Deck 6: Accounting for and Presentation of Property, Plant and Equipment, and Other Noncurrent Assets

Question 1

Basket purchase allocation Minott Jewelers, Ltd., purchased store fixtures, display cases, and a maximum-security commercial safe for a lump-sum price of $18,000 from a bankrupt competitor. Appraised values were as follows: store fixtures, $9,000; display cases, $13,500; commercial safe, $7,500.
Required:
What cost should be recorded for the commercial safe?

Answer 1

Compute the cost that should be recorded for the commercial safe:
A basket, or lump sum purchase, occurs when multiple noncurrent assets are purchased in a single transaction. The cost of each asset must be calculated and recorded separately. In order to do so, an allocation of the total cost of the purchase is made to each asset based on their individual appraised value on the date of purchase.
Compute the fair value of basket:
Calculate the percent of total for the safe:
To calculate the percent of total for the safe, divide the appraised fair value of the safe by the total fair value of the individual assets purchased:
Calculate the cost of the commercial safe:
To calculate the cost of the commercial safe, multiple the total basket purchase price by the percentage allocation of the safe:
Hence, the cost of commercial safe is $4,500.

Question 2

Goodwill effect on ROI Assume that fast-food restaurants generally provide an ROI of 12%, but that such a restaurant near a college campus has an ROI of 15% because its relatively large volume of business generates an above-average turnover (sales/assets). The replacement value of the restaurant's plant and equipment is $600,000. If you were to invest that amount in a restaurant elsewhere in town, you could expect a 12% ROI.
Required:
a. Would you be willing to pay more than $600,000 for the restaurant near the campus? Explain your answer.
b. If you purchased the restaurant near the campus for $750,000 and the fair value of the assets you acquired was $600,000, what balance sheet accounts would be used to record the cost of the restaurant?

Answer 2

(a)The average ROI is 15%. Hence, it is acceptable to invest further $150,000, as the ROI will still remain at 12% after such an investment.
The benefits derived from an additional investment of $600,000 are calculated as the difference between the two investment rates as follows:
At 18% ROI, the investment of $750,000 is required to yield $18,000 of income. Thus, $750,000 is the utmost price on should be willing to invest.
(b)Each one of the particular assets acquired should be recorded at their considered fair market values, and the amount of $40,000 should be shown as " Goodwill. "

Question 3

Focus company-property, plant, and equipment disclosures In Exercise 1.1, you were asked to obtain the most recent annual report of a company that you were interested in reviewing throughout this term.
Required:
Please review the note disclosures provided in your focus company's annual report and discuss what you've learned about how your company's:
a. Property, plant, and equipment is:
1. Depreciated.
2. Accounted for and presented.
b. Other noncurrent assets are described and reported.
Reference Exercise 1.1:
Obtain an annual report Throughout this course, you will be asked to relate the material being studied to actual financial statements. After you complete this course, you will be able to use an organization's financial statements to make decisions and informed judgments about that organization. The purpose of this assignment is to provide the experience of obtaining a company's annual report. You may want to refer to the financial statements in the report during the rest of the course.
Required:
Obtain the most recently issued annual report of a publicly owned manufacturing or merchandising corporation of your choice. Do not select a bank, insurance company, financial institution, or public utility. It would be appropriate to select a firm that you know something about or have an interest in.
Type firmname.com or use a search engine to locate your chosen company's website and then scan your firm's home page for information about annual report ordering. If you don't see a direct link to Investor Relations or Investors on the home page, look for links such as Our Company, About Us, or Site Map that may lead you to SEC Filings, Financial Information, or Annual Reports. Most companies allow you to save or print an Adobe Acrobat version of their annual reports.

Answer 3

All of the answers in this problem use the 2013 Walgreen Co. Annual Report. Your answers may be different depending on the company you choose to review.
(a)A review of Walgreen Co.'s note disclosures details the following information:
1. Property, plant and equipment is depreciated on a straight-line basis over estimated useful lives. Estimated useful lives range from 10-39 years for buildings and 2-13 years for equipment.
2. Property, plant and equipment is shown on the firm's balance sheets net of depreciation.
(b)Walgreen Co. has other non-current assets besides property and equipment:
• An investment in Alliance Boots is accounted for using the equity method. Walgreen Co.'s proportionate share of the net income is included in consolidated net earnings.
• Walgreen Co. accounts for goodwill under ASC Topic 350, Intangibles - Goodwill and Other, in which amortization is not permitted. Goodwill must be tested for impairment at least annually.

Question 4

Capitalizing versus expensing Riley Holdings Corp. incurred the following expenditures: $4,200 cost to replace the transmission in a company-owned vehicle; $12,400 cost of annual property insurance on the company's production facilities; $9,700 cost to develop and register a design patent; $24,600 cost to add a security and monitoring system to the company's distribution center; $500 cost to repair paint damage on a company-owned vehicle caused by normal wear and tear.
Required:
Which, if any, of these expenditures should be capitalized?

Question 5

Goodwill-effect on ROI and operating income Goodwill arises when one firm acquires the net assets of another firm and pays more for those net assets than their current fair value. Suppose that Target Co. had operating income of $540,000 and net assets with a fair value of $1,800,000. Takeover Co. pays $2,700,000 for Target Co.'s net assets and business activities.
Required:
a. How much goodwill will result from this transaction?
b. Calculate the ROI for Target Co. based on its present operating income and the fair value of its net assets.
c. Calculate the ROI that Takeover Co. will earn if the operating income of the acquired net assets continues to be $540,000.
d. What reasons can you think of to explain why Takeover Co. is willing to pay $900,000 more than fair value for the net assets acquired from Target Co.?

Question 6

Financial statement effects of depreciation methods Answer the following questions using data from the Campbell Soup Company annual report in the appendix:
Required:
a. Find the discussion of Property, Plant, and Equipment and depreciation methods used by Campbell's in the appendix. Explain why the particular method is used for the purpose described. What method do you think the company uses for income tax purposes?
b. Calculate the ratio of the depreciation and amortization expense for 2014, which is reported in the appendix, in the Consolidated Statements of Cash Flows to the total cost ( not net book value) of plant assets reported in the schedule.
c. Based on the ratio calculated in part b and the depreciation method being used by Campbell's, what is the average useful life being used for its depreciation calculation?
d. Assume that the use of an accelerated depreciation method would have resulted in 25% more accumulated depreciation than reported at August 3, 2014, and that Campbell's Retained Earnings account would have been affected by the entire difference. By what percentage would this have reduced the retained earnings amount reported at August 3, 2014?

Question 7

Depreciation calculation methods Gandolfi Construction Co. purchased a used CAT 336DL earth mover at a cost of $500,000 in January 2016. The company's estimated useful life of this heavy equipment is 10 years, and the estimated salvage value is $100,000.
Required:
a. Using straight-line depreciation, calculate the depreciation expense to be recognized for 2016, the first year of the equipment's life, and calculate the equipment's net book value at December 31, 2018, after the third year of the equipment's life.
b. Using declining-balance depreciation at twice the straight-line rate, calculate the depreciation expense to be recognized for 2018, the third year of the equipment's life.

Question 8

Transaction analysis-various accounts Prepare an answer sheet with the column headings that follow. For each of the following transactions or adjustments, indicate the effect of the transaction or adjustment on assets, liabilities, and net income by entering for each account affected the account name and amount and indicating whether it is an addition (+) or a subtraction (?). Transaction a has been done as an illustration. Net income is not affected by every transaction. In some cases, only one column may be affected because all of the specific accounts affected by the transaction are included in that category.

b. Sold land that had originally cost $27,000 for $42,000 in cash.
c. Acquired a new machine under a capital lease. The present value of future lease payments, discounted at 10%, was $36,000.
d. Recorded the first annual payment of $6,000 for the leased machine (in part c ).
e. Recorded a $18,000 payment for the cost of developing and registering a trademark.
f. Recognized periodic amortization for the trademark (in part e ) using a 40-year useful life.
g. Sold used production equipment for $42,000 in cash. The equipment originally cost $120,000, and the accumulated depreciation account has an unadjusted balance of $66,000. It was determined that a $3,000 year-to-date depreciation entry must be recorded before the sale transaction can be recorded. Record the adjustment and the sale.

Question 9

Capstone analytical review of Chapters 5-6. Analyzing accounts receivable, property, plant, and equipment, and other related accounts (Note: Please refer to Case 4.30 on pages 132-133 for the financial statement data needed for the analysis of this case. You should also review the solution to Case 4.30, provided by your instructor, before attempting to complete this case.)You have been approached by Gary Gerrard, president and CEO of Gerrard Construction Co., who would like your advice on a number of business and accounting related matters.
Your conversation with Mr. Gerrard, which took place in February 2017, proceeded as follows:
Mr. Gerrard: "The accounts receivable shown on the balance sheet for 2016 are nearly $20 million and the funny thing is, we just collected a bunch of the big accounts in early December but had to reinvest most of that money in new equipment. At one point last year, more than $40 million of accounts were outstanding! I had to put some pressure on our regular clients who keep falling behind. Normally, I don't bother with collections, but this is our main source of cash flows. My daughter Anna deals with collections and she's just too nice to people. I keep telling her that the
money is better off in our hands than in someone else's! Can you have a look at our books? Some of these clients are really getting on my nerves."
Your reply: "That does seem like a big problem. I'll look at your accounts receivable details and get back to you with some of my ideas and maybe some questions you can help me with. What else did you want to ask me about?"
Mr. Gerrard: "The other major problem is with our long-term asset management. We don't have much in the way of buildings, just this office you're sitting in and the service garage where we keep most of the earthmoving equipment. That's where the expense of running this business comes in. I've always said that I'd rather see a dozen guys standing around leaning against shovels than to see one piece of equipment sit idle for even an hour of daylight! There is nothing complicated about doing 'dirt work,' but we've got one piece of equipment that would cost over $3 million to replace at today's prices. And that's just it-either you spend a fortune on maintenance or else you're constantly in the market for the latest and greatest new 'Cat.'" Your reply: "So how can I help?"
Mr. Gerrard: "Now that you know a little about our business, I'll have my son Nathan show you the equipment records. He's our business manager. We've got to sell and replace some of our light-duty trucks. We need to get a handle on the value of some of the older equipment. What the books say, and what it's really worth, are two different things. I'd like to know what the accounting consequences of selling various pieces of equipment would be because I don't want to be selling anything at a loss." Your reply: "Thanks, Gary. I'll have a chat with Anna and Nathan and get back to you."
After your discussion with Anna, you analyzed the accounts receivable details and prepared the following aging schedule:

You've noted that Gerrard Construction Co. has not written off any accounts receivable as uncollectible during the past several years. The Allowance for Bad Debts account is included in the chart of accounts but has never been used. No cash discounts have been offered to customers, and the company does not employ a collection agency. Reminder invoices are sent to customers with outstanding balances at the end of every quarter. After your discussion with Nathan, you analyzed the equipment records related to the three items that the company wants to sell at this time:

Nathan explained that Gerrard Construction Co. uses the units-of-production depreciation method and estimates usage on the basis of hours in service for earthmoving equipment and miles driven for all on-road vehicles. You have recalculated the annual depreciation adjustments through December 31, 2016, and are satisfied that the company has made the proper entries. The estimated market values were recently obtained through the services of a qualified, independent appraiser whom you had recommended to Nathan.
Required:
a. Explain what Mr. Gerrard meant when he said, "I keep telling her that the money is better off in our hands than in someone else's!"
b. What is your overall reaction concerning Gerrard Construction Co.'s management of accounts receivable? What suggestions would you make to Mr. Gerrard that may prove helpful in the collection process?
c. What accounting advice would you give concerning the accounts receivable balance of $19,600,000 at December 31, 2016?
d. What impact (increase, decrease, or no effect) would any necessary adjustment(s) have on the company's working capital and current ratio? (Note that these items were computed in part g of Case 4.30 and do not need to be recomputed now.)e. Explain what Mr. Gerrard meant when he said, "We need to get a handle on the value of some of the older equipment. What the books say, and what it's really worth, are two different things."
f. Use the horizontal model, or write the journal entries, to show the effect of selling each of the three assets for their respective estimated market values. Partialyear depreciation adjustments for 2017 can be ignored.
g. Explain to Mr. Gerrard why his statement "I don't want to be selling anything at a loss" does not make economic sense.
Reference Case 4.30:
Capstone analytical review of Chapters 2-4. Calculate liquidity and profitability measures and explain various financial statement relationships for an excavation contractor Gerrard Construction Co. is an excavation contractor. The following summarized data (in thousands) are taken from the December 31, 2016, financial statements:

At December 31, 2015, total assets were $164,000 and total stockholders' equity was $65,200. There were no changes in notes payable or paid-in capital during 2016.
Required:
a. The cost of services provided amount includes all operating expenses (selling, general, and administrative expenses) except depreciation expense. What do you suppose the primary reason was for management to separate depreciation from other operating expenses? From a conceptual point of view, should depreciation be considered a "cost" of providing services?
b. Why do you suppose the amounts of depreciation expense and interest expense are so high for Gerrard Construction Co.? To which specific balance sheet accounts should a financial analyst relate these expenses?
c. Calculate the company's average income tax rate. (Hint: You must first determine the earnings before taxes.)d. Explain why the amount of income tax expense is different from the amount of income taxes payable.
e. Calculate the amount of total current assets. Why do you suppose this amount is so low, relative to total assets?
f. Why doesn't the company have a Merchandise Inventory account?
g. Calculate the amount of working capital and the current ratio at December 31, 2016. Assess the company's overall liquidity.
h. Calculate ROI (including margin and turnover) and ROE for the year ended December 31, 2016. Assess the company's overall profitability. What additional information would you like to have to increase the validity of this assessment?
i. Calculate the amount of dividends declared and paid during the year ended December 31, 2016. (Hint: Do a T-account analysis of retained earnings.)

Question 10

Effect of depreciation on ROI Refer to the information presented in Mini-Exercise 6.3. Assume that Gandolfi Construction Co. calculated depreciation expense for the CAT 336DL earth mover on the straight-line method and reported $600,000 of net income for the year ended December 31, 2016. The company's average total assets for 2016 were $4,000,000.
Required:
a. Calculate Gandolfi's ROI for the year ended December 31, 2016.
b. Calculate what Gandolfi's ROI would have been for the year ended December 31, 2016, had the company used the double-declining-balance depreciation method for the CAT 336DL earth mover.
Reference Mini-Exercise 6.3:
Depreciation calculation methods Gandolfi Construction Co. purchased a used CAT 336DL earth mover at a cost of $500,000 in January 2016. The company's estimated useful life of this heavy equipment is 10 years, and the estimated salvage value is $100,000.
Required:
a. Using straight-line depreciation, calculate the depreciation expense to be recognized for 2016, the first year of the equipment's life, and calculate the equipment's net book value at December 31, 2018, after the third year of the equipment's life.
b. Using declining-balance depreciation at twice the straight-line rate, calculate the depreciation expense to be recognized for 2018, the third year of the equipment's life.

Question 11

Transaction analysis-various accounts Prepare an answer sheet with the following column headings. For each of the following transactions or adjustments, indicate the effect of the transaction or adjustment on assets, liabilities, and net income by entering for each account affected the account name and amount and indicating whether it is an addition (+) or a subtraction (?). Transaction a has been done as an illustration. Net income is not affected by every transaction. In some cases, only one column may be affected because all of the specific accounts affected by the transaction are included in that category.

b. Sold land that had originally cost $117,000 for $102,600 in cash.
c. Recorded a $612,000 payment for the cost of developing and registering a patent.
d. Recognized periodic amortization for the patent (in part c ) using the maximum statutory useful life.
e. Capitalized $28,800 of cash expenditures made to extend the useful life of production equipment.
f. Expensed $14,100 of cash expenditures incurred for routine maintenance of production equipment.
g. Sold a used machine for $81,000 in cash. The machine originally cost $270,000 and had been depreciated for the first two years of its five-year useful life using the double-declining-balance method. (Hint: You must compute the balance of the accumulated depreciation account before you can record the sale.)h. Purchased a business for $2,800,000 in cash. The fair values of the net assets acquired were as follows: Land, $400,000; Buildings, $1,800,000; Equipment, $900,000; and Long-Term Debt, $600,000.

Question 12

Goodwill Backstreets Co. recently acquired all of Jungleland, Inc.'s net assets in a business acquisition. The cash purchase price was $12.6 million. Jungleland, Inc.'s assets and liabilities had the following appraised values immediately prior to the acquisition: land, $2.4 million; buildings, $5.8 million; inventory, $3.4 million; long-term notes payable, for which Backstreets Co. assumes payment responsibilities, $2.5 million
Required:
How much goodwill will result from this transaction?

Question 13

Capitalizing versus expensing-effect on ROI and operating income During the first month of its current fiscal year, Green Co. incurred repair costs of $40,000 on a machine that had eight years of remaining depreciable life. The repair cost was inappropriately capitalized. Green Co. reported operating income of $225,000 for the current year.
Required:
a. Assuming that Green Co. took a full year's straight-line depreciation expense in the current year, calculate the operating income that should have been reported for the current year.
b. Assume that Green Co.'s total assets at the end of the prior year and at the end of the current year were $1,400,000 and $1,600,000, respectively. Calculate ROI (based on operating income) for the current year using the originally reported data and then using corrected data.
c. Explain the effect on ROI of subsequent years if the error is not corrected.

Question 14

Present value calculations Congratulations! You have just won $1 billion in the largest Powerball jackpot payoff ever! You will receive payments of $50,000,000 per year for the next 20 years.
Required:
Using a present value table, your calculator, or a computer program present value function, calculate the present value of your lottery winnings, assuming an interest rate of 6%.

Question 15

Capitalizing versus expensing-effect on ROI Early in January 2016, Tellco, Inc., acquired a new machine and incurred $200,000 of interest, installation, and overhead costs that should have been capitalized but were expensed. The company earned net operating income of $1,500,000 on average total assets of $10,000,000 for 2016.
Assume that the total cost of the new machine will be depreciated over 10 years using
the straight-line method.
Required:
a. Calculate the ROI for Tellco, Inc., for 2016.
b. Calculate the ROI for Tellco, Inc., for 2016, assuming that the $200,000 had been capitalized and depreciated over 10 years using the straight-line method. (Hint: There is an effect on net operating income and average assets.)c. Given your answers to a and b , why would the company want to account for this expenditure as an expense?
d. Assuming that the $200,000 is capitalized, what will be the effect on ROI for 2017 and subsequent years, compared to expensing the interest, installation, and overhead costs in 2016? Explain your answer.

Question 16

Basket purchase allocation Dorsey Co. has expanded its operations by purchasing a parcel of land with a building on it from Bibb Co. for $255,000. The appraised value of the land is $60,000, and the appraised value of the building is $240,000.
Required:
a. Assuming that the building is to be used in Dorsey Co.'s business activities, what cost should be recorded for the land?
b. Explain why, for income tax purposes, management of Dorsey Co. would want as little of the purchase price as possible allocated to land.
c. Explain why Dorsey Co. allocated the cost of assets acquired based on appraised values at the purchase date rather than on the original cost of the land and building to Bibb Co.
d. Assuming that the building is demolished at a cost of $20,000 so that the land can be used for employee parking, what cost should Dorsey Co. record for the land?

Question 17

Depreciation calculation methods-partial year Freedom Co. purchased a new machine on July 2, 2016, at a total installed cost of $132,000. The machine has an estimated life of five years and an estimated salvage value of $18,000.
Required:
a. Calculate the depreciation expense for each year of the asset's life using:
1. Straight-line depreciation.
2. Double-declining-balance depreciation.
b. How much depreciation expense should be recorded by Freedom Co. for its fiscal year ended December 31, 2016, under each method? (Note: The machine will have been used for one-half of its first year of life.)c. Calculate the accumulated depreciation and net book value of the machine at December 31, 2017, under each method.

Question 18

Basket purchase allocation Crow Co. purchased some of the machinery of Hare, Inc., a bankrupt competitor, at a liquidation sale for a total cost of $90,800. Crow's cost of moving and installing the machinery totaled $8,200. The following data are available:

Required:
a. Calculate the amount that should be recorded by Crow Co. as the cost of each piece of equipment.
b. Which of the following alternatives should be used as the depreciable life for Crow Co.'s depreciation calculation? Explain your answer.
The remaining useful life to Hare, Inc.
The life of a new machine.
The useful life of the asset to Crow Co.

Question 19

Partial-year depreciation calculations-straight-line and double-decliningbalance methods Porter, Inc., acquired a machine that cost $180,000 on October 1, 2016. The machine is expected to have a four-year useful life and an estimated salvage value of $20,000 at the end of its life. Porter, Inc., uses the calendar year for financial reporting. Depreciation expense for one-fourth of a year was recorded in 2016.
Required:
a. Using the straight-line depreciation method, calculate the depreciation expense to be recognized in the income statement for the year ended December 31, 2018, and the balance of the Accumulated Depreciation account as of December 31, 2018. (Note: This is the third calendar year in which the asset has been used.)b. Using the double-declining-balance depreciation method, calculate the depreciation expense for the year ended December 31, 2018, and the net book value of the machine at that date.

Question 20

Capitalizing versus expensing For each of the following expenditures, indicate the type of account (asset or expense) in which the expenditure should be recorded. Explain your answers.
a. $30,000 annual cost of routine repair and maintenance expenditures for a fleet of delivery vehicles.
b. $12,000,000 cost to develop a coal mine, from which an estimated 1 million tons of coal can be extracted.
c. $248,000 cost to replace the roof on a building.
d. $140,000 cost of a radio and television advertising campaign to introduce a new product line.
e. $8,000 cost of grading and leveling land so that a building can be constructed.

Question 21

Identify depreciation methods used Grove Co. acquired a production machine on January 1, 2016, at a cost of $480,000. The machine is expected to have a four-year useful life, with a salvage value of $80,000. The machine is capable of producing 50,000 units of product in its lifetime. Actual production was as follows: 11,000 units in 2016; 16,000 units in 2017; 14,000 units in 2018; and 9,000 units in 2019.
Following is the comparative balance sheet presentation of the net book value of the production machine at December 31 for each year of the asset's life, using three alternative depreciation methods (items a - c ):

Required:
Identify the depreciation method used for each of the preceding comparative balance sheet presentations (items a - c ). If a declining-balance method is used, be sure to indicate the percentage (150% or 200%). (Hint: Read the balance sheet from right to left to determine how much has been depreciated each year. Remember that December 31, 2016, is the end of the first year.)

Question 22

Capitalizing versus expensing For each of the following expenditures, indicate the type of account (asset or expense) in which the expenditure should be recorded. Explain your answers.
a. $2,400 for repairing damage that resulted from the careless unloading of a new machine.
b. $21,600 cost of designing and registering a trademark.
c. $11,100 in legal fees incurred to perform a title search for the acquisition of land.
d. $3,600 cost of patching a leak in the roof of a building.
e. $285,000 cost of salaries paid to the research and development staff.

Question 23

Identify depreciation methods used Moyle Co. acquired a machine on January 1, 2016, at a cost of $2,400,000. The machine is expected to have a five-year useful life, with a salvage value of $150,000. The machine is capable of producing 300,000 units of product in its lifetime. Actual production was as follows: 60,000 units in 2016; 40,000 units in 2017; 80,000 units in 2018; 50,000 units in 2019; and 70,000 units in 2020.
Required:
Identify the depreciation method that would result in each of the following annual credit amount patterns to accumulated depreciation. If a declining-balance method is used, indicate the percentage (150% or 200%). (Hint: What do the amounts shown for each year represent?)

Question 24

Effect of depreciation on ROI Alpha, Inc., and Beta Co. are sheet metal processors that supply component parts for consumer product manufacturers. Alpha, Inc., has been in business since 1980 and is operating in its original plant facilities. Much of its equipment was acquired in the 1980s. Beta Co. was started two years ago and acquired its building and equipment then. Each firm has about the same sales revenue, and material and labor costs are about the same for each firm. What would you expect Alpha's ROI to be relative to the ROI of Beta Co.? Explain your answer. What are the implications of this ROI difference for a firm seeking to enter an established industry?

Question 25

Determine depreciation method used and date of asset acquisition; record disposal of asset The balance sheets of Tully Corp. showed the following at December 31, 2017 and 2016:

Required:
a. If there have not been any purchases, sales, or other transactions affecting this equipment account since the equipment was first acquired, what is the amount of depreciation expense for 2017?
b. Assume the same facts as in part a, and assume that the estimated useful life of the equipment is four years and the estimated salvage value is $60,000.
Determine:
1. What the original cost of the equipment was.
2. What depreciation method is apparently being used. Explain your answer.
3. When the equipment was acquired.
c. Assume that the equipment is sold on December 31, 2017, for $141,600. Use the horizontal model (or write the journal entry) to show the effect of the sale of the equipment.

Question 26

Financial statement effects of depreciation-straight-line versus accelerated methods Assume that a company chooses an accelerated method of calculating depreciation expense for financial statement reporting purposes for an asset with a five-year life.
Required:
State the effect (higher, lower, no effect) of accelerated depreciation relative to straightline depreciation on:
a. Depreciation expense in the first year.
b. The asset's net book value after two years.
c. Cash flows from operations (excluding income taxes).

Question 27

Determine depreciation method used and date of asset acquisition; record disposal of asset The balance sheets of HiROE, Inc., showed the following at December 31, 2017 and 2016:

Required:
a. If there have not been any purchases, sales, or other transactions affecting this equipment account since the equipment was first acquired, what is the amount of the depreciation expense for 2017?
b. Assume the same facts as in part a, and assume that the estimated useful life of the equipment to HiROE, Inc., is eight years and that there is no estimated salvage value. Determine:
1. What the original cost of the equipment was.
2. What depreciation method is apparently being used. Explain your answer.
3. When the equipment was acquired.
c. Assume that this equipment account represents the cost of 10 identical machines. Calculate the gain or loss on the sale of one of the machines on January 2, 2018, for $120,000. Use the horizontal model (or write the journal entry) to show the effect of the sale of the machine.

Question 28

Depreciation calculation methods Millco, Inc., acquired a machine that cost $1,200,000 early in 2016. The machine is expected to last for eight years, and its estimated salvage value at the end of its life is $180,000.
Required:
a. Using straight-line depreciation, calculate the depreciation expense to be recognized in the first year of the machine's life and calculate the accumulated depreciation after the fifth year of the machine's life.
b. Using declining-balance depreciation at twice the straight-line rate, calculate the depreciation expense for the third year of the machine's life.
c. What will be the net book value of the machine at the end of its eighth year of use before it is disposed of, under each depreciation method?

Question 29

Accounting for capital leases On January 1, 2016, Carey, Inc., entered into a noncancelable lease agreement, agreeing to pay $14,000 at the end of each year for four years to acquire a new computer system having a market value of $40,800. The expected useful life of the computer system is also four years, and the computer will be depreciated on a straight-line basis with no salvage value. The interest rate used by the lessor to determine the annual payments was 14%. Under the terms of the lease, Carey, Inc., has an option to purchase the computer for $1 on January 1, 2020.
Required:
a. Explain why Carey, Inc., should account for this lease as a capital lease rather than an operating lease. (Hint: Determine which of the four criteria for capitalizing a lease have been met.)b. Show in a horizontal model or write the entry that Carey, Inc., should make on January 1, 2016. Round your answer to the nearest $10. (Hint: First determine the present value of future lease payments using Table 6-5. )c. Show in a horizontal model or write the entry that Carey, Inc., should make on December 31, 2016, to record the first annual lease payment of $14,000. Do not round your answers. (Hint: Based on your answer to part b , determine the appropriate amounts for interest and principal.)d. What expenses (include amounts) should be recognized for this lease on the income statement for the year ended December 31, 2016?
e. Explain why the accounting for an asset acquired under a capital lease isn't really any different than the accounting for an asset that was purchased with money borrowed on a long-term loan.
Reference Table 6-5:

Question 30

Depreciation calculation methods Kleener Co. acquired a new delivery truck at the beginning of its current fiscal year. The truck cost $78,000 and has an estimated useful life of four years and an estimated salvage value of $12,000.
Required:
a. Calculate depreciation expense for each year of the truck's life using:
1. Straight-line depreciation.
2. Double-declining-balance depreciation.
b. Calculate the truck's net book value at the end of its third year of use under each depreciation method.
c. Assume that Kleener Co. had no more use for the truck after the end of the third year and that at the beginning of the fourth year it had an offer from a buyer who was willing to pay $18,600 for the truck. Should the depreciation method used by Kleener Co. affect the decision to sell the truck?

Question 31

Accounting for capital leases versus purchased assets Ambrose Co. has the option of purchasing a new delivery truck for $84,600 in cash or leasing the truck for $18,300 per year, payable at the end of each year for six years. The truck also has a useful life of six years and will be depreciated on a straight-line basis with no salvage value. The interest rate used by the lessor to determine the annual payments was 8%.
Required:
a. Assume that Ambrose Co. purchased the delivery truck and signed a six-year, 8% note payable for $84,600 in satisfaction of the purchase price. Show in a horizontal model or write the entry that Ambrose should make to record the purchase transaction.
b. Assume instead that Ambrose Co. agreed to the terms of the lease. Show in a horizontal model or write the entry that Ambrose should make to record the capital lease transaction. Round your answer up to the nearest $10. (Hint: First determine the present value of future lease payments using Table 6-5. )c. Show in a horizontal model or write the entry that Ambrose Co. should make at the end of the year to record the first annual lease payment of $18,300. Do not round your answers. (Hint: Based on your answer to part b , determine the appropriate amounts for interest and principal.)d. What expenses (include amounts) should Ambrose Co. recognize on the income statement for the first year of the lease?
e. How much would the annual payments be for the note payable signed by Ambrose Co. in part a ? (Hint: Use the present value of an annuity factor from Table 6-5. )Reference Table 6-5:

Question 32

Present value calculations Using a present value table, your calculator, or a computer program present value function, calculate the present value of:
a. A car down payment of $9,000 that will be required in two years, assuming an interest rate of 10%.
b. A lottery prize of $18 million to be paid at the rate of $900,000 per year for 20 years, assuming an interest rate of 10%.
c. The same annual amount as in part b , but assuming an interest rate of 14%.
d. A capital lease obligation that calls for the payment of $24,000 per year for 10 years, assuming a discount rate of 8%.

Question 33

Present value calculation-capital lease Renter Co. acquired the use of a machine by agreeing to pay the manufacturer of the machine $4,500 per year for 10 years. At the time the lease was signed, the interest rate for a 10-year loan was 12%.
Required:
a. Use the appropriate factor from Table 6-5 to calculate the amount that Renter Co. could have paid at the beginning of the lease to buy the machine outright.
b. What causes the difference between the amount you calculated in part a and the total of $45,000 ($4,500 per year for 10 years) that Renter Co. will pay under the terms of the lease?
c. What is the appropriate amount of cost to be reported in Renter Co.'s balance sheet (at the time the lease was signed) with respect to this asset?
Reference Table 6-5:

Question 34

Present value calculations-effects of compounding frequency, discount rates, and time periods Using a present value table, your calculator, or a computer program present value function, verify that the present value of $100,000 to be received in five years at an interest rate of 16%, compounded annually, is $47,610. Calculate the present value of $100,000 for each of the following items (parts a - f ) using these facts, except:
a. Interest is compounded semiannually.
b. Interest is compounded quarterly.
c. A discount rate of 12% is used.
d. A discount rate of 20% is used.
e. The cash will be received in three years.
f. The cash will be received in seven years.

Question 35

Present value calculations Using a present value table, your calculator, or a computer program present value function, answer the following questions:
Required:
a. ? What is the present value of nine annual cash payments of $36,000, to be paid at the end of each year using an interest rate of 6%?
b. ? What is the present value of $135,000 to be paid at the end of 20 years, using an interest rate of 18%?
c. ? How much cash must be deposited in a savings account as a single amount in order to accumulate $2,700,000 at the end of 12 years, assuming that the account will earn 10% interest?
d. ? How much cash must be deposited in a savings account (as a single amount) in order to accumulate $450,000 at the end of seven years, assuming that the account will earn 12% interest?
e. ? Assume that a machine was purchased for $540,000. Cash of $180,000 was paid, and a four-year, 8% note payable was signed for the balance.
1. ? Use the horizontal model, or write the journal entry, to show the purchase of the machine as described.
2. ? How much is the equal annual payment of principal and interest due at the end of each year? Round your answer to the nearest $1.
3. ? What is the total amount of interest expense that will be reported over the life of the note? Round your answer to the nearest $1.
4. ? Use the horizontal model, or write the journal entries, to show the equal annual payments of principal and interest due at the end of each year.