Solution manual financial accounting 8th by harrison CH07

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Chapter 7
Plant Assets & Intangibles
Short Exercises
(5 min.)

S 7-1

1. Property and Equipment, at Cost
Aircraft…………………………………………………
Package handling and ground support
equipment………………………………………….
Computer and electronic equipment…………….
Vehicles……………………………………………….
Facilities and other………………………………….
Total cost…………………………………………..
Less: Accumulated depreciation………………..
Net property and equipment……………………

Millions
$ 2,394
12,225
28,165
586
1,435
44,805
(14,903)
$ 29,902

2. Cost

= $44,805 million
Book value = $29,902 million

Book

value

is

less

than

cost

because

accumulated

depreciation is subtracted from cost to compute book value.

Chapter 7

Plant Assets & Intangibles

515


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(5 min)

S 7-2

The related costs (real estate commission, back property tax,
removal of a building, and survey fee) are included as part of
the cost of the land because the buyer of the land must incur
these costs to get the land ready for its intended use.
After the land is ready for use, the related costs (listed above)
would be expensed.

(10 min.)
Land ($140,000 × .50)……………………….
Building ($140,000 × .30)…………………...
Equipment ($140,000 × .20)………………..
Note Payable………………………………

Land………………….
Building……………...
Equipment…………..
Total……………….…

516

Current
Market
Value
$ 75,000
45,000
30,000

$150,000

Financial Accounting 8/e Solutions Manual

S 7-3

70,000
42,000
28,000
140,000

Percent of Total
$75,000 / $150,000 = 50.0%
$45,000 / $150,000 = 30.0%
$30,000 / $150,000 = 20.0%
100.0%


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(5 min.)

S 7-4
Income Statement
Revenues
CORRECT
Expenses
UNDERSTATED
Net income
OVERSTATED

(10 min.)

S 7-5

1. First-year depreciation:
Straight-line ($53,000,000 − $5,000,000) / 5 years……. $9,600,000
Units-of-production [($53,000,000 − $5,000,000) /
6,000,000 miles] × 775,000 miles…………………….. $6,200,000
Double-declining-balance ($53,000,000 / 5 years × 2). $21,200,000

2. Book value:

StraightLine

Units-ofProduction

DoubleDecliningBalance

Cost……………………. $53,000,000 $53,000,000 $53,000,000
Less Accumulated
Depreciation………..

(9,600,000)

(6,200,000) (21,200,000)

Book value……………. $43,400,000 $46,800,000 $31,800,000

Chapter 7

Plant Assets & Intangibles

517


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(10 min.)

S 7-6

Third-year depreciation:
a. Straight-line ($53,000,000 − $5,000,000) / 5 years….. $9,600,000
b. Units-of-production [($53,000,000 − $5,000,000) /
6,000,000 miles] × 1,275,000 miles………………… $10,200,000
c. Double-declining-balance:
Year 1 ($53,000,000 × 2/5) = $21,200,000
Year 2 ($53,000,000 − $21,200,000) × 2/5 = $12,720,000
Year 3 ($53,000,000 − $21,200,000 − $12,720,000)= $19,080,000;
$19,080,000 × 2/5……………………………… $7,632,000

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S 7-7

(10 min.)

1. Double-declining-balance (DDB) depreciation offers the tax
advantage for the first year of an asset’s use. DDB’s
advantage results from the greater amount of DDB
depreciation (versus the other methods’ depreciation)
during the first year. DDB saves cash that the taxpayer can
invest to earn a return.
2.
DDB depreciation…………………………………..

$21,200,000

Straight-line depreciation………………………...

(9,600,000)

Excess depreciation tax deduction……………. $ 11,600,000
Income tax rate……………………………………..
Income tax savings for first year………………..

Chapter 7

× .32
$ 3,712,000

Plant Assets & Intangibles

519

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(5-10 min.)

S 7-8

First-year depreciation (for a partial year):
a. Straight-line (€45,000,000 − €5,400,000) / 6 years
× 3/12……………………………………………… €1,650,000
b. Units-of-production (€45,000,000 − €5,400,000)
/ 4,500,000 miles × 410,000 miles…………….

€3,608,000

c. Double-declining-balance (€45,000,000 × 2/6
× 3/12)….………………………………………….

€3,750,000

SL depreciation produces the highest net income (lowest
depreciation). DDB depreciation produces the lowest net
income (highest depreciation).

520

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(10 min.)

S 7-9

Depreciation Expense — Concession Stand………... 14,167
Accumulated Depreciation — Concession Stand..
14,167

Depreciation for years 1-4:
$100,000 / 20 years

= $ 5,000 per year

$ 5,000 × 3 years = $15,000 for years 1-3
Asset’s remaining
depreciable
÷ (New) Estimated =
book value
useful life remaining
$100,000 − $15,000 ÷

6 years

(New) Annual
depreciation

= $14,167 per year

$85,000
____

Chapter 7

Plant Assets & Intangibles

521


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(5-10 min.)

S 7-10

1. ($37,700,000 − $2,900,000) / 6 years × 3 = $17,400,000
2.
2013
Jan. 1 Cash………………………………... 8,300,000
Accumulated Depreciation…… 17,400,000
Loss on Sale of Airplane……… 12,000,000
Airplane…………………………
37,700,000

(5-10 min.)

S 7-11

1. Units-of-production depreciation method is used to

compute depletion.

2. Depletion Expense [($120 / 10) × 0.4]…………
Accumulated Depletion………………………

Billions
4.8
4.8

3. At December 31, 2011:
Cost of mineral assets………………………..
Less Accumulated depletion ($38.0 + $4.8).
Book value of mineral assets………………..

North

Coast’s

minerals

are

less

than 36%

Billions
$120.0
(42.8)
$ 77.2

used

up.

Accumulated depletion is low relative to the cost of the
mineral assets.

522

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(5-10 min.)

S 7-12

Req. 1
Cost of goodwill purchased:
Purchase price paid for Concord Snacks, Inc.
$8,800,000
Market value of Concord Snack’s net assets:
Market value of Concord Snacks’ assets…. $15,000,000
Less: Concord Snack’s liabilities………….. (8,000,000)
7,000,000
Market value of Concord Snacks’ net assets
Cost of goodwill…………………………………..
$1,800,000

Req. 2
In future years Vector, Inc. will determine whether its goodwill
has increased or decreased in value. If the goodwill’s value
has increased, there is nothing to record. But if goodwill’s
value has decreased, Vector, Inc. will record a loss and write
down the book value of the goodwill.

Chapter 7

Plant Assets & Intangibles

523


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(10 min.)

S 7-13

Solar Automobiles Limited
Income Statement
Year Ended December 31, 2010
Revenues:
Sales
revenue………………………………
Expenses:
Cost of goods
$3,800,000

sold………………………..
Research and development
600,000
expense…..
Amortization of patent ($350,000 /
50,000
7)...
Selling
480,000
expenses…………………………..
Total
expenses…………………………….
Net
income…………………………………….

$5,200,000

4,930,000
$270,000

(5 min.)

S 7-14

Northern Satellite Systems, Inc.
Statement of Cash Flows
Year Ended December 31, 2010
Cash flows from investing activities:
Millions
Purchase of other companies………………………… $(16.0)

Capital expenditures……………………………….…... (7.0)
Proceeds from sale of North American operations. 14.0
Net cash (used) by investing activities…………... $(9.0)

524

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Exercises
Group A
(5-10 min.)

E 7-15A

Land: $175,000 + $190,000 + $3,500 + $3,000 + $9,000 =
$380,500
Land improvements: $55,000 + $14,000 + $8,000 = $77,000
Building: $59,000 + $650,000 = $709,000

Chapter 7

Plant Assets & Intangibles

525


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(10-15 min.)

E 7-16A

Allocation of cost to individual machines:
Appraised
Machine Value

1
2
3
Totals

Percentage of Total
Market Value

Total
Cost

Cost of
Each
Machine

$ 38,250$38,250 / $170,000 = .225 $167,000 × .225 = $ 37,575
73,100 73,100 / 170,000 = .430 167,000 × .430 = 71,810
58,650 58,650 / 170,000 = .345 167,000 × .345 = 57,615
$170,000
1.000
$167,000

Sale price of machine No. 2…………….
Cost………………………………………….
Gain on sale of machine…………………

$73,100
71,810
$ 1,290

(5-10 min.)

E 7-17A

Capital expenditures:
(a) Sales tax, (b) transportation and insurance, (c) purchase
price,

(d)

installation,

(e)

training

of

personnel,

(f)

reinforcement to platform, (h) major overhaul, (j) lubrication
before machine is placed in service
Immediate expenses:
(g) Income tax, (i) ordinary recurring repairs, (k) periodic
lubrication

526

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(15 min.)

E 7-18A

Journal
ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

1. a. Land…………………………………………… 487,000
Cash………………………………………...
487,000
b. Building
($1,400 + $15,320 + $690,000 + $28,300)... 735,020

Note Payable………………………………
690,000
Cash ($1,400 + $15,320 + $28,300)…….
45,020
c. Depreciation Expense………………………
Accumulated Depreciation
($735,020 − $337,000) / 35 × 3/12………

2,843
2,843

2. BALANCE SHEET
Plant assets:
Land………………………………………...
$487,000
Building……………………………………. $735,020
Less Accumulated depreciation……….
(2,843)
Building, net……………………………….
732,177

3. INCOME STATEMENT
Expense:
Depreciation expense…………………...

Chapter 7

$

Plant Assets & Intangibles

2,843

527


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(15-20 min.)

Year
2010
2011
2012
2013

Straight-Line
$ 4,050
4,050
4,050
4,050
$16,200

Units-ofProduction
$ 4,950
5,850
2,250
3,150
$16,200

E 7-19A

Double-DecliningBalance
$ 9,500
4,750
1,950
-0$16,200

_____
Computations:
Straight-line: ($19,000 − $2,800) ÷ 4 = $4,050 per year.
Units-of-production: ($19,000 − $2,800) ÷ 36,000 miles =
$.45 per mile;
2010 11,000 × $.45
=
$4,950
2011 13,000 ×
.45
=
5,850
2012
5,000 ×
.45
=
2,250
2013
7,000 ×
.45
=
3,150

Double-declining-balance — Twice the straight-line rate:
1/4 × 2 = 2/4 = 50%
2010 $19,000 × .50
= $9,500
2011 ($19,000 − $9,500) × .50 = $4,750
2012 $4,750 − $2,800
= $4,750 − residual value of
$2,800 = $1,950
The units-of production method tracks the wear and tear on
the van most closely.
For income tax purposes, the double-declining-balance
method is best because it provides the most depreciation and,
thus, the largest tax deductions in the early life of the asset.
The company can invest the tax savings to earn a return on
the investment.
528

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(15 min.)

E 7-20A

INCOME STATEMENT
Expenses:
Depreciation expense — Building
[($56,000 + $107,000 + $61,000) − $55,000] / 20…

$ 8,450

Depreciation expense — Furniture and Fixtures
($53,000 × 2/5)…………………………………………

21,200

Supplies expense
($9,200 − $1,700)………………………………………

7,500

BALANCE SHEET
Current assets:
Supplies………………………………………………….. $

1,700

Plant assets:
Building ($56,000 + $107,000 + $61,000).. $224,000
Less Accumulated depreciation…………
(8,450) $215,550
Furniture and fixtures……………………... $ 53,000
Less Accumulated depreciation………… (21,200)

31,800

STATEMENT OF CASH FLOWS
Cash flows from investing activities:

Purchase of buildings ($56,000* + $61,000)……… $(117,000)
Purchase of furniture and fixtures…………………
(53,000)
_____
*Does not include the $100,000 note payable because Oatmeal
House paid no cash on the note.

Chapter 7

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529


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(10-15 min.)

E 7-21A

SHORT-CUT SOLUTION:
SL
DDB
Depreciation by the two methods………. $12,375* $27,500*
Extra depreciation provided by DDB
($27,500 − $12,375)………………………………. $15,125
Multiply by the income tax rate……………………
× .40
Tax saved by using DDB = Extra cash to invest. $ 6,050
Depreciation method for income tax: Double-decliningbalance

Cash saved by using MACRS depreciation:
SL
Cash
$115,000
revenues…………………………………
Cash
75,000
expenses………………………………...
Cash provided by operations before
income
40,000
tax…………………………………...
Depreciation expense (a noncash expense):
*SL: [($220,000 − $22,000) / 8 ×
12,375
6/12]……
*DDB: ($220,000 × 2/8 ×
6/12)…………….
Income before income
27,625
tax…………………...
Income tax expense
$ 11,050
(40%)…………………..
Cash-flow analysis:
Cash provided by operations
before income
$ 40,000
tax………………………………..
Income tax

(11,050)
expense…………………….….
530

Financial Accounting 8/e Solutions Manual

DDB
$115,000
75,000

40,000

27,500
12,500
$

5,000

$ 40,000
(5,000)


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Cash provided by
operations…………….

$ 28,950

Extra cash available for investment if

DDB is used ($35,000 − $28,950)……………………..

Chapter 7

$ 35,000

$

Plant Assets & Intangibles

6,050

531


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(10-15 min.)

E 7-22A

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Year 20 Depreciation Expense
[($400,000 − $55,000) ÷ 40]…………….

8,625
Accumulated Depreciation — Building

CREDIT

8625

Year 21 Depreciation Expense…………………… 14,500*
Accumulated Depreciation — Building
14,500
_____
*Computation:
Depreciable cost: $400,000 − $55,000 = $345,000
Depreciation through year 20:
$345,000 ÷ 40 = $8,625 × 20 = $172,500
Asset’s remaining depreciable book value:
$400,000 − $172,500 − $10,000 = $217,500
New estimated useful life remaining: 15 years
New annual depreciation: $217,500÷ 15 = $14,500

532

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(15-20 min.)

E 7-23A

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

2011
Depreciation for 8 months:
Aug. 31 Depreciation Expense………………… 1,408a
Accumulated Depreciation —
Fixtures………………………………..

1,408

Sale of fixtures:
31 Cash………………………………………
Accumulated Depreciation —
Store Fixtures ($3,520 + $1,408)……..
Loss on Sale of Fixtures………………
Fixtures………………………………..

8,800

2,900
4,928
972b

_____
a
2010 depreciation: $8,800 × 2/5 = $3,520
2011 depreciation: ($8,800 − $3,520) × 2/5 × 8/12 = $1,408
b

Loss is computed as follows:
Sale price of old fixtures……………………….
Book value of old fixtures:
Cost……………………………………………..
Less: Accumulated depreciation………….
Loss on sale……………………………………...

Chapter 7

$2,900
$8,800
(4,928)

Plant Assets & Intangibles

3,872
$ 972

533


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(10-15 min.)
Cost of old
truck……………………………………

E 7-24A
$380,000

Less Accumulated depreciation:
($380,000 − $100,000) ×

76 + 116 + 156 +
37
1,000

(107,800)a
_______
$272,200

Book value of old
truck……………………………

_____
a
Alternate solution setup for accumulated depreciation:
($380,000 − $100,000)
1,000,000 miles

=

$.28 per mile

76,000 + 116,000 + 156,000 + 37,000 = 385,000 miles driven
Accumulated depreciation

=

385,000 miles × $.28

=

$107,800

Calculation of gain or loss:
Purchase price of Freightliner truck
Cash paid for Freightliner truck
Trade in value of Mack truck
Book Value of Mack truck
Net loss on disposal of Mack truck

534

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$300,000
28,000
272,000
272,200
$ (200)

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Chapter 7

Plant Assets & Intangibles

535


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(Continued)

E 7-24A

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

2013 Truck-Freightliner…………………. 300,000
Accumulated Depreciation – Mack
Truck………………………………. 107,800
Loss on Disposal of Mack truck…
200
Truck – Mack……………………
Cash……………………………...

536

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CREDIT

380,000
28,000


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(10-15 min.)

E 7-25A

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

2010
(a) Purchase of mineral assets:
Mineral Asset……………………….
Cash………………………………

426,000

(b) Payment of fees and other costs:
Mineral Asset ($120 + $2,100)……
Cash………………………………

2,220

426,000

2,220

Mineral Asset………………………..
Cash………………………………

64,030

(c) Depletion Expense…………………
Accumulated Depletion —
Mineral Asset……………………

71,600*

64,030

71,600

_____
*$426,000 + $120 + $2,100 + $64,030 = $492,250;
$492,250 ÷ 275,000 tons = $1.79 per ton;

40,000 tons × $1.79 = $71,600
Mineral asset book value = $420,650 ($492,250 − $71,600).

Chapter 7

Plant Assets & Intangibles

537


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(10-15 min.)

E 7-26A

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

Part 1(a) Purchase of patent:
Patents………………………………..
Cash………………………………..
(b) Amortization for each year:
Amortization Expense — Patents
($900,000 ÷ 10)……………………….
Patents…………………………….
Part 2

DEBIT

900,000
900,000

90,000
90,000

Amortization for year 6:
Amortization Expense — Patents.. 225,000*
Patents…………………………….
225,000

_____
*Asset remaining book value:
$900,000 − ($90,000 × 5) = $450,000
New estimated useful life remaining: 2 years
New annual amortization: $450,000 ÷ 2 = $225,000

538

CREDIT

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(5-10 min.)

E 7-27A

Req. 1
Cost of goodwill purchased:
Millions
$16

Purchase price paid for Northshore.com…………...
Market value of Northshore’s net assets:
Market value of Northshore’s assets ($13 + $18). $31
Less: Northshore’s liabilities………………………. (25)
6
Market value of Northshore’s net assets…………
Cost of goodwill………………………………………….
$10

Req. 2

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT CREDIT

Current Assets………………………………….. 13
Long-Term Assets……….……………………... 18
Goodwill…………………………….……………. 10
Liabilities………………………………………
Cash…………………………………………….

Purchased Northshore.com

25
16

Req. 3
Haledan will determine whether its goodwill has increased or
decreased in value. If the goodwill’s value has increased,
there is nothing to record. But if goodwill’s value has
decreased, Haledan will record a loss and write down the book
value of the goodwill.
Chapter 7

Plant Assets & Intangibles

539