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Chapter 11 - Page 108
Chapter 11 - Questions
1)
2)
3)
4)
5)
6)
7)
Chapter 11 - Page 109
8)
9)
10)
11)
12)
13)
14)
Chapter 11 - Page 110
Chapter 11 - Exercises
Dr Cr
1. (a)
Maintenance expense
Cash
To record payment for the fumigation of the hotel
(b)
To record payment for painting the hotel
(c)
(d)
Cash
(e)
(f)
Building
Cash
To record payment for improving the insulation of the hotel
2. (a) Dr Cr
Cash 8,000,000
To record sale of an airplane that cost $30 million and had $20 million of accumulated depreciation
for $8 million.
(b)
To record scrapping of a fully depreciated oven with no salvage value
(c)
Loss on disposal of refrigerator
Equipment 15,000
To record scrapping of a refrigerator that cost $15,000 and had $13,000 of accumulated depreciation
(d)
Gain on sale of building 10,000
To record the sale of a building that cost $250,000, and had $50,000 of accumulated depreciation
for the amount of $210,000.
(e)
To record the sale of a generator that cost $20,000, and had $17,000 of accumulated depreciation
for $2,000.
Chapter 11 - Page 111
3. Lower Higher
Tax Book Taxable Taxable
Year reporting income Income Amount Income Amount
1
2
3
36,000 36,000
Cost =
Salvage =
Depreciable value = $36,000
Useful life = 3 years
Straight-line depreciation method
Straight line rate =
Annual
Year Depreciation
1 x 36,000 =
2 x 36,000 =
3 x 36,000 =
Total accumulated depreciation 36,000
Double-declining balance depreciation method
Double-declining balance rate =
Annual Annual
Depreciation Depreciation Correct
Using DDB Taking Accumulated
in Year 3 Remaining Depreciation
Year Balance in Yr 3
1
2 x (40,000 - 26,666)
3 36,000
Total accumulated depreciation 38,519 36,000
In this case during the last year of the asset's life using the value generated by the
double-declining balance method would OVER-DEPRECIATE the broiler.
Therefore, the difference between the depreciable value of $36,000 and the accumulated
depreciation already taken is used to depreciate the asset in its final year.
NOTE: Even when using this accelerated method of depreciation you should never depreciate an
asset below its depreciable value.
Chapter 11 - Page 112
4. Cost =
Salvage value = Useful life = 10 years
Depreciable value = 27,000
Sum-of-years digits = N ( N + 1) = = =
2
Annual Net
Year Depreciatio Book Value
1 x =
2 x =
3 x =
4 x =
5 x =
6 x =
7 x =
8 x =
9 x =
10 x =
Total depreciation 27,000
5. Dr Cr
25,000
Equipment (Sales Tax)
Equipment (Site preparation cost)
Cash
To record purchase of central air conditioning unit
6. (a) China, glassware, silver & linen
Accounts payable
To record the purchase of china ware on account.
(b)
To record the consumption of $4,000 worth of china
NOTE: The $4,000 amount is the difference between the original inventory on April 1 and the value
of the china counted on May 1.
Chapter 11 - Page 113
7. (a) (1)
(2)
(b) Number Date FIFO Number Date LIFO
of bottles bought Cost of bottles bought Cost
25 January 1 25 January 15
25 January 15 25 January 30
FIFO Cost of sales ………. LIFO Cost of sales ……….
(c)
NOTE: This is only true in an inflationary environment in which unit costs are increasing.
The opposite would be true if costs were decreasing.
(d)
NOTE: This is only true in an inflationary environment in which unit costs are increasing.
The opposite would be true if costs were decreasing.
8. (a)
(b)
(c)
(d)
(e)
9. (a) The cost of sales for each year can be calculated using any amounts for "goods available for sale" (+ beginning
inventory + purchases) and for ending inventory to obtain the cost of food and beverage sold. We will use
a hypothetical amount of $200,000 for beginning inventory in the year 2007 and a hypothetical amount of
$200,000 for purchases during each year and then we will adjust the ending inventory to obtain the cost of
sales in the original (erroneous) income statements as follows:
Original (Erroneous) Hypothetical Cost of Sales Calculation
Years >>>>>>> 2007 2008 2009
Beginning inventory
Purchases
Available for sale
Ending inventory
Cost of food and beverages sold With incorrect
2007 ending
Income Statements inventory
Years >>>>>>> 2007 2008 2009
Sales
Cost of food & beverage sold
Gross profit
Expenses
Net income
Now let us correct the ending inventory for the year 2007 by reducing the ending inventory by $10,000
to $160,000. The new cost of sales calculations would be as follows:
Chapter 11 - Page 114
New (correct) Hypothetical Cost of Sales Calculation
Years >>>>>>> 2007 2008 2009
Beginning inventory With correct
Purchases 2007 ending
Available for sale inventory
Ending inventory
Cost of food and beverages sold
Income Statements
Years >>>>>>> 2007 2008 2009
Sales With correct
Cost of food & beverage sold 2007 ending
Gross profit inventory
Expenses
Net income
(b)
10. (a) To answer these questions it is best to recreate a hypothetical cost of sales calculation for the month
of November. It does not matter what amounts are used in the calculation as long as the ending inventory
is $100,000. This hypothetical calculation is shown below:
Wrong inventory Correct Inventory
Nov. 30, 2007 Nov. 30, 2007 Difference is
Beginning inventory Increase in 2007
Purchases cost of sales by Effect of error
Available for sale $21,000 if no on ending
Ending inventory correction is made inventory at
Cost of sales 21,000 11/30/07
(1)
($15,000)
(2)
(6,000)
(3)
# No correction
needed
#
#
Corrected inventory valuation as of Nov. 30, 2007 $79,000
(b)
(c)
Chapter 11 - Page 115
Chapter 11 - Short Problems
Amount of annual
1. (a) Calendar Depreciation depreciation per
Year Months year calendar year
2006 Oct-Nov-Dec 1
2007 Jan. to Sept. 1 Cost =
Oct-Nov-Dec 2 Salvage =
2008 Jan. to Sept. 2 Depreciable value =
Oct-Nov-Dec 3
2009 Jan. to Sept. 3 Life = 4 years
Oct-Nov-Dec 4
2010 Jan. to Sept. 4
Total depreciation …….. $3,000
Sum of years' digits = __ + __ +__ + __ ...
Depreciation OR >> N (N + 1) = =
year 2
1 1/4 is taken in Oct-Dec of 2006 - and 3/4 in Jan-Sept 2007
2 1/4 is taken in Oct-Dec of 2007 - and 3/4 in Jan-Sept 2008
3 1/4 is taken in Oct-Dec of 2008 - and 3/4 in Jan-Sept 2009
4 1/4 is taken in Oct-Dec of 2009 - and 3/4 in Jan-Sept 2010
Total depreciation …….. $3,000
2. (1)
(2)
(3)
(4)
3. (a) Dr Cr
Vehicles (cost of truck)
Vehicles (repair truck)
Vehicles (transportation cost - pay driver)
Cash
To record purchase of pick-up truck
(b) Cost = Year Depreciation
Salvage value = 2007
Depreciable value = 13,950 2008
Useful life = 7 years 2009
2010 1/2 year
Straight-line rate = _____________ Total depreciation
Annual depreciation = _________________________ taken prior to sale 6,975.01
Dr Cr
Cash
Accumulated depreciation
Loss on sale of vehicle
Vehicles
To record sale of pick-up truck on June 30, 2010
Chapter 11 - Page 116
4. (a) Dr Cr
Franchise rights
To record purchase of Bumble Burger franchise rights
(b) Life of franchise rights = 10 years
Annual amortization of franchise rights = _________________________________
Amortization expense
To record annual amortization of Bumble Burger franchise rights
(c)
(d) Other Assets
NOTE: Amortization expense is deducted directly from its related intangible asset account.
Normally, an accumulated amortization account is not used for amortization.
5. To answer these questions it is best to create a hypothetical cost of sales calculation based on a
hypothetical beginning inventory of $200,000 in the year 2006, as follows:
Cost of Sales Based on FIFO Inventory Valuation
2006 2007 2008
Beginning inventory
Purchases
Available for sale
Ending inventory (FIFO)
Cost of sales 200,000 (103,000) 82,000
Cost of Sales Based on LIFO Inventory Valuation
2006 2007 2008
Beginning inventory
Purchases
Available for sale
Ending inventory (LIFO)
Cost of sales
(1)
(2)
Chapter 11 - Page 117
Chapter 11 - Long Problems
1. (a) Dr Cr
Equipment (cost of oven)
Equipment (sales tax)
Equipment (transportation insurance)
Equipment (testing cost)
Cash
Accounts payable
To record purchase of oven
Accounts payable
To record cost of painting room where oven will be located
NOTE: The cost of painting the room where the oven would be located is not an acquisition cost
because it has been painted regularly every year.
(b) Cost = sum of years' digits = __ + __ + __ + __ + …
Salvage value = OR
Depreciable value = 9,100 N (N = 1) = =
Useful life = 5 years 2
Year Sum-of-years' digits depreciation
1 5 / 15 x =
2 _____ x =
3 3 / 15 x =
4 _____ x =
5 _____ x =
Total depreciation .. 9,100
(c) Year Straight-line depreciation
1 X ________= Straight-line rate = __________________
2 X ________=
3 X ________=
4 X ________=
5 X ________=
Total depreciation 9,100
(d) Depreciation
3,000 $3,033
2,000
Straight-Line = $1,820/year
1,000
$
1 3 5
2 4 Year
(e)
(f)
(g)
Chapter 11 - Page 118
2. (a) Dr Cr
Equipment (sales tax)
Equipment (transport insurance)
Notes payable
Accounts payable
To record the purchase of a refrigerator
Accounts payable
To repair cables leading to refrigeration room
NOTE: These cables would have had to be repaired anyway so this expense is not related to
the purchase of the refrigerator
(b) One-and-one-half times declining balance depreciation method
Cost = straight-line rate = ____________________
Salvage value =
Depreciable value = One-and-one-half times rate = _____________________
1 1/2 times Straight Remaining
Deprec. Line Accumul. net book
Year expense Deprec. Deprec. v alue
1 (13,150 - 0)
2
3
4
5 (13,150-3,945-2,762-1,933-1,353)
Total depreciation
NOTE:
The straight-line depreciation amounts are calculated by div iding the remaining
net book v alue by the remaining years in the asset's useful life.
NOTE:
You sw itch to the straight-line method w hen it giv es a higher depreciation for the
remaining net book v alue than the declining balance method.
Therefore: The total depreciation is calculated by adding the following amounts:
Year 1 1 1/2 times declining balance
Year 2 1 1/2 times declining balance
Year 3 1 1/2 times declining balance
Year 4 Straight-line
Year 5 Straight-line
13,150
(c) Straight-line depreciation
Year
1 X = Straight-line rate = __________________
2 X =
3 X =
4 X =
5 X =
Total depreciation 13,150
Chapter 11 - Page 119
(d) Depreciation
4,000
$
3,000
Straight-Line = $2,630/year
2,000 $2,255
1,000
1 3 5
2 4 Year
(e)
(f)
(g)
3. (a) Cost of tour bus
Purchase price Cost =
Cost of overhaul Salvage =
Total cost 20,000 Depreciable value = 15,000
Deprec. Annual
Units-of-output method Year Miles per mile Deprec.
1
________________________________________ 2
3
4
Total depreciation 15,000
Straight-line depreciation S/L Deprec. Annual
Year rate v alue Deprec.
______________________________________ 1
2
3
4
Total depreciation 15,000
Sum-of-years'-digits depreciation Deprec. Annual
Year Fraction v alue Deprec.
Sum-of-years' digits = __ + __ + __ + __ +… OR 1
2
N (N = 1) = = 3
2 4
Total depreciation 15,000
Chapter 11 - Page 120
Double declining balance depreciation
2 x Straight-Line rate = Annual Accumulated Book
Expense Depreciation Value
Year 1 _____ x ( 20,000 - 0 ) = 10,000 10,000
Year 2
Year 3 Salvage value reached-Yr. 2
Year 4
Total depreciation expense taken over the life of the tour bus =
There is an alternate method of depreciation that can be used
to extend the remaining value to years 2, 3 and 4 Annual Accumulated Book
Expense Depreciation Value
Year 1 .50 ( 20,000 - 0 ) = 10,000 10,000 10,000
Year 2
Year 3
Year 4
Total depreciation expense taken over the life of the tour bus =
(b)
(c)
(d)
(e)
(b)
(c)
(d)
(e)
4. (a)
(b)
(c)
(d) Construction Salaries Interest
in-progress Building Equipment & wages expense
__________ _________ _________ __________ _________
Cost of reinstalling ducts in __________ _________ _________ __________ _________
original hotel __________ _________ _________ __________ _________
__________ _________ _________ __________ _________
Supervisor's salary __________ _________ _________ __________ _________
######## 2,500
(e) Dr Cr
Construction-in-progress
Equipment
Salaries & wages
To correct mis-postings in various accounts
Chapter 11 - Page 121
5. Dr Cr
(1) 6/10/08
Accounts payable
To record purchase of 20 ducks at $10 each - 2/10,net 30 credit terms
(2) 6/15/08
To record sale of 25 ducks
(3) 6/19/08
To record purchase of 30 ducks for $9 each on credit - no prompt payment discount
(4) 6/20/08
Purchase discounts
To record payment for 20 ducks purchased on June 10, 2008
(5) 6/24/08
To record sale of 15 ducks
(6) 6/30/08
To record purchase of 10 ducks for $8 each - no prompt payment discount
Inventory purchases
Date Units Unit cost Total cost Beginning inventory Dollars Ducks
Beginning Purchases
6/10 Available for sale
6/19 Ending inventory
6/30 Cost of sales
70 $650 $40
Ducks sold
Date Units Unit cost Total cost
6/15
6/24
40 $390
Ending inventory value
Date Units Unit cost Total cost
6/19
6/30
30 $260
Dr Cr
Inventory
To record cost of sales
Chapter 11 - Page 122
6. Units Unit Total
purchased cost cost
1/10/07 Av erage cost = ____________________
1/15/07
1/26/07
31 $63.10
Cost of sales based on v arious
flow -through assumptions
Sales Units FIFO LIFO Weighted Av erage
Dates sold Unit cost Total cost Unit cost Total cost Unit cost Total cost
1/13
1/18
17 $35.10
Weighted
FIFO LIFO Av erage
Sales
Cost of sales
Gross profit $66.90
7. Units Unit Total
purchased cost cost
2/10 Av erage cost = / 14 =
2/28
14 $30.45
Cost of sales based on v arious
flow -through assumptions
Sales Units FIFO LIFO Weighted Av erage
Dates sold Unit cost Total cost Unit cost Total cost Unit cost Total cost
2/20
2/28
11 $23.85
Weighted
FIFO LIFO Av erage
Sales
Cost of sales
Gross profit $42.00
8. Units Unit Total
purchased cost cost
3/10 Av erage cost = $ / 19 =
3/17
3/23
19 $41.95
Sales Units FIFO Cost of sales
Dates sold Unit cost Total cost Sales Units Weighted Av erage
3/13 Dates sold Unit cost Total cost
3/19 3/13
3/19
3/27 3/27
3/30 3/30
16 $35.33
Chapter 11 - Page 123
Sales Units LIFO
Dates sold Unit cost Total cost
3/13
3/19
3/27
3/30
16 $35.05 Weighted
FIFO LIFO Av erage
Sales
Cost of sales
Gross profit $60.95
9. (a) 2008
Ending Inventory Cost of Sales Gross Profit
Mistake
(1)
(2)
(3)
(4)
(5)
(12,300) 12,300
Totals
Effects of Mistakes on Inventory and Gross Profit in 2008 and 2009
2009
Ending Inventory Cost of Sales Gross Profit
Mistake
(1)
(2)
(3)
(4)
(5)
(12,300) 12,300
Totals
(b) Assuming that the 2008 closing entries have already been made, to correct the above mistakes
the following journal entry must be made at the end of 2008:
Dr CR
Inventory
This entry reduces the ending inventory for 2008 and reduces the gross profit that was
closed out to retained earnings in 2008.
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