Solution manual for Core Concepts of Accounting

Raiborn 2nd Edition

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Solution manual for Core Concepts of Accounting Raiborn 2nd Edition

CHAPTER 6

SOLUTIONS TO END OF CHAPTER MATERIAL

QUESTIONS

1. The major types of long-term assets and examples of each are below.

Long-term Investments: Investment in Bonds, Investment in Stock (such as that of a

subsidiary)

Property, Plant, and Equipment: Land, Building, Equipment, Leasehold Improvement

Intangible Assets: Patent, Copyright, Trademark, Goodwill

2. Depreciation is a method of allocating asset cost (expended when the asset is acquired)
over the time that the asset is used and provides benefits to the organization (the useful
life). Depreciation expense is the portion of the cost expensed in a given year. Use of
depreciation provides proper matching of revenues and expenses.

3. Using the straight-line method, depreciation expense for a full year is calculated by
dividing the depreciable amount (acquisition cost minus salvage value) by the useful life
in years. Partial years are adjusted by multiplying by a fraction that indicates the portion
of a year the asset was in service. The straight-line rate of depreciation (not needed for
calculations) is 100% ÷ useful life in years.

Using the units-of-production method, depreciation expense for a given year is calculated
by multiplying the units used in that year by the per-unit depreciation amount. Per-unit
depreciation is calculated by dividing the depreciable amount (acquisition cost minus
salvage value) by the useful life in units.

Using the double-declining balance method, depreciation expense for a full year is
calculated by multiplying the beginning book balance (acquisition cost minus
accumulated depreciation from prior years) by the depreciation rate. The depreciation rate
is calculated as twice the straight-line depreciation rate. Partial years are adjusted by
multiplying by a fraction that indicates the portion of a year the asset was in service.

EXAMPLE [Numerical examples given by students will differ.]

An asset costing $106,000, has a salvage value of $6,000 and a useful life of 10 years.
For the first year (a full year), depreciation expense is calculated using straight-line and
double-declining balance methods below.

Straight Line (SL) Method:

Depreciable Amount = $106,000 – $6,000 = $100,000
Depreciation Expense = $100,000 ÷ 10 years = $10,000

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 Double-Declining Balance (DDB) Method:
Book Value = $106,000 - $0 = $106,000
Depreciation Rate = 2 x 10% = 20%
Depreciation Expense = $106,000 × 20% = $21,200

The SL method yields a higher net income on the income statement because the
depreciation expense is lower than if the company used the DDB method. However, the
higher expense obtained using the DDB Method would be beneficial for tax purposes
because the net income and, therefore, taxes would be lower.

4. Book value is calculated by subtracting accumulated depreciation from asset cost. Each
year an asset’s useful life, depreciation expense is recorded which causes accumulated
depreciation to increase and book value to decrease. Other events that might cause an
asset’s book value to change include the capitalization of expenditures (such as putting a
new motor on a machine) that increase the asset’s value or useful life.

In contrast, fair value is what an asset is actually worth in the market at a specific point in
time. Fair values reflect both general and specific price level changes as well as
technological advancements or “market interest.” For example, a fully depreciated asset
may gain in value because it suddenly becomes a collector’s item.

5. The gain or loss on the sale of a long-term asset is calculated as cash received for the
asset minus the asset’s book value. If the asset is not sold, but “junked” or disposed of,
the cash received would be zero. Therefore, the loss would be equal to the book value.

Gains and losses differ, respectively, from revenues and expenses in that the latter two
items occur in the normal course of business operations while gains and losses occur
from “side-line” activities—those that the business does not view as occurring during the
provision of its primary source of operating funds.

6. When an asset is sold, three events occur that must be reflected in the journal entry: (1)
cash is received, (2) the asset is removed from the accounting records, and (3) a gain or
loss, if one exists, is recognized. In the journal entry provided, only the first and third
events are recorded properly.

The asset has not been removed from the books correctly. The asset’s original cost is in
the Equipment account. Therefore, that account should be credited for $89,000, not
$29,000. The accumulated depreciation (the difference between cost and book value) is in
a contra-asset account entitled Accumulated Depreciation—Equipment, which has a
balance of $60,000 ($89,000–$29,000). To remove that account it should be debited for
its balance. The correct journal entry is shown below.

Cash 24,600
Loss on Sale of Equipment 4,400
Accumulated Depreciation–Equipment 60,000
Equipment 89,000
7. Depreciation is used to expense the cost of a PPE asset over its useful life. Depreciation
takes into account the asset’s salvage value and its useful life The amount of depreciation
taken each year is accumulated in a contra-account.

Depletion is used to expense the cost of a natural resource asset (e.g., trees, oil, coal,
etc.). Depletion takes into account the estimated quantity of natural resource that can be
obtained from the asset. The amount of depreciation taken each year is accumulated in a
contra-account. After the natural resource is completely depleted, the value of the asset
should be equal to the value of the land without the resources (or equal to zero if only the
right to the resources were purchased).

Amortization, which is similar to straight-line depreciation, is used to expense the cost of

an intangible asset. The cost of an intangible asset is expensed over its useful life, legal
life, or 40 years, whichever is shorter. There is typically no salvage value for intangible
assets, and the cost of the asset is written down directly without the use of a contra-
account.

8. Identifiable intangible assets include patents, copyrights, trademarks, and other rights to
profit from an “idea.” These assets are called intangible because they represent “ideas” as
opposed to physical assets (e.g., car).

Goodwill is another intangible asset that represents some “idea” that a company is more
valuable than the fair market value of its assets. This intangible asset is usually
unidentifiable. It is the culmination of years of business, customer loyalty, etc. However,
goodwill cannot be recorded by a business if that goodwill has been internally developed;
only goodwill that is purchased (as the excess of cost over FMV of net assets) can be
recorded.

Unlike unidentifiable intangibles, identifiable intangible assets usually have a limited life
time and are amortized at the end of every accounting period. In contrast, an accountant
has to test annually for impairment in the value of unidentifiable intangible assets.
Impairment exists when the carrying value exceeds its fair market value. It is only when
the asset is impaired that a write-down occurs.

9. The FASB requires the immediate expensing of all research and development (R&D)
costs because it is generally unknown whether R&D activities will result in a
technologically feasible, marketable, or useful product.

The capitalization of development costs is based on recognition criteria that focus on

whether:
▪ it is probable that the future economic benefits that are attributable to the asset
will flow to the enterprise; and
▪ the cost of the asset can be measured reliably.
 10. An advantage of using historical cost to value assets is objectivity and verifiability
because historical cost can be found in source documents. A disadvantage of using
historical cost is that, after some period of ownership and use, the balance sheet amount
for an asset will probably be totally unrelated to the actual market values of the assets
they purport to represent. Thus, the information would not be considered “timely” nor
“representationally faithful.” However, most people do not have the expertise to estimate
the value of an asset nor would multiple parties necessarily agree on that estimation;
therefore, historical cost is used to eliminate subjectivity.

11. A company can depart using historical cost when long-term assets become impaired and
must be written down to lower values.

The use of the IFRS’s “revaluation method” for PP & E might be difficult because it
involves a significant amount of judgment and subjectivity.

12. Acquisition cost includes all costs that are reasonable and necessary to get the asset into
place and ready for its intended use (i.e., purchase price, sales tax, freight, insurance
during shipping, and installation costs). Excluded costs (which are expensed rather than
capitalized) include costs that are not reasonable or necessary to get the asset into place
(e.g., insurance after shipping, yearly registration or license fees, repair costs for
damage).

13. The information needs concerning PPE include the following:

(a) disclosure of major types of depreciable assets;
(b) historical cost of assets;
(c) depreciation methods used;
(d) any restrictions on the use of long-term assets;
(e) impairments to the fair market value of the asset;
(f) average age of assets; and
(g) average useful or legal life of assets.

Each student will prioritize these items differently. Such priorities may be affected by the
industry in which a particular company in involved.

EXERCISES
14. (a) F Acquisition cost is the total amount capitalized to acquire the asset. Depreciable cost is
acquisition cost minus salvage value.
(b) F Even though the salvage value is not used in calculations, the asset cannot be depreciated
below salvage value.
(c) F Depreciation is the method of expensing cost over useful life (for purposes of proper
matching of revenues and expenses) and is not influenced by market value.
(d) F Although land is not depreciated, it may decline in value. If such a decline occurs, it is
recorded as an impairment loss rather than depreciation.
(e) T
(f) T
 (g) F Intangible assets should be amortized over the shorter of legal life, useful life, or 40
years.
(h) F Intangible assets are presented at the unamortized portion of historical cost.
(i) T
(j) F Expenditures made to a PP&E asset after it has been in service for a number of years can
be expensed. Expenditures are capitalized only if they add value for more than one year
or additional useful life to the asset.
(k) T

15. (a) Purchase price ($300,000 × .85) $255,000

Delivery cost 2,750
Installation and testing 1,870
Installation and testing supplies 135
Total Acquisition Cost $259,755

(b) Computer 259,755

Cash (or Accounts Payable) 259,755

(c) Because of the accounting principle of verifiability, historical cost is still the best
value to use for depreciable assets in spite of rapid changes in technology. For assets
that decline in value so quickly, it is appropriate to choose a declining-balance
depreciation method. Therefore, even though the historical cost is shown on the
balance sheet, the book value would reflect the big reduction due to depreciation.
However, if the assets have had substantial declines in value, conservatism would
require writing those items down to their impaired values.

16. (a) ($22,800 – $3,000]) ÷ 5 yrs = $19,800 = $3,960 per year

(b) Units of Production
SL
Year Beg. BV Depr End. BV Acc. Depr.
2009 $22,800 $3,960 $18,840 $3,960
2010 18,840 3,960 14,880 7,920

DDB Annual Depreciation Rate: 0.4

Year Beg. BV Depr End. BV Acc. Depr.
2009 $22,800.00 $9,120.00 $13,680.00 $ 9,120.00
2010 13,680.00 5,472.00 8,208.00 14,592.00
2011 8,208.00 3,283.20 4,924.80 17,875.20
2012 4,924.80 1,924.80 3,000.00 19,800.00
2013 3,000.00 0.00 3,000.00 19,800.00

UOP Per-unit depreciation rate: $0.03

Year Units Beg. BV Depr End. BV Acc. Depr.
2009 110,000 $22,800 $3,300 $19,500 $3,300
2010 140,000 19,500 4,200 15,300 7,500
 2011 150,000 15,300 4,500 10,800 12,000
2012 141,800 10,800 4,254 6,546 16,254
2013 118,200 6,546 3,546 3,000 19,800

(c) Double-Declining Balance (see previous calculations)

(d) Ending book value will be equal to salvage value ($3,000)
Accumulated Depreciation will be equal to depreciable amount ($19,800)
(e) $0; the full depreciable cost would have been taken by the end of year 4.
(f) $3,546

17. Calculations:
Depreciable Useful Life Useful Life
Cost Salvage Value Amount (years) (units)
$6,500 $500 $6,000 6 12,000

SL Annual Depreciation: $1,000

Year Beg. BV Depr End. BV Acc. Depr.
2009 $6,500 $1,000 $5,500 $1,000
2010 5,500 1,000 4,500 2,000

DDB Annual Depreciation Rate: 1/3

Year Beg. BV Depr End. BV Acc. Depr.
2009 $6,500 $2,167 $4,333 $2,167
2010 4,333 $1,444 2,889 3,611

(a) (1) Depreciation Expense - Equipment 1,000

Accumulated Depreciation - Equipment 1,000
(same entry for both years)

(a) (2) Depreciation Expense - Equipment 2,167

Accumulated Depreciation - Equipment 2,167

Depreciation Expense - Equipment 1,444

Accumulated Depreciation - Equipment 1,444

(b)
UOP Per-unit depreciation rate: $0.50
Year Units Beg. BV Depr End. BV Acc. Depr.
2009 2,500 $6,500 $1,250 $5,250 $1,250
2010 1,900 5,250 950 4,300 2,200

Depreciation Expense - Equipment 1,250

Accumulated Depreciation - Equipment 1,250
 Depreciation Expense - Equipment 950
Accumulated Depreciation - Equipment 950

18.
Depreciable Useful Life Useful Life
Cost Salvage Value Amount (years) (units)
$6,500.00 $500.00 $6,000.00 6 12,000

Calculations: 10/1 = ¼ of year in year of acquisition

(a) (1)
SL Annual Depreciation: $1,000.00
Year Beg. BV Depr End. BV Acc. Depr.
2009 $6,500.00 $ 250.00 $6,250.00 $ 250.00
2010 6,250.00 1,000.00 5,250.00 1,250.00
2011 5,250.00 1,000.00 4,250.00 2,250.00

(a) (2)
DDB Annual Depreciation Rate: 1/3
Year Beg. BV Depr End. BV Acc. Depr.
2009 $6,500.00 $ 541.75 $5,958.25 $ 541.75
2010 5,958.25 1,986.08 3,972.17 2,527.83
2011 3,972.17 1,324.06 2,648.11 3,851.89

(b) Equipment 6,500

Cash 6,500

Depreciation Expense 250

Accumulated Depreciation - Equipment 250

19. Calculations:
Depreciable Useful Life
Cost Salvage Value Amount (years)
$14,500 $500 $14,000 5

SL Annual Depreciation: $2,800.00

Year Beg. BV Depr End. BV Acc. Depr.
2007 $14,500 $2,800 $11,700 $2,800
2008 11,700 2,800 8,900 5,600
(½ year) 2009 8,900 1,400 7,500 7,000

(a) Book Value on December 31, 2008 = $8,900

 (b) Depreciation Expense 1,400
Accumulated Depreciation – Computer 1,400

Cash 7,250
Accumulated Depreciation – Computer 7,000
Loss on Sale 250
Computer 14,500

20.
Depreciable Useful Life
Cost Salvage Value Amount (years)
$8,000 $800 $7,200 8

SL Annual Depreciation: $900.00

Year Beg. BV Depr End. BV Acc. Depr.
2006 $8,000 $900 $7,100 $ 900
2007 7,100 900 6,200 1,800
2008 6,200 900 5,300 2,700
( /12 year) 2009
9 5,300 675 4,625 3,375

(a) Depreciation Expense - Machines 675

Accumulated Depreciation - Machines 675

Book value = $4625 ÷ 10 = $462.50 per washer

(b) Gain (Loss) = Cash Received – Book Value

Gain (Loss) = $1,630.00 – $4,625.00
Loss = $2,995.00

Cash 1,630
Accumulated Depreciation - Machines 3,375
Loss on Sale of Machines 2,995
Machines 8,000

(c) Gain (Loss) = Cash Received – Book Value

Gain (Loss) = $0 – $4,625.00
Loss = $4,625.00

Accumulated Depreciation - machines 3,375

Loss on Disposal of Machines 4,625
Machines 8,000
21. (a) Land 600,000
Natural Resource 4,650,000
Cash 5,250,000

(b) The average cost per acre would be ($4,650,000 ÷ 1,500) or $3,100. Such a cost
might not be appropriate if there were significantly different density of trees on the
acreage or if there were different types or sizes of trees with different selling price
values on different sections of the acreage.

(c) Cost of Goods Sold 310,000

Natural Resource 310,000

(d) Pappas should not change the historical cost of the land because increases in the
valuation of long-term asset are not considered in the preparation of U.S. financial
statements. The conservatism principle does not allow the write-up of asset value.
However, if International Financial Reporting Standards (IFRS) are being used for
reporting; the write-up of long-term assets is allowed if the fair value to the asset can
be reliably measured.

(e) Land cost per acre = $600,000 ÷ 1,500 = $400

Cash ($3,300 x 300) 990,000

Land ($400 x 300) 120,000
Gain on Sale of Land 870,000

22. (a) Patent 1,871,800

Cash 1,871,800

(b) The salvage value will be zero after seven years. As with most intangible assets, after
the right to use the patent expires, the patent has no value.

(c) $1,871,800 ÷ 7 = $267,400 per year

2009 $267,400 x 9/12 = $200,550
All other full years $267,400

(d) 2009
Amortization Expense 200,550
Patent 200,550
23. (a) Depreciation Expense in 2007: ($144,000 - $18,000) ÷ 6 = $21,000 x 7/12 = $12,250

(b) (1) Equipment cleaning is treated as an expense when incurred in 2008 and 2009.
(2) Lubricating should be expensed when incurred.
(3) Engine replacement should be capitalized.

(c) Original cost of equipment $144,000

Depreciation taken in 2007 (7 months) $12,250
Depreciation taken in 2008 and 2009 42,000 (54,250)
Depreciation taken in 2010 before
engine replacement ($21,000 x 5/12) (8,750)
2010 BV before engine replacement $ 81,000
Capitalized engine replacement 7,000
“New” cost $ 88,000
Salvage value (no change) (18,000)
New depreciable cost $70,000
New remaining life (3 remaining + 2 additional) ÷5
Annual depreciation for next three years $ 14,000

Depreciation in 2010:
January through May $8,750
May through December ($14,000 x 7/12) 8,167 $16,917

Depreciation in 2011 $14,000

24. (a) Average Age = Accumulated Depreciation ÷ Depreciation Expense

Average Age = $1,058,700 ÷ $250,000
Average Age = 4.2 years

(b) Average Useful Life = Average Investment ÷ Depreciation Expense

Ending Balance = Beginning Balance + Acquisitions

$3,670,000 = Beginning Balance + $978,000
Beginning Balance = $3,670,000 – $978,000
Beginning Balance = $2,692,000

Average Investment = (Beginning + Ending) ÷ 2

Average Investment = ($2,692,000 + $3,670,000) ÷ 2
Average Investment = $6,362,000 ÷ 2
Average Investment = $3,181,000

Average Useful Life = $3,181,000 ÷ $250,000

Average Useful Life = 12.7 years
 (c) If the acquisitions were made in December, the average investment amount is
misleading because for most of the year, the investment would be the beginning
balance of $2,692,000.Given that information, the average investment should be
recalculated, which would change the calculation of average useful life.

Average Investment = ($2,692,000 × 11/12) + ($3,670,000 × 1/12)

Average Investment = $2,467,667 + $305,833
Average Investment = $2,773,500

Average Useful Life = $2,773,500 ÷ $250,000

Average Useful Life = 11.1 years

PROBLEMS
25. (a) Land 650,000
Warehouse 1,950,000
Cash 2,600,000

Fair Market Proportion of Fair Proportion of

Value Market Value Total Cost Total Cost
Land $ 700,000 0.25 $2,600,000 $ 650,000
Warehouse 2,100,000 0.75 $2,600,000 1,950,000
$2,800,000 $2,600,000

Equipment 1,000,000
Cash 1,000,000

Repair Expense 2,700

Cash 2,700

Office Furniture & Fixtures 400,000

Cash 400,000

Trucks 51,600
Cash 51,600

Trucks Expenditure Quantity Extended

Cost $12,000 4 $48,000
Delivery 900 1 900
Insurance 300 1 300
Alarm 600 4 2,400
$51,600
 (b) Depreciation Expense - Warehouse 87,500
Accumulated Depreciation – Warehouse 87,500

Depreciation Expense - Equipment 188,000

Accumulated Depreciation - Equipment 188,000

Depreciation Expense – F&F 27,750

Accumulated Depreciation – F&F 27,750

Depreciation Expense - Trucks 5,250

Accumulated Depreciation - Trucks 5,250

Depreciable Useful Annual Portion of 2009 Depr

Asset Cost Salvage Value Amount Life(yrs) Depreciation 2009 Owned Expense
Warehouse $1,950,000 $200,000 $1,750,000 20 $ 87,500 12/12 $ 87,500
Equipment 1,000,000 60,000 940,000 5 188,000 12/12 188,000
Furniture &
Fixtures 400,000 30,000 370,000 10 37,000 9/12 27,750
Trucks 51,600 9,600 42,000 4 10,500 6/12 5,250

26. (a) Building 650,000

Cash 65,000
Note Payable 585,000

Equipment 80,000
Cash 80,000

(b)
Depreciable Useful Life
Cost Salvage Value Amount (years)
$650,000 $150,000 $500,000 25

SL Annual Depreciation: $20,000

Year Beg. BV Depr End. BV Acc. Depr.
2009 $650,000 $20,000 $630,000 $20,000
2010 630,000 20,000 610,000 40,000

DDB Annual Depreciation Rate: 0.08

Year Beg. BV Depr End. BV Acc. Depr.
2009 $650,000 $52,000 $598,000 $52,000
2010 598,000 47,840 550,160 99,840

(c) (1) 2009 and 2010; same entry:

Depreciation Expense - Building 20,000
Accumulated Depreciation - Building 20,000
 (2) DDB 2009:
Depreciation Expense - Building 52,000
Accumulated Depreciation – Building 52,000

DDB 2010:
Depreciation Expense - Building 47,840
Accumulated Depreciation – Building 47,840

(d)
Depreciable Useful Life
Cost Salvage Value Amount (years)
$80,000 $8,000 $72,000 4

SL Annual Depreciation: $18,000

Year Beg. BV Depr End. BV Acc. Depr.
2009 $80,000 $18,000 $54,000 $18,000
2010 62,000 18,000 44,000 36,000
2011 44,000 18,000 26,000 54,000
2012 26,000 18,000 8,000 72,000

DDB Annual Depreciation Rate 0.5

Year Beg. BV Depr End. BV Acc. Depr.
2009 $80,000 $40,000 $40,000 $40,000
2010 40,000 20,000 20,000 60,000
2011 20,000 10,000 10,000 70,000
2012 10,000 2,000* 8,000 72,000

*Can only take $2,000 in this year because to take $5,000 would depreciate the equipment
below the salvage value.

(e) It would not be unethical to use the SL method. Both SL and DDB are acceptable
depreciation methods. The organization needs to choose one method to use for a
particular asset and continue the use of that method throughout the asset's life.

(f) Positive: Used equipment is less expensive; thus, depreciation is a lower amount.
Reduced expenses are good for new businesses that do not have large revenues from
which to deduct expenses.

Negative: Used equipment has a shorter life and may require more maintenance.
27. (a)
Depreciable
Cost Salvage Value Amount Useful Life (years) Useful Life (miles)
$2,600,000 $700,000 $1,900,000 5 500,000

SL Annual Depreciation: $380,000

Year Beg. BV Depr End. BV Acc. Depr.
2009 $2,600,000 $380,000 $2,220,0000 $ 380,000
2010 2,220,000 380,000 1,840,000 760,000
2011 1,840,000 380,000 1,460,000 1,140,000
2012 1,460,000 380,000 1,080,000 1,520,000
2013 1,080,000 380,000 700,000 1,900,000

DDB Annual Depreciation Rate: 0.4

Year Beg. BV Depr End. BV Acc. Depr.
2009 $2,600,000 $1,040,000 $1,560,000 $1,040,000
2010 1,560,000 624,000 936,000 1,664,000
2011 936,000 236,000* 700,000 1,900,000
2012 700,000 700,000
0 1,900,000
2013 700,000 700,000
0 1,900,000

*Can only take $2,000 in this year because to take $374,400 would depreciate the equipment
below the salvage value.

UOP Per-mile depreciation rate: $3.80

Miles Year Beg. BV Depr End. BV Acc. Depr.
100,000 2009 $2,600,000 $380,000 $2,220,000 $ 380,000
120,000 2010 2,220,000 456,000 1,764,000 836,000
130,000 2011 1,764,000 494,000 1,270,000 1,330,000
90,000 2012 1,270,000 342,000 928,000 1,672,000
60,000 2013 928,000 228,000 700,000 1,900,000

(b) Units of production is probably the best because it depreciates the asset only to the
extent that it is used.

(c) The bank would probably prefer CALAir to use the straight-line method because the
effect on net income is consistent. Also, other methods may cause a smaller net
income in early years while the bank loan is still outstanding.

(d) The depreciation method should have limited effect on CALAir’s ability to repay the
bank because depreciation is not a cash expense. However, the method chosen may
affect the amount of taxes to be paid by the business, which would affect cash flows.

The only other way that a depreciation method could affect cash flows (ability to
repay the loan) is if large depreciation amounts (i.e., DDB Method) caused lower net
income, which then led to a loss of confidence in the company and lower future
revenues. This effect is not likely because investors are usually more savvy that that.
28. Calculations
Depreciable
Cost Salvage Value Amount Useful Life (years)
$15,500.00 $2,000.00 $13,500.00 6

SL Annual Depreciation: $2,250.00

Year Beg. BV Depr End. BV Acc, Depr.
2009 $15,500.00 $2,250.00 $13,250.00 $2,250.00
2010 13,250.00 2,250.00 11,000.00 4,500.00
2011 11,000.00 2,250.00 8,750.00 6,750.00
(3/12 year) 2012 8,750.00 562.50 8,187.50 7,312.50

(a) Depreciation Expense - Machines 562.50

Accumulated Depreciation - Machines 562.50

(b) $8,187.50 in total or $1,637.50 per machine

(c) Cash 8,000.00

Accumulated Depreciation - Machines 7,312.50
Loss on Sale of Machines 187.50
Machines 15,500.00

(d) Cash 9,300.00

Accumulated Depreciation - Machines 7,312.50
Machines 15,500.00
Gain on Sale of Machines 1,112.50

29. (a) 1/4 Patent 1,500,000

Cash 1,500,000

2/9 Cash 800,000

Patent 753,000
Gain on Sale of Patent 47,000

6/30 Amortization Expense 50,000

Patent 50,000
Loss due to Obsolescence 557,000
Patent 557,000

12/31 Amortization Expense 300,000

Patent 300,000

12/31 R&D Expense 876,800

Cash 876,800
 Shorter of Useful and
Cost Salvage Value Amortizable Amount Legal Life
$1,500,000 $0 $1,500,000 5

Amortization Annual Amortization: $300,000.00

Year Beginning Balance Amortization Ending Balance
2009 $1,500,000 $300,000 $1,200,000

(b) 12/31 R&D Expense 876,800

Cash 876,800

(c) 12/31 Research Expense 540,700

Cash 540,700

12/31 Development Cost 336,100

Cash 336,100

(d) If an investor were only concerned about short-term profitability, the accounting
treatment in part (d) would be more preferable because expenses for the year would
be $336,100 less than they would be if U.S. GAAP were used. Thus, income before
income taxes would be $336,100 higher. However, if no viable asset were produced
from the development expenses, that asset would simply have to be written off in a
future period—creating the same decline in income that would have occurred under
U.S. GAAP.

30. (a) Kosciusko Corporation

Partial Balance Sheet
December 31, 2009

Plant, Property and Equipment

Land $ 350,000
Office Building $ 748,000
Less Accumulated Depreciation (230,000) 518,000

Production Equipment $1,072,800

Less Accumulated Depreciation (112,000) 960,800

Office Furniture $ 131,500

Less Accumulated Depreciation (61,000) 70,500

Delivery Trucks $ 320,000

Less Accumulated Depreciation (125,000) 195,000
Total PPE $2,094,300

(b) Land is not a depreciable asset.

 (c) Average Useful Life = Average Investment ÷ Depreciation Expense

Depreciation
Average Investment Expense Average Useful Life
Office Building $ 748,000 $34,000 22 years
Production Equipment 1,072,800 89,400 12 years
Office Furniture 131,500 26,300 5 years
Delivery Trucks 320,000 40,000 8 years

Average Age = Accumulated Depreciation ÷ Depreciation Expense

Accumulated Depreciation Average

Depreciation Expense Age
Office Building $230,000 $34,000 6.8 years
Production Equipment 112,000 89,400 1.3 years
Office Furniture 61,000 26,300 2.3years
Delivery Trucks 125,000 40,000 3.1 years

(d) Capital Spending to Depr. Exp. Ratio = Capital Spending ÷ Depreciation Expense

Depreciation Cap Spending

Capital Spending Expense to Depr Exp
Office Furniture $60,000 $26,300 2.3:1
Delivery Trucks 5,000 40,000 .125 or 1:8

The rule of thumb is that the ratio should be about 1:1.2 (or .833). The lower ratio for
delivery trucks suggests that the company is cutting back on expenditures. For office
furniture, however, the company is spending a lot, which might indicate that the
company is remodeling its offices.

(e) Users may want to know about impairments to the assets, particularly the production
equipment. Equipment typically has a short life as innovations make older equipment
obsolete. The ratio calculations indicate that the production equipment has a life of 12
years which, depending on the type of business in which this company operates, may
be fairly long.

31. (a) Depreciation Expense 4,375

Accumulated Depreciation – Truck 4,375

Cash 9,000
Accumulated Depreciation – Truck 23,125
Loss on Sale of Delivery Truck 2,875
Delivery Truck 35,000
 Delivery Truck
Depreciable
Cost Salvage Value Amount Useful Life (years)
$35,000 $5,000 $30,000 4

SL Annual Depreciation: $7,500

Year Beg. BV Depr End. BV Acc. Depr.
(6/12 year) 2006 $35,000 $3,750 $31,250 $ 3,750
2007 31,250 7,500 23,750 11,250
2008 23,750 7,500 16,250 18,750
(7/12 year) 2009 16,250 4,375 11,875 23,125

(b) Land 180,000

Building 220,000
Cash 100,000
Notes Payable 300,000

Proportion of
FMV Proportion of FMV Total Cost Cost
Land $247,500 0.45 $400,000 $180,000
Building 302,500 0.55 400,000 220,000
$550,000 $400,000

(c) Depreciation Expense – Building 17,000

Accumulated Depreciation – Building 17,000

Building
Depreciable
Cost Salvage Value Amount Useful Life (years)
$220,000 $50,000 $170,000 10

SL Annual Depreciation: $17,000

Year Beg. BV Depr End. BV Acc. Depr.
2009 $220,000 $17,000 $203,000 $17,000

Depreciation Expense 3,888

Accumulated Depreciation – Equipment 3,888

Office Equipment
Depreciable
Cost Salvage Value Amount Useful Life (years)
$45,000 $4,000 $41,000 5
 DDB Annual Depreciation Rate: 0.4
Year Beg. BV Depr End. BV Acc. Depr.
2006 $45,000 $18,000 $27,000 $18,000
2007 27,000 10,800 16,200 28,800
2008 16,200 6,480 9,720 35,280
2009 9,720 3,888 5,832 39,168

Depreciation Expense 9,200

Accumulated Depreciation – Machinery 9,200

Factory Machinery
Depreciable
Cost Salvage Value Amount Useful Life (years)
$100,000 $8,000 $92,000 10

SL Annual Depreciation: $9,200

Year Beg. BV Depr End. BV Acc. Depr.
2005 $100,000 $9,200 $90,800 $ 9,200
2006 90,800 9,200 81,600 18,400
2007 81,600 9,200 72,400 27,600
2008 72,400 9,200 63,200 36,800
2009 63,200 9,200 54,000 46,000

Amortization Expense 1,000

Patent 1,000
($7,000 ÷ 7 years)

(d) Withers Industries

Partial Balance Sheet
December 31, 2009

Plant, Property and Equipment

Land $180,000
Building $220,000
Less Accumulated Depreciation (17,000) 203,000
Office Equipment $ 45,000
Less Accumulated Depreciation (39,168) 5,832
Factory Machinery $100,000
Less Accumulated Depreciation (46,000) 54,000
Total PPE $442,832

Intangible Assets
Patent $ 6,000
 (e) These transactions made the following effects on the income statement:
Depreciation Expense of $34,463 was taken.
Amortization Expense of $1,000 was taken.
A loss on sale of $2,875 was taken.

In all, $21,338 expenses (which reduced net income) ended up on the income statement
as a result of these transactions.

(f) Average Useful Life = Average Investment ÷ Depreciation Expense

Average Investment Depr. Expense Average Useful Life

Building $211,500 $17,000 12.4 years
Office Equipment 45,000 3,888 11.6 years
Factory Machinery 100,000 9,200 10.9 years

Average Age = Accumulated Depreciation ÷ Depreciation Expense

Accumulated
Depreciation Depr. Expense Average Age
Building $17,000 $17,000 1.0 years
Office Equipment 39,168 3,888 10.1 years
Factory Machinery 46,000 9,200 5.0 years

CASES
32. (a)
Depreciable
Cost Salvage Value Amount Useful Life (years) Useful Life (units)
$15,000 $1,000 $14,000 5 3,500

SL Annual Depreciation: $2,800

Year Beg. BV Depr End. BV Acc. Depr.
2009 $15,000 $2,800 $12,200 $2,800
2010 12,200 2,800 9,400 5,600

DDB Annual Depreciation Rate: 0.4

Year Beg. BV Depr End. BV Acc. Depr.
2009 $15,000 $6,000 $9,000 $6,000
2010 9,000 3,600 5,400 9,600
 (b)
Depreciable
Cost Salvage Value Amount Useful Life (years) Useful Life (units)
$15,000 $1,000 $14,000 5 3,500

UOP Per-unit depreciation rate: $4

Units Year Beg. BV Depr End. BV Acc. Depr.
550 2009 $15,000 $2,200 $12,800 $2,200
670 2010 12,800 2,680 10,120 4,880

(c) Each student will have a different answer and a different justification. Straight-line
may be considered to provide a better matching of expenses to revenues because it
provides a constant amount of depreciation expense each year of an asset's life. For
some rapidly deteriorating assets, DDB may better match expenses and revenues.
However, for items that deteriorate with specific usage, units of production may
provide better matching.
(d) Units-of-production will provide the highest net income in both years 1 and 2,
because that method will show the lowest amount of depreciation expense on the
income statement.

(e) DDB Method gives the highest expense and, therefore, the lowest net income, which
will minimize tax liability.

(f) A company may want to “smooth” net income (make it as consistent as possible from
year to year) on the financial statements. Therefore, a company often chooses SL for
financial statement presentation. A company may want lower taxes, so it might use
the DDB method to have higher depreciation expenses in early years and lower taxes
in those years. If a company continues to add assets, the DDB method will continue
to give high depreciation expenses each year for tax purposes. Because companies
want both “smooth” earnings and low taxes, they are probably allowed to do both so
that there is no incentive to manipulate either.

It is ethical to use different methods for tax purposes and financial statement
purposes. Eventually the same amount of depreciation will be taken regardless of the
method chosen if the asset is kept for the entire life of the asset. “Tax avoidance” is a
term that means operating within the tax laws (i.e., it is legal) to minimize tax debt. It
is in the best interest of a company to minimize its tax debt, so companies are likely
to take advantage of all legal ways to make that minimization possible.

33. (a) The air compressor cannot be depreciated any longer because it already has a zero
book value. Assets cannot be depreciated below their cost.

(b) Yes, it is acceptable to keep the asset on the books even if it is fully depreciated,
especially if the asset is still in good working condition and is currently being used by
the business.
 (c) The matching principle was violated because the cost of the air compressor was
spread over four years ($600 per year), but it will continue to be used for a few more
years. Therefore, in the first four years, too much expense was taken related to the use
of the air compressor, and in future years, too little depreciation (none) will be
expensed. Thus, income for the first four years was actually understated and income
for however long the compressor continues to be used is overstated.

The violation was not intentional. Depreciation computations are estimates and are
made on the best information available at the time. However, if a company
intentionally misrepresents salvage value (usually too high) or useful life (usually too
long), financial statement users can be very misled. For example, consider the case of
Waste Management Inc. which assigned a $25,000 salvage value to each garbage
truck but the company never sold used garbage trucks; WM also used a depreciation
period that was both longer than the actual depreciable life and longer than the normal
depreciation period in the garbage industry. Net income for every year from 1992 to
1997 was overstated by more than $100 million. In early 1998, WM issued restated
financial statements for 1991-1997 that were adjusted by $1.32 billion.

(d) When an asset is acquired, two very important estimates are made: (1) salvage value
and (2) useful life. If these estimates are inaccurate, depreciation calculations will be
too high or too low. When depreciation taken is too low or too high, the matching
principle has been violated because the cost of the asset is not properly matched with
the revenues that asset helped to generate.

The salvage value is the value that will not be depreciated; it is the book value that
will remain when the assets useful life is over. This estimate represents the amount
that you believe you will be able to sell the asset for after you are done using it. If it
will be worthless, the salvage value should be zero. Some suggestions for estimating
this number are (1) using your past experience with similar items or (2) finding out
what used items are selling for. If the estimate is too high (low), then the depreciable
amount will be too low (high), resulting in depreciation expense that is too low
(high).

The useful life is the amount of time in years the asset will be used or the number of
units or times the asset will be used. This estimates the length of time you will use the
asset. Some suggestions for estimating this number are (1) your experience with
similar items or (2) the manufacturer’s estimation of life expectancy. If the estimate is
too high (low), then the depreciation taken in one year is too low (high) and
depreciation will continue too long (not long enough).

34. (a) Answers will vary.

(b) Intangible assets were reduced (credited).

Operating expenses were increased (debited).
Net income and Retained Earnings were reduced.
 (c) The goodwill was produced when company A bought company B and paid more than
the fair market value for the assets. If an impairment has occurred, the carrying value
of B’s net assets are now greater than the fair market value. This overstatement could
be because of a decline in fair market value caused by obsolete inventory or
technology or because products and services that are no longer desirable. A positive
indicator might be that the managers have decided to "clean up" the balance sheet
because they recognize that the goodwill being carried does not truly reflect
organizational image or value. For instance, assume that Company A bought
Company B which had lots of knowledge workers at a price in excess of FMV.
Corporate culture at A was such that the B employees did not fit in well and many
employees began leaving—deteriorating that which was really being paid for when
the goodwill was recorded. Writing off some of that goodwill might reflect the
"decline in organizational value" due to the exodus of employees.

35. (a) (The company includes amortization with depreciation.)

Average Age = Accumulated Depreciation ÷ Depreciation Expense
Average Age = $5,901,000,000 ÷ $1,101,000,000
Average Age = 5.36 years

Average Investment = (Beginning + Ending) ÷ 2

Average Investment = ($26,639,000,000 + $26,457,000,000) ÷ 2
Average Investment = $53,096,000,000 ÷ 2
Average Investment = $26,548,000,000

Average Useful Life = Average Investment ÷ Depreciation Expense

Average Useful Life = $25,548,000,000 ÷ $1,101,000,000
Average Useful Life = 24.11 years

(b) Capital Spending Ratio = Capital Spending ÷ Depr Expense

Capital Spending Ratio = $3,312,000,000 ÷ $1,101,000,000
Capital Spending Ratio = 3.01:1

The ratio is much larger than the rule of thumb (1:1.2) indicating that Carnival is not
backing off capital spending. Carnival does not break down the capital spending or
depreciation into types of PPE, so it is difficult to determine what the spending is on.
However, there are separate discussions of ships that are under construction, the
portion of interest that was capitalized and included in the capital spending number
($44 million), and that ship improvements are also included.

(c) Carnival does not discuss the average age of its assets.

(d) Carnival uses the straight-line method of depreciation. Ships are depreciated over 30
years, and other PPE assets are depreciated over a range of years.

36. Answers will vary.

 SUPPLEMENTAL PROBLEMS
37. (a) 1/2 Computer 55,000
Cash 55,000

1/2 Insurance Expense (or Prepaid Insurance) 900

Cash 900

3/30 Delivery Van 27,800

Cash 27,800

3/30 Automobile Expense 340

Cash 340

8/8 Land 87,200

Cash 87,200

8/8 Property Tax Expense 950

Cash 950

(b)12/31 Depreciation Expense 9,300

Acc. Depreciation – Computer 5,400
Acc. Depreciation – Van 3,900

COMPUTER
Depreciable
Cost Salvage Value Amount Useful Life (years)
$55,000 $1,000 $54,000 10

SL Annual Depreciation: $5,400.00

Year Beg. BV Depr End. BV Acc. Depr.
2009 $55,000 $5,400 $49,600 $5,400

DELIVERY VAN
Depreciable
Cost Salvage Value Amount Useful Life (years)
$27,800 $1,800 $26,000 5

SL Annual Depreciation: $5,200

Year Beg. BV Depr End. BV Acc. Depr.
2009 (9/12yr.) $27,800 $3,900 $23,900 $3,900
38. (a)
Depreciable Useful Life Useful Life
Cost Salvage Value Amount (years) (miles)
$52,000 $7,000 $45,000 4 144,000

SL Annual Depreciation: $11,250

Year Beg. BV Depr End. BV Acc. Depr.
(9/12 year) 2009 $52,000.00 $8,437.50 $43,562.50 $ 8,437.50
2010 43,562.50 11,250.00 32,312.50 19,687.50
2011 32,312.50 11,250.00 21,062.50 30,937.50
2012 21,062.50 11,250.00 9,812.50 42,187.50
(3/12 year) 2013 9,812.50 2,812.50 7,000.00 45,000.00

DDB Annual Depreciation Rate: 0.5

Year Beg. BV Depr End. BV Acc. Depr.
(9/12 year) 2009 $52,000.00 $19,500.00 $32,500.00 $19,500.00
2010 32,500.00 16,250.00 16,250.00 35,750.00
2011 16,250.00 8,125.00 8,125.00 43,875.00
2012 8,125.00 1,125.00* 7,000.00 45,000.00

*Can only take $1,125 in this year because to take $4,062.50 would depreciate the equipment
below the salvage value.

UOP Per-unit depreciation rate: $0.3125

Year Units Beg. BV Depr End. BV Acc. Depr.
2009 30,000 $52,000.00 $ 9,375.00 $42,625.00 $ 9,375.00
2010 32,000 42,625.00 10,000.00 32,625.00 19,375.00
2011 36,000 32,625.00 11,250.00 21,375.00 30,625.00
2012 40,000 21,375.00 12,500.00 8,875.00 43,125.00
2013 6,000 8,875.00 1,875.00 7,000.00 45,000.00

(b) Depreciation taken in 2011 would be $8,125 x 10/12 or $$6,771. Thus total
depreciation to date of disposal is $19,500 + $16,250 + $6,771 = $42,521. The
following entry needs to be made prior to disposal (regardless of which
circumstance):

Depreciation Expense 6,771

Accumulated Depreciation – Limo 6,771

(1) Cash 15,000

Accumulated Depreciation – Limo 42,521
Gain on Sale of Limo 5,521
Limo 52,000

(2) Cash 9,479

Accumulated Depreciation – Limo 42,521
Limo 52,000
Solution manual for Core Concepts of Accounting Raiborn 2nd Edition

(3) Cash 9,000

Accumulated Depreciation – Limo 42,521
Loss on Sale of Limo 479
Limo 52,000

(4) Accumulated Depreciation – Limo 42,521

Loss on Disposal of Limo 9,629
Limo 52,000
Cash 150

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