Financial and Managerial Accounting

Business

Quiz 9 :

Plant and Intangible Assets

Quiz 9 :

Plant and Intangible Assets

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Comparison of Straight- Line and Accelerated Methods Swanson Hiller, Inc., purchased a new machine on September 1, 2012 at a cost of $108,000. The machine's estimated useful life at the time of the purchase was five years, and its residual value was $8,000. Instructions a. Prepare a complete depreciation schedule, beginning with calendar year 2012, under each of the methods listed below (assume that the half-year convention is used): 1. Straight-line. 2. 200 percent declining-balance. 3. 150 percent declining-balance, switching to straight-line when that maximizes the expense. b. Which of the three methods computed in part a is most common for financial reporting purposes? Explain. c. Assume that Swanson Hiller sells the machine on December 31, 2015, for $29,000 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a. Does the gain or loss reported in the company's income statement have any direct cash effects? Explain.
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Straight line depreciation allocates equal portion of depreciation expenses to each year of the assets expected useful life after deducting its expected residual value. The formula for straight line depreciation is cost minus residual value divided by the number of years of useful life of the asset.
Declining Balance method is an accelerated depreciation method. In this method depreciation rate is calculated as a fixed percentage of the straight line depreciation rate. Formula for declining balance method is opening book value multiplied by depreciation rate.
a)
1)
Calculate depreciation expense using straight line method:
Depreciation is calculated by using following formula:
img Depreciation expense is calculated as follows:
img 2)
Calculate depreciation expense using double declining balance method:
img 3)
Calculate depreciation expense using 150% declining balance method:
150% declining balance method
img b)
For financial reporting purposes straight line method is used as it maximises profit.
c)
img There is no direct cash effect of gain or loss reported in companies income statement.

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Assume that you recently applied for a student loan to go to graduate school. As part of the application process, your bank requested a list of your assets. Aside from an extensive CD collection, your only other asset is a pickup truck. You purchased the truck six years ago for $15,000. Its current fair value is approximately $5,000. a. What factors caused your pickup track to depreciate $10,000 in value? b. Assume that the bank is willing to lend you money for graduate school. Even with the loan, however, you still need to raise an additional $5,000. Do you think that the bank will lend you $5,000 more for graduate school if you agree to use your truck as collateral? Explain. c. Assume that the truck has been used solely in a delivery service business that you operated while in college. Would your balance sheet necessarily show $10,000 in accumulated depreciation related to the truck? Explain.
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a. Two factors have caused the truck to depreciate: (1) physical deterioration and (2) obsolescence. The miles driven during the past six years have caused wear and tear on all of the truck's major components, including its engine, transmission, brakes, and tires. As these components deteriorate, their fair values, in turn, depreciate. Furthermore, during the time that you have owned the truck, innovations have been developed leading to improved fuel economy, higher horsepower, better handling, and more corrosion-resistant materials. These innovations have made the truck obsolete in many respects. As the design and engineering technologies associated with the truck become more and more outdated, its fair market value will continue to depreciate.
b. No. It is not likely that the bank will lend you an additional $5,000, even if you agree to pledge your truck as collateral. Your truck will continue to depreciate in value each year. By the time you begin repayment of your loan, it will be worth less to the bank than its current fair market value.
c. Depreciation is a process of cost allocation, not a process of valuation. As such, accounting records do not attempt to show the current fair values of business assets. Only by coincidence would the balance sheet show $10,000 in accumulated depreciation on this truck.

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Issues Involving Alternative Depreciation Methods Davidson, DDS, purchased new furniture for its store on May 1, 2015. The furniture is expected to have a 10-year life and no residual value. The following expenditures were associated with the purchase: img Instructions a. Compute depreciation expense for the years 2015 through 2018 under each depreciation method listed below: 1. Straight-line, with fractional years rounded to the nearest whole month. 2. 200 percent declining-balance, using the half-year convention. 3. 150 percent declining-balance, using the half-year convention. b. Davidson, DDS, has two conflicting objectives. Management wants to report the highest possible earnings in its financial statements, yet it also wants to minimize its taxable income reported to the IRS. Explain how both of these objectives can be met. c. Which of the depreciation methods applied in part a resulted in the lowest reported book value at the end of 2018? Is book value an estimate of an asset's fair value? Explain. d. Assume that Davidson, DDS, sold the old furniture that was being replaced. The old furniture had originally cost $3,000. Its book value at the time of the sale was $400. Record the sale of the old furniture under the following conditions: 1. The furniture was sold for $780 cash. 2. The furniture was sold for $250 cash.
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Calculated depreciation expense using straight line method:
Straight line depreciation allocates equal portion of depreciation expenses to each year of the assets expected useful life after deducting its expected residual value. The formula for straight line depreciation is cost minus residual value divided by the number of years of useful life of the asset.
Depreciation is calculated by using following formula:
img Depreciation expense is calculated as follows:
img Declining Balance method is an accelerated depreciation method. In this method depreciation rate is calculated as a fixed percentage of the straight line depreciation rate. Formula for declining balance method is opening book value multiplied by depreciation rate.
Prepare a schedule using 150% declining balance method:
img Prepare a schedule using 200% declining balance method:
img b)
Highest possible earning can be reported by following straight line method. Minimum tax can be paid by following 200% Declining Balance method.
c)
Lowest possible book value will be reported in 200% Declining Balance Method. The book value is the assets value in the market in its present condition and location.
d)
Calculate gain/loss on resale:
To get gain/loss on resale, deduct net book value from resale price.
img

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The following is a neile accompanying a recent financial statement of International Paper Company : Plant, Properties, and Equipment Plant, properties. and equipment are stated at cost less accumulated depreciation. For financial reporting purposes, the company uses the units-of-production method of depreciating its major pulp and paper mills and certain wood products facilities, and the straight-line method for other plant and equipment. Annual straight-line depreciation rates for financial reporting purposes are as follows: buildings img percent to 8 percent: machinery and equipment 5 percent to 33 percent: woods equipment 10 percent to 16 percent. For tax purposes, depreciation is computed utilizing accelerated methods. Instructions a. Are the depreciation methods used in the company's financial statements determined by current income tax laws? If not, who is responsible for selecting these methods? Explain. b. Does the company violate the consistency principle by using different depreciation methods for its paper mills and wood products facilities than it uses for its other plant and equipment? If not, what does the principle of consistency mean? Explain. c. What is the estimated useful life of the machinery and equipment being depreciated with a straight-line depreciation rate of: 1. 5 percent. 2. 33 percent (round to the nearest year). d. Who determines the useful lives over which specific assets are to be depreciated? e. Why do you think the company uses accelerated depreciation methods for income tax purposes, rather than using the straight-line method?
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Declining-Balance Depreciation Equipment costing $86,000 was purchased by Spence, Inc., at the beginning of the c urrent year. The company will depreciate the equipment by the declining-balance method, but it has not determined whether the rate will be at 150 percent or 200 percent of the straight-line rate. The estimated useful life of the equipment is eight years. Prepare a comparison of the two alternative rates for management for the first two years Spence owns the equipment.
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Mickey Gillespie is the controller of Print Technologies, a publicly owned company. The company is experiencing financial difficulties and is aggressively looking for ways to cut.costs. Suzanne Bedell, the CEO, instructs Gillespie to lengthen from 5 to 10 years the useful life used in computing depreciation on certain special-purpose machinery. Bedell believes that this change represents a substantial cost savings, as it will reduce the depreciation expense on these assets by nearly one-half. Note: The proposed change affects only the depreciation expense recognized in financial statements. Depreciation deductions in income tax returns will not be affected. Instructions a. Discuss the extent to which Bedell's idea will, in fact, achieve a cost savings. Consider the effects on both net income and cash flows. b. Who is responsible for estimating the useful lives of plant assets? c. Discuss any ethical issues that Gillespie should consider with respect to Bedell's instructions.
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Straight-Line Depreciation Twin-Cities, Inc., purchased a building for $600,000. Straight-line depreciation was u sed for each of the first two years using the following assumptions: 25-year estimated useful life, with a residual value of $100,000. a. Calculate the annual depreciation for the first two years that Twin-Cities owned the building. b. Calculate the book value of the building at the end of the second year.
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Depreciation for Partial Years On August 3, Cinco Construction purchased special-purpose equipment at a cost of $1,000,000. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $50,000. a. Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the straight-line depreciation method (half-year convention). b. Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the 200 percent declining-balance method (half-year convention) with a switch to straight-line when it will maximize depreciation expense. c. Which of these two depreciation methods (straight-line or double-declining-balance) results in the highest net income for financial reporting purposes during the first two years of the equipment's use? Explain.
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Cost of Plant Asset Amigos, Inc., purchased a used piece of heavy equipment for $30,000. Delivery of the e quipment to Amigos' business site cost $750. Expenditures to recondition the equipment and prepare it for use totaled $2,230. The maintenance for the first year Amijo owned the equipment was $1,370. Determine the cost that is the basis for calculating annual depreciation on the equipment.
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Identify the basic "accountable events" in the life of a depreciable plant asset. Which of these events directly affect the net income of the current period? Which directly affect cash flows (other than income tax payments)?
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Issues Involving Alternative Depreciation Methods Hills Hardware purchased new shelving for its store on April 1, 2015. The shelving is expected to have a 20-year life and no residual value. The following expenditures were associated with the purchase: img Instructions a. Compute depreciation expense for the years 2015 through 2018 under each depreciation method listed below: 1. Straight-line, with fractional years rounded to the nearest whole month. 2. 200 percent declining-balance, using the half-year convention. 3. 150 percent declining-balance, using the half-year convention. b. Hills Hardware has two conflicting objectives. Management wants to report the highest possible earnings in its financial statements, yet it also wants to minimize its taxable income reported to the IRS. Explain how both of these objectives can be met. c. Which of the depreciation methods applied in part a will result in the lowest reported book value at the end of 2018? Is book value an estimate of an asset's fair value? Explain. d. Assume that Hills Hardware sold the old shelving that was being replaced. The old shelving had originally cost $9,000. Its book value at the time of the sale was $400. Record the sale of the old shelving under the following conditions: 1. The shelving was sold for $1,100 cash. 2. The shelving was sold for $175 cash.
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The following expenditures were incurred in connection with a new machine acquired by a metals manufacturing company. Identify those that should be included in the cost of the asset, (a) Freight charges, (b) sales tax on the machine, (c) payment to a passing motorist whose car was damaged by the equipment used in unloading the machine.(d) wages of employees for time spent in installing and testing the machine before it was placed in service, (e) wages of employees assigned to lubricate and make minor adjustments to the machine one year after it was placed in service.
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Departures from GAAP-Are They Ethical? Maggie Miller owns Miller Construction Co. The company maintains accounting records for the purposes of exercising control over its construction activities and meeting its reporting obligations regarding payrolls and income tax returns. As it has no other financial reporting obligations, Miller does not prepare formal financial statements. The company owns land and several other assets with current market values well in excess of their historical costs. Maggie Miller directs the company's accountant, Max O'Shaughnessey, to prepare a balance sheet in which assets are shown at estimated market values. Miller says this type of balance sheet will give her a better understanding of where the business stands. She also thinks it will be useful in obtaining bank loans, as loan applications always ask for the estimated market values of real estate owned. Instructions a. Would the financial statements requested by Maggie Miller be in conformity with generally accepted accounting principles? b. Is Miller Construction under any legal or ethical obligation to prepare financial statements that do conform to generally accepted accounting principles? c. Discuss any ethical issues that O'Shaughnessey should consider with respect to Miller's request.
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Determining the Cost of Plant Assets and Depreciation Smithfield Hotel recently purchased new exercise equipment for its exercise room. The following information refers to the purchase and installation of this equipment: 1. The list price of the equipment was $42,000; however, Smithfield qualified for a "special discount" of $5,000. It paid $10,000 cash, and issued a three-month, 12 percent note payable for the remaining balance. The note, plus accrued interest charges of $750, was paid promptly at the maturity date. 2. In addition to the amounts described in 1, Smithfield paid sales taxes of $2,100 at the date of purchase. 3. Freight charges for delivery of the equipment totaled $600. 4. Installation and training costs related to the equipment amounted to $900. 5. During installation, one of the pieces of equipment was accidentally damaged by an employee. Smithfield paid $400 to repair this damage. 6. As soon as the equipment was installed, the hotel paid $3,200 to print brochures featuring the exercise room's new, state-of-the-art exercise facilities. Instructions a. In one sentence, make a general statement summarizing the nature of expenditures that qualify for inclusion in the cost of plant assets such as exercise equipment. b. For each of the six numbered paragraphs, indicate which items should be included by Smithfield Hotel in the total cost added to its Equipment account. Also briefly indicate the proper accounting treatment of those items that are not included in the cost of the equipment. c. Compute the total cost added to the hotel's Equipment account. d. Prepare a journal entry at the end of the current year to record depreciation on the exercise equipment. Smithfield Hotel plans to depreciate this equipment by the straight-line method (half-year convention) over an estimated useful life of five years. Assume a zero residual value.
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Coca-Cola's distinctive trademark is more valuable to the company than its bottling plants. But the company's bottling plants are listed in the balance sheet, and the famous trademark isn't. Explain.
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Determining the Cost of Plant Assets and Depreciation Hamlet College recently purchased new computing equipment for its library. The following information refers to the purchase and installation of this equipment: 1. The list price of the equipment was $285,000; however, Hamlet College qualified for an "education discount" of $25,000. It paid $50,000 cash for the equipment, and issued a three-month, 9 percent note payable for the remaining balance. The note, plus accrued interest charges of $4,500, was paid promptly at the note's maturity date. 2. In addition to the amounts described in 1, Hamlet paid sales taxes of $15,000 at the date of purchase. 3. Freight charges for delivery of the equipment totaled $1,000. 4. Installation costs related to the equipment amounted to $5,000. 5. During installation, one of the computer terminals was accidentally damaged by a library employee. It cost the college $500 to repair this damage. 6. As soon as the computers were installed, the college paid $4,000 to print admissions brochures featuring the library's new, state-of-the-art computing facilities. Instructions a. In one sentence, make a general statement summarizing the nature of expenditures that qualify for inclusion in the cost of plant assets such as computing equipment. b. For each of the six numbered paragraphs, indicate which items should be included by Hamlet College in the total cost added to its Computing Equipment account. Also briefly indicate the proper accounting treatment of those items that are not included in the cost of the equipment. c. Compute the total cost added to the college's Computing Equipment account. d. Prepare a journal entry at the end of the current year to record depreciation on the computing equipment. Hamlet College intends to depreciate this equipment by the straight-line method (half-year convention) over an estimated useful life of five years. Assume a zero residual value.
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Straight-Line and Declining-Balance Depreciation Messer Company purchased equipment for $24,000. The company is considering whether t o determine annual depreciation using the straight-line method or the declining-balance method at 150 percent of the straight-line rate. Waller expects to use the equipment for 10 years, at the end of which it will have an estimated salvage value of $4,000. Prepare a comparison of these two alternatives for the first two years Messer will own the equipment.
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Capitalization vs. Expense One of your responsibilities as division manager of an important component of P aramount Industries is to oversee accounting for the division. One of the issues you grapple with on an almost continuous basis is whether particular costs should be expensed immediately or whether they should be capitalized. The company has an accounting policy manual that includes a section on this topic, but it is rather vague in this regard. It simply says that if a cost benefits multiple accounting periods, the cost should be capitalized; otherwise, that cost should be expensed immediately. It also makes a brief reference to materiality by stating that, if a cost is sufficiently small, it should be immediately expensed despite the fact that it may benefit multiple accounting periods. No additional guidance is provided with regard to how these general concepts should be applied. Over several years you have noticed a tendency of your staff to capitalize rather than expense more costs. While you and your coworkers in the division do not receive a bonus or other direct compensation that is tied to your division's performance, you know that upper management monitors carefully the financial performance of divisions. From time to time in various meetings and in written correspondence, comments are made praising individuals and divisions of the company for their positive financial performance. In fact, within your division you have done the same when you meet with your employees and either compliment them for strong financial performance or express concern about weak financial performance. Paramount Industries has a code of professional conduct that is discussed with employees when they are hired. Within that code are references to personal integrity and the responsibility of employees to carry out company policy and not engage in activities that benefit themselves at the expense of the company. Like the accounting policies referred to above, there is no guidance on how this general principle might be carried out. Instructions a. What behavior may your comments in meetings with your employees, or the comments made to you from upper management, be motivating in terms of the continuous decisions that are being made about capitalizing and expensing costs? b. What steps might you take to ensure that you and the employees in your division are taking actions that are consistent with the company's accounting policies and code of professional conduct?
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Comparison of Straight- Line and Accelerated Methods R R, Inc., purchased a new machine on September 1, 2013, at a cost of $180,000. The machine's estimated useful life at the time of the purchase was five years, and its expected residual value was $10,000. Instructions a. Prepare a complete depreciation schedule, beginning with calendar year 2013, under each of the methods listed below (assume that the half-year convention is used): 1. Straight-line. 2. 200 percent declining-balance. 3. 150 percent declining-balance (not switching to straight-line). b. Which of the three methods computed in part a is most common for financial reporting purposes? Explain. c. Assume that R R sells the machine on December 31, 2016, for $58,000 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a. Does the gain or loss reported in the company's income statement have any direct cash effects? Explain.
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Distinguishing Capital Expenditures from Revenue Expenditures Identify the f ollowing expenditures as capital expenditures or revenue expenditures: a. Immediately after acquiring a new delivery truck, paid $260 to have the name of the store and other advertising material painted on the vehicle. b. Painted delivery truck at a cost of $450 after two years of use. c. Purchased new battery at a cost of $40 for two-year-old delivery truck. d. Installed an escalator at a cost of $17,500 in a three-story building that had been used for some years without elevators or escalators. e. Purchased a pencil sharpener at a cost of $15.00. f. Original life of the delivery truck had been estimated at four years, and straight-line depreciation of 25 percent yearly had been recognized. After three years' use, however, it was decided to recondition the truck thoroughly, including replacing the engine.
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