Accounting Tools for Business Decision Making 4th edition

Paul D. KimmelJerry J. Weygandt and Donald E. Kieso

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Accounting : Tools for Business Decision Making (ISBN10: 0470534788; ISBN13: 9780470534786)   

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Questions

1.
Mrs. Villarreal is uncertain about how the cost principle applies to plant assets. Explain the principle to Mrs. Villarreal.

2.
How is the cost for a plant asset measured in a cash transaction? In a noncash transaction?

3.
Johnstone Company acquires the land and building owned by Briggs Company. What types of costs may be incurred to make the asset ready for its intended use if Johnstone Company wants to use only the land? If it wants to use both the land and the building?

4.
Pryor Inc. needs to upgrade its diagnostic equipment. At the time of purchase, Pryor had expected the equipment to last 8 years. Unfortunately, it was obsolete after only 4 years. Justin Meyer, CFO of Pryor Inc., is considering leasing new equipment rather than buying it. What are the potential benefits of leasing?

5.
In a recent newspaper release, the president of Franklin Company asserted that something has to be done about depreciation. The president said, “Depreciation does not come close to accumulating the cash needed to replace the asset at the end of its useful life.” What is your response to the president?

6.
Carmelita is studying for the next accounting examination. She asks your help on two questions: (a) What is salvage value? (b) How is salvage value used in determining depreciable cost under the straight-line method? Answer Carmelita’s questions.

7.
Contrast the straight-line method and the units-of-activity method in relation to (a) useful life and (b) the pattern of periodic depreciation over useful life.

8.
Contrast the effects of the three depreciation methods on annual depreciation expense.

9.
In the fourth year of an asset’s 5-year useful life, the company decides that the asset will have a 6-year service life. How should the revision of depreciation be recorded? Why?

10.
Distinguish between ordinary repairs and capital expenditures during an asset’s useful life.

11.
How is a gain or a loss on the sale of a plant asset computed?

12.
Folstein Corporation owns a machine that is fully depreciated but is still being used. How should Folstein account for this asset and report it in the financial statements?

13.
What does Tootsie Roll use as the estimated useful life on its buildings? On its machinery and equipment?

14.
What are the similarities and differences between depreciation and amortization?

15.
During a recent management meeting, Steve Micke, director of marketing, proposed that the company begin capitalizing its marketing expenditures as goodwill. In his words, “Marketing expenditures create goodwill for the company which benefits the company for multiple periods. Therefore it doesn’t make good sense to have to expense it as it is incurred. Besides, if we capitalize it as goodwill, we won’t have to amortize it, and this will boost reported income.” Discuss the merits of Steve’s proposal.

16.
Alford Company hires an accounting intern who says that intangible assets should always be amortized over their legal lives. Is the intern correct? Explain.

17.
Goodwill has been defined as the value of all favorable attributes that relate to a business enterprise. What types of attributes could result in goodwill?

18.
Janis Ford, a business major, is working on a case problem for one of her classes. In this case problem, the company needs to raise cash to market a new product it developed. Mark Gordon, an engineering major, takes one look at the company’s balance sheet and says, “This company has an awful lot of goodwill. Why don’t you recommend that they sell some of it to raise cash?” How should Janis respond to Mark?

19.
Under what conditions is goodwill recorded? What is the proper accounting treatment for amortizing goodwill?

20.
Often research and development costs provide companies with benefits that last a number of years. (For example, these costs can lead to the development of a patent that will increase the company’s income for many years.) However, generally accepted accounting principles require that such costs be recorded as an expense when incurred. Why?

21.
In 2009, Campbell Soup Company reported average total assets of $6,265 million, net sales of $7,586 million, and net income of $736 million. What was Campbell Soup’s return on assets ratio?

22.
Lauren Rado, a marketing executive for Fresh Views Inc., has proposed expanding its product line of framed graphic art by producing a line of lowerquality products. These would require less processing by the company and would provide a lower profit margin. Tom Hogle, the company’s CFO, is concerned that this new product line would reduce the company’s return on assets. Discuss the potential effect on return on assets that this product might have.

23.
Give an example of an industry that would be characterized by (a) a high asset turnover ratio and a low profit margin ratio, and (b) a low asset turnover ratio and a high profit margin ratio.

24.
Allman Corporation and Bryant Corporation operate in the same industry. Allman uses the straight-line method to account for depreciation, whereas Bryant uses an accelerated method. Explain what complications might arise in trying to compare the results of these two companies.

25.
Guzman Corporation uses straightline depreciation for financial reporting purposes but an accelerated method for tax purposes. Is it acceptable to use different methods for the two purposes? What is Guzman Corporation’s motivation for doing this?

26.
You are comparing two companies in the same industry. You have determined that Morris Corp. depreciates its plant assets over a 40-year life, whereas Kiram Corp. depreciates its plant assets over a 20-year life. Discuss the implications this has for comparing the results of the two companies.

27.
Explain how transactions related to plant assets and intangibles are reported in the statement of cash flows.

Brief Exercises


BE9-1
These expenditures were incurred by Patnode Company in purchasing land: cash price $60,000; accrued taxes $5,000; attorney’s fees $2,100; real estate broker’s commission $3,300; and clearing and grading $3,500. What is the cost of the land?

BE9-2
Deutsch Company incurs these expenditures in purchasing a truck: cash price $24,000; accident insurance (during use) $2,000; sales taxes $1,080; motor vehicle license $300; and painting and lettering $1,700. What is the cost of the truck?

BE9-3
Alan Chemicals Company acquires a delivery truck at a cost of $31,000 on January 1, 2012. The truck is expected to have a salvage value of $4,000 at the end of its 4-year useful life. Compute annual depreciation for the first and second years using the straight-line method.

BE9-4
Erin Company purchased land and a building on January 1, 2012. Management’s best estimate of the value of the land was $100,000 and of the building $250,000. However, management told the accounting department to record the land at $230,000 and the building at $120,000. The building is being depreciated on a straight-line basis over 20 years with no salvage value. Why do you suppose management requested this accounting treatment? Is it ethical?

BE9-5
On January 1, 2012, the Eugene Company ledger shows Equipment $36,000 and Accumulated Depreciation $13,600. The depreciation resulted from using the straightline method with a useful life of 10 years and a salvage value of $2,000. On this date, the company concludes that the equipment has a remaining useful life of only 2 years with the same salvage value. Compute the revised annual depreciation.

BE9-6
Sabina Company had the following two transactions related to its delivery truck.

1. Paid $38 for an oil change.

2. Paid $400 to install special shelving units, which increase the operating efficiency of the truck.

Prepare Sabina’s journal entries to record these two transactions.


BE9-7
Prepare journal entries to record these transactions: (a) Benton Company retires its delivery equipment, which cost $41,000. Accumulated depreciation is also $41,000 on this delivery equipment. No salvage value is received. (b) Assume the same information as in part (a), except that accumulated depreciation for the equipment is $37,200 instead of $41,000.

BE9-8
Clark Company sells office equipment on July 31, 2012, for $21,000 cash. The office equipment originally cost $72,000 and as of January 1, 2012, had accumulated depreciation of $42,000. Depreciation for the first 7 months of 2012 is $4,600. Prepare the journal entries to (a) update depreciation to July 31, 2012, and (b) record the sale of the equipment.

BE9-9
In its 2009 annual report, McDonald’s Corporation reports beginning total assets of $28.46 billion; ending total assets of $30.22 billion; net sales of $22.74 billion; and net income of $4.55 billion.

(a) Compute McDonald’s return on assets ratio.

(b) Compute McDonald’s asset

Exercises
E9-1 The following expenditures relating to plant assets were made by Newport Company during the first 2 months of 2012. 1. Paid $7,000 of accrued taxes at the time the plant site was acquired. 2. Paid $200 insurance to cover a possible accident loss on new factory machinery while the machinery was in transit. 3. Paid $850 sales taxes on a new delivery truck. 4. Paid $21,000 for parking lots and driveways on the new plant site. 5. Paid $250 to have the company name and slogan painted on the new delivery truck. 6. Paid $8,000 for installation of new factory machinery. 7. Paid $900 for a 1-year accident insurance policy on the new delivery truck. 8. Paid $75 motor vehicle license fee on the new truck.

Instructions

 
(a) Explain the application of the cost principle in determining the acquisition cost of plant assets. (b) List the numbers of the transactions, and opposite each indicate the account title to which each expenditure should be debited.

E9-2
Ramona Company incurred the following costs. 1. Sales tax on factory machinery purchased $ 5,000 2. Painting of and lettering on truck immediately upon purchase 700 3. Installation and testing of factory machinery 2,000 4. Real estate broker’s commission on land purchased 3,500 5. Insurance premium paid for first year’s insurance on new truck 880 6. Cost of landscaping on property purchased 7,200 7. Cost of paving parking lot for new building constructed 17,900 8. Cost of clearing, draining, and filling land 13,300 9. Architect’s fees on self-constructed building 10,000

Instructions

 
Indicate to which account Ramona would debit each of the costs.


E9-3 On March 1, 2012, Enrique Company acquired real estate, on which it planned to construct a small office building, by paying $80,000 in cash. An old warehouse on the property was demolished at a cost of $8,200; the salvaged materials were sold for $1,700. Additional expenditures before construction began included $1,900 attorney’s fee for work concerning the land purchase, $5,200 real estate broker’s fee, $9,100 architect’s fee, and $14,000 to put in driveways and a parking lot.

Instructions

 


(a) Determine the amount to be reported as the cost of the land.

(b) For each cost not used in part (a), indicate the account to be debited.


E9-4
Belinda Lorenz has prepared the following list of statements about depreciation.

1. Depreciation is a process of asset valuation, not cost allocation.

2. Depreciation provides for the proper matching of expenses with revenues.

3. The book value of a plant asset should approximate its fair value.

4. Depreciation applies to three classes of plant assets: land, buildings, and equipment.

5. Depreciation does not apply to a building because its usefulness and revenueproducing ability generally remain intact over time.

6. The revenue-producing ability of a depreciable asset will decline due to wear and tear and to obsolescence.

7. Recognizing depreciation on an asset results in an accumulation of cash for replacement of the asset.

8. The balance in accumulated depreciation represents the total cost that has been charged to expense.

9. Depreciation expense and accumulated depreciation are reported on the income statement.

10. Four factors affect the computation of depreciation: cost, useful life, salvage value, and residual value.


Instructions

 
Identify each statement as true or false. If false, indicate how to correct the statement.

E9-5
Deloise Company purchased a new machine on October 1, 2012, at a cost of $90,000. The company estimated that the machine has a salvage value of $8,000. The machine is expected to be used for 70,000 working hours during its 8-year life.

Instructions

 
Compute the depreciation expense under the straight-line method for 2012 and 2013, assuming a December 31 year-end.

E9-6
Brett Richard, the new controller of Maldonado Company, has reviewed the expected useful lives and salvage values of selected depreciable assets at the beginning of 2012. Here are his findings: Accumulated Useful Life Type of Date Depreciation, (in years) Salvage Value Asset Acquired Cost Jan. 1, 2012 Old Proposed Old Proposed Building Jan. 1, 2004 $700,000 $130,000 40 48 $50,000 $35,000 Warehouse Jan. 1, 2007 120,000 23,000 25 20 5,000 3,600 All assets are depreciated by the straight-line method. Maldonado Company uses a calendar year in preparing annual financial statements. After discussion, management has agreed to accept Brett’s proposed changes. (The “Proposed” useful life is total life, not remaining life.)

Instructions

 
(a) Compute the revised annual depreciation on each asset in 2012. (Show computations.) (b) Prepare the entry (or entries) to record depreciation on the building in 2012.

E9-7
Kemp Co. has delivery equipment that cost $50,000 and has been depreciated $24,000.

Instructions

 
Record entries for the disposal under the following assumptions. (a) It was scrapped as having no value. (b) It was sold for $37,000. (c) It was sold for $20,000.

E9-8
Here are selected 2012 transactions of Eghan Corporation. Jan. 1 Retired a piece of machinery that was purchased on January 1, 2002. The machine cost $62,000 and had a useful life of 10 years with no salvage value. June 30 Sold a computer that was purchased on January 1, 2010. The computer cost $36,000 and had a useful life of 3 years with no salvage value. The computer was sold for $5,000 cash. Dec. 31 Sold a delivery truck for $9,000 cash. The truck cost $25,000 when it was purchased on January 1, 2009, and was depreciated based on a 5-year useful life with a $4,000 salvage value.

Instructions

 
Journalize all entries required on the above dates, including entries to update depreciation on assets disposed of, where applicable. Eghan Corporation uses straight-line depreciation.

E9-9
The following situations are independent of one another.

1. An accounting student recently employed by a small company doesn’t understand why the company is only depreciating its buildings and equipment, but not its land. The student prepared journal entries to depreciate all the company’s property, plant, and equipment for the current year-end.

2. The same student also thinks the company’s amortization policy on its intangible assets is wrong. The company is currently amortizing its patents but not its goodwill. The student fixed that for the current year-end by adding goodwill to her adjusting entry for amortization. She told a fellow employee that she felt she had improved the consistency of the company’s accounting policies by making these changes.

3. The same company has a building still in use that has a zero book value but a substantial fair value. The student felt that this practice didn’t benefit the company’s users—especially the bank—and wrote the building up to its fair value. After all, she reasoned, you can write down assets if fair values are lower. Writing them up if fair value is higher is yet another example of the improved consistency that she has brought to the company’s accounting practices.


Instructions

 
Explain whether or not the accounting treatment in each of the above situations is in accordance with generally accepted accounting principles. Explain what accounting principle or assumption, if any, has been violated and what the appropriate accounting treatment should be.

E9-10
During 2009, Federal Express reported the following information (in millions): net sales of $35,497 and net income of $98. Its balance sheet also showed total assets at the beginning of the year of $25,633 and total assets at the end of the year of $24,244.

Instructions

 
Calculate the (a) asset turnover ratio and (b) return on assets ratio.

E9-11
Mangrich International is considering a significant expansion to its product line. The sales force is excited about the opportunities that the new products will bring. The new products are a significant step up in quality above the company’s current offerings, but offer a complementary fit to its existing product line. Michael Powell, senior production department manager, is very excited about the high-tech new equipment that will have to be acquired to produce the new products. Linda Huang, the company’s CFO, has provided the following projections based on results with and without the new products.

Without New Products With New Products
Sales $10,000,000 $16,000,000 Net income $500,000 $960,000 Average total assets $5,000,000 $12,000,000

Instructions

 
(a) Compute the company’s return on assets ratio, profit margin ratio, and asset turnover ratio, both with and without the new product line. (b) Discuss the implications that your findings in part (a) have for the company’s decision.

E9-12 Tobias Company reports the following information (in millions) during a recent year: net sales, $11,408.5; net earnings, $264.8; total assets, ending, $4,312.6; and total assets, beginning, $4,254.3.

Instructions

 
(a) Calculate the (1) return on assets, (2) asset turnover, and (3) profit margin ratios. (b) Prove mathematically how the profit margin and asset turnover ratios work together to explain return on assets, by showing the appropriate calculation. (c) Tobias Company owns Villas (grocery), Tobias Theaters, Kurt Drugstores, and Cepeda (heavy equipment), and manages commercial real estate, among other activities. Does this diversity of activities affect your ability to interpret the ratios you calculated in (a)? Explain.

E9-13
These are selected 2012 transactions for Jendusa Corporation: Jan. 1 Purchased a copyright for $120,000. The copyright has a useful life of 6 years and a remaining legal life of 30 years. Mar. 1 Purchased a patent with an estimated useful life of 4 years and a legal life of 20 years for $54,000. Sept. 1 Purchased a small company and recorded goodwill of $150,000. Its useful life is indefinite.

Instructions

 
Prepare all adjusting entries at December 31 to record amortization required by the events.

E9-14
Kopke Company, organized in 2012, has these transactions related to intangible assets in that year: Jan. 2 Purchased a patent (5-year life) $280,000. Apr. 1 Goodwill acquired as a result of purchased business (indefinite life) $360,000. July 1 Acquired a 9-year franchise; expiration date July 1, 2021, $540,000. Sept. 1 Research and development costs $185,000.

Instructions

 
(a) Prepare the necessary entries to record these transactions related to intangibles. All costs incurred were for cash. (b) Make the entries as of December 31, 2012, recording any necessary amortization. (c) Indicate what the balances should be on December 31, 2012.

E9-15
Alliance Atlantis Communications Inc. changed its accounting policy to amortize broadcast rights over the contracted exhibition period, which is based on the estimated useful life of the program. Previously, the company amortized broadcast rights over the lesser of 2 years or the contracted exhibition period.

Instructions

 
Write a short memo to your client explaining the implications this has for the analysis of Alliance Atlantis’s results.

E9-16
The questions listed below are independent of one another.

Instructions

 
Provide a brief answer to each question. (a) Why should a company depreciate its buildings? (b) How can a company have a building that has a zero reported book value but substantial fair value? (c) What are some examples of intangibles that you might find on your college campus? (d) Give some examples of company or product trademarks or trade names. Are trade names and trademarks reported on a company’s balance sheet?

E9-17
Elmbrook Corporation reported net income of $58,000. Depreciation expense for the year was $132,000. The company calculates depreciation expense using the straightline method, with a useful life of 10 years. Top management would like to switch to a 15-year useful life because depreciation expense would be reduced to $88,000. The CEO says, “Increasing the useful life would increase net income and net cash provided by operating activities.”

Instructions

 
Provide a comparative analysis showing net income and net cash provided by operating activities (ignoring other accrual adjustments) using a 10-year and a 15-year useful life. (Ignore income taxes.) Evaluate the CEO’s suggestion. *

E9-18
Buckeye Bus Lines uses the units-of-activity method in depreciating its buses. One bus was purchased on January 1, 2012, at a cost of $100,000. Over its 4-year useful life, the bus is expected to be driven 160,000 miles. Salvage value is expected to be $8,000.

Instructions

 
(a) Compute the depreciation cost per unit. (b) Prepare a depreciation schedule assuming actual mileage was: 2012, 40,000; 2013, 52,000; 2014, 41,000; and 2015, 27,000. *

E9-19
Basic information relating to a new machine purchased by Deloise Company is presented in

E9-5.


Instructions

 
Using the facts presented in

E9-5, compute depreciation using the following methods in the year indicated. (a) Declining-balance using double the straight-line rate for 2012 and 2013. (b) Units-of-activity for 2012, assuming machine usage was 3,900 hours. (Round depreciation per unit to the nearest cent.)


Exercises: Set B and Challenge Exercises

Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose the Student Companion site to access Exercise Set B and Challenge Exercises.

Problems: Set A

P9-1A
Irina Company was organized on January 1. During the first year of operations, the following plant asset expenditures and receipts were recorded in random order. Debits 1. Cost of real estate purchased as a plant site (land $255,000 and building $25,000) $ 280,000 2. Installation cost of fences around property 6,800 3. Cost of demolishing building to make land suitable for construction of new building 31,000 4. Excavation costs for new building 23,000 5. Accrued real estate taxes paid at time of purchase of real estate 3,170 6. Cost of parking lots and driveways 29,000 7. Architect’s fees on building plans 33,000 8. Real estate taxes paid for the current year on land 6,400 9. Full payment to building contractor 640,000 $1,052,370 Credits 10. Proceeds from salvage of demolished building $ 12,000


P9-2A
At December 31, 2012, Rivera Corporation reported the following plant assets. Land $ 3,000,000 Buildings $26,500,000 Less: Accumulated depreciation—buildings 11,925,000 14,575,000 Equipment 40,000,000 Less: Accumulated depreciation—equipment 5,000,000 35,000,000 Total plant assets $52,575,000 During 2013, the following selected cash transactions occurred. Apr. 1 Purchased land for $2,200,000. May 1 Sold equipment that cost $600,000 when purchased on January 1, 2006. The equipment was sold for $170,000. June 1 Sold land for $1,600,000. The land cost $1,000,000. July 1 Purchased equipment for $1,100,000. Dec. 31 Retired equipment that cost $700,000 when purchased on December 31, 2003. No salvage value was received.

Instructions

 
(a) Journalize the transactions. (Hint: You may wish to set up T accounts, post beginning balances, and then post 2013 transactions.) Rivera uses straight-line depreciation for buildings and equipment. The buildings are estimated to have a 40-year useful life and no salvage value; the equipment is estimated to have a 10-year useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or retirement. (b) Record adjusting entries for depreciation for 2013. (c) Prepare the plant assets section of Rivera’s balance sheet at December 31, 2013.

P9-3A
Presented here are selected transactions for Snow Company for 2012. Jan. 1 Retired a piece of machinery that was purchased on January 1, 2002. The machine cost $71,000 on that date and had a useful life of 10 years with no salvage value. June 30 Sold a computer that was purchased on January 1, 2009. The computer cost $30,000 and had a useful life of 5 years with no salvage value. The computer was sold for $12,000. Dec. 31 Discarded a delivery truck that was purchased on January 1, 2007. The truck cost $33,400 and was depreciated based on an 8-year useful life with a $3,000 salvage value.

Instructions

 
Journalize all entries required on the above dates, including entries to update depreciation, where applicable, on assets disposed of. Snow Company uses straight-line depreciation. (Assume depreciation is up to date as of December 31, 2011.)

P9-4A
The intangible assets section of Cepeda Corporation’s balance sheet at December 31, 2012, is presented here. Patents ($60,000 cost less $6,000 amortization) $54,000 Copyrights ($36,000 cost less $25,200 amortization) 10,800 Total $64,800 The patent was acquired in January 2012 and has a useful life of 10 years. The copyright was acquired in January 2006 and also has a useful life of 10 years. The following cash transactions may have affected intangible assets during 2013. Jan. 2 Paid $46,800 legal costs to successfully defend the patent against infringement by another company. Jan.–June Developed a new product, incurring $230,000 in research and development costs. A patent was granted for the product on July 1, and its useful life is equal to its legal life. Legal and other costs for the patent were $20,000. Sept. 1 Paid $40,000 to a quarterback to appear in commercials advertising the company’s products. The commercials will air in September and October. Oct. 1 Acquired a copyright for $200,000. The copyright has a useful life and legal life of 50 years.

Instructions

 
(a) Prepare journal entries to record the transactions. (b) Prepare journal entries to record the 2013 amortization expense for intangible assets. (c) Prepare the intangible assets section of the balance sheet at December 31, 2013. (d) Prepare the note to the financial statements on Cepeda Corporation’s intangible assets as of December 31, 2013.

P9-5A
Due to rapid employee turnover in the accounting department, the following transactions involving intangible assets were improperly recorded by Neitzke Corporation in 2012. 1. Neitzke developed a new manufacturing process, incurring research and development costs of $160,000. The company also purchased a patent for $40,000. In early January, Neitzke capitalized $200,000 as the cost of the patents. Patent amortization expense of $10,000 was recorded based on a 20-year useful life. 2. On July 1, 2012, Neitzke purchased a small company and as a result acquired goodwill of $80,000. Neitzke recorded a half-year’s amortization in 2012, based on a 20-year life ($2,000 amortization). The goodwill has an indefinite life.

Instructions

 
Prepare all journal entries necessary to correct any errors made during 2012. Assume the books have not yet been closed for 2012.

P9-6A
Phelan Corporation and Keevin Corporation, two companies of roughly the same size, are both involved in the manufacture of shoe-tracing devices. Each company depreciates its plant assets using the straight-line approach. An investigation of their financial statements reveals the information shown below. Phelan Corp. Keevin Corp. Net income $ 240,000 $ 300,000 Sales 1,150,000 1,200,000 Total assets (average) 3,200,000 3,000,000 Plant assets (average) 2,400,000 1,800,000 Intangible assets (goodwill) 300,000 0

Instructions

 
(a) For each company, calculate these values: (1) Return on assets ratio. (2) Profit margin. (3) Asset turnover ratio. (b) Based on your calculations in part (a), comment on the relative effectiveness of the two companies in using their assets to generate sales. What factors complicate your ability to compare the two companies? *

P9-7A
In recent years, Walz Company has purchased three machines. Because of frequent employee turnover in the accounting department, a different accountant was in charge of selecting the depreciation method for each machine, and various methods have been used. Information concerning the machines is summarized in the table below. Salvage Useful Life Machine Acquired Cost Value (in years) Depreciation Method 1 Jan. 1, 2010 $96,000 $12,000 8 Straight-line 2 July 1, 2011 85,000 10,000 5 Declining-balance 3 Nov. 1, 2011 66,000 6,000 6 Units-of-activity For the declining-balance method, Walz Company uses the double-declining rate. For the units-of-activity method, total machine hours are expected to be 30,000. Actual hours of use in the first 3 years were: 2011, 800; 2012, 4,500; and 2013, 6,000.

Instructions

 
(a) Compute the amount of accumulated depreciation on each machine at December 31, 2013. (b) If machine 2 was purchased on April 1 instead of July 1, what would be the depreciation expense for this machine in 2011? In 2012?

*

P9-8A
Rogers Corporation purchased machinery on January 1, 2012, at a cost of $250,000. The estimated useful life of the machinery is 4 years, with an estimated salvage value at the end of that period of $30,000. The company is considering different depreciation methods that could be used for financial reporting purposes.

Instructions

 
(a) Prepare separate depreciation schedules for the machinery using the straight-line method, and the declining-balance method using double the straight-line rate. Round to the nearest dollar. (b) Which method would result in the higher reported 2012 income? In the highest total reported income over the 4-year period? (c) Which method would result in the lower reported 2012 income? In the lowest total reported income over the 4-year period?

Problems: Set B


P9-1B
Franz Company was organized on January 1. During the first year of operations, the following plant asset expenditures and receipts were recorded in random order. Debits 1. Cost of real estate purchased as a plant site (land $190,000 and building $80,000) $ 270,000 2. Accrued real estate taxes paid at time of purchase of real estate 6,000 3. Cost of demolishing building to make land suitable for construction of new building 32,000 4. Cost of filling and grading the land 6,700 5. Excavation costs for new building 21,900 6. Architect’s fees on building plans 44,000 7. Full payment to building contractor 629,500 8. Cost of parking lots and driveways 36,000 9. Real estate taxes paid for the current year on land 7,300 $1,053,400 Credits 10. Proceeds for salvage of demolished building $ 12,700

Instructions

 
Analyze the transactions using the table column headings provided here. Enter the number of each transaction in the Item column, and enter the amounts in the appropriate columns. For amounts in the Other Accounts column, also indicate the account titles. Item Land Buildings Other Accounts

P9-2B
At December 31, 2011, Craig Corporation reported these plant assets. Land $ 4,000,000 Buildings $28,800,000 Less: Accumulated depreciation—buildings 11,520,000 17,280,000 Equipment 48,000,000 Less: Accumulated depreciation—equipment 5,000,000 43,000,000 Total plant assets $64,280,000 During 2012, the following selected cash transactions occurred. Apr. 1 Purchased land for $2,600,000. May 1 Sold equipment that cost $750,000 when purchased on January 1, 2007. The equipment was sold for $367,000. June 1 Sold land purchased on June 1, 2000, for $1,800,000. The land cost $800,000. Sept. 1 Purchased equipment for $840,000. Dec. 31 Retired fully depreciated equipment that cost $470,000 when purchased on December 31, 2002. No salvage value was received.



Instructions

 
(a) Journalize the transactions. (Hint: You may wish to set up T accounts, post beginning balances, and then post 2012 transactions.) Craig uses straight-line depreciation for buildings and equipment. The buildings are estimated to have a 40-year life and no salvage value; the equipment is estimated to have a 10-year useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or retirement. (b) Record adjusting entries for depreciation for 2012. (Note: The only assets that are fully depreciated are those that were retired on December 31.) (c) Prepare the plant assets section of Craig’s balance sheet at December 31, 2012.

P9-3B
Here are selected transactions for Halverson Corporation for 2012. Jan. 1 Retired a piece of machinery that was purchased on January 1, 2002. The machine cost $47,000 and had a useful life of 10 years with no salvage value. Mar. 31 Sold a computer that was purchased on January 1, 2009. The computer cost $43,400 and had a useful life of 7 years with no salvage value. The computer was sold for $25,000. Dec. 31 Discarded a delivery truck that was purchased on January 1, 2009. The truck cost $30,000 and was depreciated based on a 6-year useful life with a $3,000 salvage value.

Instructions

 
Journalize all entries required on the above dates, including entries to update depreciation on assets disposed of, where applicable. Halverson Corporation uses straight-line depreciation.

P9-4B
The intangible assets section of the balance sheet for Vincent Company at December 31, 2012, is presented here. Patents ($70,000 cost less $7,000 amortization) $63,000 Copyrights ($48,000 cost less $18,000 amortization) 30,000 Total $93,000 The patent was acquired in January 2012 and has a useful life of 10 years. The copyright was acquired in January 2010 and also has a useful life of 8 years. The following cash transactions may have affected intangible assets during 2013. Jan. 2 Paid $36,000 legal costs to successfully defend the patent against infringement by another company. Jan.–June Developed a new product, incurring $220,000 in research and development costs. A patent was granted for the product on July 1, and its useful life is equal to its legal life. Legal and other costs for the patent were $18,000. Sept. 1 Paid $110,000 to an extremely large defensive lineman to appear in commercials advertising the company’s products. The commercials will air in September and October. Oct. 1 Acquired a copyright for $120,000. The copyright has a useful life and legal life of 50 years.

Instructions

 
(a) Prepare journal entries to record the transactions. (b) Prepare journal entries to record the 2013 amortization expense. (c) Prepare the intangible assets section of the balance sheet at December 31, 2013. (d) Prepare the note to the financial statements on Vincent Company’s intangible assets as of December 31, 2013.

P9-5B
Due to rapid employee turnover in the accounting department, the following transactions involving intangible assets were improperly recorded by the Demeyer Company in 2012. 1. Demeyer developed a new manufacturing process, incurring research and development costs of $150,000. The company also purchased a patent for $96,000. In early January, Demeyer capitalized $246,000 as the cost of the patents. Patent amortization expense of $24,600 was recorded based on a 10-year useful life. 2. On July 1, 2012, Demeyer purchased a small company and as a result acquired goodwill of $40,000. Demeyer recorded a half-year’s amortization in 2012, based on a 40-year life ($500 amortization). The goodwill has an indefinite life.



Instructions

 
Prepare all journal entries necessary to correct any errors made during 2012. Assume the books have not yet been closed for 2012.

P9-6B
Culver Corporation and Kiltie Corporation, two corporations of roughly the same size, are both involved in the manufacture of umbrellas. Each company depreciates its plant assets using the straight-line approach. An investigation of their financial statements reveals the following information. Culver Corp. Kiltie Corp. Net income $ 780,000 $ 900,000 Sales 2,400,000 2,500,000 Total assets (average) 3,000,000 2,700,000 Plant assets (average) 1,400,000 1,200,000 Intangible assets (goodwill) 480,000 0

Instructions

 
(a) For each company, calculate these values: (1) Return on assets ratio. (2) Profit margin. (3) Asset turnover ratio. (b) Based on your calculations in part (a), comment on the relative effectiveness of the two companies in using their assets to generate sales. What factors complicate your ability to compare the two companies? *

P9-7B
In recent years, Harper Transportation purchased three used buses. Because of frequent employee turnover in the accounting department, a different accountant selected the depreciation method for each bus, and various methods have been used. Information concerning the buses is summarized in the table below. Salvage Useful Life Bus Acquired Cost Value (in years) Depreciation Method 1 Jan. 1, 2011 $ 96,000 $ 6,000 5 Straight-line 2 Jan. 1, 2011 135,000 10,000 4 Declining-balance 3 Jan. 1, 2011 100,000 4,000 5 Units-of-activity For the declining-balance method, Harper Transportation uses the double-declining rate. For the units-of-activity method, total miles are expected to be 160,000. Actual miles of use in the first 3 years were: 2011, 29,000; 2012, 34,000; and 2013, 35,000.

Instructions

 
(a) Compute the amount of accumulated depreciation on each bus at December 31, 2013. (b) If Bus 2 was purchased on March 1 instead of January 1, what would be the depreciation expense for this bus in 2011? In 2012? *

P9-8B
Kiram Corporation purchased machinery on January 1, 2012, at a cost of $350,000. The estimated useful life of the machinery is 5 years, with an estimated salvage value at the end of that period of $20,000. The company is considering different depreciation methods that could be used for financial reporting purposes.

Instructions

 
(a) Prepare separate depreciation schedules for the machinery using the straight-line method, and the declining-balance method using double the straight-line rate. (b) Which method would result in the higher reported 2012 income? In the higher total reported income over the 5-year period? (c) Which method would result in the lower reported 2012 income? In the lower total reported income over the 5-year period?

Problems: Set C Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose the Student Companion site to access Problem Set C. Comprehensive Problem

CP9 Paulson Corporation’s unadjusted trial balance at December 1, 2012, is presented below.

Debit Credit


Cash $ 22,000

Accounts Receivable 36,800

Notes Receivable 10,000

Interest Receivable –0–

Inventory 36,200



Prepaid Insurance 3,600

Land 20,000

Buildings 150,000

Equipment 60,000

Patent 9,000

Allowance for Doubtful Accounts $ 500

Accumulated Depreciation—Buildings 50,000

Accumulated Depreciation—Equipment 24,000

Accounts Payable 27,300

Salaries and Wages Payable –0–

Notes Payable (due April 30, 2013) 11,000

Interest Payable –0–

Notes Payable (due in 2018) 35,000

Common Stock 50,000

Retained Earnings 63,600

Dividends 12,000

Sales Revenue 900,000

Interest Revenue –0–

Gain on Disposal of Plant Assets –0–

Bad Debts Expense –0–

Cost of Goods Sold 630,000

Depreciation Expense –0–

Insurance Expense –0–

Interest Expense –0–

Other Operating Expenses 61,800

Amortization Expense –0–

Salaries and Wages Expense 110,000

Total $1,161,400 $1,161,400

The following transactions occurred during December.

Dec. 2 Paulson purchased equipment for $16,000, plus sales taxes of $800 (all paid in cash).

2 Paulson sold for $3,500 equipment which originally cost $5,000. Accumulated depreciation on this equipment at January 1, 2012, was $1,800;

2012 depreciation prior to the sale of equipment was $450.

15 Paulson sold for $5,000 on account inventory that cost $3,500.

23 Salaries and wages of $6,600 were paid.

Adjustment data:

1. Paulson estimates that uncollectible accounts receivable at year-end are $4,000.

2. The note receivable is a one-year, 8% note dated April 1, 2012. No interest has been recorded.

3. The balance in prepaid insurance represents payment of a $3,600, 6-month premium on September 1, 2012.

4. The building is being depreciated using the straight-line method over 30 years. The salvage value is $30,000.

5. The equipment owned prior to this year is being depreciated using the straight-line method over 5 years. The salvage value is 10% of cost.

6. The equipment purchased on December 2, 2012, is being depreciated using the straight-line method over 5 years, with a salvage value of $1,800.


7. The patent was acquired on January 1, 2012, and has a useful life of 9 years from that date.

8. Unpaid salaries at December 31, 2012, total $2,200.

9. Both the short-term and long-term notes payable are dated January 1, 2012, and carry a 10% interest rate. All interest is payable in the next 12 months.

10. Income tax expense was $15,000. It was unpaid at December 31.


Instructions

 


(a) Prepare journal entries for the transactions listed above and adjusting entries.

(b) Prepare an adjusted trial balance at December 31, 2012.

(c) Prepare a 2012 income statement and a 2012 retained earnings statement.

(d) Prepare a December 31, 2012, balance sheet.