Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Q8-1. Routine maintenance costs that are necessary to realize the full benefits of
ownership of the asset should be expensed. However, betterment or
improvement costs should be capitalized if the outlay enhances the usefulness
of the asset or extends the asset’s useful life beyond original expectations. As
would be the case with any cost, an immaterial amount should be expensed as
incurred.
Q8-2. Capitalizing interest costs as part of the cost of constructing an asset reduces
interest expense, and increases net income during the construction period. In
subsequent periods, the interest costs that were capitalized as part of the cost
of the asset will increase the periodic depreciation expense and reduce net
income.
Q8-3. As any asset is used up, its cost is removed from the balance sheet and
transferred into the income statement as an expense. Capitalization of costs
onto the balance sheet and subsequent removal as expense is the essence of
accrual accounting. If the cost of a depreciable asset is recognized in full upon
purchase, profit would be inaccurately measured: it would be too low in the year
of purchase when the asset is expensed and too high in later years as
revenues earned by the asset are not matched with a corresponding cost. In
other words, expenses would not be recognized as assets are used up or as a
result of earning revenue.
Q8-4. The primary benefit of accelerated depreciation for tax reporting is that the
higher depreciation deductions in early periods reduce taxable income and
income taxes. Cash flow is, therefore, increased, and this additional cash can
be invested to yield additional cash inflows (e.g., an "interest-free loan" that can
be used to generate additional income). We would generally prefer to receive
cash inflows sooner rather than later in order to maximize this investment
potential.
Q8-5. When a change occurs in the estimate of an asset's useful life or its salvage
value, the revision of depreciation expense is handled by depreciating the
current undepreciated cost of the asset (original cost – accumulated
depreciation) using the revised assumptions of remaining useful life and
salvage value.
Present and future periods are affected by such revisions. Depreciation
expense calculated and reported in past periods is not revised.
a. Expense
b. Capitalize
c. Capitalize (the new equipment enhances the assembly line)
d. Expense – this is routine maintenance of the building, unless it extends the
building’s useful life
e. Capitalize – the useful life is extended
f. Capitalize – this is a purchased intangible asset
a. Straight-line: ($18,000 - $1,500)/ 5 years = $3,300 for both 2019 and 2020.
Notice that, over the first two years, the company reports $6,600 of depreciation
expense under the straight-line method and $11,520 of depreciation expense under
the double-declining-balance method.
a. Straight-line: ($130,000 - $10,000)/ 6 years = $20,000 for both 2019 and 2020.
b.
Balance Sheet Income Statement
Cash Noncash Contra Liabi- Contrib. Earned Net
Transaction - = + + Revenues - Expenses =
Asset + Assets Assets lities Capital Capital Income
b.
a. Straight-line depreciation
2018: ($145,800 - $5,400)/3 = $46,800; (8/12) x $46,800 = $31,200
(Note: 8/12 is the fraction of the year, May through December)
2019: $46,800
b. Double-declining-balance depreciation
a. Under U.S. GAAP, capitalization of development costs is not allowed and all R&D
costs must be expensed. Under IFRS, development costs are capitalized if there is the
intention, feasibility and resources to bring the asset to completion, there exists the
ability to use or sell the asset to generate an economic benefit. Otherwise the costs
must be expensed.
b. Yes, impairment should be tested for annually (or sooner if there is an indication that
goodwill is impaired).
a.
Year Book Value Depreciation Rate Depreciation Expense
1 $50,000 2 x ¼ = 0.5 $25,000
2 25,000 2 x ¼ = 0.5 12,500
3 12,500 4,500
4 8,000 0*
*No depreciation is recorded in Year 4 because the asset is depreciated to its residual value of $8,000.
b.
Year Book Value Depreciation Rate Depreciation Expense
1 $50,000 2 x 1/5 = 0.4 $20,000
2 30,000 2 x 1/5 = 0.4 12,000
3 18,000 2 x 1/5 = 0.4 7,200
4 10,800 2 x 1/5 = 0.4 4,320
5 6,480 3,480*
*$3,480 of depreciation is required in Year 5 to depreciate the asset to its residual value of $3,000.
* $5,711 of depreciation is required in Year 10 to depreciate the remaining value of the asset.
Alternatively, DeFond could switch to straight-line depreciation in Year 7, recording $3,027 of
depreciation in Years 7 through 10.
a.
Year Barrels Extracted Depletion per Barrel Depletion
2019 300,000 $32,000,000 / 4,000,000 = $8 $2,400,000
2020 500,000 $32,000,000 / 4,000,000 = $8 $4,000,000
2021 600,000 $32,000,000 / 4,000,000 = $8 $4,800,000
b.
i. Oil reserve (+A) ........................................................... 32,000,000
Cash (-A) ............................................................... 32,000,000
c.
+ Oil Reserve (A) - + Oil Inventory (A) -
i. 32,000,000 ii. 2,400,000
2,400,000 ii.
Balance 29,600,000 Balance 2,400,000
+ Cash (A) -
32,000,000 i.
Balance 32,000,000
a.
PPE Turnover Rates for 2018
Texas Instruments $15,784 / [($3,183 + $2,664) / 2] = 5.40
Intel Corp. $70,848 / [($48,976 + $41,109) / 2] = 1.57
Texas Instruments turns its PPE more quickly than does Intel.
b. PPE turnover rates increase with increases in sales volume relative to the dollar
amount of PPE on the balance sheet. The PPE turnover rate is often a very difficult
turnover rate to change, and typically requires creative thinking. Many companies are
outsourcing the manufacturing process in whole or in part to others in the supply chain.
This is beneficial so long as the savings realized by the reduction of manufacturing
assets more than offset the higher cost of the goods as these are now purchased
rather than manufactured. Another approach is to utilize long-term operating assets in
partnership with another firm, say in a joint venture.
b. R&D costs must be expensed when incurred unless they are expenditures for
depreciable assets that have alternative future uses (in which case the depreciation is
expensed as recognized). As a result, the balance sheet does not reflect the costs
incurred for long-term R&D assets. In addition, operating expenses are increased, thus
reducing retained earnings.
($ millions) Balance Sheet Income Statement
a. Straight line:
($80,000 - $5,000)/5 years = $15,000 per year
b. 1.
Cash (+A) .........................................................................................
368,000
Accumulated depreciation (-XA, +A) ................................................ 432,000
Plane (-A) ...................................................................................... 800,000
b. 1. $0
2. $400 gain ($15,000 - $14,600)
3. $2,600 loss ($12,000 - $14,600)
Note: We eliminate land and construction in progress from the computation because
these assets are not depreciated.
Assuming that assets are replaced evenly as they are used up, we would expect assets
to be 50% depreciated, on average. Deere’s 59% is slightly higher than this level. If the
percentage depreciation were high, one possible concern is that it often requires higher
capital expenditures in the near future to replace aging assets.
b. 3M’s Receivable and Inventory turnover ratios have declined from 2017 to 2018,
while its PPET improved. 3M’s revenues increased in 2018, and that increase is
likely to account for the increase in the PPET. PPE turns can also be improved by
off-loading manufacturing to other companies in the supply chain and acquiring long-
term operating assets in partnership with other companies, for example, in a joint
venture. Receivable turnover decline indicates that receivables have increased
faster than sales. This could indicate a need to monitor more closely the quality of
customers to which credit is granted, implement better collection procedures, or
offering discounts as an incentive for early payment. Inventory turnover rates can be
improved by weeding out slowly moving product lines, by reducing the depth and
breadth of products carried, and by implementing just-in-time deliveries.
a. b.
Fair Value Useful Amortization
(Capitalized) Life Expense for 2019
Patent $200,000 3 years $66,667
Trademark $500,000 Indefinite
Noncompetition agreement $300,000 5 years $60,000
$126,667
c. Tesla’s assets are about one fifth depreciated at the end of 2018. This results in an
extremely low percent depreciated ratio and PPE turnover ratio (PPET).
Tesla’s useful life assumptions could affect these ratios. For example, Tesla uses a
units-of-production approach to depreciate tooling. In the auto industry, companies
retool each time they make major design changes to a model. Years ago, this would
happen annually, but in more recent years, automakers may retool only every three
to five years. Tesla’s depreciation for tooling costs depend on its assumptions about
sales of each model. So, it assumes 325,000 units for the expensive Models S and
X while the (relatively) less expensive Model 3 has a projected demand of 1,000,000
units. Ultimately, the accuracy of these sales estimates will have an effect on
depreciation expenses and, in turn, Tesla’s ratios.
a. The list illustrates the wide range in expenditures for R&D (as a percent of sales)
across firms. Note the large amount spent by Intel (19.11%) and pharmaceutical
companies Pfizer (14.92%) and Merck (23.06%), compared to the amount spent by
Apple (5.36%), Deere (4.97%) or Callaway Golf (3.28%). The companies in the list
are to some extent paired by industry. It is interesting to see how similar some firms
in the same industry are. For example, Apple and Samsung spend almost the same
percentage of sales on R&D.
b. Beside industry affiliation, the differences in R&D expenditures as a percent of sales
is due to differences in markets, product mix, and other strategic considerations. As
suppliers of technology (hardware and software), Intel and Microsoft depend very
heavily on their intellectual property. As a result, their expenditures on research and
development are among the highest of established firms. Apple has established
itself as an innovator in technology and design and has spent billions of dollars
developing unique products such as the iPad®. Apple’s research intensity looks
relatively low but the company has tremendous sales revenue (the denominator in
the R&D intensity ratio). In addition, the company has increased their spending on
R&D.
a. Yes, the equipment is impaired at July 1, 2020 because its book value is not
recoverable through future cash flows. Specifically, on July 1, 2020, its book value is
$145,000 ($225,000 initial cost less $80,000 accumulated depreciation*) and the
estimated future (undiscounted) cash flows are only $125,000.
*4 years of [($225,000-$25,000)/10 years].
b. The impairment loss in a is computed as the equipment's book value minus its current
fair value: $145,000 $90,000 = $55,000
c. Assuming that the salvage value remains the same after the impairment (this is not
likely given the decline in market value of the asset), the annual depreciation expense
would be ($90,000 - $25,000) / 6 = $10,833 per year.
d.
($000) Balance Sheet Income Statement
Cash Noncash Contra Liabi- Contrib. Earned Net
Transaction Asset + Assets - Assets = lities + Capital + Capital Revenues - Expenses = Income
In order to determine the entries for the sale of property, plant and equipment, we need
to “fill in the blanks” for the PPE and accumulated depreciation accounts. Once we
record the purchases and the depreciation expense, we can determine the cost and
accumulated depreciation for the assets sold.
The net book value of the assets that were sold was $4 million. If Hilton sold the assets
for more (less) than $4 million a gain (loss) would have resulted equal to the difference
between the sale price and the net book value. A gain would be recorded as a credit
entry in the journal entry (iii) and a loss would be recorded as a debit entry.
b. R&D costs are expensed in the income statement except for the portion relating to
depreciable assets that have alternate uses. Expensing (rather than capitalizing and
depreciating) reduces assets, and the additional expense reduces profit and equity
(via the reduction in retained earnings). In addition, expensing R&D as incurred
means that potentially valuable intangible assets are omitted from the balance sheet.
c. Agilent has reduced its R&D spending as a percent of revenues in recent years and,
as a result, increased its earnings. This has turned operating losses into an
operating profit for the company. However, Agilent is dependent upon technology in
order to maintain its market position, and R&D is critical to its very existence. Agilent
divested itself of some high-intensity R&D businesses between 2003 and 2011.
($ millions)
a.
i. Depreciation expense (+E, -SE) ........................................................2,460
Accumulated depreciation (+XA, -A) .................................................. 2,460
ii. Property and equipment (+A) .............................................................3,516
Cash (-A) ............................................................................................ 3,516
iii. Cash (+A) ........................................................................................... 85
Accumulated depreciation (-XA, +A) (see T-account) .......................2,171
Property and equipment (-A) (see T-account) ................................... 2,256
iv Impairment and writedown charges (+E, -SE) 92
.
Property and equipment (-A) 92
However, this leaves the property and equipment T-account unbalanced. A likely
reason is that Target acquires some property and equipment without an expenditure
of cash. (Chapter 10 will cover capital lease transactions, which play a role in
Target’s operations.) Based on the information in the problem, we would estimate
that $118 million of property and equipment was acquired through such transactions,
because that amount balances the property and equipment T-account.
The process used in this question is to fill in the entries for property and equipment and
for accumulated depreciation in parts a, b and c, and then to use the “plug” figures in
the T-accounts to determine the values in part d.
($ thousands)
a. Depreciation expense (+E, -SE) ........................................................
182,533
Accumulated depreciation (+XA, -A) .................................................. 182,533
1. Use of less costly components (of equal quality) and production with lower wage
rates
2. Elimination of product features not valued by customers
3. Outsourcing to reduce product cost
4. Just-in-time deliveries of raw materials
5. Elimination of manufacturing bottlenecks to reduce work-in-process inventories
6. Producing to order rather than to estimated demand to reduce finished goods
inventories
7. Eliminating defects
c. Reducing PPE assets is much more difficult. The benefits, however, can be
substantial. Some suggestions are the following:
d. Reducing unnecessary intangible assets that are reported on the balance sheet is
the most difficult.
b. DreamWorks capitalizes film production costs and amortizes them over the life of the
film, meaning over the time period of the expected revenue stream. The unamortized
asset (that is, the unamortized capitalized costs) have to be tested for impairment
each reporting period.