CH 10

CHAPTER 10
FIXED ASSETS AND INTANGIBLE ASSETS

CLASS DISCUSSION QUESTIONS
1. a. Tangible
b. Capable of repeated use in the
operations of the business
e. Long-lived
2. a. Property, plant, and equipment
b. Current assets (merchandise inventory)
3. Real estate acquired as speculation should
be listed in the balance sheet under the
caption "Investments," below the Current
Assets section.
4. $325,000
5. Ordinarily not; if the book values closely
approximate the market values of fixed
assets, it is coincidental.
6. a. No, it does not provide a special cash
fund for the replacement of assets.
Unlike
most expenses, however,
depreciation expense does not require
an equivalent outlay of cash in the
period to which the expense is
allocated.
b. Depreciation is the cost of fixed assets
periodically charged to revenue over
their expected useful lives.
7. Initial fixed asset cost, the useful life of the
fixed asset, and residual value
8. 11 years
9. a. No
b. No
10. Straight-line method
11. a. An accelerated depreciation method is
most appropriate for situations in which
the decline in productivity or earning
power of the asset is proportionately
greater in the early years of use than in
later years, and the repairs tend to
increase with the age of the asset.
b. An accelerated depreciation method reduces income tax payable to the IRS in
the earlier periods of an assets life.
Thus, cash is freed up in the earlier
periods to be used for other business
purposes.
c. MACRS was enacted by the Tax Reform
Act of 1986 and provides for
depreciation for fixed assets acquired
after 1986.
12. No. Accounting Principles Board Opinion

No. 20, Accounting Changes, is quite
specific about the treatment of changes in
depreciable assets' estimated service lives.
Such changes should be reflected in the
amounts for depreciation expense in the
current and future periods. The amounts
recorded for depreciation expense in the
past are not affected.
13. Capital expenditures are those properly
chargeable to an asset account or to an
accumulated depreciation account; revenue
expenditures are chargeable to current
operations.
14. Capital expenditure
15. a. No, the accumulated depreciation for an
asset cannot exceed the cost of the
asset. To do so would create a negative
book value, which is meaningless.
b. The cost and accumulated depreciation
should be removed from the accounts
when the asset is no longer useful and
is removed from service. Presumably,
the asset will then be sold, traded in, or
discarded.
16. Other Income and Other Expenses sections
17. Capital leases are defined as leases that
include one or more provisions that result in
treating the leased asset as a purchased
asset in the accounts. Leases that are not
capital leases are classified as operating
leases.
18. These leases would be classified as capital
leases because the lease agreements
contain provisions that treat the leased
asset as if it were a purchased asset.
19. All purchases of fixed assets should be
approved by an appropriate level of
management. In addition, competitive bids
should be solicited to ensure that the
company is acquiring the assets at the
lowest possible price.
20. A physical count of fixed assets will verify
the accuracy of accounting records. It will
also detect missing fixed assets that should
be removed from the records and obsolete
or idle fixed assets that should be disposed
of.
205
21. a. Depletion
b. Amortization
22. a. Over the years of its expected
usefulness
b. Expense as incurred
23. a. The balance of each major class of
depreciable assets should be disclosed
in the balance sheet or notes thereto,
together with the related accumulated
depreciation, either by major class or in total,

under the caption property, plant, and
equipment.
b. Intangible assets are usually presented
in the balance sheet in a separate
section immediately following fixed
assets. The balance of each major class
should be disclosed as an amount net of
amortization taken to date.
206
EXERCISES
Ex. 101
a. New printing press: 1, 2, 3, 4, 6
b. Secondhand printing press: 7, 8, 10, 12
Ex. 102
a. Yes. All expenditures incurred for the purpose of making the land suitable for
its intended use should be debited to the land account.
b. No. Land is not depreciated.
Ex. 103
Initial cost of land ($25,000 + $100,000).....................
Plus: Legal fees...........................................................
Delinquent taxes................................................
Demolition of building.......................................
Less: Salvage of materials..........................................
Cost of land...................................................................
$125,000
$1,750
7,500
5,500
14,750
$139,750
1,500
$138,250
Ex. 104
a. No. The $575,000 represents the original cost of the equipment. Its
replacement cost, which may be more or less than $575,000, is not reported
in the financial statements.
b. No. The $217,500 is the accumulation of the past depreciation charges on the
equipment. The recognition of depreciation expense has no relationship to
the cash account or accumulation of cash funds.
Ex. 105
(a) 25%, (b) 20%, (c) 10%, (d) 5%, (e) 4%, (f) 2%, (g) 2%
Ex. 106
$11,750 [($112,000 $18,000) 8]
Ex. 107
$375,000 $30,000
= $4.60 depreciation per hour
75,000 hours
700 hours at $4.60 = $3,220 depreciation for November
Ex. 108
a.
Truck No.
Rate per Mile
Credit to
Accumulated
Depreciation
Miles Operated
1
28.0 cents
30,000
2
17.5
25,000
3
32.0
36,000
4
20.0
21,000
Total................................................................................................
$ 8,400
3,500*
11,520
4,200
$27,620
* Mileage depreciation of $4,375 is limited to $3,500, which reduces the book

value of the truck to $3,600, its residual value.
b. Depreciation ExpenseTrucks.....................................
Accumulated DepreciationTrucks........................
27,620
Ex. 109
First Year
a. 10% of $154,000 = $15,400
b. 20% of $154,000 = $30,800
Second Year
10% of $154,000 = $15,400
20% of $123,200* = $24,640
*$154,000 $30,800
27,620
Ex. 1010
a. 12 1/2% of ($70,000 $5,200) = $8,100
b. First year: 25% of $70,000 = $17,500
Second year: 25% of ($70,000 $17,500) = $13,125
Ex. 1011
a. First year: 9/12 [($64,000 $5,200) 6] = $7,350
Second year: ($64,000 $5,200) 6 = $9,800
b. First year: 9/12 33 1/3% of $64,000 = $16,000
Second year: 33 1/3% of ($64,000 $16,000) = $16,000
Ex. 1012
a. $12,000 [($500,000 $20,000) 40]
b. $260,000 [$500,000 ($12,000 20 yrs.)]
c. $17,000 [($260,000 $5,000) 15 yrs.]
Ex. 1013
a.
Land and buildings

Machinery and equipment
Total cost
Accumulated depreciation
Book value
Current
Year
$ 388,618,000
953,625,000
$1,342,243,000
447,797,000
$ 894,446,000
Preceding
Year
$ 364,773,000
894,533,000
$1,259,306,000
364,791,000
$ 894,515,000
A comparison of the book values of the current and preceding years indicates
that they are approximately the same. A comparison of the total cost and
accumulated depreciation reveals that Interstate Bakeries purchased
$82,937,000 ($1,342,243,000 $1,259,306,000) of additional fixed assets,
which was offset by the additional depreciation expense of $83,006,000
($447,797,000 $364,791,000) taken during the current year.
b. The book value of fixed assets should normally increase during the year.
Although additional depreciation expense will reduce the book value, most
companies invest in new assets in an amount that is at least equal to the
depreciation expense. Only in declining businesses will the book value of
fixed assets decline from year to year.
Ex. 1014
Capital expenditures:
Additions: 1, 6
Betterments: 2, 7, 10
Extraordinary repairs: 3, 9
Revenue expenditures: 4, 5, 8
Ex. 1015
Capital expenditures:
Additions: 6, 7, 9
Betterments: 4, 8, 10
Extraordinary repairs: 1, 2
Revenue expenditures: 3, 5
Ex. 1016
a.
b.
c.
d.
$550,000 25 = $22,000 annual depreciation

Accumulated DepreciationBuilding
$270,000 = $550,000 ($330,000 $50,000)
$270,000 18 years (10* years life remaining prior to repairs plus 8 additional
years) = $15,000 depreciation for current year
*$330,000 $22,000 = 15 years; 25 years 15 years = 10 years
Ex. 1017
a.
Cost of equipment......................................................................
Accumulated depreciation at December 31, 2003
(4 years at $13,750* per year)..............................................
Book value at December 31, 2003............................................
*($117,500 $7,500) 8 = $13,750
$117,500
55,000
$ 62,500
b. 1. Depreciation ExpenseEquipment.........................
Accumulated DepreciationEquipment............
6,875
2. Cash.............................................................................
Accumulated DepreciationEquipment.................
Loss on Disposal of Fixed Assets...........................
Equipment.............................................................
53,500
61,875
2,125
6,875
117,500
Ex. 1018
a. 2000 depreciation expense: $16,750 [($71,500 $4,500) 4]
2001 depreciation expense: $16,750
2002 depreciation expense: $16,750
b. $21,250 ($71,500 $50,250)
c.
Cash..................................................................................
Accumulated DepreciationEquipment.......................
Loss on Disposal of Fixed Assets.................................
Equipment...................................................................
18,000
50,250
3,250
d. Cash..................................................................................
Equipment...................................................................
Gain on Disposal of Fixed Assets............................
23,000
50,250
71,500
71,500
1,750
Ex. 1019
a. $185,000 ($220,000 $35,000)
b. $203,750 [$220,000 ($35,000 $18,750)], or
$203,750 ($185,000 + $18,750)
Ex. 1020
a. $185,000 ($220,000 $35,000)
b. $220,000. The new printing presss cost cannot exceed $220,000 on a similar
exchange.
Ex. 1021
a.
Depreciation ExpenseEquipment..............................
Accumulated DepreciationEquipment.................
3,000
b. Accumulated DepreciationEquipment.......................
Equipment........................................................................
Equipment...................................................................
Cash.............................................................................
Notes Payable............................................................
99,000
285,000
14,500
3,000
183,500
50,000
165,000*
*$285,000 $70,000 $50,000
Ex. 1022
a.
Depreciation ExpenseTrucks.....................................
Accumulated DepreciationTrucks........................
3,375
b. Accumulated DepreciationTrucks..............................
Trucks...............................................................................
Trucks..........................................................................
Cash.............................................................................
Notes Payable............................................................
39,375
73,125
*$75,000 $15,000 $10,000
3,375
52,500
10,000
50,000*
Ex. 1023
a. $45,000. The new trucks cost cannot exceed $45,000 in a similar exchange.
b. $42,000 ($45,000 $3,000) or
$42,000 ($28,000 + $14,000)
Ex. 1024
The managers at DataNet Co. are not required to obtain approval before
disposing of fixed assets. Managers may be disposing of assets that are in good
working order and that are needed at another location within the company.
Alternatively, managers may be persuaded to sell used assets to employees and
replace them with new assets, even though the older items are still in good
working order. This weakness in the internal control system could be minimized
by establishing policies regarding the disposition of common assets, such as
office equipment and vehicles. For example, a policy might state that vehicles
must have over 75,000 miles before disposal is permitted.
Ex. 1025
a. $30,000,000 50,000,000 tons = $0.60 depletion per ton
7,500,000 $0.60 = $4,500,000 depletion expense
b. Depletion Expense..........................................................
Accumulated Depletion.............................................
4,500,000
4,500,000
Ex. 1026
a. ($675,000 18) + ($45,000 15) = $40,500 total patent expense
b. Amortization ExpensePatents....................................
Patents........................................................................
40,500
40,500
Ex. 1027
1. Fixed assets should be reported at cost and not replacement cost.
2. Land does not depreciate.
3. Patents and goodwill are intangible assets that should be reported at their
net book values (cost less amortization to date) and listed in a separate
section following the fixed assets section.
Ex. 1028
a. Current year:
Ratio of fixed assets to long-term liabilities (debt) = $69,413,000/$35,566,000 =
2.0
Preceding year:
Ratio of fixed assets to long-term liabilities (debt) = $83,404,000/$36,444,000 =
2.3
b. The ratio of fixed assets to long-term liabilities has declined from 2.3 in the
preceding year to 2.0 in the current year. This indicates a decrease in the
margin of safety for long-term creditors. It is somewhat striking that the
companys property and equipment has declined significantly. This may be
the result of selling a business unit.
Ex. 1029
Cisco Systems, Inc., can borrow on a long-term basis with relative ease, since it
has no long-term liabilities.
Appendix Ex. 1030

First year: 10/55 $154,000 = $28,000
Second year: 9/55 $154,000 = $25,200
Appendix Ex. 1031

First year: 8/36 $64,800 = $14,400
Second year: 7/36 $64,800 = $12,600
Appendix Ex. 1032

First year: 9/12 6/21 $58,800 = $12,600
Second year: (3/12 6/21 $58,800) + (9/12 5/21 $58,800) = $14,700
PROBLEMS
Prob. 101A
1.
Item
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
2.
Land
$ 3,500
255,000
18,750
4,800
(3,100)*
5,000
Land
Improvements
Building
Other
Accounts
6,600
29,700
$
1,500
$12,500
15,000
40,000
1,500
48,000
13,500
(500,000)*
750,000
(3,000)*
$313,650
$41,000
(750)*
$843,850
*Receipt
3. Since land used as a plant site does not lose its ability to provide services, it
is not depreciated. However, land improvements do lose their ability to
provide services as time passes and are therefore depreciated.
Prob. 102A
Year
Depreciation Expense
a. Straightb. Units-of
Line
Production
Method
Method
2002
2003
2004
Total
$105,000
105,000
105,000
$315,000
$131,250
105,000
78,750
$315,000
c. DecliningBalance
Method
$226,667
75,555
12,778
$315,000
Calculations:
Straight-line method:
($340,000 $25,000) 3 = $105,000 each year
Units-of-production method:
($340,000 $25,000) 18,000 hours = $17.50 per hour
2002: 7,500 hours @ $17.50 = $131,250
2003: 6,000 hours @ $17.50 = $105,000
2004: 4,500 hours @ $17.50 = $ 78,750
Declining-balance method:
2002: $340,000 2/3 = $226,667
2003: ($340,000 $226,667) 2/3 = $75,555
2004: ($340,000 $226,667 $75,555 $25,000*) = $12,778
*Book value should not be reduced below the residual value of $25,000.
Prob. 103A
a.
2002:
[($108,000 $6,000) 3] 1/2.........................................
2003:
($108,000 $6,000) 3.....................................................
2004:
($108,000 $6,000) 3.....................................................
2005:
[($108,000 $6,000) 3] 1/2.........................................
$17,000
34,000
34,000
17,000
b. Units-of-production method:
2002:
2,400 hours @ $7.50*........................................................
2003:
4,500 hours @ $7.50.........................................................
2004:
5,000 hours @ $7.50.........................................................
$18,000
33,750
37,500
2005:
1,700 hours @ $7.50.........................................................
12,750
*($108,000 $6,000) 13,600 hours = $7.50 per hour

c.
2002:
$108,000 2/3 1/2..........................................................
2003:
($108,000 $36,000) 2/3................................................
2004:
($108,000 $36,000 $48,000) 2/3...............................
2005:
($108,000 $36,000 $48,000 $16,000 $6,000*)......
$36,000
48,000
16,000
2,000
*Book value should not be reduced below $6,000, the residual value.
Prob. 104A
1.
2.
Year
Depreciation
Expense
Accumulated
Depreciation,
End of Year
a.
1
2
3
4
5
$23,000
23,000
23,000
23,000
23,000
$ 23,000
46,000
69,000
92,000
115,000
$102,000
79,000
56,000
33,000
10,000
b.
1
2
3
4
5
$50,000
30,000
18,000
10,800
6,200
$ 50,000
80,000
98,000
108,800
115,000
$ 75,000
45,000
27,000
16,200
10,000
Book Value,
End of Year
Book value of old equipment...............................................................

Boot given (cash and notes payable).................................................
Cost of new equipment.........................................................................
$ 16,200
130,000
$146,200
or
Price of new equipment........................................................................
Less unrecognized gain on exchange................................................
3.
4.
Equipment........................................................................
Equipment...................................................................
Cash.............................................................................
Notes Payable............................................................
108,800
146,200
Equipment........................................................................
Equipment...................................................................
Cash.............................................................................
Notes Payable............................................................
108,800
150,000
1,200
$150,000
3,800
$146,200
125,000
30,000
100,000
125,000
30,000
105,000
Prob. 105A
2002
Jan.
3 Delivery Equipment....................................................
Cash........................................................................
26,750
Cash........................................................................
1,250
Aug. 16 Truck Repair Expense...............................................

Cash........................................................................
285
Dec. 31 Depreciation ExpenseDelivery Equipment..........

Accumulated DepreciationDelivery
Equipment (50% $28,000)...................................
14,000
31 Income Summary.......................................................
Depreciation ExpenseDelivery Equipment......
Truck Repair Expense...........................................
14,285
2003
June 30 Depreciation ExpenseDelivery Equipment..........
Equipment [50% ($28,000 $14,000) 6/12]....
26,750
1,250
285
14,000
14,000
285
3,500
3,500
30 Accumulated DepreciationDelivery Equipment. .

Delivery Equipment....................................................
Delivery Equipment................................................
Cash........................................................................
17,500
40,000
Aug. 10 Truck Repair Expense...............................................

Cash........................................................................
175

Equipment (6/12 40% $40,000).......................
8,000
31 Income Summary.......................................................
11,675
Cash........................................................................
42,000
2 Depreciation ExpenseDelivery Equipment..........

Equipment [9/12 40% ($40,000 $8,000)]......
9,600
2004
Oct.
28,000
29,500
175
8,000
11,500
175
42,000
9,600
Prob. 105A
2004
Oct.
Continued
2 Cash ............................................................................
Equipment...................................................................
Gain on Disposal of Fixed Assets........................
26,750

Equipment (3/12 25% $42,000).......................
2,625
31 Income Summary.......................................................
7,875
4,350
17,600
40,000
4,350
2,625
12,225
Delivery Equipment
Date
122
Item
Dr.
Cr.
Dr.
Balance
Cr.
2002
Jan. 3
5
..................................
..................................
26,750
1,250
.............
.............
26,750
28,000
.............
.............
2003
June 30
30
..................................
..................................
40,000
.............
.............
28,000
68,000
40,000
.............
.............
2004
Oct. 1
2
..................................
..................................
42,000
.............
.............
40,000
82,000
42,000
.............
.............
Accumulated DepreciationDelivery Equipment
123
2002
Dec. 31
..................................
.............
14,000
.............
14,000
2003
June 30
30
Dec. 31
..................................
..................................
..................................
.............
17,500
.............
3,500
.............
8,000
.............
.............
17,500
8,000
2004
Oct. 2
2
Dec. 31
..................................
..................................
..................................
.............
17,600
.............
9,600
.............
2,625
.............
.............
17,600
2,625
Prob. 105A
Concluded
Depreciation ExpenseDelivery Equipment

Date
Item
616
Dr.
Cr.
Dr.
Balance
Cr.
2002
Dec. 31
31
..................................
..................................
14,000
.............
.............
14,000
14,000
.............
2003
June 30
Dec. 31
31
..................................
..................................
..................................
3,500
8,000
.............
.............
.............
11,500
3,500
11,500
.............
.............
2004
Oct. 2
Dec. 31
31
..................................
..................................
..................................
9,600
2,625
.............
.............
.............
12,225
9,600
12,225
.............
.............
Truck Repair Expense
617
2002
Aug. 16
Dec. 31
..................................
..................................
285
.............
.............
285
285
.............
2003
Aug. 10
Dec. 31
..................................
..................................
175
.............
.............
175
175
.............
Gain on Disposal of Fixed Assets

2004
Oct. 2
Dec. 31
..................................
..................................
812
.............
4,350
4,350
.............
.............
4,350
Prob. 106A
1.
2.
a.
$480,000 1,500,000 board feet = $0.32 per board foot; 380,000 board
feet $0.32 per board foot = $121,600
b.
$5,000,000 40 years (maximum period of amortization) = $125,000
c.
$80,000 10 years = $8,000; 1/4 of $8,000 = $2,000
a. Depletion Expense.....................................................
Accumulated Depletion........................................
121,600
b. Amortization ExpenseGoodwill............................
Goodwill................................................................
125,000
c. Amortization ExpensePatents..............................
Patent.....................................................................
2,000
121,600
125,000
2,000
Prob. 101B
1.
Item
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
2.
Land
$ 10,000
300,000
2,500
18,500
11,250
(3,500)*
15,500
9,000
Land
Improvements
Other
Accounts
Building
50,000
5,700
$
3,500
800
$17,500
20,000
(4,300)*
65,000
(1,000,000)*
$363,250
$37,500
1,250,000
(1,050)*
$ 1,369,650
*Receipt
3. Since land used as a plant site does not lose its ability to provide services, it
is not depreciated. However, land improvements do lose their ability to
provide services as time passes and are therefore depreciated.
Prob. 102B
Year
Depreciation Expense
a. Straightb. Units-ofLine
Production
Method
Method
2002
2003
2004
2005
Total
$ 57,500
57,500
57,500
57,500
$230,000
$ 68,000
64,800
62,400
34,800
$230,000
c. DecliningBalance
Method
$127,500
63,750
31,875
6,875
$230,000
Calculations:
($255,000 $25,000) 4 = $57,500 each year
Units-of-production method:
($255,000 $25,000) 28,750 hours = $8 per hour
2002: 8,500 hours @ $8 = $68,000
2003: 8,100 hours @ $8 = $64,800
2004: 7,800 hours @ $8 = $62,400
2005: 4,350 hours @ $8 = $34,800
2002: $255,000 50% = $127,500
2003: ($255,000 $127,500) 50% = $63,750
2004: ($255,000 $127,500 $63,750) 50% = $31,875
2005: ($255,000 $127,500 $63,750 $31,875 $25,000*) = $6,875
*Book value should not be reduced below the residual value of $25,000.
Prob. 103B
a.
2002: [($64,800 $3,600) 3] 1/2.............................................
2003: ($64,800 $3,600) 3.........................................................
2004: ($64,800 $3,600) 3.........................................................
2005: [($64,800 $3,600) 3] 1/2.............................................
$10,200
20,400
20,400
10,200
b. Units-of-production method:
2002: 3,100 hours @ $4*...............................................................
2003: 5,000 hours @ $4................................................................
2004: 4,900 hours @ $4................................................................
2005: 2,300 hours @ $4................................................................
$12,400
20,000
19,600
9,200
*($64,800 $3,600) 15,300 hours = $4 per hour

c.
2002: $64,800 2/3 1/2..............................................................
2003: ($64,800 $21,600) 2/3....................................................
2004: ($64,800 $21,600 $28,800) 2/3....................................
2005: ($64,800 $21,600 $28,800 $9,600 $3,600*)............
*Book value should not be reduced below $3,600, the residual value.
$21,600
28,800
9,600
1,200
Prob. 104B
1.
2.
Year
Depreciation
Expense
Accumulated
Depreciation,
End of Year
a.
1
2
3
4
$22,500
22,500
22,500
22,500
$22,500
45,000
67,500
90,000
$77,500
55,000
32,500
10,000
b.
1
2
3
4
$50,000
25,000
12,500
2,500
$50,000
75,000
87,500
90,000
$50,000
25,000
12,500
10,000
Book Value,
End of Year
Book value of old equipment...............................................................

Boot given (cash and notes payable).................................................
$ 12,500
110,000
$122,500
or
Price of new equipment........................................................................
Less unrecognized gain on exchange................................................
3.
4.
Equipment........................................................................
Equipment...................................................................
Cash.............................................................................
Notes Payable............................................................
87,500
122,500
Equipment........................................................................
Equipment...................................................................
Cash.............................................................................
Notes Payable............................................................
87,500
125,000
4,500
$ 125,000
2,500
$ 122,500
100,000
10,000
100,000
100,000
10,000
107,000
Prob. 105B
2001
Jan.
Cash........................................................................
18,000
Cash........................................................................
2,000
7 Truck Repair Expense...............................................

Cash........................................................................
125

Equipment (25% $20,000)...................................
5,000
31 Income Summary.......................................................
5,125
April
2002
Mar. 13 Truck Repair Expense...............................................
Cash........................................................................
Apr.
18,000
2,000
125
5,000
5,000
125
180
180

Equipment [25% ($20,000 $5,000) 4/12]......
1,250
30 Accumulated DepreciationDelivery Equipment. .

Delivery Equipment....................................................
Cash........................................................................
6,250
38,250

Equipment (8/12 20% $38,250).......................
5,100
31 Income Summary.......................................................
6,530
1,250
20,000
24,500
5,100
6,350
180
Prob. 105B
2003
Sept.
Continued
Cash........................................................................
45,000

Equipment [8/12 20% ($38,250 $5,100)].........
4,420
2 Cash.............................................................................
Accumulated DepreciationDelivery Equipment. .
Gain on Disposal of Fixed Assets........................
30,500
9,520

Equipment (4/12 20% $45,000).......................
3,000
31 Income Summary.......................................................
5,650
1,770
45,000
4,420
38,250
1,770
3,000
7,420
Delivery Equipment
Date
122
Item
Dr.
Cr.
Dr.
Balance
Cr.
2001
Jan. 2
5
..................................
..................................
18,000
2,000
.............
.............
18,000
20,000
.............
.............
2002
Apr. 30
30
..................................
..................................
38,250
.............
.............
20,000
58,250
38,250
.............
.............
2003
Sept. 1
2
..................................
..................................
45,000
.............
.............
38,250
83,250
45,000
.............
.............
Prob. 105B
Continued
Accumulated DepreciationDelivery Equipment
123
Balance
Date
Item
Dr.
Cr.
Dr.
Cr.
2001
Dec. 31
..................................
.............
5,000
.............
5,000
2002
Apr. 30
30
Dec. 31
..................................
..................................
..................................
.............
6,250
.............
1,250
.............
5,100
.............
.............
6,250
5,100
2003
Sept. 2
2
Dec. 31
..................................
..................................
..................................
.............
9,520
.............
4,420
.............
3,000
.............
.............
9,520
3,000
Depreciation ExpenseDelivery Equipment
616
2001
Dec. 31
31
..................................
..................................
5,000
.............
.............
5,000
5,000
.............
2002
Apr. 30
Dec. 31
31
..................................
..................................
..................................
1,250
5,100
.............
.............
.............
6,350
1,250
6,350
.............
.............
2003
Sept. 2
Dec. 31
31
..................................
..................................
..................................
4,420
3,000
.............
.............
.............
7,420
4,420
7,420
.............
.............
Truck Repair Expense
617
2001
April 7
Dec. 31
..................................
..................................
125
.............
.............
125
125
.............
2002
Mar. 13
Dec. 31
..................................
..................................
180
.............
.............
180
180
.............
Prob. 105B
Concluded
Gain on Disposal of Fixed Assets
812
Balance
Date
2003
Sept. 2
Dec. 31
Item
..................................
..................................
Dr.
Cr.
Dr.
Cr.
.............
1,770
1,770
.............
.............
1,770
Prob. 106B
1.
2.
a.
$1,875,000 40 years (maximum period of amortization) = $46,875
b.
$75,200 8 years = $9,400; 1/2 of $9,400 = $4,700
c.
$520,000 2,000,000 board feet = $0.26 per board foot; 250,000 board
feet $0.26 per board foot = $65,000
a. Amortization ExpenseGoodwill............................
Goodwill................................................................
46,875
b. Amortization ExpensePatents..............................
Patent.....................................................................
4,700
c. Depletion Expense.....................................................
Accumulated Depletion........................................
65,000
46,875
4,700
65,000
SPECIAL ACTIVITIES
Activity 101
It is generally considered unprofessional for employees to use company assets
for personal reasons, because such use reduces the useful life of the assets for
normal business purposes. Thus, it is unethical for Stuart Madden to use TriState Co.'s computers and laser printers to service his part-time accounting
business, even on an after-hours basis. In addition, it is improper for Stuarts
clients to call him during regular working hours. Such calls may interrupt or
interfere with Stuarts ability to carry out his assigned duties for Tri-State Co.
Activity 102
You should explain to Allison and Geoff that it is acceptable to maintain two sets
of records for tax and financial reporting purposes. This can happen when a
company uses one method for financial statement purposes, such as straight-line
depreciation, and another method for tax purposes, such as MACRS
depreciation. This should not be surprising, since the methods for taxes and
financial statements are established by two different groups with different
objectives. That is, tax laws and related accounting methods are established by
Congress. The Internal Revenue Service then applies the laws and, in some
cases, issues interpretations of the law and Congressional intent. The primary
objective of the tax laws is to generate revenue in an equitable manner for
government use. Generally accepted accounting principles, on the other hand,
are established primarily by the Financial Accounting Standards Board. The
objective of generally accepted accounting principles is the preparation and
reporting of true economic conditions and results of operations of business
entities.
You might note, however, that companies are required in their tax returns to
reconcile differences in accounting methods. For example, income reported on
the companys financial statements must be reconciled with taxable income.
Finally, you might also indicate to Allison and Geoff that even generally accepted
accounting principles allow for alternative methods of accounting for the same
transactions or economic events. For example, a company could use straight-line
depreciation for some assets and double-declining-balance depreciation for
other assets.
Activity 103
1.
a. Straight-line method:
2001: ($150,000 5) 1/2.....................................................................
2002: ($150,000 5)...............................................................................
2003: ($150,000 5)...............................................................................
2004: ($150,000 5)...............................................................................
2005: ($150,000 5)...............................................................................
2006: ($150,000 5) 1/2.....................................................................
$15,000
30,000
30,000
30,000
30,000
15,000
b. MACRS:
2001: ($150,000 20%).........................................................................
2002: ($150,000 32%).........................................................................
2003: ($150,000 19.2%)......................................................................
2004: ($150,000 11.5%).......................................................................
2005: ($150,000 11.5%).......................................................................
2006: ($150,000 5.8%)........................................................................
$30,000
48,000
28,800
17,250
17,250
8,700
Activity 103 Continued

2.
a. Straight-line method
Income before depreciation...........
Depreciation expense....................
Income before income tax.............
Income tax.......................................
Net income.......................................
Year
2001
2002
2003
2004
2005
2006
$150,000
15,000
$135,000
40,500
$ 94,500
$150,000
30,000
$120,000
36,000
$ 84,000
$150,000
30,000
$120,000
36,000
$ 84,000
$150,000
30,000
$120,000
36,000
$ 84,000
$150,000
30,000
$120,000
36,000
$ 84,000
$150,000
15,000
$135,000
40,500
$ 94,500
b. MACRS
Income before depreciation...........
Depreciation expense....................
Income before income tax.............
Income tax.......................................
Net income.......................................
Year
2001
2002
2003
2004
2005
2006
$150,000
30,000
$120,000
36,000
$ 84,000
$150,000
48,000
$102,000
30,600
$ 71,400
$150,000
28,800
$121,200
36,360
$ 84,840
$150,000
17,250
$132,750
39,825
$ 92,925
$150,000
17,250
$132,750
39,825
$ 92,925
$150,000
8,700
$141,300
42,390
$ 98,910
Activity 103 Concluded

3. For financial reporting purposes, Ami should select the method that provides
the net income figure that best represents the results of operations. (Note to
Instructors: The concept of matching revenues and expenses is discussed in
Chapter 3.) However, for income tax purposes, Ami should consider selecting
the method that will minimize taxes. Based upon the analyses in (2), both
methods of depreciation will yield the same total amount of taxes over the
useful life of the equipment. MACRS results in fewer taxes paid in the early
years of useful life and more in the later years. For example, in 2001 the
MACRS amount is less than the straight-line amount. Heimlich Co. can invest
such differences in the early years and earn income.
In some situations, it may be more beneficial for a taxpayer not to choose
MACRS. These situations usually occur when a taxpayer is expected to be
subject to a low tax rate in the early years of use of an asset and a higher tax
rate in the later years of the assets useful life. In this case, the taxpayer may
be better off to defer the larger deductions to offset the higher tax rate.
Activity 104
Note to Instructors: The purpose of this activity is to familiarize students with the
differences in cost and other factors in leasing and buying a business vehicle.
Activity 105
Note to Instructors: The purpose of this activity is to familiarize students with the
procedures involved in acquiring a patent, a copyright, and a trademark.

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CHAPTER 10

FIXED ASSETS AND INTANGIBLE ASSETS

12. No. Accounting Principles Board Opinion

depreciation, either by major class or in total,

700 hours at $4.60 = $3,220 depreciation for November

Rate per Mile

* Mileage depreciation of $4,375 is limited to $3,500, which reduces the book

Land and buildings

$550,000 25 = $22,000 annual depreciation

*$285,000 $70,000 $50,000

*$75,000 $15,000 $10,000

Appendix Ex. 1030

Appendix Ex. 1031

Appendix Ex. 1032

1,700 hours @ $7.50.........................................................

*($108,000 $6,000) 13,600 hours = $7.50 per hour

Book value of old equipment...............................................................

Aug. 16 Truck Repair Expense...............................................

Dec. 31 Depreciation ExpenseDelivery Equipment..........

30 Accumulated DepreciationDelivery Equipment. .

Aug. 10 Truck Repair Expense...............................................

Dec. 31 Depreciation ExpenseDelivery Equipment..........

2 Depreciation ExpenseDelivery Equipment..........

Dec. 31 Depreciation ExpenseDelivery Equipment..........

Accumulated DepreciationDelivery Equipment

Depreciation ExpenseDelivery Equipment

Truck Repair Expense

Gain on Disposal of Fixed Assets

$5,000,000 40 years (maximum period of amortization) = $125,000

$80,000 10 years = $8,000; 1/4 of $8,000 = $2,000

*($64,800 $3,600) 15,300 hours = $4 per hour

Book value of old equipment...............................................................

7 Truck Repair Expense...............................................

Dec. 31 Depreciation ExpenseDelivery Equipment..........

30 Depreciation ExpenseDelivery Equipment..........

30 Accumulated DepreciationDelivery Equipment. .

Dec. 31 Depreciation ExpenseDelivery Equipment..........

2 Depreciation ExpenseDelivery Equipment..........

Dec. 31 Depreciation ExpenseDelivery Equipment..........

Accumulated DepreciationDelivery Equipment

Depreciation ExpenseDelivery Equipment

Truck Repair Expense

Gain on Disposal of Fixed Assets

$1,875,000 40 years (maximum period of amortization) = $46,875

$75,200 8 years = $9,400; 1/2 of $9,400 = $4,700

Activity 103 Continued

Activity 103 Concluded

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