Chapter 9 HW Day 1

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					Chapter 9 HW Day 1


                           ANSWERS TO QUESTIONS
     6. You should explain to the president that depreciation is a process of allocating the cost of
        a plant asset to expense over its service (useful) life in a rational and systematic manner.
        Recognition of depreciation is not intended to result in the accumulation of cash for
        replacement of the asset.

9.      The effects of the three methods on annual depreciation expense are: Straight-line—
        constant amount; units-of-activity—varying amount; declining-balance—decreasing
        amounts.

11.     Ordinary repairs are made to maintain the operating efficiency and expected productive life
        of the asset. Capital expenditures are additions and improvements made to increase
        efficiency, productive capacity, or expected useful life of the asset. Revenue expenditures
        are recognized as expenses when incurred; capital expenditures are generally debited to
        the plant asset affected.

13.     The plant asset and related accumulated depreciation should continue to be reported on
        the balance sheet without further depreciation or adjustment until the asset is retired.
        Reporting
        the asset and related accumulated depreciation on the balance sheet informs the reader of
        the financial statements that the asset is still being used by the company. However, once
        an asset is fully depreciated, even if it is still being used, no additional depreciation should
        be taken on this asset. In no situation can the depreciation on the plant asset exceed the
        cost of the plant asset.



                    SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 9-2

The cost of the truck is $26,280 (cash price $24,000 + sales taxes
$1,080 + painting and lettering $1,200). The expenditures for insurance
and                                                               motor
vehicle license should not be added to the cost of the truck.

BRIEF EXERCISE 9-3

The depreciable cost is $27,000 ($31,000 – $4,000). With a 5-year useful
life, annual depreciation is $5,400 ($27,000 ÷ 5). Under the straight-line
method, depreciation is the same each year. Thus, depreciation is
$5,400 for both the first and second years.


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Chapter 9 HW Day 1


BRIEF EXERCISE 9-7

(a) Accumulated Depreciation—Delivery
     Equipment .............................................................   41,000
      Delivery Equipment ............................................                     41,000

(b) Accumulated Depreciation—Delivery
     Equipment .............................................................   38,800
    Loss on Disposal .....................................................      2,200
       Delivery Equipment ............................................                    41,000

                  Cost of delivery equipment                       $41,000
                  Less accumulated depreciation                     38,800
                  Book value at date of disposal                     2,200
                  Proceeds from sale                                     0
                  Loss on disposal                                 $ 2,200




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Chapter 9 HW Day 1


                     SOLUTIONS TO EXERCISES
EXERCISE 9-4
 1.    False. Depreciation is a process of cost allocation, not asset
       valuation.
 2.    True.
 3.    False. The book value of a plant asset may be quite different from
       its market value.
 4.    False. Depreciation applies to three classes of plant assets: land
       improvements, building, and equipment.
 5.    False. Depreciation does not apply to land because its
       usefulness and revenue-producing ability generally remain intact
       over time.
 6.    True.
 7.    False. Recognizing depreciation on an asset does not result in an
       accumulation of cash for replacement of the asset.
 8.    True.
 9.    False. Depreciation expense is reported on the income
       statement, and accumulated depreciation is reported as a
       deduction from plant assets on the balance sheet.
10.    False. Three factors affect the computation of depreciation: cost,
       useful life, and salvage value (also called residual value).

EXERCISE 9-5

                             $90,000 – $6,000
      Straight-line method:                   =$10,500 per year.
                                    8        

2010 depreciation = $10,500 X 4/12 = $3,500
2011 depreciation = $10,500.




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Chapter 9 HW Day 1


                        SOLUTIONS TO PROBLEMS
                                           PROBLEM 9-2A


(a) April      1     Land ....................................................... 2,200,000
                        Cash ................................................               2,200,000

     May       1     Depreciation Expense ..........................                  20,000
                        Accumulated Depreciation—
                            Equipment.................................                            20,000
                            ($600,000 X 1/10 X 4/12)

               1     Cash .......................................................    170,000
                     Accumulated Depreciation—
                        Equipment ......................................             440,000
                              Equipment.................................                         600,000
                              Gain on Disposal ......................                             10,000

                     Cost .......................................... $600,000
                     Accum. depr.—Equipment ...... 440,000
                       [($600,000 X 1/10) X 7 + $20,000)]
                     Book value ............................... 160,000
                     Cash proceeds ......................... 170,000
                     Gain on disposal ...................... $ 10,000

     June      1     Cash ....................................................... 1,800,000
                        Land ................................................               1,000,000
                        Gain on Disposal ............................                         800,000

     July      1     Equipment ............................................         1,300,000
                        Cash ...............................................                    1,300,000

     Dec. 31         Depreciation Expense ..........................                  50,000
                        Accumulated Depreciation—
                            Equipment.................................                            50,000
                            ($500,000 X 1/10)

             31      Accumulated Depreciation—
                        Equipment ......................................             500,000
                           Equipment.................................                            500,000
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Chapter 9 HW Day 1


PROBLEM 9-2A (Continued)

                     Cost........................................         $500,000
                     Accum. depr.—Equipment
                       ($500,000 X 1/10 X 10) .......                      500,000
                     Book value.............................              $      0


(b) Dec. 31           Depreciation Expense ............................              662,500
                         Accumulated Depreciation—
                             Buildings .....................................                   662,500
                             ($26,500,000 X 1/40)

               31     Depreciation Expense ............................ 3,955,000
                         Accumulated Depreciation—
                             Equipment...................................         3,955,000

                      $38,900,000* X 1/10 ..............             $3,890,000
                      $ 1,300,000 X 1/10 X 6/12 ....                     65,000
                                                                     $3,955,000

                      *($40,000,000 – $600,000 – $500,000)


(c)                                     RIJO CORPORATION
                                        Partial Balance Sheet
                                         December 31, 2011

      Plant Assets*
          Land ........................................................                   $ 4,200,000
          Buildings.................................................        $26,500,000
          Less: Accumulated depreciation—
                 buildings .....................................             12,762,500    13,737,500
          Equipment ..............................................           40,200,000
          Less: Accumulated depreciation—
                 equipment ...................................                8,085,000    32,115,000
             Total plant assets .............................                             $50,052,500
      *See T-accounts which follow.



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Chapter 9 HW Day 1


PROBLEM 9-2A (Continued)

                                     Land
     12/31/10               3,000,000    6/1/10                1,000,000
     04/01/11               2,200,000
     12/31/11           Bal. 4,200,000



                                   Buildings
     12/31/10              26,500,000
     12/31/11          Bal. 26,500,000



                                  Equipment
     12/31/10              40,000,000    05/01/11                 600,000
     07/01/11               1,300,000    12/31/11                 500,000
     12/31/11          Bal. 40,200,000



                     Accumulated Depreciation—Buildings
                                         12/31/10             12,100,000
                                         12/31/11                662,500
                                         12/31/11         Bal. 12,762,500



                     Accumulated Depreciation—Equipment
     05/01/11                 440,000    12/31/10              5,000,000
     12/31/11                 500,000      5/1/11                 20,000
                                         12/31/11                 50,000
                                         12/31/11              3,955,000
                                         12/31/11          Bal. 8,085,000


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Chapter 9 HW Day 1



                                     *PROBLEM 9-8A

(a)           STRAIGHT-LINE DEPRECIATION

                      Computation                                 End of Year
                                             Annual
            Depreciable      Depreciation  Depreciation Accumulated          Book
      Years    Cost     X       Rate      = Expense     Depreciation         Value
      2010 $240,000*                25%**       $60,000       $ 60,000    $190,000
      2011 240,000                  25%          60,000        120,000     130,000
      2012 240,000                  25%          60,000        180,000      70,000
      2013 240,000                  25%          60,000        240,000      10,000

         *($250,000 – $10,000)
      **1/4 = 25%

                     DOUBLE-DECLINING-BALANCE DEPRECIATION

                      Computation                                 End of Year
            Book Value                       Annual
            Beginning        Depreciation  Depreciation Accumulated          Book
      Years   of Year  X        Rate      = Expense     Depreciation         Value
      2010    $250,000              50%*       $125,000       $125,000    $125,000
      2011     125,000              50%          62,500        187,500      62,500
      2012      62,500              50%          31,250        218,750      31,250
      2013      31,250              50%          21,250**      240,000      10,000

       *(1/4) X 2 = 50%
      **Adjusted so ending book value will equal salvage value.

(b)     Straight-line depreciation provides the lowest amount for 2010
        depreciation expense ($60,000) and, therefore, the highest 2010
        income. Over the four-year period, both methods result in the same
        total depreciation expense ($240,000) and, therefore, the same
        total income.




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Chapter 9 HW Day 1


(c)    Double-declining-balance depreciation provides the highest
       amount for 2010 depreciation expense ($125,000) and, therefore,
       the lowest 2010 income. Both methods result in the same total
       income over the four-year period.




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