CHAPTER 7

LONG-LIVED NONMONETARY ASSETS

AND THEIR AMORTIZATION
Changes from Eleventh Edition
Updated from Eleventh Edition.
Approach
Students find it difficult to accept the basic fact that deprecation is a process of writing off an assets cost,
rather than a process that has something to do with asset valuation. (A great many business people have
the same difficulty.) Instinctively, they think depreciation is related to some physical change in the asset,
or to changes in its market value. Basically, this point is made only after repeated emphasis of it.
Since the text summarizes APB Opinion No. 17 on goodwill, FASB Statement No. 2 on research and
development, FASB Statement No. 13 on leases, FASB Statement No. 86 on computer software, and FASB
Statement No 142 on goodwill and other intangible assets, instructors may wish to refer to this material
for additional background.
Cases
Stern Corporation (B) is a straightforward problem in analyzing fixed asset transactions.
Joan Holtz (C) describes several debatable items that might or might not be included in the asset amounts.
Stafford Press describes a series of transactions related to amounts to be capitalized. The case probably
cannot be covered in one session and, therefore, either the case should be used for two days or the
instructor should assign only about half the transactions.

Problems
Problem 7-1
With units-of-production depreciation, one finds the cost of one production unit, and then multiplies this
by the units used in a year to determine the years depreciation:
Cost of one unit

Years
1
2
3
4
5
6

Units
930,000
800,000
580,000
500,000
415,000
300,000
3,525,000

x
x
x
x
x
x
x

$.08
$.08
.08
.08
.08
.08
.08

$300,000 - $18,000
$.08
3,525,000

=
=
=
=
=
=
=

Units of
Production
Depreciation
$ 74,400
64,000
46,400
40,000
33,200
24,000
$282,000

SYD
Charge
$80,571
67,143
53,714
40,286
26,857
13,429
282,000

(6/21 x $282,000)
(5/21 x 282,000)
(4/21 x 282,000)
(3/21 x 282,000)
(2/21 x 282,000)
(1/21 x 282,000)

Accounting: Text and Cases 12e Instructors Manual

Anthony/Hawkins/Merchant

Problem 7-2
Equipment ID #103

Dr. Cash....................................................................................................................................................................................
14,300
Accumulated Depreciation...................................................................................................................................................
59,755*
Cr. Equipment.................................................................................................................................................................
70,300
Gain on Sale of Equipment........................................................................................................................................
3,755
*(70,300 / 10) x 8 years = $59,755.

Equipment ID #415

Dr. Cash....................................................................................................................................................................................
63,000
Accumulated Deprecation....................................................................................................................................................
26,640*
Loss on Sale of Equipment..................................................................................................................................................
6,360
Cr. Equipment.................................................................................................................................................................
96,000
*Year 1, ($96,000 x 30%)( year) = $14,400.
*Year 2, ($81,600 x 30%)( year) = 12,240.

Equipment ID #573

Dr. Cash....................................................................................................................................................................................
38,000
Accumulated Depreciation...................................................................................................................................................
49,500*
Loss on Sale of Equipment..................................................................................................................................................
7,000
Cr. Equipment.................................................................................................................................................................
94,500
*$94,500 x 11/21 = $49,500.

Problem 7-3

Automobile (new)...........................................................................................................................................................................
9,900
Accumulated Depreciation (old).....................................................................................................................................................
14,500
Automobile (old)......................................................................................................................................................................
16,000
Cash..........................................................................................................................................................................................
8,400
(No gain or loss was involved, because the two assets were of like kind.)
Furniture..........................................................................................................................................................................................
8,850
Accumulated Depreciation..............................................................................................................................................................
13,610
Loss on Disposal of Truck...............................................................................................................................................................
750
Truck.........................................................................................................................................................................................
19,860
Cash..........................................................................................................................................................................................
3,350
Problem 7-4

(1) Land......................................................................................................................................................................................
80,600
Cash................................................................................................................................................................................
80,600

(2) Building................................................................................................................................................................................
138,000
Common Stock...............................................................................................................................................................
90,000
Notes Payable.................................................................................................................................................................
16,000
Cash................................................................................................................................................................................
32,000

(3) Desks and Chairs (80% x $8,700).........................................................................................................................................

6,960
Bookcases (80% x $2,200)....................................................................................................................................................
1,760
Filing Cabinets (80% x $1,100)............................................................................................................................................
880
Cash................................................................................................................................................................................
9,600

2007 McGraw-Hill/Irwin

Chapter 7

The above does not treat the equipment purchase as a fortunate acquisition. An argument can be made to
record the equipment as a fortunate acquisition, giving rise to this entry instead:
Desks and Chairs......................................................................................................................................................
8,700
Bookcases................................................................................................................................................................
2,200
Filing Cabinets.........................................................................................................................................................
1,100
Cash...................................................................................................................................................................
9,600
Retained Earnings..............................................................................................................................................
2,400
Problem 7-5

Depletable Assets
Land...................................................................................................................................................................................
$ 21,700,000
Tests successful ..............................................................................................................................................................
35,250
Tests unsuccessful...........................................................................................................................................................
116,250
Permits...............................................................................................................................................................................
41,000
$ 21,892,500
Salvage value.....................................................................................................................................................................
(2,325,000)
Net Cost.............................................................................................................................................................................
$19,567,500
Unit depletion = $19,567,500/800,000 tons = $24.46/ton.
Depreciation year 1 = $24.46 x 30,000 tons = $733,800
Depreciation year 2 = $24.46 x 70,000 tons = $1,712,200
Depreciation year 3 = $24.46 x 75,000 tons = $1,834,500
Land Improvements
$387,500/10 years = $38,750/year amortization.
Amortization year 1 = $38,750
Amortization year 2 = 38,750
Amortization year 3 = 38,750
Buildings
$271,250/10 years = $27,125/year depreciation
Deprecation year 1 = $27,125
Deprecation year 2 = 27,125
Deprecation year 3 = 27,125
Machinery
Depreciation year 1 = $1,162,500 x 10/55 = $211,364
Depreciation year 2 = $1,162,500 x 9/55 = $190,227
Depreciation year 3 = $1,162,500 x 8/55 = $169,091

Cases
Case 7- 1: Stern Corporation (B)*
Note: This case is updated from the Eleventh Edition.
Approach
This is a straightforward problem, designed for use in connection with study of the text. I find it useful to
put T-accounts on the board or on a Vugraph and post entries to them as they are given. The account titles
*

This teaching note was prepared by Robert N. Anthony. Copyright Robert N. Anthony.

Accounting: Text and Cases 12e Instructors Manual

Anthony/Hawkins/Merchant

given in the balance sheet should be used.

The case assumes individual unit depreciation. It may be desirable to ask at some point what the entries
would be if composite or group depreciation were used.
Comments on Questions
Question 1
1.

2.

3.

(a)

(b)

4.
5.

6.

(a)

(b)

7.

Cash.............................................................................................................................................................................
3,866
Accumulated Depreciation, Factory Machinery ..........................................................................................................
27,367
Factory Machinery .................................................................................................................................................
31,233
Tools Used (Expense) .................................................................................................................................................
7,850
Tools
7,850
(Note the contrast between depreciation and a direct write-off.)
Depreciation Expense..................................................................................................................................................
278
Accumulated Depreciation, Automotive Equipment...............................................................................................
278
(The additional depreciation is 1/6 x .20 x $8,354. Note that the half-year
convention is not used. Note that if the depreciation incurred in 2006 is
disregarded, the loss will be overstated.)
Cash.............................................................................................................................................................................
2,336
Accumulated Depreciation, Automotive Equipment....................................................................................................
5,458
Loss on Sale of Other Assets........................................................................................................................................
560
Automotive Equipment...........................................................................................................................................
8,354
(There can be a discussion of the proper showing of the loss on the income
statement.)
Patent Amortization Expense.......................................................................................................................................
11,250
Patent......................................................................................................................................................................
11,250
Cash.............................................................................................................................................................................
75
Accumulated Depreciation, Office Machines..............................................................................................................
1,027
Gain on Sale of Other Assets..................................................................................................................................
75
Office Machines......................................................................................................................................................
1,027
(The gain is preferably combined with the loss on Item 3, with entries to a
Loss or Gain account. It is shown separately here for clarity.)
Depreciation Expense.............................................................................................................................................
37
Accumulated Depreciation...............................................................................................................................
37
(.75 x .10 x $490)
Cash .......................................................................................................................................................................
80
Accumulated Depreciation, Furniture and Fixtures.................................................................................................
432
Furniture and Fixtures......................................................................................................................................
490
Gain on Sale of Other Assets............................................................................................................................
22
Depreciation Expense.............................................................................................................................................
398,779
Accumulated Depreciation, Building................................................................................................................
48,105
Accumulated Depreciation, Factory Machinery...............................................................................................
330,935
Accumulated Depreciation, Furniture and Fixtures..........................................................................................
5,599
Accumulated Depreciation, Automotive
Equipment........................................................................................................................................................
9,989
Accumulated Depreciation, Office Machines...................................................................................................
4,151

2007 McGraw-Hill/Irwin

Chapter 7

(Note that depreciation is calculated after the earlier entries have been recorded and that
depreciation on factory machinery is not calculated on the $85,000 of fully depreciated assets.)

Question 2

Accumulated
Gross
Depreciation
Net
Land...........................................................................................................................................................................
$ 186,563
$ 186,563
Building.....................................................................................................................................................................
2,405,259
$ 711,484
1,693,775
Factory machinery ....................................................................................................................................................
3,394,352
1,945,926
1,448,426
Furniture and fixtures ................................................................................................................................................
55,994
45,604
10,390
Automotive equipment ..............................................................................................................................................
49,944
41,965
7,979
Office machines ........................................................................................................................................................
41,507
31,129
10,378
Tools .........................................................................................................................................................................
53,444
53,444
Patent.........................................................................................................................................................................
45,000
_________
45,000
Total....................................................................................................................................................................
$6,232,063
$2,776,108
$3,455,955
Case 7- 2: Joan Holtz (C)*
Note: This case is unchanged from the Eleventh Edition.
Approach
This case brings up a wide variety of problems that arise in applying the general principle that the cost of
an asset includes all the costs involved in acquiring it and getting it ready to perform that service for
which it is intended. The case discussion should bring out the difficulty of resolving these problems, the
fact that people will differ on how to resolve them leads to differences in accounting treatment, and the
necessity for solving these problems in some practical way.
It may be desirable to bring up the different objectives of income tax accounting and financial accounting.
Since income tax accounting generally seeks to minimize current income, the motive generally is to
charge off as much as possible as expense in the current year. Similarly, since some state taxes are based
on the value of property, there are advantages in making this value as low as possible. In financial
accounting, on the other hand, the presumed objective is to present the situation fairly, and there often are
strong practical reasons for making current income high, which is accomplished by capitalizing costs and
charging them off against future periods. Although there is no absolute requirement that a given item be
treated the same way for tax purposes as it is treated for book purposes, it is reasonable to expect that the
tax examiner will raise questions about expensing for tax purposes an item that the company has decided
should be capitalized for book purposes. Thus, there is a conflict of objectives, and companies often have
interesting discussions of where, on balance, is the best place to draw the line.
Comments on Questions
Question 1
I find it useful to approach this problem as if the new wing were being constructed by an outside firm.
Under these circumstances, the price would include all the items listed except (g) mistakes made during
construction, and (i) losses not covered by insurance. (Even these would be included under certain
circumstances.) The contractor would charge for interest, either explicitly, or as part of its fee. An outside
*

This teaching note was prepared by Robert N. Anthony. Copyright Robert N. Anthony.

Accounting: Text and Cases 12e Instructors Manual

Anthony/Hawkins/Merchant

contractor has its own overhead costs, comparable to those of the Bruce maintenance department, and it
would include a fair share of these in the bid.
Many companies do not use such an analogy. They approach the problem on a direct cost basis, and
students who have had a course in economics may also want to talk about marginal costs as being the
relevant costs here. Thus, they would eliminate overhead (h) and possibly taxes (f). I do not believe the
conceptual argument for this approach is strong, but it is commonly made, in effect, in practice.
Formerly, many companies did not charge interest as a cost. For years, public utility commissions
specifically have allowed this cost (including imputed equity interest) as a part of the cost of fixed plant,
and FASB Statement No. 34 requires this same treatment for all companies, unless the interest cost is
immaterial.
Question 2
Since revenues are being earned from the existing buildings and will continue to be earned until they are
razed, it is appropriate to charge depreciation on these buildings against these revenues in order to
measure income. It may not, however, be appropriate to calculate this charge by spreading the entire cost
of the buildings over the remaining periods before they are expected to be razed. To do so would imply
that the buildings were purchased for the purpose of earning income from the existing theater, stores, and
apartment buildings, which is clearly not the case. Only a portion of the purchase price should be so
charged, therefore.
There is no very good way of determining what this portion should be, and the practical solution must
therefore be somewhat arbitrary. Perhaps there is a going rate of annual depreciation per square foot for
buildings of this type in this neighborhood, and this could be used in the absence of any other measure.
Note that the cost of the new hotel and office building is affected by the decision made on this question
because the more of the purchase price that is charged against current revenue, the less remains to become
part of the nondepreciable land cost associated with the new buildings.
Demolition costs should be capitalized as part of the cost of the parcel of land, as described in the text.
The situation assumed in Part (c) points up an important distinction. Archer Company established the
value, and hence the cost, of the property by purchasing it in what was presumably an arms-length
transaction. The Part (c) company engaged in no such transaction, and its cost was therefore the book
value (cost) of the property. The net book value of the old buildings would be written off when they were
razed. Since book values of real property are typically less than market value, the cost of the new
buildings (including land) if built under the situation assumed in Part (c) would be less than the cost of
buildings built by the Archer Company, even if the physical facts were identical. This is one of the prices
we pay for adhering to the cost concept in accounting (but for reasons suggested in Chapter 2, I believe it
is a price worth paying). The construction cost and demolition costs are accounted for in the same way in
either situation.
Question 3
Here is perhaps the easiest piece to bring out the difference between tax accounting and financial
accounting. The company will want to bury as many of these extra costs as possible for tax purposes,
simply by recording them as normal operating expenses. Thus, it is motivated to include some or all of the
installation costs as part of the ordinary expenses of the maintenance department. Conceptually, a case
can be made for including each and every one of the items listed in (a)-(c) as part of the cost of the
machinery as they all bear on the objective of getting it ready to provide future service.

2007 McGraw-Hill/Irwin

Chapter 7

The trade-in problem depends on whether the old machine was similar to the new one. If not, the issue
should be solved by referring to the market value of the old machine, if such can be established. The
difference between book value and market value is a gain on disposal of the old machine. If the machines
are similar, the net book value of the old is added to the cash consideration given for the new to establish
the cost of the new; no gain is recorded.
Question 4
In its Statement No. 2 on Research and Development, the FASB espoused a general philosophy that costs
should be expensed if related future revenue is uncertain, and that this applies to a whole class of costs,
such as research and development, even though some items in this class are almost certain to produce
revenue (such as development costs on a product whose future profitability has been confirmed by market
tests). If the same reasoning is applied to applications engineering costs, these costs should be expensed.
To do this, however, results in the peculiar effect mentioned in the question, namely, that profits do not go
up to match increased sales volume. Moreover, from the customers standpoint, these services are
bundled with the computer to constitute a working system; the customer is buying this system, not just
the computer. Thus, if the system is leased, these costs should be capitalized along with the hardware
costs.
The argument against capitalization is that the lease revenue is uncertain. Although past experience has
shown that computers are leased for four years, if the company produces a lemon, the machines will be
returned in a year or two, and the profits will then turn out to have been overstated if the applications
engineering costs are capitalized. Moreover, expensing the costs as incurred better reflects the cash flows
of the business.
Question 5
This item illustrates the ambiguity firms face when they attempt to interpret standards and apply them to
actual situations. It is not simply black or white. Considerable judgment is required to interpret and
apply the standard, especially when firms encounter situations different from those with which they have
typically dealt. The result can be a dilemma. Conceptually, one alternative may seem more appropriate.
Practically, however, it may be difficult to accomplish. Some firms may opt for the easier solution as
being the most practical, especially when the differences do not have a material effect on the financial
statements. Others may make the extra effort to implement the alternative they consider conceptually
more appropriate.
The costs that are capitalized for fixed assets are all expenditures that are necessary to make the asset
ready for its intended use. In the situation described in item 6, the intended use is to manufacture product
at the 65 ppm quality standard (or better) .1 Thus, conceptually, it would be reasonable for the electronics
component manufacturer to capitalize all of the costs required to enable the machine to meet the 65 ppm
quality standard.
However, the firm faced a dilemma when one of its major customers, eager for the functionality of the
new component, agreed to purchase product that did not quite meet the 65 ppm quality standard. Thus, on
one hand, when the machine begins to generate revenue, the manufacturer must match the related costs
including depreciation which is based on the cost of the machinewith the revenue generated. On the
other hand, when the machine begins to generate revenue, the complete cost of the machinethat is, the
complete cost required to achieve the 65 ppm standardis not known; hence, the amount of depreciation
to charge is not known.
1

It is becoming increasingly common for customers to impose quality standards on their suppliers, or to require suppliers to meet
industry defined standards.

Accounting: Text and Cases 12e Instructors Manual

Anthony/Hawkins/Merchant

The electronics component manufacturing firm faced two basic alternatives. Under the first alternative,
they could consider the cost of the machine as the expenditures-to-date when the machine begins to
generate revenue ($500,000), and they would expense this cost through depreciation over the service life
of the machine.2 Under the second alternative, they could choose to capitalize the additional costs
required to achieve the 65 ppm standard. Conceptually, the choice between these two basic alternatives
hinges on whether you believe that the intended use for the machine is to produce electronic
components that can be sold, or whether you believe that the intended use for the machine is to produce
electronic components at the 65 ppm standard.
If the second alternative is chosen, several issues must be dealt with. First, what is the depreciation
expense for the initial product that is produced below standard and sold? Should it be based on the
expenditures-to-date ($500,000), or should it be based on a cost that also includes an estimate of future
expenditures expected to be required to meet the 65 ppm standard ($550,000 = $500,000 + $50,000)?
Second, in either case, what adjustments will be required once the actual cost to meet the 65 ppm standard
is known? The actual cost will clearly be different than the expenditures-to-date ($500,000), but it is also
likely to be different form the estimated total cost ($550,000). How, if at all, should the financial
statements be adjusted for these differences? Finally, what if the 65 ppm standard is never achieved?
What should the firm do about the expenditures it made attempting to achieve that standard which it had
intended to capitalize as part of the cost of the asset?
A midwestern electronics component manufacturer recently faced this dilemma. Their choice was to
capitalize all of the costs required to meet the 65 ppm standard. Because expenditures on testing and
debugging to achieve such a quality standard could easily exceed 10 percent of the assets cost prior to
testing and debugging, these expenditures were considered a significant component of the asset cost.
However, when they began to produce the electronic components ordered by the customer before the 65
ppm standard had been achieved, they did not feel they could estimate the future expenditures required to
meet the 65 ppm standard accurately enough to include them in the cost. As a result, the initial
depreciation expense was based on expenditures-to-date ($500,000). Once the 65 ppm standard had been
achieved and the complete cost to achieve it was known, the cost of the asset was adjusted and an
adjustment was made to previous depreciation expense. (Presumably, not a great deal of time would have
elapsed, so the amount of this depreciation expense adjustment would be small.) The firm considered the
65 ppm standard an extremely tough standard to achieve. They had been seriously concerned about what
they would dowith respect to both the fixed asset accounting and with respect to their major customer
if they had not achieved the standard.
Case 7- 3: Strafford Press*
Note: This case is updated from the Eleventh Edition.
Approach
This case is, in effect, a series of short problems dealing with various aspects of fixed asset accounting.
The problems illustrate issues of asset valuation, disposal gains and losses, and expense versus
capitalization of certain items. In class I have students discuss the items sequentially, describing treatment
of each transaction with a journal entry. I try to keep income tax treatment out of the discussion; or, if it
does enter in, to keep it clearly distinguished from the financial reporting issues of the case.
Comments on Questions
1.

The journal entry recording this disposal would be:

Cash....................................................................................................................................................................................
149,860

22

Under this alternative, any further expenditures required to meet the 65 ppm standard would simply be expensed.
This teaching note was prepared by Robert N. Anthony. Copyright Robert N. Anthony.

2007 McGraw-Hill/Irwin

Chapter 7

Accumulated Depreciation (bldgs.)........................................................................................................................

199,056
Loss on Sale of Fixed Assets..................................................................................................................................
35,182
Land..................................................................................................................................................................
34,034
Buildings...........................................................................................................................................................
350,064

2.

3.

4.

The $35,182 is a plug figure; that is, it is determined as a result of the following
sequence: (1) the cost of the old land and building must be removed from the books
(credits); (2) the accumulated depreciation on the building must also be removed (debit);
(3) the cash consideration must be recorded (debit); (4) the balancing debit is $35,182,
representing the difference between the net book value of the assets disposed of and the
cash proceeds from the disposal. Although extraordinary items have not yet been covered in
the text, it should be made clear that such gains or losses on disposal of fixed assets are not
extraordinary items.
The entry for this disposal is completely analogous to the previous one, except in this instance
there is a gain instead of a loss:
Cash.......................................................................................................................................................................
35,200
Accumulated Depreciation (eqpt.) .........................................................................................................................
40,890
Equipment.........................................................................................................................................................
73,645
Gain on Sale of Fixed Assets.............................................................................................................................
2,445
The purchase price should probably be recorded at $109,868, although the companys policy
may be to treat all cash discounts separately, in which case the cost would be $112,110. The
$450 delivery cost should be capitalized, as should installation costs. The question on the latter
is the appropriate hourly rate; I feel the 60 hours should be costed at $27.15, the retail billing
rate less profit, for a total of $1,629. Others will argue for the $15 rate, or $900. One possible
entry therefore is:
Equipment (109,868 + 450 + 1,629)......................................................................................................................
111,947
Cash (possibly other items)...............................................................................................................................
111,947
The company paid $140,000 to purchase the land for the new plant.
Land.......................................................................................................................................................................
140,000
Cash ..................................................................................................................................................................
140,000
As stated in the text, the cost of land includes the cost of tearing down existing structures so as
to make the land ready for its intended use.
Land.......................................................................................................................................................................
21,235
Cash ..................................................................................................................................................................
21,235
In either case, the drainage installation is an additional cost that should be capitalized, as
follows:
Land.......................................................................................................................................................................
13,950
Cash ..................................................................................................................................................................
13,950
STAFFORD PRESS
Condensed Balance Sheet
(Revised to Reflect Move)

Assets
Liabilities and Owners Equity
Current assets:
Current liabilities............................................................
$ 160,223
Cash..................................................................................................................................................................................
$ 121,912
Long-term liabilities.......................................................
425,000
Other current assets...........................................................................................................................................................
251,790
Common stock................................................................
400,000
Total current Assets........................................................................................................................................................
373,702
Retained earnings...........................................................
310,857
Plant and equipment:............................................................................................................................................................
Land..................................................................................................................................................................................
175,185
9

Accounting: Text and Cases 12e Instructors Manual

Anthony/Hawkins/Merchant

Buildings .......................................................................................................................................................................................
$561,000
Less accumulated........................................................................................................................................................................
Depreciation............................................................................................................................................................................
0
561,000
Equipment.........................................................................................................................................................................................
319,025
Less: accumulated
depreciation ...................................................................................................................................................................................
132,832
186,193
_________
Total liabilities and
Total assets........................................................................................................................................................................................
$1,296,080
owners equity..........................................................................
$1,296,080
5.

The item was intentionally stated ambiguously in the case so that the issue of similar (likekind) trade-ins can be discussed. If the equipment traded in was similar, then the journal entry
is constructed so that no gain or loss on disposal is recorded:
Equipment (new) (20,830 + 6,800).....................................................................................................................................
27,630
Accumulated Depreciation (old).........................................................................................................................................
5,200
Cash...............................................................................................................................................................................
20,830
Equipment (old).............................................................................................................................................................
12,000
On the other hand, if it is assumed that the trade-in was not similar, the entry is as follows:
Equipment (new) (20,830 + 6,050).....................................................................................................................................
26,880
Accumulated Depreciation (old).........................................................................................................................................
5,200
Loss on Sale of Fixed Assets..............................................................................................................................................
750
Cash...............................................................................................................................................................................
20,830
Equipment (old).............................................................................................................................................................
12,000
Note that in either case the nominal trade-in allowance $7,200 is irrelevant. In the second
treatment, the $750 loss is the difference between the fair value of the trade-in, $6,050, and its
$6,800 net book value.

6.

This is straightforward as given:.............................................................................................................................................

Buildings............................................................................................................................................................................
561,000
Cash...............................................................................................................................................................................
136,000
Mortgage Payable..........................................................................................................................................................
425,000

7.

Some might argue that these moving costs should be capitalized, on the grounds that there are
future benefits associated with the move (that was the owners motivation in moving). In
response, I ask, How would you feel if the move had been made out of necessity--say, the old
property had been condemned or taken by eminent domain? The response in that case usually is
that the moving costs should not be capitalized. Since the benefits are speculative and (more
importantly), since changing the location of equipment through a move does not alter its future
productive capacity or useful life, I see no strong argument for capitalization. Thus, the entry
would be (again using $27.15 per hour for the workers time, consistent with item 3):
Moving Expense (8,440 + 3,394)......................................................................................................................................
11,834
Cash...............................................................................................................................................................................
11,834
(There would be labor, over and above this 125 hours, charged to moving expense, but the
total number of workers hours devoted to the move is not given.)

8.

The repair of the damage during the move has not improved the equipment so as to constitute a
betterment; thus it is expensed:
Maintenance (or Moving) Expense.....................................................................................................................................
3,220
Cash.................................................................................................................................................................................
3,220
The decrease in salvage value, $660, could be expensed immediately with an entry such as:

10

2007 McGraw-Hill/Irwin

Chapter 7

Moving Expense (or Deprec. Expense)....................................................................................................................

660
Equipment (or Accum. Deprec.).........................................................................................................................
660
However, I dont think an event that changes a fixed assets future salvage value is any more
relevant, in terms of the cost concept, than an event that changes its current market value. Thus,
in my view, rather than adjusting the cost of the asset, it is better to amortize the reduction in
salvage value by adjusting the depreciation charge for the rest of the equipments useful life,
which constitutes a change in an estimate. Since the accumulated depreciation was $3,220, and
annual depreciation was $805, the asset was 4 years old, and thus had 6 years left of useful life.
The amount of remaining depreciation is the net book value at the end of 4 years, $6,780, less
the newly estimated S1,290 salvage value, or $5,490. Divided by 6 years, the new annual
depreciation expense on this item would be $915. (Easier, though not quite as thorough: the
$660 lesser salvage value, spread over 6 years, is $110 per year, added to the current
depreciation charge of $805, makes a total of $915.)
The revised balance sheet reflecting the above transactions is shown above.

11