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EXERCISE 11-2 (20-25 minutes)

(a)               If there is any salvage value and the amount is unknown (as is the case here), the cost would have to be determined by looking at the data for the double-declining balance method.

100%

= 20%; 20% X 2 = 40%

5

            Cost X 40% = $20,000

            $20,000 ¸ .40 = $50,000 Cost of asset

(b)            $50,000 cost [from (a)] – $45,000 total depreciation = $5,000 salvage value.

(c)        The highest charge to income for Year 1 will be yielded by the double-declining balance method.

(a)               The highest charge to income for Year 4 will be yielded by the straight-line method.

(b)               The method that produces the highest book value at the end of Year 3 would be the method that yields the lowest accumulated depreciation at the end of Year 3, which is the straight-line method.

Computations:

St.-line = $50,000 – ($9,000 + $9,000 + $9,000) = $23,000 book value, end of Year 3.

S.Y.D. = $50,000 – ($15,000 + $12,000 + $9,000) = $14,000 book value, end of Year 3.

D.D.B. = $50,000 – ($20,000 + $12,000 + $7,200) = $10,800 book value, end of Year 3.

(c)               The method that will yield the highest gain (or lowest loss) if the asset is sold at the end of Year 3 is the method which will yield the lowest book value at the end of Year 3, which is the double-declining balance method in this case.

EXERCISE 11-5

(a)

($117,900 – $12,900)

= $21,000/yr. = $21,000 X 5/12 = $8,750

5

            2004 Depreciation — Straight line = $8,750

 

(b)

($117,900 – $12,900)

= $5.00/hr.

21,000

            2004 Depreciation — Machine Usage = 800 X $5.00 = $4,000

(c)

Machine

 

Allocated to

 

Year

Total

2004

 

2005

 

1

5/15 X $105,000 = $35,000

$14,583*

 

$20,417**

 

2

4/15 X $105,000 = $28,000

______

 

  11,667***

 

 

 

$14,583

 

$32,084

 

*

$35,000 X 5/12 = $14,583

 

 

 

 

**

$35,000 X 7/12 = $20,417

 

 

 

 

***

$28,000 X 5/12 = $11,667

 

 

 

            2005 Depreciation — Sum-of-the-Years’-Digits = $32,084

 

 (d)      2004 40% X ($117,900) X 5/12 = $19,650

            2005 40% X ($117,900 – $19,650) = $39,300

OR

            1st full year (40% X $117,900) = $47,160

            2nd full year [40% X ($117,900 – $47,160)] = $28,296

2004 Depreciation =

5/12 X $47,160 =

$19,650

 

 

 

2005 Depreciation =

7/12 X $47,160 =

$27,510

 

5/12 X $28,296 =

  11,790

 

 

$39,300

EXERCISE 11-6 (20-30 minutes)

(a)

2003

Straight-line

$212,000 – $12,000

= $25,000/year

8

 

 

 

 

 

 

 

3 months — Depreciation $6,250 = ($25,000 X 3/12)

 

(b

2003

Output

$212,000 – $12,000

= $5.00/output unit

 

40,000

 

 

 

 

 

 

 

 

 

1,000 units X $5.00 = $5,000

 

(c)

2003

Working hours

$212,000 – $12,000

= $10.00/hour

 

20,000

 

 

 

 

 

 

 

 

 

525 hours X $10.00 = $5,250

 

 

 

 

 

(d)

8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 36 OR

n (n + 1)

=

8(9)

= 36

2

2

 

 

 

 

Allocated to

Sum-of-the-years’-digits

Total

2003

2004

2005

Year 1

8/36 X $200,000 =

$44,444

$11,111

$33,333

 

2

7/36 X $200,000 =

$38,889

 

    9,722

$29,167

3

6/36 X $200,000 =

$33,333

_______

_______

    8,333

 

 

 

$11,111

$43,055

$37,500

 

         2005:      $37,500 = (9/12 of 2nd year of machine’s life plus 3/12 of 3rd year of machine’s life)

 

(e)               Double-declining balance 2004: 1/8 X 2 = 25%.

 

2003:            25% X $212,000 X 3/12 = $13,250

            2004:            25% X ($212,000 – $13,250) = $49,688

OR

            1st full year (25% X $212,000) = $53,000

            2nd full year [25% X ($212,000 – $53,000)] = $39,750

           2003 Depreciation 3/12 X $53,000 = $13,250

            2004 Depreciation 9/12 X $53,000 = $39,750

                                          3/12 X $39,750 =     9,938

                                                               $49,688

 

EXERCISE 11-16

 (a)

December 31, 2004

 

Loss on Impairment................................................................

3,200,000

 

 

            Accumulated Depreciation—Equipment..................

 

3,200,000

 

 

Cost

$9,000,000

 

 

Accumulated depreciation

  1,000,000

 

 

Carrying amount

8,000,000

 

 

Fair value

  4,800,000

 

 

Loss in impairment

$3,200,000

 

 (b)

December 31, 2005

 

Depreciation Expense...........................................................

1,200,000

 

 

            Accumulated Depreciation—Equipment..................

 

1,200,000

 

New carrying amount

$4,800,000

 

 

Useful life

      4 years

 

 

Depreciation per year

$1,200,000

 

(c)        No entry necessary. Restoration of any impairment loss is not permitted.

EXERCISE 11-17

(a)

Loss on Impairment................................................................

3,220,000

 

 

            Accumulated Depreciation—Equipment..................

 

3,220,000

 

Cost

$9,000,000

 

 

Accumulated depreciation

  1,000,000

 

 

Carrying amount

8,000,000

 

 

Less: Fair value

4,800,000

 

 

Plus: Cost of disposal

       20,000

 

 

Loss on impairment

$3,220,000

 

(a)               No entry necessary. Depreciation not taken on assets intended to be sold.

(c)

Accumulated Depreciation—Equipment............................

500,000

 

 

            Recovery of Loss on Impairment............................

 

500,000

 

 

 

 

 

Fair value

$5,300,000

 

 

Less: Cost of disposal

       20,000

5,280,000

 

Carrying amount

 

  4,780,000

 

Recovery of impairment loss

 

$   500,000

EXERCISE 11-23

(a)

$970,000 + $170,000 + $40,000* – $100,000

= .09 depletion per unit

12,000,000

            *(Note to instructor: The $40,000 should be depleted because it is a cost of the mine. This cost is incurred to get the land back to its original value of $100,000.)

            2,500,000 units extracted X $.09 = $225,000 depletion for 2004

(b)            2,100,000 units sold X $.09 = $189,000 charged to cost of goods sold for 2004

 

EXERCISE 11-24

 

(a)        Asset turnover ratio:

$13,234

= .96 times

$14,212 + $13,362

2

 

 

(a)               Rate of return on assets:

$76

= .55%

$14,212 + $13,362

2

 

 

(b)               Profit margin on sales:

$76

= .57%

$13,234

 

(c)               The asset turnover ratio times the profit margin on sales provides the rate of return on assets computed for Eastman Kodak as follows:

 

Profit margin on sales

X

Asset Turnover

 

Return on Assets

.57%

X

.96

=

.55%

 

Note the answer .55% is the same as the rate of return on assets computed in (b) above.

 

 

PROBLEM 11-3

 

 

 (a)

Depreciation Expense—Asset A

2,900

 

 

            Accumulated Depreciation—Asset A

 

2,900

 

               (5/55 X [$35,000 – $3,100])

 

 

 

 

 

 

 

Accumulated Depreciation—Asset A

26,100

 

 

            Asset A ($35,000 – $13,000)

 

22,000

 

            Gain on Disposal of Plant Assets

 

4,100

 

 

 

 

(b)

Depreciation Expense—Asset B

6,720

 

 

            Accumulated Depreciation—Asset B

 

6,720

 

               ([$51,000 – $3,000] ¸ 15,000 X 2,100)

 

 

 

 

 

 

(c)

Depreciation Expense—Asset C

6,000

 

 

            Accumulated Depreciation—Asset C

 

6,000

 

               ([$80,000 – $15,000 – $5,000] ¸ 10)

 

 

 

 

 

 

(d)

Asset E

22,000

 

 

            Retained Earnings

 

22,000

 

 

 

 

 

Depreciation Expense—Asset E

4,400*

 

 

            Accumulated Depreciation—Asset E

 

4,400

 

 

 

 

 

*($22,000 X .20)

 

 

 

 

 

 

 

 

PROBLEM 11-8

 

 

(a)               The amounts to be recorded on the books of Selig Sporting Goods Inc. as of December 31, 2004, for each of the properties acquired from Starks Athletic Equipment Company are calculated as follows:

Cost Allocations to Acquired Properties

 



Appraisal Value

Remaining Purchase Price Allocations




Renovations



Capitalized Interest




Total

(1) Land

$280,000

 

 

 

$280,000

(2) Building

 

$   84,0001

$100,000

 $21,6002

  205,600

(3) Machinery

_______

      36,0001

_______

______

    36,000

            Totals

$280,000

$120,000

$100,000

$21,600

$521,600

Supporting Calculations

1Balance of purchase price to be allocated.

 

            Total purchase price

$400,000

            Less land appraisal

  280,000

                        Balance to be allocated

$120,000

 

Appraisal Values

 


Ratios

 

Allocated Values

Building

$105,000

 

105/150 =

  .70

X $120,000

$  84,000

Machinery

    45,000

 

  45/150 =

  .30

X $120,000

    36,000

            Totals

$150,000

 

 

1.00

 

$120,000

 

2Capitalizable interest.

Dates of loans in 2004

 


Amounts

 

Periods Outstanding

 

Interest
At 12%

1/1

 

$  50,000

X

12/12

X .12

$  6,000

4/1

 

  130,000

X

  9/12

X .12

  11,700

10/1

 

  130,000

X

  3/12

X .12

    3,900

12/31

 

  190,000

X

 

X .12

_______

            Totals

 

$500,000

 

 

 

$21,600

 

Note t: If the interest is allocated between the building and the machinery, $15,120 ($21,600 X 105/150) would be allocated to the building and $6,480 ($21,600 X 45/150) would be allocated to the machinery.

(b)               Selig Sporting Goods Inc.’s 2004 depreciation expense, for book purposes, for each of the properties acquired from Starks Athletic Equipment Company is as follows:

1.

Land: No depreciation.

 

 

 

 

2.

Building: Depreciation rate

= 1.50 X 1/15 = .10

 

                    2004 depreciation expense

= Cost X Rate X 1/2 year

 

 

= $205,600 X .10 X 1/2

 

 

= $10,280

 

 

 

3.

Machinery: Depreciation rate

= 2.00 X 1/5 = .40

 

                    2004 depreciation expense

= Cost X Rate X 1/2

 

 

= $36,000 X .40 X 1/2

 

 

= $7,200

(c)               Arguments for the capitalization of interest costs include the following.

(1)               Diversity of practices among companies and industries called for standardization in practices.

(2)               Total interest costs should be allocated to enterprise assets and operations, just as material, labor, and overhead costs are allocated. That is, under the concept of historical costs, all costs incurred to bring an asset to the condition and location necessary for its intended use should be reflected as a cost of that asset.

Arguments against the capitalization of interest include the following:

(1)        Interest capitalized in a period would tend to be offset by amortiza­tion of interest capitalized in prior periods.

(2)        Interest cost is a cost of financing, not of construction.

 

 

PROBLEM 11-9

 

(a)               Carrying value of asset: $8,000,000 – $2,000,000 = $6,000,000.

Future cash flows ($5,300,000) < Carrying value ($6,000,000)

Impairment entry:

Loss on Impairment.. 1,600,000*.....

            Accumulated Depreciation                                    1,600,000

*$6,000,000 – $4,400,000

(b)            Depreciation Expense.......             1,100,000**

                        Accumulated Depreciation                         1,100,000

            **(4,400,000 ¸ 4)

 

(c)        No depreciation is recorded on impaired assets to be disposed of. Recovery of impairment losses are recorded.

Accumulated Depreciation........... 200,000

            Recovery of Impairment Loss               200,000

 

 

PROBLEM 11-10

 

 

(1)

$82,000

Allocated in proportion to appraised values

 

 

   (1/10 X $820,000).

 

 

 

(2)

$738,000

Allocated in proportion to appraised values

 

 

   (9/10 X $820,000).

 

 

 

(3)

Forty years

Cost less salvage ($738,000 – $40,000) divided by

 

 

   annual depreciation ($17,450).

 

 

 

(4)

$17,450

Same as prior year since it is straight-line depreciation.

 

 

 

(5)

$91,000

[Number of shares (2,500) times fair value ($30)]

 

 

   plus demolition cost of existing building ($16,000).

 

 

 

(6)

None

No depreciation before use.

 

 

 

(7)

$30,000

Fair market value.

 

 

 

(8)

$4,500

Cost ($30,000) times percentage (1/10 X 150%).

 

 

 

(9)

$3,825

Cost ($30,000) less prior year’s depreciation ($4,500)

 

 

   equals $25,500. Multiply $25,500 times 15%.

 

 

 

(10)

$150,000

Total cost ($164,900) less repairs and maintenance

 

 

   ($14,900).

 

 

 

(11)

$32,000

Cost less salvage ($150,000 – $6,000) times 8/36.

 

 

 

(12)

$9,333

Cost less salvage ($150,000 – $6,000) times 7/36 times

 

 

   one-third of a year.

 

(13)

$52,000

Annual payment ($6,000) times present value of annuity due at 8% for 11 years (7.710) plus down payment ($5,740). This can be found in an annuity due table since the payments are at the beginning of each year. Alternatively, to convert from an ordinary annuity to an annuity due factor, proceed as follows: For eleven payments use the present value of an ordinary annuity for 11 years (7.139) times 1.08. Multiply this factor (7.710) times $6,000 annual payment to obtain $46,260, and then add the $5,740 down payment.

 

 

 

(14)

$2,600

Cost ($52,000) divided by estimated life (20 years).