Solution manual financial accounting 8e by libby ch08

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

Chapter 8
Reporting and Interpreting
Property, Plant, and Equipment;
Intangibles; and Natural Resources
ANSWERS TO QUESTIONS
1.

Long-lived assets are noncurrent assets, which a business retains beyond one
year, not for sale, but for use in the course of normal operations. Long-lived assets
include land in use, plant and equipment, natural resources, and certain intangibles
such as a patent used in operating the business. Long-lived assets are acquired
because of the future use that is expected of them. Thus, they may be thought of
as a bundle of future services to be used over a period of time to earn revenue. As
those services are used, as in the case of a machine, the cost of the asset is
allocated as a periodic expense (i.e., matched with revenue).

2.

The fixed asset turnover ratio =
Net sales
[(Beginning net fixed asset balance + Ending net fixed asset balance)  2]
This ratio measures how efficiently a company utilizes its investment in property,
plant, and equipment over time. The ratio can also be compared to the ratio for the
company’s competitors.

3.

Long-lived assets are classified as follows:

(1) Tangible long-lived assets—assets that are tangible (i.e., have physical
substance) and long-lived (i.e., beyond one year); they are acquired for use in
the operation of a business and are not intended for resale. They are
comprised of three different kinds of assets:
(a) Land—not subject to depreciation.
(b) Plant and equipment—subject to depreciation.
(c) Natural resources—mines, gravel pits, and timber tracts. Natural
resources are subject to depletion.
(2) Intangible long-lived assets—assets held by the business because of the
special valuable rights that they confer; they have no physical substance.
Examples are patents, copyrights, franchises, licenses, trademarks,
technology, and goodwill. Intangible assets with definite lives are subject to
amortization.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

4.

When a long-lived asset is acquired, it is recorded in the accounts in conformity
with the cost principle. That is, the acquisition cost of a long-lived asset is the cash
equivalent price paid for it plus all incidental costs expended to obtain it, to place it

in the location in which it is to be used, and to prepare it for use.

5.

In measuring and reporting long-lived assets, the expense matching principle is
applied. As a long-lived asset is used, revenues are earned over a period of time.
Over that same period of time, the long-lived asset tends to be used up or worn out.
As a consequence, under the expense matching principle, the acquisition cost of
the asset must be allocated to the periods in which it is used to earn revenue. In
this way the cost of the asset is matched, as expense, with the revenues as they
are earned from period to period through the use of the asset.

6.

Ordinary repairs—expenditures for the normal maintenance and upkeep of
machinery and other tangible long-lived assets that are necessary to keep the
assets in their usual operating conditions. Generally, ordinary repairs are recurring
in nature, involve relatively small amounts at each occurrence and do not extend
the useful estimated life of the asset. Ordinary repairs are debited to expense in the
period in which incurred.
Improvements—unusual, nonrecurring, major renovations that are necessary
because of unusual conditions. Generally, they are large in amount, not recurring,
and tend to either make the asset more efficient or to extend its useful life.
Improvements are a type of capital expenditure involving acquiring an asset (e.g.,
equipment) that will help earn revenue for periods beyond the current accounting
period. Improvements (capital expenditures) should be debited to appropriate asset
accounts and then allocated to those future periods in which revenues will be
earned and against which the expenditures will be matched.

7.

Depreciation—allocation of the cost of a tangible long-lived asset over its useful life.
Depreciation refers to allocation of the costs of such items as plant and equipment,
buildings, and furniture.
Depletion—allocation of the cost of a natural resource over its useful life. It is
identical in concept to depreciation except that it relates to a different kind of asset,
depletable natural resources.
Amortization—allocation of the cost of an intangible asset over its estimated useful
life. Conceptually, it is the same as depreciation and depletion except it relates to
an intangible asset.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

8.

To compute depreciation, the three values that must be known or estimated are:
Cost—the actual total expenditures incurred in acquiring the asset in conformity
with the cost principle.
Estimated useful life—the estimated length of time that the asset will be used by
the present owner for the purposes for which it was acquired.
Residual value—the estimated amount of cash that is expected to be recovered at

the end of the estimated useful life of the asset. The residual value is the estimated
cash recovery amount minus the estimated cost of removing and disposing of the
asset at the end of its estimated useful life.
Notice that, on the acquisition date, the first of these values is an actual known
amount, while the latter two are estimates.

9.

The estimated useful life and estimated residual value of a long-lived asset when
used for depreciation purposes relate to the current owner-user and not to all
potential users of the asset because the asset’s cost must be allocated to the
revenue that it generates during the period in which it is to be used by the current
owner. The fact that the current owner may dispose of the asset and others may
use it to earn revenues for a number of periods after that is of no consequence to
the measurement of the asset and income for the current owner (other than for the
effect of estimated residual value).

10. a. The straight-line method of depreciation causes an equal amount of
depreciation expense to be apportioned to, or matched with, the revenues of
each period. It is especially appropriate for tangible long-lived assets that are
used at an approximately uniform level from period to period.
b. The units-of-production method of depreciation causes a depreciation expense
pattern that varies in amount with the rate at which the asset is used
productively each year. For example, if in the current year the asset is used
twice as much as in the prior year, twice as much depreciation expense would
be matched with the revenue of the current year as compared with the previous
year. Usually use is measured in terms of productive output. The units-ofproduction method of depreciation is particularly appropriate for those assets
that tend to earn revenue with use rather than with the passage of time. Thus, it
normally would apply to assets that are not used at a uniform rate from period
to period.

c.

The double-declining-balance method of depreciation is a form of accelerated
depreciation, causing a higher amount of depreciation expense to be matched
with revenue in early periods of the estimated useful life of the asset. The
double-declining-balance method is particularly appropriate when the long-lived
assets perform more efficiently and therefore produce more revenue in the
early years of their useful life than in the later years.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

11. The cost of an addition to an existing long-lived asset should be depreciated over
the shorter of the estimated life of the addition or the remaining life of the existing
asset to which it relates. This rule is necessary because an addition to an existing
long-lived asset has no use after the useful life of the existing asset has expired.
12. Asset impairment—when events or changes in circumstances cause the book value
of long-lived assets to be higher than their related estimated future cash flows. It is
accounted for by writing down the asset to the asset’s fair value and recording a
loss.
13. When equipment is sold, the Equipment account is credited for the asset’s historical
cost. Its related Accumulated Depreciation account is debited for the amount

representing prior usage. The Cash account is debited for the sales price. If the
cash received exceeds the cost less accumulated depreciation (net book value), a
Gain on Sale of Equipment is recorded for the difference. If the cash received is
lower than the net book value, a Loss on Sale of Equipment is recorded for the
difference.
Net book value is the asset’s historical cost less accumulated
depreciation on the asset.
14. An intangible asset is acquired and held by the business for use in operations and
not for sale. Intangible assets are acquired because of the special rights they confer
on ownership. They have no physical substance but represent valuable rights that
will be used up in the future. Examples are patents, copyrights, trademarks,
technology, franchises, goodwill, and licenses.
When an intangible asset is purchased, managers determine if it has a definite or
indefinite life. If it has a definite life, the intangible asset’s cost is amortized on a
straight-line basis over its expected useful life. However, an intangible asset with
an indefinite life is not amortized, but is tested annually for possible impairment.
15. Goodwill represents an intangible asset that exists because of the good reputation,
customer appeal, and general acceptance of a business. Goodwill has value
because other parties often are willing to pay a substantial amount for it when they
buy a business. Goodwill should be recorded in the accounts and reported in the
financial statements only when it has been purchased at a measurable cost. The
cost of goodwill is measured in conformity with the cost principle. Because it is
considered to have an indefinite life, goodwill is not amortized, but it is reviewed
annually for possible impairment of value.
16. Depreciation expense is a noncash expense.
That is, each period when
depreciation is recorded, no cash payment is made. (The cash outflow associated
with depreciation occurs when the related asset is first acquired.) Since no cash
payment is made for depreciation, the effect of the depreciation expense on net
income needs to be reversed in the reconciliation to cash flows. Depreciation

expense was originally subtracted to arrive at net income; thus, to reverse its effect,
depreciation expense needs to be added back to net income on the statement of
cash flows (indirect method).
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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

ANSWERS TO MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

a
a
d
b

a
d
a
d
d
e

Financial Accounting, 8/e

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

Authors' Recommended Solution Time
(Time in minutes)

Mini-exercises
No.
Time
1
5
2
5
3
3

4
4
5
5
6
4
7
4
8
5
9
5
10
5

Exercises
No. Time
1
10
2
15
3
15
4
20
5
15
6
15
7

20
8
20
9
10
10
10
11
20
12
20
13
15
14
15
15
10
16
15
17
20
18
20
19
15
20
15
21
15
22

20
23
15

Problems
No.
Time
1
20
2
30
3
25
4
20
5
25
6
20
7
20
8
30
9
15
10
25
11
20

Alternate
Comprehensive
Problems
Problem
No.
Time
No.
Time
1
20
1
60
2
30
3
25
4
20
5
20
6
30
7
25

Cases and
Projects
No.
Time
1

20
2
20
3
20
4
15
5
10
6
15
7
15
8
15
9
15
10
*

Continuing Case
1
25

* Due to the nature of this project, it is very difficult to estimate the amount of time
students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear. For example, when our goal is to sharpen research

skills, we devote class time to discussing research strategies. When we want the
students to focus on a real accounting issue, we offer suggestions about possible
companies or industries.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

MINI-EXERCISES
M8–1.
Asset
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)

Tractors

Land in use
Timber tract
Warehouse
New engine for old machine
Operating license
Production plant
Trademark
Silver mine
Land held for sale

Nature
E
L
NR
B
E
I
B
I
NR
O (investment)

Cost
Allocation Concept
DR
NO
DP
DR
DR
A

DR
A
DP
NO

M8–2.
Young’s fixed asset turnover ratio is
=
Net sales
[(Beginning net fixed asset balance + Ending net fixed asset balance)  2]
=

$3,600,000
[($1,500,000 + $2,300,000)  2]

= 1.89

Young’s ratio is higher than Southwest’s 2011 ratio of 1.38, indicating that Young may
be more efficient in its use of fixed assets.
M8–3.
(1) C
(2) E
(3) N
(4) C
(5) N
(6) E
(7) E
(8) C
(9) C
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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

M8–4.
Machinery (original cost)
Accumulated depreciation at end of third year
Depreciation expense =
($31,000 cost – $1,000 residual value) x 1/5 = $6,000

$31,000

Accumulated depreciation = $6,000 annual depreciation expense x 3 yrs = 18,000
Net book value at the end of the third year
$13,000

M8–5.
Machinery (original cost)
Accumulated depreciation at end of first year:
Depreciation expense = ($55,000 – $0 acc. depr.) x 2 / 5 = $22,000
Net book value at end of first year

$55,000
22,000

$33,000

Machinery (original cost)
$55,000
Accumulated depreciation at end of second year:
Depreciation expense = ($55,000 - $22,000 acc. depr.) x 2 / 5 = $13,200
Accumulated depreciation = Year 1, $22,000 + Year 2, $13,200 =
35,200
Net book value at end of second year
$19,800
Machinery (original cost)
Accumulated depreciation at end of third year:
Depreciation expense = ($55,000 - $35,200 acc. depr.) x 2 / 5 = $7,920
Accumulated depreciation = (Year 2, $35,200 + Year 3, $7,920) =
Net book value at end of third year

$55,000

43,120
$11,880

M8–6.
Machinery (original cost)
Accumulated depreciation at end of third year
Depreciation expense per machine hour
= ($26,000 cost – $1,000 residual value) = $0.50 per machine hour
50,000 machine hours
Accumulated depreciation
= $0.50 depreciation expense per machine hr
x (3,200 + 7,050 + 7,500) hrs =

Net book value at end of third year

8-8

$26,000

8,875
$17,125

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

M8–7.
a. Machine

Impairment
Y

Loss
$6,000

Cost - Fair Value
$15,500 -$ 9,500

b. Copyright

N

—

Estimated cash flows
exceed book value

c. Factory building

Y

$31,000

$58,000 - $27,000

d. Building

N

—

Estimated cash flows
equal book value

M8–8.
Store fixtures (original cost)
Accumulated depreciation at end of tenth year
Depreciation expense =

($6,500 cost – $800 residual value) x 1/12 = $475
Accumulated depreciation = $475 annual depreciation expense x 10 yrs =
Net book value at end of tenth year (i.e., NBV immediately prior to sale)
Journal entry to record the disposal is as follows.
Cash (+A) ....................................................................
Accumulated depreciation, store fixtures (XA, +A) .....
Gain on sale of store fixtures (+Gain, +SE) ......
Store fixtures (A) ............................................

$6,500

4,750
$1,750

1,800
4,750
50
6,500

M8–9.
Elizabeth Pie Company’s management may choose to accept the offer of $5,000,000 as
this amount is more than the $4,800,000 market value of separately identifiable assets
and liabilities ($4,500,000 market value of recorded assets and liabilities and $300,000
for the patent). If so, Giant Bakery would record $200,000 of goodwill on the date of
purchase (i.e., the excess of the $5,000,000 purchase price over the $4,800,000 fair
value of identifiable assets and liabilities). The $110,000 difference in goodwill
(Elizabeth’s $310,000 estimated value of goodwill less goodwill of $200,000 provided by
the offer) provides potential for Elizabeth’s management to negotiate a higher purchase
price.

Financial Accounting, 8/e

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

M8–10.
Garrett Company
Excerpts from Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Net income
Add back: Depreciation expense
Cash provided by (used in) operating activities

$ 18,000
5,500
23,500

Cash flows from investing activities:
Purchase of equipment
Sale of land
Cash provided by (used in) investing activities

(156,000)

20,000
(136,000)

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

EXERCISES
E8–1.
Hasbro, Inc.
Excerpts from Balance Sheet
(in millions)
ASSETS
Current Assets
Cash and cash equivalents
Accounts receivable (net of allowance for doubtful accounts, $24)
Inventories
Prepaid expenses and other current assets
Total current assets
Property, Plant, and Equipment
Machinery and equipment
Buildings and improvements
Land and improvements

Property, plant, and equipment (at cost)
Less: Accumulated depreciation
Total property, plant, and equipment (net)
Other Assets
Goodwill
Other intangibles (net of accumulated amortization, $622)
Other noncurrent assets
Total other assets
Total Assets

Financial Accounting, 8/e

$ 642
1,035
334
243
2,254

462
202
7
671
453
218

475
467
717
1,659
$4,131

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–2.
Req. 1
Fixed asset turnover ratio: (in millions)
Sales  [(beginning net fixed assets + ending net fixed assets)  2]
2009
2010
2011
$36,537  $2,704.5
$62,225  $3,861.0
$108,249  $6,272.5
13.51
16.12
17.26
Computation of denominator:
2009
($2,954 + $2,455)  2
2010
($4,768 + $2,954)  2
2011
($7,777 + $4,768)  2

= $2,704.5
= $3,861.0
= $6,272.5

Req. 2
Apple’s fixed asset turnover ratio increased each year from 2009 to 2011. This
suggests that Apple’s management became more efficient at utilizing its long-lived
assets over time. The increase in 2010 and 2011 was due primarily to a large increase
in sales during those years. An analyst can use longitudinal analysis to observe
possible trends over time. In addition, the analyst may compare Apple’s ratios to those
of competitors in the industry.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–3
Req. 1
Building (+A) ........................................................................
106,000
Land (+A) ............................................................................
113,000

Cash (A) ...................................................................

Cash paid
+ renovations to prepare for use
+ share of transfer costs

Building
$82,000
3,000
21,000
$106,000

219,000

Land
$107,000
6,000
$113,000

Req. 2
Straight-line depreciation computation:
($106,000 cost - $15,000 residual value) x 1/10 = $9,100 depreciation expense per year
Note: Land is not depreciated.

Req. 3
Computation of the book value of the property at the end of year 2:
Building
Less: Accumulated depreciation ($9,100 x 2 years)
Land
Net book value

Financial Accounting, 8/e

$106,000
(18,200)

$ 87,800
113,000
$200,800

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–4.
Req. 1
Date

Assets

Liabilities

January No effect
1
January Cash

2
Equipment
January Cash
3
Equipment
January Cash
5
Equipment
July 1

Cash

No effect

Stockholders’ Equity
No effect

–6,000 Short term
+15,000
+21,000 note payable
–1,000
+1,000
–2,500
+2,500
–15,750 Short term
–15,000 Interest
note payable
expense*

–750

* $15,000 principal x .10 interest rate x 6/12 of a year = $750 interest
Req. 2
Acquisition cost of the machine:
Cash paid
Note payable with supplier
Freight costs
Installation costs
Acquisition cost

$ 6,000
15,000
1,000
2,500
$24,500

Req. 3
Depreciation for 2013: ($24,500 cost - $4,000 residual value) x 1/10

$ 2,050

Req. 4
On July 1, 2013, $750 ($15,000 x 10% x 6/12) is paid and is recorded as interest
expense. The amount is not capitalized (added to the cost of the asset) because
interest is capitalized only on constructed assets. This machine was purchased.

Req. 5
Equipment (cost) ...................................................................................... $24,500
Less: Accumulated depreciation ($2,050 x 2 years) ..............................
4,100

Net book value at end of 2014 ................................................................. $20,400
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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–5.
Req. 1
Adjusting entry for 2013:
Depreciation expense (+E, SE) ......................................
Accumulated depreciation, equipment (+XA, A)........
($120,000 – $12,000) x 1/15 = $7,200

7,200
7,200

Req. 2 ( beginning of 2014)
Estimated life
Less: Used life $57,600 accumulated depreciation  $7,200 annual expense =
Remaining life

15 years
8 years
7 years

Req. 3 (during 2014):
Repair and maintenance expense (+E, SE) ...................
Cash (A) ...................................................................
(Ordinary repairs incurred.)

1,000

Equipment (+A) ................................................................
Cash (A) ...................................................................
Improvements incurred and capitalized.

13,000

1,000

13,000

E8–6.
Date

Assets

Liabilities

Stockholders’ Equity

1. 2013* Accumulated
depreciation

–7,200

Depreciation
expense

–7,200

2a. 2014 Cash

–1,000

Repair and
maintenance
expense

–1,000

2b. 2014 Cash

–13,000

Equipment

+13,000

* Adjusting entry for 2013:
($120,000 cost – $12,000 residual value) x 1/15 = $7,200.
Financial Accounting, 8/e

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–7.
Req. 1
a. Straight-line:
Year
Computation
At acquisition
1
($9,000 - $1,000) x 1/4
2
($9,000 - $1,000) x 1/4
3
($9,000 - $1,000) x 1/4
4
($9,000 - $1,000) x 1/4

Depreciation
Expense

Accumulated
Depreciation

$2,000

2,000
2,000
2,000

$2,000
4,000
6,000
8,000

Net
Book Value
$9,000
7,000
5,000
3,000
1,000

b. Units-of-production: ($9,000 – $1,000)  16,000 = $0.50 per hour of output
Depreciation
Accumulated
Net
Year
Computation
Expense
Depreciation
Book Value
At acquisition
$9,000
1
$0.50 x 5,500 hours

$2,750
$2,750
6,250
2
$0.50 x 3,800 hours
1,900
4,650
4,350
3
$0.50 x 3,200 hours
1,600
6,250
2,750
4
$0.50 x 3,500 hours
1,750
8,000
1,000
c. Double-declining-balance:
Year
Computation
At acquisition
1
($9,000 - $0) x 2/4
2
($9,000 - $4,500) x 2/4
3
($9,000 - $6,750) x 2/4
4
($9,000 - $7,875) x 2/4

Depreciation
Expense

Accumulated
Depreciation

$4,500
2,250
1,125
563
125

$4,500
6,750
7,875
8,438
8,000

Net
Book Value
$9,000
4,500
2,250
1,125
562
1,000

Too large. Net book value cannot be below residual value.
Req. 2

If the machine is used evenly throughout its life and its efficiency (economic value in
use) is expected to decline steadily each period over its life, then straight-line
depreciation would be preferable. If the machine is used at a consistent rate but the
efficiency is expected to decline faster in the earlier years of its useful life, then an
accelerated method would be appropriate [such as, double-declining-balance]. If the
machine is used at different rates over its useful life and its efficiency declines with
output, then the units-of-production method would be preferable because it would result
in a better matching of depreciation expense with revenue earned.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–8.
Req. 1
a. Straight-line:
Year
Computation
At acquisition
1
($950,000 - $50,000) x 1/5
2
($950,000 - $50,000) x 1/5

3
($950,000 - $50,000) x 1/5
4
($950,000 - $50,000) x 1/5
5
($950,000 - $50,000) x 1/5

Depreciation
Expense

Accumulated
Depreciation

$180,000
180,000
180,000
180,000
180,000

$180,000
360,000
540,000
720,000
900,000

Net
Book Value
$950,000
770,000
590,000

410,000
230,000
50,000

b. Units-of-production: ($950,000 – $50,000)  300,000 = $3.00 per unit of output
Depreciation Accumulated
Net
Year
Computation
Expense
Depreciation
Book Value
At acquisition
$950,000
1
$3.00 x 70,000 units
$210,000
$210,000
740,000
2
$3.00 x 67,000 units
201,000
411,000
539,000
3
$3.00 x 50,000 units
150,000
561,000
389,000
4

$3.00 x 73,000 units
219,000
780,000
170,000
5
$3.00 x 40,000 units
120,000
900,000
50,000

c. Double-declining-balance:
Year
Computation
At acquisition
1
($950,000 - 0) x 2/5
2
($950,000 - $380,000) x 2/5
3
($950,000 - $608,000) x 2/5
4
($950,000 - $744,800) x 2/5
5
($950,000 - $826,880) x 2/5

Depreciation
Expense

Accumulated
Depreciation

$380,000
228,000
136,800
82,080
49,248
73,120

$380,000
608,000
744,800
826,880
876,128
900,000

Net
Book Value
$950,000
570,000
342,000
205,200
123,120
73,872
50,000

Too large. Net book value should
equal residual value at end of useful
life. Change depreciation expense to
yield a net book value of $50,000.

Financial Accounting, 8/e

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–8. (continued)
Req. 2
If the machine is used evenly throughout its life and its efficiency (economic value in
use) is expected to decline steadily each period over its life, then straight-line
depreciation would be preferable. If the machine is used at a consistent rate but the
efficiency is expected to decline faster in the earlier years of its useful life, then an
accelerated method would be appropriate [such as, double-declining-balance]. If the
machine is used at different rates over its useful life and its efficiency declines with
output, then the units-of-production method would be preferable because it would result
in a better matching of depreciation expense with revenue earned.

E8–9.
Management of General Motors Corporation probably anticipated that the pre-2001
property and equipment would be more productive or efficient in the earlier part of their
lives than in the later. Thus, the accelerated method would provide the best matching of
expenses with revenues in the same period. In 2001, however, General Motors’
management may have recognized a change in the revenue-generating capacity of the
property and equipment such that a better matching would occur using the straight-line
method in which equal amounts of depreciation expense would be computed each

period.
E8–10.
Straight-line depreciation (SL) is a simple method to use and understand. Managers
often prefer SL because it results in lower depreciation expense and higher net income
in the earlier years of an asset’s life when compared with the accelerated methods.
Because SL depreciation results in higher income in earlier years, it is not desirable to
use it for tax reporting purposes with the objective of lowering tax liabilities. By using SL
depreciation instead of an accelerated method in the earlier years for tax purposes, a
company would have to pay higher taxes. In any case, the tax code specifies that
MACRS, an accelerated method, may be used for most tangible depreciable property
placed in service after December 31, 1986. It is important to note, however, that, over
the entire useful life of an asset, total depreciation expense is the same regardless of
the method.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–11.
Req. 1
Depreciation Expense
Method of Depreciation
Year 1

Year 2
Straight-line........................... $22,500
$22,500
Units-of-production................
32,250
33,750
Double-declining-balance......
48,000
24,000

Book Value at End of
Year 1
Year 2
$73,500
$51,000
63,750
30,000
48,000
24,000

Computations:
Amount to be depreciated: $96,000 – $6,000 = $90,000:
Straight-line:

$90,000  4 years = $22,500 per year

Units-of-production: $90,000  120,000 units = $.75 per unit
Year 1: 43,000 x $.75
= $32,250
Year 2: 45,000 x $.75

= $33,750
Double-declining-balance (Rate: 2 x the straight line rate of 25% (2/4) = 50%):
Year 1:
$96,000 x 50% = $48,000
Year 2:
($96,000 – $48,000) x 50% = $24,000
Req. 2
The double-declining-balance method would result in the lowest EPS for Year 1
because it produced the highest depreciation expense and therefore the lowest income
(from Requirement 1). In Year 2, the units-of-production method would result in the
lowest EPS because it produced the highest depreciation expense and therefore the
lowest income in that year.
Req. 3
Depreciation is a noncash expense; that is, no cash is paid when depreciation is
recognized. Ignoring income tax implications, all methods have the same impact on
cash flows in year 1. Assuming a method is applied for tax determination, the straightline method will result in the lowest expense, highest net income, highest tax liability,
and therefore the highest amount of cash outflows in year 1.
Companies will select
methods for tax purposes that reduce tax obligations.
Req. 4
The machine acquisition would decrease cash provided by investing activities by the
purchase cost of $96,000. As a noncash expense, the annual depreciation should have
no overall effect on cash provided by operating activities—however, because it is
originally subtracted to arrive at net income, an adjustment needs to be made to reverse
this effect for cash flows. Hence, $22,500 (the annual straight-line depreciation) must
be added back to net income in the operating section of the statement of cash flows.
Financial Accounting, 8/e

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–12.
Req. 1
Property, Plant, and Equipment
Beg. Bal
Capital expenditures

33,611
2,636

End. Bal.

35,098

1,040
109

Property sold
Write-offs

Accumulated Depreciation
Property sold

929

15,948
1,814

Beg. Bal.
Depreciation expense

16,833

End. Bal.

Disposal of property and equipment:
Cash (+A) .......................................................................
Accumulated depreciation (XA, +A) ...............................
Property and equipment (A) ......................................
Gain on sale of property and equipment (+Gain, +SE)

147
929
1,040
36

Req. 2
Amount of property and equipment written off as impaired during the year:
Beginning balance
$33,611
+ Capital expenditures during year
2,636
- Cost of property sold during year
(1,040)

- Impairment loss during year
(?)
Ending balance
$35,098
Impairment loss = $109

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–13.
Req. 1a
Cash (+A) ............................................................................
Accumulated depreciation (XA, +A) ...................................
Delivery truck (A) ............................................................
Sale of an asset at book value; the result is no loss or gain.
Req. 1b
Cash (+A) ...........................................................................
Accumulated depreciation (XA, +A) ..................................
Gain on sale of long-lived asset (+Gain, +SE) .................
Delivery truck (A) ...........................................................
Sale of an asset above book value; the result is a gain.
Req. 1c

Cash (+A) ............................................................................
Accumulated depreciation (XA, +A) ...................................
Loss on sale of long-lived asset (+Loss, SE)......................
Delivery truck (A) ............................................................
Sale of an asset below book value; the result is a loss.

12,000
23,000
35,000

12,400
23,000
400
35,000

11,500
23,000
500
35,000

Req. 2 Summarization of the effects of the disposal:
1.

The loss or gain on disposal of a long-lived asset is the difference between the
disposal price and the book value at date of disposal.

2.

When the disposal price is the same as the book value there is no loss or gain;
when the price is above book value there is a gain; and when the price is below

book value, there is a loss on disposal.

3.

The book value does not purport to be market value, so a loss or gain on disposal
of a long-lived asset normally would occur.

Financial Accounting, 8/e

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–14.
Req. 1a
Cash (+A) ............................................................................
Accumulated depreciation (XA, +A) ...................................
Furniture (A) ...................................................................
Sale of an asset at book value; the result is no loss or gain.
Req. 1b
Cash (+A) ...........................................................................
Accumulated depreciation (XA, +A) ..................................
Gain on sale of long-lived asset (+Gain, +SE) .................
Furniture (A) ..................................................................
Sale of an asset above book value; the result is a gain.

Req. 1c
Cash (+A) ............................................................................
Accumulated depreciation (XA, +A) ...................................
Loss on sale of long-lived asset (+Loss, SE)......................
Furniture (A) ...................................................................
Sale of an asset below book value; the result is a loss.

300,000
7,700,000
8,000,000

900,000
7,700,000
600,000
8,000,000

100,000
7,700,000
200,000
8,000,000

Req. 2 Summarization of the effects of the disposal:
1.

The loss or gain on disposal of a long-lived asset is the difference between the
disposal price and the book value at date of disposal.

2.

When the disposal price is the same as the book value there is no loss or gain;

when the price is above book value there is a gain; and when the price is below
book value, there is a loss on disposal.

3.

The book value does not purport to be market value, so a loss or gain on disposal
of a long-lived asset normally would occur.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–15.
Req. 1
Depreciation expense per year:
$6,000 accumulated depreciation  3 years of usage = $2,000 per year
Estimated useful life:
($25,000 – $9,000) x 1/? useful life = $2,000 per year
$16,000 / $2,000 = 8 year estimated useful life
Req. 2
December 31, 2015:
2,000
Depreciation expense (+E, SE) ...................................

2,000
Accumulated depreciation (+XA, A) .........................
To bring accumulated depreciation up to the date of the accidental loss
($25,000 – $9,000) x 1/8 = $2,000.
Accumulated depreciation ($6,000 + $2,000) (XA, +A )
Loss on disposal of truck (+Loss, SE) .........................
Truck (A) .................................................................
To record disposal of wrecked truck.

8,000
17,000
25,000

E8–16.
Req. 1
Computation of acquisition cost of the deposit in 2015:
February 2015:
Purchase of mineral deposit
March 2015:
Preparation costs
Total acquisition cost in 2015

$ 800,000
70,000
$ 870,000

Req. 2
Computation of depletion for 2015:
$870,000 cost  1,000,000 cubic yards = $.87 per cubic yard depletion rate
60,000 cubic yards in 2015 x $.87 = $52,200

Req. 3
Computation of net book value of the deposit after the developmental work:
Total acquisition cost in 2015
$ 870,000
Less: 2015 depletion
(52,200)
January 2016 developmental costs
6,000
Net book value
$ 823,800

Financial Accounting, 8/e

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–17.
Req. 1
Acquisition cost:
Technology
Patent
Trademark

$70,000

6,000
13,000

Req. 2
Amortization on December 31, 2013 (straight-line method with no residual value):
Technology: $70,000 x 1/4 = $17,500 amortization expense
Patent:

$6,000 x 1/15* remaining = $400 amortization expense
*Patents have a 20 year legal life and the patent was registered
five years ago.

Trademark: The trademark is not amortized due to its indefinite life.

Req. 3
Income statement for 2013:
Operating expenses:
Amortization expense ($17,500 + $400)

$17,900

Balance sheet at December 31, 2013:
(under noncurrent assets)
Intangibles:
Technology ($70,000 - $35,000*) ....................................
$35,000
Patent ($6,000 - $400) ....................................................
5,600
Trademark .....................................................................
13,000 **

$53,600

* $17,500 amortization expense x 2 years
** Although trademarks are valuable assets, they are rarely seen on balance sheets.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

E8–18.
Req. 1
Acquisition cost:
Copyright
Goodwill
Patent

$14,500
65,000
48,000

Req. 2
Amortization on December 31, 2014 (straight-line method with no residual value):

Copyright: $14,500 x 1/10 = $1,450 amortization expense
Goodwill: The goodwill is not amortized due to its indefinite life.
Patent: $48,000 x 1/16 remaining at time of purchase = $3,000 amortization exp.
Req. 3
Income statement for 2014:
Operating expenses:
Amortization expense ($1,450 + $3,000)
Balance sheet at December 31, 2014:
(under noncurrent assets)
Intangibles:
Copyright ($14,500 - $1,450) ..........................................
$13,050
Goodwill .........................................................................
65,000
Patent ($48,000 - $6,000*) ..............................................
42,000

$4,450

$120,050

* $3,000 amortization expense x 2 years

Financial Accounting, 8/e

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