Wednesday October 26th Chapter 8 ANSWERS TO QUESTIONS M8 3 1 C 2 R 3 N 4 C 5 N 6 R 7 R 8 C 9 C Monday October 31st E8 4 Req 1 Date Assets Liabilities January No effect 1 January Cash 2 Equipment January Cash 3 Equipment January Cash 5 Equipment July 1 Cash No effect Stockholders Equity No effect 6 000 Short term note 15 000 21 000 payable 1 000 1 000 2 500 2 500 15 750 Short term note 15 000 Interest payable expense 750 15 000 principal x 10 interest rate x 6 12 of a year 750 interest Req 2 Acquisition cost of the machine Cash paid Note payable with supplier Freight costs Installation costs Acquisition cost 6 000 15 000 1 000 2 500 24 500 Req 3 Depreciation for 2012 24 500 cost 4 000 residual value x 1 10 2 050 Req 4 On July 1 2012 750 15 000 x 10 x 6 12 is paid and is recorded as interest expense The amount is not capitalized added to the cost of the asset because interest is capitalized only on constructed assets This machine was purchased Req 5 Equipment cost 24 500 Less Accumulated depreciation 2 050 x 2 years 4 100 Net book value at end of 2013 20 400 E8 5 Req 1 Adjusting entry for 2010 Depreciation expense E SE Accumulated depreciation equipment XA A 100 000 10 000 x 1 15 6 000 6 000 6 000 Req 2 beginning of 2011 Estimated life Less Used life 54 000 accumulated depreciation 6 000 annual expense Remaining life 15 years 9 years 6 years Req 3 during 2011 Repair and maintenance expense E SE Cash A Ordinary repairs incurred 1 000 Equipment A Cash A Extraordinary repairs incurred and capitalized 12 000 1 000 12 000 E8 7 Req 1 a Straight line Year Computation At acquisition 1 10 000 1 000 x 1 4 2 10 000 1 000 x 1 4 3 10 000 1 000 x 1 4 4 10 000 1 000 x 1 4 Depreciation Expense Accumulated Depreciation 2 250 2 250 2 250 2 250 2 250 4 500 6 750 9 000 Net Book Value 10 000 7 750 5 500 3 250 1 000 b Units of production 10 000 1 000 9 000 1 00 per hour of output Depreciation Accumulated Net Year Computation Expense Depreciation Book Value At acquisition 10 000 1 1 00 x 3 600 hours 3 600 3 600 6 400 2 1 00 x 2 700 hours 2 700 6 300 3 700 3 1 00 x 1 800 hours 1 800 8 100 1 900 4 1 00 x 900 hours 900 9 000 1 000 c Double declining balance Year Computation At acquisition 1 10 000 0 x 2 4 2 10 000 5 000 x 2 4 3 10 000 7 500 x 2 4 4 10 000 8 750 x 2 4 Depreciation Expense Accumulated Depreciation 5 000 2 500 1 250 625 250 5 000 7 500 8 750 9 375 9 000 Net Book Value 10 000 5 000 2 500 1 250 625 1 000 Req 2 Too large Net book value cannot be below residual value If the machine is used evenly throughout its life and its efficiency economic value in use is expected to decline steadily each period over its life then straight line depreciation would be preferable If the machine is used at a consistent rate but the efficiency is expected to decline faster in the earlier years of its useful life then an accelerated method would be appropriate such as double declining balance If the machine is used at different rates over its useful life and its efficiency declines with output then the units of production method would be preferable because it would result in a better matching of depreciation expense with revenue earned Wednesday November 2nd E8 13 Req 1a Cash A Accumulated depreciation XA A Delivery truck A Sale of an asset at book value the result is no loss or gain Req 1b Cash A Accumulated depreciation XA A Gain on sale of long lived asset Gain SE Delivery truck A Sale of an asset above book value the result is a gain Req 1c Cash A Accumulated depreciation XA A Loss on sale of long lived asset Loss SE Delivery truck A Sale of an asset below book value the result is a loss 15 000 23 000 38 000 15 600 23 000 600 38 000 14 600 23 000 400 38 000 Req 2 Summarization of the effects of the disposal 1 The loss or gain on disposal of a long lived asset is the difference between the disposal price and the book value at date of disposal 2 When the disposal price is the same as the book value there is no loss or gain when the price is above book value there is a gain and when the price is below book value there is a loss on disposal 3 The book value does not purport to be market value so a loss or gain on disposal of a long lived asset normally would occur E8 16 Req 1 Computation of acquisition cost of the deposit in 2012 February 2012 Purchase of mineral deposit March 2012 Preparation costs Total acquisition cost in 2012 Req 2 700 000 74 000 774 000 Computation of depletion for 2012 774 000 cost 900 000 cubic yards 86 per cubic yard depletion rate 60 000 cubic yards in 2012 x 86 51 600 Req 3 Computation of net book value of the deposit after the developmental work Total acquisition cost in 2012 774 000 Less 2012 depletion 51 600 January 2013 developmental costs 6 000 Net book value 728 400 E8 17 Req 1 Acquisition cost Technology Patent Trademark 70 000 6 000 13 000 Req 2 Amortization on December 31 2012 straight line method with no residual value Technology 70 000 x 1 4 17 500 amortization expense Patent 6 000 x 1 15 remaining 400 amortization expense Trademark The trademark is not amortized due to its indefinite life Req 3 Income statement for 2012 Operating expenses Amortization expense 17 500 400 17 900 Balance sheet at December 31 2012 under noncurrent assets Intangibles Technology 70 000 35 000 35 000 Patent 6 000 800 5 200 Trademark 13 000 53 200 17 500 amortization expense x 2 years Although trademarks are valuable assets they are rarely seen on balance sheets M8 7 a Machine Impairment Y Loss 6 000 Cost Fair Value 15 500 9 500 b Copyright N Estimated cash flows exceed book value c Factory building Y 31 000 58 000 27 000 d Building N ANSWERS TO MULTIPLE CHOICE 1 2 3 4 5 6 7 8 9 10 a c b b a d a d d c Estimated cash flows equal book value