mba_fa_《financial_accounting》_习题答案9
CHAPTER 9
LONG-LIVED ASSETS
BRIEF EXERCISES
BE9–1
a. The new method, straight-line depreciation, will increase net income in the early years and
reduce income in the later years versus using an accelerated method. An accelerated method of depreciation increases the depreciation charges in the early years of the life of an asset and reduces the depreciation charges in the later years.
b. Allegheny may have decided that it wanted depreciation charges to be spread evenly over the
life of an asset so that the impact on net income in any one reporting period was less. It may also feel that it will make its financial statements easier to compare with its competitors.
During periods of high fixed asset investment Allegheny’s results may look unfavorable versus other companies that use a straight-line method instead of an accelerated method.
c. In the annual report one could look through footnote #1. This footnote typically highlights all of
the significant accounting policies and methods used by the company to prepare the financial statements.
BE9–2
a. The recognition of depreciation and amortization affects the basic accounting equation by
reducing assets and reducing retained earnings in the stockholders’ equity section. Fixed assets such as property, plant and equipment are reduced through depreciation charges (which are collected in the contra asset account Accumulated Depreciation) which lower net income.
Intangible assets are reduced by amortization charges which reduce the net income of the company. This reduction in net income reduces the retained earnings of the company.
b. Boeing recognized a gain of $117 million, computed as follows:
Accumulated depreciation 2002 $12,719 million
+ Depreciation charges for 2003 1,005 million
– Accumulated depreciation 2003 12,963 million
Accumulated depreciation on assets sold $ 761 million
PP&E 2002 $21,484 million
+ PP&E purchases for 2003 741 million
– PP&E 2003 21,395 million
PP&E sold $ 830 million
1
Derived Journal Entry:
Cash (+A) 186
Accumulated Depreciation (+A) 761
Property, Plant & Equipment (-A) 830
Gain on Sale (R, +SE) 117
The gain on the sale of property, plant and equipment would be shown in the income statement, usually in an “other gains and losses” section. These transactions would affect the statement of cash flows in the “funds from investing activities section”. Any sales would be a source of funds in the amount of cash received.
BE9–3
a. Johnson and Johnson invested $122 million ($594– $472) of land during 2003.
b. Accumulated depreciation increased during 2003 because of depreciation expense taken by
Johnson and Johnson. Instead of reducing the asset account directly, depreciation expense is added to accumulated depreciation, which offsets the asset account to show its reduction in value.
c. During 2003 Johnson and Johnson must have sold some assets that were classified in the
fixed assets accounts. These accounts are carried at historical cost so that only the sale of an asset will reduce the account. Any gains or losses on the sale of these assets would be shown on the income statement. The change from 2002 ($14,314) to 2003 ($17,052) is $2,738. Since Johnson & Johnson spent $5,074 on fixed assets, then $2,336 ($5,074 - $2,738) must have been sold.
d. Johnson and Johnson would show $9,846 million for property, plant and equipment on its
financial statement for 2003. The gross amount and the accumulated depreciation would be disclosed in the footnote.
EXERCISES
E9–1
a. Lowery, Inc., should capitalize all costs associated with getting the equipment in a serviceable
condition and location. These costs would be the actual purchase price of $920,000, the transportation cost of $62,000, and the insurance cost of $10,000. Therefore, the total cost of the equipment is $992,000.
b. The depreciation base equals the dollar amount of a fixed asset's cost that the company does
not expect to recover over the asset's useful life, but instead expects to consume over the asset's useful life. Since the plant equipment's total cost is $992,000 and since Lowery, Inc., expects to sell the equipment for $50,000 at the end of its useful life, Lowery, Inc., does not expect to recover $942,000 of the asset's cost. Therefore, the depreciation base equals $942,000. The depreciation base always equals the capitalized cost of a fixed asset less its estimated salvage value.
c. The amount that will be depreciated over the life of the plant equipment is its depreciation base.
The depreciation base equals the amount of the equipment's future benefits that the company will consume. The outflow of future benefits are expenses, in this case depreciation expense.
Therefore, the total amount that Lowery, Inc., will depreciate over the equipment's useful life is $942,000.
E9–2
Lot 1 Lot 2 Lot 3 Lot 4
Revenue $ 160,000 $ 120,000 $ 60,000 $ 60,000
Expenses 128,000* 96,000* 48,000* 48,000*
Net income $ 32,000 $ 24,000 $ 12,000 $ 12,000
_______________
* Expenses were calculated as follows:
1. Calculate total market value.
Total Market value = $160,000 + $120,000 + $60,000 + $60,000 = $400,000
2. Allocate costs to each lot based upon relative market values.
Lot 1 = $320,000 × (160,000/400,000) = $128,000
Lot 2 = $320,000 × (120,000/400,000) = $ 96,000
Lot 3 = $320,000 × (60,000/400,000) = $ 48,000
Lot 4 = $320,000 × (60,000/400000) = $ 48,000
E9–3
a. All costs that are necessary and reasonable to get an asset ready for its intended use should be
capitalized as part of the cost of that asset. In the case of property, plant, and equipment, "ready for its intended use" means that the asset is in a serviceable condition and location.
Land
Item Land Improvements Building Tract of land $90,000
Demolition of warehouse 10,000
Scrap from warehouse (7,000)
Construction of building $140,000
Driveway and parking lot $32,000
Permanent landscaping 4,000
Total $ 97,000 $32,000 $140,000
b. Land:
Since land is assumed to have an indefinite life, it is never depreciated.
Land Improvements:
Depreciation Expense—Land Improvements (E, –SE)................... 1,600 Accumulated Depreciation—Land Improvements (–A)............... 1,600 Depreciated land improvements.
Building:
Depreciation Expense—Building (E, –SE)....................................... 7,000 Accumulated Depreciation—Building (–A).................................. 7,000 Depreciated building.
E9–4
a. Maintenance
b. Maintenance
c. Maintenance
d. Betterment
e. Maintenance
f. Maintenance
g. Betterment
h. Maintenance
i. Betterment
Note:The classification of these expenditures can be quite subjective. Some accountants might very well classify some of these expenditures differently. For example, one might argue that the cost of the muffler in (h) is actually a betterment expenditure if the reduced noise allows workers to work more efficiently, thereby increasing the productive capacity of the machine.
E9–5
a. (1) Expensed immediately:
Income Statement
2008 2007 2006 Revenues $ 65,000 $ 65,000 $ 65,000
Amortization 0 0 (40,000)
Other expenses (20,000) (20,000) (20,000)
Net income $ 45,000 $ 45,000 $ 5,000
Balance Sheet
12/31/08 12/31/07 12/31/06 Assets
Current assets $ 135,000 $ 90,000 $ 45,000
Long-lived assets
(including land) 50,000 50,000 50,000
Total assets $ 185,000 $ 140,000 $ 95,000
Liabilities and Stockholders' Equity
Liabilities $ 35,000 $ 35,000 $ 35,000
Stockholders' equity 150,000 105,000 60,000
Total liabilities & stockholders'
equity $ 185,000 $ 140,000 $ 95,000
E9–5 Continued
(2) Amortized over two years:
Income Statement
2008 2007 2006 Revenues $ 65,000 $ 65,000 $ 65,000
Amortization 0 20,000 20,000
Other expenses 20,000 20,000 20,000
Net income $ 45,000 $ 25,000 $ 25,000
Balance Sheet
12/31/08 12/31/07 12/31/06 Assets
Current assets $ 135,000 $ 90,000 $ 45,000
Long-lived assets (including
land) 50,000 50,000 70,000
Total assets $ 185,000 $ 140,000 $ 115,000
Liabilities and Stockholders' Equity
Liabilities $ 35,000 $ 35,000 $ 35,000
Stockholders' equity 150,000 105,000 80,000
Total liabilities & stockholders'
equity $ 185,000 $ 140,000 $ 115,000
(3) Amortized over three years:
Income Statement
2008 2007 2006 Revenues $ 65,000 $ 65,000 $ 65,000
Amortization 13,334 13,333 13,333
Other expenses 20,000 20,000 20,000
Net income $ 31,666 $ 31,667 $ 31,667
Balance Sheet
12/31/08 12/31/07 12/31/06 Assets
Current assets $ 135,000 $ 90,000 $ 45,000
Long-lived assets (including
land) 50,000 63,334 76,667
Total assets $ 185,000 $ 153,334 $ 121,667
Liabilities and Stockholders' Equity
Liabilities $ 35,000 $ 35,000 $ 35,000
Stockholders' equity 150,000 118,334 86,667
Total liabilities & stockholders'
equity $ 185,000 $ 153,334 $ 121,667
b. 2008 2007 2006 Total
Method 1: $45,000 $45,000 $ 5,000 $95,000 Method 2: 45,000 25,000 25,000 95,000 Method 3: 31,666 31,667 31,667 95,000
E9–5 Concluded
c. The balance sheets under all three methods report identical amounts for each balance sheet
account. Since the asset was fully amortized by December 31, 2008, the method used to amortize the asset does not affect the amounts reported on the balance sheet as of December 31, 2008.
E9–6
a. and
b.
Stork Freight Company
Income Statement
For the Year Ended December 31
12-Year Useful Life 6-Year Useful Life Revenues $ 50,000,000 $ 50,000,000 Expenses:
Operating expenses $ 25,000,000 $ 25,000,000 Depreciation expense 1,250,000 2,500,000 Total expenses 26,250,000 27,500,000 Net income $ 23,750,000 $ 22,500,000 The percentage decrease in net income would be approximately 5.26% [($22,500,000 – $23,750,000) ÷ $23,750,000].
c.
12-Year Useful Life 6-Year Useful Life Net income $ 23,750,000 $ 22,500,000
Dividend payout percentage 30% 30%
Dividends $ 7,125,000 $ 6,750,000
The difference in dividends due simply to using different estimated useful lives for the planes would be $375,000 ($7,125,000 – $6,750,000).
E9–7
a. An asset's book value equals the asset's initial capitalized value less the associated
accumulated depreciation. With straight-line depreciation, accumulated depreciation equals depreciation expense per year times the number of years the asset has been used. Therefore, the asset's book value would be calculated as follows:
Depreciation expense per year = (Cost – Salvage Value) ÷ Useful Life
= ($60,000 – $12,000) ÷ 5 years
= $9,600 per year
Book Value = Capitalized Cost – Accumulated Depreciation
= $60,000 – ($9,600 × 3 years)
= $31,200
E9–7 Concluded
b. Depreciation Expense = [(Cost – Accumulated Depreciation) – Salvage Value] ÷
Remaining Useful Life
= (Book value – Salvage value) ÷ Remaining useful life
= ($31,200 – $12,000) ÷ 5 remaining years
= $3,840
Depreciation Expense (E, –SE)....................................................... 3,840 Accumulated Depreciation (–A)................................................. 3,840 Depreciated asset for 2005.
E9–8
Straight- Double-Declining- Activity
Objective Line Balance Method
(a) x1x1x1
(b) x x x
(c) x x2
(d) x
(e) x
(f) x
(g) x x3
(h) x x x
1Under certain conditions, all three methods could meet this objective. However, for the straight-line method and the double-declining-balance method, this objective will be met only by chance.
The activity method will always meet this objective because depreciation is based upon the actual use of the asset.
2It is possible that the activity method would generate the largest net income in the last year of an asset's useful life. However, this result would be due to the company's use patterns of the asset and would not be due to the depreciation method per se.
3See note (2). The same rationale would hold in this case too.
E9–9
a. (1) Straight-line depreciation:
Depreciation per Year = (Cost – Salvage Value) ÷ Useful Life
= ($300,000 – $60,000) ÷ 4 years
= $60,000 per year for 2005, 2006, 2007, and 2008
E9–9 Concluded
(2) Double-declining-balance depreciation:
Depreciation Depreciation Accumulated Book Date Factor Expense Cost Depreciation Value
1/1/05 $300,000 $ 0 $300,000
12/31/05 50% $150,000a300,000 150,000 150,000
12/31/06 50% 75,000 300,000 225,000 75,000
12/31/07 50% 15,000b300,000 240,000 60,000
12/31/08 50% 0 300,000 240,000 60,000 ______________
a Depreciation Expense = Book Value at Beginning of the Period × Depreciation Factor
b Book Value ×Depreciation Factor = $75,000 ×50% = $37,500. If Benick Industries
depreciated $37,500 in 2007, the asset's book value would drop below its salvage value. To prevent this from happening, depreciation expense for 2007 can be only $15,000.
b. A manager should consider the costs and benefits associated with each depreciation method.
The most likely benefit is the impact of depreciation methods on income taxes. An accelerated method decreases the present value of tax payments. However, since there is no requirement that a company use the same depreciation method for financial reporting purposes as it does for tax reporting, tax considerations are not an issue for financial reporting. A manager should also consider the bookkeeping costs associated with each method. However, with computers the bookkeeping costs should be relatively consistent across methods. Finally, since the choice of depreciation methods affects net income, managers might consider the impact of the different depreciation methods on contracts such as debt covenants and incentive compensation contracts. Comparability with other in the same industry may also be a factor.
E9–10
a. Computer System (+A).................................................................... 335,000
Cash (–A)........................................................................... 335,000 Purchased computer system.
Note: Capitalizing the $10,000 of training costs could be debated. But, without incurring these costs, the computer system would not be in a serviceable condition. Hence, the
training costs meet the requirement to be capitalized as part of the fixed asset.
b. (1) Straight-line depreciation:
Depreciation per Year = (Cost – Salvage Value) ÷ Useful Life
= ($335,000 – $70,000) ÷ 5 years
= $53,000 per year for 2005, 2006, 2007, 2008, and 2009
E9–10 Concluded
(2) Double-declining-balance depreciation:
Depreciation Depreciation Accumulated Book Date Factor Expense Cost Depreciation Value
1/1/05 $335,000 $ 0 $335,000
12/31/05 40% $134,000a335,000 134,000 201,000
12/31/06 40% 80,400 335,000 214,400 120,600
12/31/07 40% 48,240 335,000 262,640 72,360
12/31/08 40% 2,360b335,000 265,000 70,000
12/31/09 40% 0 335,000
_____________
a Depreciation expense = Book value at beginning of the period×Depreciation factor
b Book value ×Depreciation factor = $72,360 ×40% = $28,944. If Stockton Corporation
depreciated $28,944 in 2008, the asset's book value would drop below its salvage value. To prevent this from happening, depreciation expense for 2008 can be only $2,360.
c. Depreciation Expense (E, –SE)................................................. 134,000
Accumulated Depreciation (–A)......................................... 134,000 Depreciated fixed asset for 2005.
E9–11
1. Activity Method:
Depreciation Expense per Mile = ($100,000 – $20,000) ÷ 200,000 Miles
= $0.4/Mile
Depreciation Expense (E, –SE)....................................................... 19,200 Accumulated Depreciation (–A)................................................. 19,200 Depreciated asset for 2005.
Depreciation Expense (E, –SE)....................................................... 14,000 Accumulated Depreciation (–A)................................................. 14,000 Depreciated asset for 2006.
Depreciation Expense (E, –SE)....................................................... 16,000 Accumulated Depreciation (–A)................................................. 16,000 Depreciated asset for 2007.
Depreciation Expense (E, –SE)....................................................... 10,000 Accumulated Depreciation (–A)................................................. 10,000 Depreciated asset for 2008.
E9–11 Concluded
Depreciation Expense (E, –SE)....................................................... 14,000
Accumulated Depreciation (–A)................................................. 14,000 Depreciated asset for 2009.
Depreciation Expense (E, –SE)....................................................... 4,000 Accumulated Depreciation (–A)................................................. 4,000 Depreciated asset for 2010.
Cash (+A) ......................................................................................... 12,000
Accumulated Depreciation (+A)....................................................... 77,200
Loss on Sale of Truck (Lo, –SE)...................................................... 10,800 Truck (–A)................................................................................... 100,000 Sold truck.
2. Straight-line Method:
Depreciation Expense per Year = ($100,000 – $20,000) ÷ 5 Years
= $16,000/year
Depreciation Expense (E, –SE)....................................................... 16,000 Accumulated Depreciation (–A)................................................. 16,000 Depreciated asset.
Note:This entry would be made each year for five years. No entry would be made in Year 6 since the truck's estimated useful life ended at the end of Year 5, which means that the
truck would have been depreciated down to its estimated salvage value.
Cash (+A) ....................................................................................... 12,000
Accumulated Depreciation (+A)....................................................... 80,000
Loss on Sale of Truck (Lo, –SE)...................................................... 8,000 Truck (–A)................................................................................. 100,000 Sold truck.
E9–12
a. Depletion (E, –SE)............................................................................ 1,200,000*
Oil Deposits (–A)........................................................................ 1,200,000 Depleted oil deposits.
___________
* $1,200,000 = ($4,000,000 ÷ 100,000 barrels)×30,000 barrels extracted
b. Depletion (E, –SE)............................................................................ 2,000,000*
Oil Deposits (–A)........................................................................ 2,000,000 Depleted oil deposits.
___________
* $2,000,000 = ($4,000,000 ÷ 100,000 barrels)×50,000 barrels extracted
c. $800,000
E9–13
a.
Depreciation Expense Correct Annual Cumulative Year Per Company's Books Depr. Exp. Difference Difference
2005 $120,000 $25,000 $95,000 $95,000
2006 0 25,000 (25,000) 70,000
2007 0 25,000 (25,000) 45,000
2008 0 25,000 (25,000) 20,000
b. After adjusting entries are prepared and posted on December 31, 2007, Accumulated
Depreciation will be understated by $75,000.
c. After adjusting entries, but before closing entries have been prepared and posted on December
31, 2007, Retained Earnings will be understated by $70,000.
d. After both adjusting and closing entries have been prepared and posted on December 31, 2007,
Retained Earnings will be understated by $45,000.
E9–14
a. Cash (+A) ....................................................................................... 235,000
Accumulated Depreciation—Office Equipment (+A)....................... 300,000 Office Equipment (–A)............................................................... 500,000 Gain on Sale of Fixed Assets (Ga, +SE)................................... 35,000 Sold office equipment.
b. Cash (+A) ......................................................................................... 185,000
Accumulated Depreciation—Office Equipment (+A)....................... 300,000
Loss on Sale of Fixed Assets (Lo, –SE)........................................... 15,000 Office Equipment (–A)............................................................... 500,000 Sold office equipment.
E9–15
Assuming that Paris Company kept the equipment for its entire five-year estimated useful life, the depreciation schedule on the equipment would be as follows.
Depreciation Depreciation Accumulated Book Date Factor Expense Cost Depreciation Value
1/1/03 $25,000 $ 0 $25,000
12/31/03 40% $10,000 25,000 10,000 15,000
12/31/04 40% 6,000 25,000 16,000 9,000
12/31/05 40% 3,600 25,000 19,600 5,400
12/31/06 40% 400* 25,000 20,000 5,000
12/31/07 40% 0 25,000 20,000 5,000
__________________
* Because the equipment's book value cannot drop below its estimated salvage value, depreciation expense for 2006 cannot exceed $400.
a. Accumulated Depreciation—Equipment (+A).................................. 19,600
Loss on Disposal of Equipment (Lo, –SE)....................................... 5,400 Equipment (–A).......................................................................... 25,000 Disposed of equipment.
b. Accumulated Depreciation—Equipment (+A).................................. 20,000
Loss on Disposal of Equipment (Lo, –SE)....................................... 5,000 Equipment (-A)........................................................................... 25,000 Disposed of equipment.
c. Cash (+A) ....................................................................................... 8,000
Accumulated Depreciation—Equipment (+A).................................. 19,600 Equipment (–A).......................................................................... 25,000 Gain on Sale of Fixed Assets (Ga, +SE)................................... 2,600 Sold equipment.
d. Fixed Asset (new) (+A).................................................................... 30,000
Accumulated Depreciation—Equipment (+A).................................. 20,000
Loss on Disposal of Fixed Asset (Lo, –SE)...................................... 3,000 Cash (–A)................................................................................... 28,000 Equipment (old) (–A).................................................................. 25,000 Exchanged fixed assets.
E9–16
a. and
b. First, let us compute the original cost of the equipment that was sold in 2005 as
follows:
Equipment Equipment Equipment Equipment
at the End + Purchased – sold during = at the End
of 2004 during 2005 2005 of 2005
$32,700 + $12,000 – X = $37,500
X = $7,200
Now, let us compute the related accumulated depreciation for the equipment sold during 2005 as follows:
Accumulated Depreciation Exp. Accumulated Accumulated
Depreciation at + for 2005 – Depreciation = Depreciation
the End of 2004 for the Sold at the End
Equipment of 2005
during 2005
$14,300 + $7,200 – X = $17,600
X = $ 3,900 Now, we can reconstruct the journal entry.
Cash................................................................................................. 5,400*
Accumulated Depreciation............................................................... 3,900 Equipment.................................................................................. 7,200 Gain on Sale of Equipment........................................................ 2,100 ___________
* $7,200 + $2,100 – $3,900 = $5,400
E9–17
Account Financial Statement
a. Property, plant & equipment Balance Sheet
Less: accumulated depreciation Balance Sheet
Depreciation expense Income Statement
Investments in property, plant & equipment Statement of Cash Flows
b. Property, plant & equipment – 2002 $36,912
Plus: investments in property, plant & equipment 3,656
Less: property, plant & equipment – 2003 38,692
Property, plant & equipment sold in 2003 $ 1,876
c. Accumulated depreciation – 2002 $19,065
Plus: depreciation expense – 2003 4,651
Less: accumulated depreciation – 2003 22,031
Accumulated depreciation – sold property $ 1,685
E9–17 Concluded
d. Compute the gain on the sale:
Cost of property sold $1,876
Less: accumulated depreciation 1,685
Book value of property sold $ 191
Sales price of property $100
Less: book value of property 191
Loss on sale of property $ 91
This loss on sale of property would appear on the income statement.
E9–18
a. First, let us compute the related accumulated depreciation for the equipment sold during 2005
as follows:
Accumulated Depreciation Cap. Accumulated Accumulated
Depreciation at + for 2005 – Depreciation = Depreciation
the End of 2004 for the Sold at the End
Equipment 0f 2005
during 2005
$9,800 + $3,800 – X = $10,500
X = $ 3,100 Now, we can reconstruct the journal entry.
Cash................................................................................................. 4,300
Loss on Sale of Equipment (900)
Accumulated Depreciation............................................................... 3,100 Equipment.................................................................................. 8,300 b. Equipment Equipment Equipment Equipment
at the End + Purchased – sold during = at the End
of 2004 during 2005 2005 of 2005
$23,400 + X – $8,300 = $26,900
X = $11,800
___________
Equipment purchased during 2000 = $11,800
E9–19
a. Swift Corporation should capitalize these costs. Assets are defined as items that are expected
to provide future economic benefits to the entity. Organization costs are costs incurred by an entity prior to starting operations. Such costs include legal fees to incorporate and accountant's fees to set up an accounting system. Without incurring these costs, most companies could not be in business. Consequently, organization costs allow a company to be in business, thereby helping it to generate future benefits. Since these costs help in generating future benefits, they should most definitely be capitalized.
b. Theoretically, organization costs should be amortized over their useful life. In the extreme,
organization costs provide a benefit over the entire life of a company. Since under the going concern assumption accountants assume that entities will exist indefinitely, it would seem that organization costs should be amortized over an indefinite period. Since this position is not practical, the accounting profession has decided that organization costs should be amortized over a period not to exceed forty years.
Assuming that Swift Corporation amortizes its organization costs over the maximum period of forty years, the appropriate adjusting journal entry for a single year would be as follows:
Amortization Expense (E, –SE)........................................................ 1,125 Organization Costs (–A)............................................................. 1,125 Amortized organization costs.
c. As mentioned in part (b), organization costs theoretically provide benefits over the entire life of
the company. Under the going concern assumption, the company is assumed to exist indefinitely. If the company is assumed to exist indefinitely and if organization costs provide benefits over the entire life of the company, then these costs should provide an indefinite benefit. Consequently, organization costs should provide a benefit for an indefinite period of time, which implies that they should be reported as an asset (i.e., future benefit) indefinitely.
But if organization costs are amortized, the asset will at some point in time have a zero balance, and the cost of the asset cannot be matched against the benefits the asset will help generate in the future. This situation contradicts the matching principle and the concept of an asset.
d. A patent gives a company the exclusive right to use or market a particular product or process,
thereby providing the company with an expected future benefit. Consequently, the costs incurred to acquire a patent should be capitalized as an asset and amortized over the patent's useful life. If Swift were to immediately expense the $65,000, the company would be implying that it did not expect to receive any benefits from the patent in the future. If this were the case, one would have to question why Swift purchased the patent in the first place.
e. Research and development costs may or may not provide a company with future benefits. The
company will not know whether or not a particular R & D expenditure will provide a future benefit until some time in the future. Due to the uncertainty of projecting the usefulness of a given R & D expenditure, the FASB, in Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs," requires companies to expense R & D costs in the year in which they are incurred.
E9–19 Concluded
f. Engaging in research and development activities can lead companies to develop new products
or processes that will provide them with future benefits. In such cases, the R & D costs should, theoretically, be capitalized. The R & D costs would then be allocated to those periods in which the costs help generate a benefit. From a practical standpoint, however, this matching of costs with the associated benefits is not readily possible. For example, consider a company that spends $10,000,000 trying to develop a more efficient manufacturing process. The company's attempts end in failure, but the company acquires some new technology from its R & D activities that permit it to develop a revolutionary new product ten years later. In this case, it is clear that the $10,000,000 eventually provided a future benefit. But this information is available only with hindsight. At the time the $10,000,000 was expended, all the company knew was that the R & D project was a failure. So, while capitalizing R & D costs and then amortizing the costs over their useful lives is theoretically superior to immediately expensing the R & D costs, immediately expensing R & D costs is extremely practical and lessens a manager's ability to manipulate the financial statements.
E9–20
a.
(1) Southern Robotics should report the costs incurred in acquiring the patent as an asset.
Therefore, the $50,000 of legal and filing fees should be capitalized as an asset in 2005.
Since it is company policy not to amortize intangible assets in the year of acquisition, the company would report the entire $50,000 as an asset as of December 31, 2005.
(2) Since Southern Robotics successfully defended its patent, the patent is still expected to
provide a future benefit to the company. Hence, the company should continue to carry the patent on its books as an asset. The amount it should report for the patent as of December 31, 2006 should be the cost of acquiring and defending the patent less the portion of these costs that have been amortized. Therefore, Southern Robotics should report $200,000 on its balance sheet (i.e., $50,000 in legal and filing fees incurred in 2005 + $200,000 in legal fees incurred in 2006 to defend the patent – $50,000 in amortization).
(3) Amortization Expense (E, –SE)................................................. 50,000
Patent (–A)........................................................................... 50,000 Amortized patent.
b.
(1) Since the lawsuit did not take place until 2006, the patent still had value to Southern
Robotics as of December 31, 2005. Therefore, the company should still report the patent at $50,000 on its books as of December 31, 2005. However, if Southern Robotics was aware of the lawsuit as of December 31, 2005, it might want to disclose the lawsuit and the potential effect on the company's financial statements in a footnote as a contingency.
(2) Since Southern Robotics was unsuccessful in defending its patent, the company no longer
has the exclusive right to use or market its robotics arm. Therefore, the patent no longer provides the company with any future benefits. Since the patent no longer provides any future benefits, it should be written off in 2006.
(3) Loss on Patent (Lo, –SE)........................................................... 50,000
Legal Expenses (E, –SE)........................................................... 200,000
Patent (–A)........................................................................... 50,000
Cash (–A)............................................................................. 200,000 Incurred legal fees for patent defense and wrote off patent.
E9–21
a. The journal entry for the acquisition can be derived from the information provided and
appears below:
Assets (+A) (at fair market value)...............................................5.1
Goodwill (+A)...............................................................................3.8
Liabilities (+L)............................................................................. 1.1
Cash (-A).................................................................................... 7.8
Goodwill represents the excess of the purchase price above the fair market value of the assets purchased.
b. Assets increased by a net $1.1 billion ($5.1 + 3.8 – 7.8) and liabilities increased by $1.1
billion.
PROBLEMS
P9–1
a. Stonebrecker should capitalize all costs that it incurred that were necessary and reasonable to
get the equipment in a serviceable condition and location. The capitalizable costs are (1) the $1,000,000 purchase price, (2) the $40,000 transportation costs actually incurred by Stonebrecker, (3) the $8,000 insurance coverage, (4) the $20,000 installation fees, (5) the $15,000 to reinforce the floor, and (6) the $10,000 of employee downtime. Some accountants may disagree with capitalizing the last two items as part of the equipment. However, theoretically, these costs are necessary to get the equipment in a usable condition. Therefore, the total dollar amount that should be capitalized for the equipment is $1,093,000.
b. Equipment (+A)................................................................................ 1,093,000
Cash (–A)................................................................................... 1,093,000 Purchased equipment.
c. The depreciation base represents the capitalized cost of a fixed asset that the company does
not expect to recover over the asset's estimated useful life. Since the capitalized cost of the equipment is $1,093,000 and the company expects to sell the equipment for $100,000 after ten years, the company does not expect to recover $993,000 of the capitalized cost. Therefore, the depreciation base of the equipment is $993,000.
d. As discussed in part [c], the depreciation base represents the dollar amount of a fixed asset
that the company does not expect to recover from the asset at the end of the asset's estimated useful life. This implies that the depreciation base represents the dollar amount of a fixed asset that the company expects to consume over the asset's estimated useful life. Since the consumption of an asset is an outflow of that asset and since, by definition, outflows of assets are expenses, the depreciation base represents the amount that should be expensed over a fixed asset's useful life. This is true whether the company uses the straight-line method or the double-declining-balance method. Thus, every depreciation method will result in the same total amount being depreciated over a fixed asset's useful life. Although each method gives rise to the same total amount of depreciation, the timing of depreciation charges varies across depreciation methods. The straight-line method allocates depreciation evenly across time, while the double-declining-balance method allocates the depreciation base more rapidly to the early years of the asset's useful life and more slowly to the later years of the asset's useful life.
Thus, Stonebrecker will depreciate a total of $993,000 under both depreciation methods.
P9–2
a.
1/1/05 Relative Purchase Cost Asset FMV FMV ×Price = Allocation Building $ 300,000 300/1,200 $1,000,000 $ 250,000
Office equip. 150,000 150/1,200 1,000,000 125,000
Crane 1 75,000 75/1,200 1,000,000 62,500
Crane 2 75,000 75/1,200 1,000,000 62,500
Land 600,000 600/1,200 1,000,000 500,000
Total $ 1,200,000 1,200/1,200 $ 1,000,000
Building (+A)..................................................................................... 250,000
Office Equipment (+A)..................................................................... 125,000
Cranes (+A) ..................................................................................... 125,000
Land (+A) ....................................................................................... 500,000 Cash (–A)................................................................................... 1,000,000 Purchased basket of assets.
b. Depreciation Expense—Building (E, –SE)....................................... 8,750a
Depreciation Expense—Office Equipment (E, –SE)....................... 30,000b
Depreciation Expense—Cranes (E, –SE)........................................ 19,000c Accumulated Depreciation—Building (–A)................................ 8,750 Accumulated Depreciation—Office Equipment (–A)................. 30,000 Accumulated Depreciation—Cranes (–A).................................. 19,000 Depreciated fixed assets.
___________
a $8,750 = ($250,000 – $75,000) ÷ 20 years
b $30,000 = ($125,000 – $35,000) ÷ 3 years
c $19,000 = [$125,000 – ($15,000 + $15,000)] ÷ 5 years
c. Property, plant, and equipment:
Land.................................................................................................. $500,000
Building............................................................................................. 250,000
Office equipment.............................................................................. 125,000
Cranes.............................................................................................. 125,000
Less: Accumulated depreciation...................................................... (201,000)*
Total property, plant, and equipment............................................... $799,000
___________
* $201,000 = ($8,750 × 4 years) + ($30,000 × 3 years) + ($19,000 × 4 years)
P9–3
a. Cost = Purchase Price + Transportation + Installation
= $950,000 + $100,000 + $130,000 = $1,180,000
b. (1) Double-declining-balance method:
Depreciation Expense—Equipment (E, –SE)......................... 590,000*
Accumulated Depreciation—Equipment (–A).................. 590,000 Depreciated fixed asset.
____________
*$590,000 = $1,180,000 × 50%
(2) Straight-line method:
Depreciation Expense—Equipment (E, –SE)......................... 282,500*
Accumulated Depreciation—Equipment (–A).................. 282,500 Depreciated fixed asset.
____________
*$282,500 = ($1,180,000 – $50,000) ÷ 4 years
c. (1) Double-declining-balance method:
Cash (+A)................................................................................ 250,000
Accumulated Depreciation: Equipment (+A).......................... 590,000
Loss on Sale of Equipment (Lo, –SE).................................... 340,000
Equipment (–A)................................................................. 1,180,000 Sold equipment.
(2) Straight-line method:
Cash (+A)................................................................................ 250,000
Accumulated Depreciation: Equipment (+A).......................... 282,500
Loss on Sale of Equipment (Lo, –SE).................................... 647,500
Equipment (–A)................................................................. 1,180,000 Sold equipment.
P9–4
a. Truck (+A)....................................................................................... 48,000
Cash (–A)................................................................................... 48,000 Purchased a truck.
b.
Depreciation Correct
Per Books Depreciation Difference 2003 $48,000 $ 0 $48,000
2004 0 12,000* 12,000
____________
*$12,000 = ($48,000 – $12,000) ÷ 3 years
Therefore, in 2003 expenses were overstated by $48,000, so net income was understated by $48,000. In 2004 expenses were understated by $12,000, so net income was overstated by $12,000.
c.
Depreciation Correct
Per Books Depreciation Difference 2003 $48,000 $ 0 $48,000
2004 0 32,000* 32,000
____________
*$32,000 = $48,000 × 2/3
Therefore, in 2003 expenses were overstated by $48,000, so net income was understated by $48,000. In 2004 expenses were understated by $32,000, so net income was overstated by $32,000.