 of net sales
per year.
* Total asset turnover =
Net sales
Average total assets
(b) Under this proposal, its asset turnover would increase to 3.67. This is
computed by taking its net sales of $5,500,000 ($3,000,000 + $2,500,000)
and dividing by its average total assets of $1,500,000 ($1,000,000 +
$500,000). This means the company would now turn its assets over 3.67
times per year or, stated differently, each $1 of assets would now
produce $3.67 of net sales per year.
Part 2
Cordovas proposal would yield an improved total asset turnover of 3.67
vis--vis the current total asset turnover of 3. However, we need to
recognize that this proposal depends on our confidence in both
maintaining current sales, meeting future sales expectations, and not
losing or alienating current and/or future customers due to the expanded
operations. Assuming all of our estimates are reasonable, we need to focus
on any potential customer concern and the impact on other dimensions of
analysis that such a proposal can bring about.*
*We must remember that total asset turnover is only one dimension of a complete analysis of this
proposal. For example, we would want to explore the impact of this proposal on net income and
other activities.
Hitting the Road
BTN 10-9
No formal solution exists for this activity. It is usually interesting for the
class to exchange their discoveries via class discussion. This is
particularly the case with respect to patents, copyrights, and trademarks.

103
Global Decision BTN
10-10
1. Total asset turnover for Grupo Bimbo (millions of pesos):

Current Year:
$41,373 / [($31,719 + $23,781)/2] = 1.49 times
One Year Prior:
$34,968 / [($23,781 + $25,035)/2] = 1.43 times
2. Grupo Bimbo and Krispy Kreme were the most efficient in producing
net sales from total assets employed ($1.49 and $1.48 respectively).
Specifically, each peso of Grupo Bimbos assets produces 1.49 pesos
in net sales for the current year and 1.43 pesos in net sales for the prior
year. In comparison, each dollar of Krispy Kremes assets produces
$1.48 in net sales for the current year and $1.85 in net sales for the
prior year, whereas each dollar of Tastykakes assets produces $1.39 in
net sales for the current year and $1.46 in net sales for the prior year.

104

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Chapter 10

Plant Assets, Natural Resources and

The Accumulated DepreciationMachinery account is a contra asset account with a credit

Solutions Manual, Chapter 10

McGraw-Hill Companies, Inc., 2005

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Quick Study 10-2 (10 minutes)

450 depreciation per concert

Quick Study 10-4 (10 minutes)

McGraw-Hill Companies, Inc., 2005

2 Years of life remaining

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Quick Study 10-5 (10 minutes)

* Total accumulated depreciation of $537,656 ($232,500 + $174,375 + $130,781)

Quick Study 10-6 (10 minutes)

To record addition of a new wing.

(d) Equipment................................................................ 50,000

To record an extraordinary repair.

Quick Study 10-7 (10 minutes)

To record similar asset exchange.

Solutions Manual, Chapter 10

McGraw-Hill Companies, Inc., 2005

To record similar asset exchange.

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Quick Study 10-8 (10 minutes)

To record cost of ore mine.

= $2.70 per ton

Depletion ExpenseOre Mine........................................

To record depletion of ore mine (90,000 x $2.70).

Quick Study 10-9 (10 minutes)

b) Trademark c) Leasehold f) Copyright g) Franchise

Natural Resources: a) Oil well

d) Gold mine h) Timberland

Building is reported under plant assets.

Quick Study 10-10 (10 minutes)

To record leasehold improvements.

To record amortization of leasehold over

Amortization = $95,000 / 8-year-lease-term = $11,875 per year.

Quick Study 10-11 (10 minutes)

Solutions Manual, Chapter 10

Interpretation: The companys turnover of 0.80 times is markedly lower than

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Exercise 10-2 (15 minutes)

To record costs of plant assets.

Solutions Manual, Chapter 10

McGraw-Hill Companies, Inc., 2005

Exercise 10-3 (20 minutes)

Allocation of total cost

To record costs of lump-sum purchase.

Exercise 10-4 (20 minutes)

Fundamental Accounting Principles, 17th Edition

Solutions Manual, Chapter 10

McGraw-Hill Companies, Inc., 2005

Exercise 10-5 (15 minutes)

Book value at January 1, 2005 ($250,000 - $75,000).......

Depreciation for 2005 ($175,000 x 40%)...........................

Exercise 10-7 (15 minutes)

2. Book value at end of second year..........................

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition