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CHAPTER 11
QUESTIONS
1. Depreciation refers to the cost allocation of
tangible long-term assets, depletion refers
to the cost allocation of natural resources,
and amortization refers to the cost allocation of intangible assets. All three terms
have similar underlying principles governing their use.

productive output or service hours. In theory, the use-factor methods provide a much
better matching of costs against revenues
than do time-factor methods. However, because use-factor methods require more extensive accounting records, they are not as
common as the time-factor methods.

2. Four separate factors must be considered


in determining the periodic depreciation
charges that should be made for a companys assets. They are (1) asset cost, (2)
residual or salvage value, (3) useful life,
and (4) pattern of use. These factors, when
considered together, help determine which
of the common methods is most appropriate for the circumstances.

6. With group depreciation, periodic depreciation expense is computed on a whole group


of assets as if the group were one single
asset. The weighted-average life of the
group is used to determine how much of
the aggregate asset cost should be depreciated each year. No gains or losses are
recognized at the time of the retirement of
individual assets; accumulated depreciation
is reduced for the difference between the
asset cost and the cash retirement proceeds.

3. Residual or salvage value is included in the


formulas for all time-factor depreciation methods except for the declining-balance methods. In practice, residual value is often
ignored if it is the practice of a company to
retain assets for most of their useful lives.
In the case of declining-balance methods,
although residual value is not included in
the formulas, it is considered when an asset is near the end of its useful life. Generally, the book value should not be reduced
below its expected residual value.

7. Some items of property, plant, and equipment


are composed of identifiable subitems, or
components, with substantially different useful lives or usage patterns. The component
approach to depreciation is to depreciate
each component separately. The component
approach is allowed in the United States and
is required under IAS 16.
8. The amount of an asset retirement obligation is added to the cost of the associated
asset. Accordingly, the asset retirement obligation increases periodic depreciation. In
addition, the amount of the asset retirement
obligation itself increases each year as the
time until the obligation must be satisfied
decreases. However, this increase, which
conceptually is exactly the same as interest
expense, is not accounted for as interest
expense. Instead, it is called accretion expense.

4. Functional factors include inadequacy and


obsolescence that reduce the usefulness of
the asset. Physical factors include wear
and tear, deterioration and decay, and
damage or destruction reducing the usefulness of the asset.
5. Time-factor methods of depreciation base
cost allocation on time according to either
straight-line or accelerated depreciation. In
theory, the pattern selected should be related to the pattern of benefits expected
from the asset. Because the pattern of
benefits is very subjective, the selection of
a specific time-factor method is usually an
arbitrary decision.
Use-factor methods of depreciation base
cost allocation on some measure that relates more directly to the use of the asset.
Most commonly, the allocation is based on

9. When a useful-life estimate is changed, the


remaining book value of the asset is depreciated over the revised remaining useful life.
In other words, the estimate impacts only
the current and future periods. No attempt is
made to go back and fix the depreciation
amount recognized in prior periods.

425

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10. When new estimates of recoverable natural


resources are obtained, a new depletion
cost per basic unit is computed from the
beginning of the period in which the new
estimate is made. No adjustment is made
to prior periods. It is a change in estimate
and therefore prospective in nature.

b. If the fair value of the reporting unit exceeds the net book value of the assets
and liabilities of the reporting unit, the
goodwill is assumed to not be impaired
and no impairment loss is recognized.
c. If the fair value of the reporting unit is
less than the net book value of the assets and liabilities of the reporting unit,
a new fair value of goodwill is computed. The goodwill value is the
amount of fair value of a reporting unit
that is left over after the values of all
identifiable assets and liabilities of the
reporting unit have been considered.
d. If the implied amount of goodwill computed in (c) is less than the amount initially recorded, a goodwill impairment
loss is recognized for the difference.

11. A company should recognize an impairment loss when the undiscounted sum of
expected future cash flows from the asset
is less than the recorded book value of the
asset. The impairment loss is measured as
the difference between the book value of
the asset and the assets fair value. Fair
value can be estimated as the discounted
sum of expected future cash flows.
12. IAS 36 differs from U.S. GAAP in that the
discounted sum of future cash flows, rather
than the undiscounted sum, is used to determine whether an impairment loss exists.
13. If a non-U.S. company chooses to revalue
a long-term operating asset upward in accordance with IAS 16, the unrealized
gain on the revaluation is recognized as
a revaluation equity reserve. This equity
reserve increases the reported amount of
equity but is not shown as a gain in the income statement.
14. For accounting purposes, recorded intangible assets come in three varieties:
a. Intangible assets that are amortized.
The impairment test for these intangibles is the same as the 2-step test
used for tangible long-term operating
assets.
b. Intangible assets that are not amortized. The impairment test for these intangibles involves a simple 1-step
comparison of the book value to the fair
value.
c. Goodwill, which is not amortized. The
goodwill impairment test is a 4-step
process that first involves estimating
the fair value of the entire reporting unit
to which the goodwill is allocated.
15. a. Compute the fair value of each reporting unit to which goodwill has been assigned.

16. Under IAS 36, the general structure of the


impairment test for intangible assets is that
the recorded amount of the intangible asset
is compared to its recoverable amount.
17. a. No depreciation is to be recognized.
b. The asset is to be reported at the lower
of its book value or its fair value (less
the estimated cost to sell).
18. A gain or loss is recognized whenever an
exchange of assets takes place unless the
exchange does not affect the risk, timing, or
amount of a companys cash flows. In
those instances where the transaction lacks
commercial substance, indicated gains
are not recognized unless a small amount
of cash is received. Indicated losses are
always recognized.

19. Depreciation is an estimate, and the effort


necessary to compute depreciation expense for the exact number of days an asset is owned usually exceeds any benefit
derived. For companies that acquire and
dispose of many assets during a year, detailed tracking of daily depreciation is almost impossible. A variety of simplifying
assumptions are used, including rounding
to the nearest whole month and the halfyear convention in which one-half of a
years depreciation is taken on any asset
acquired or disposed of during the year.

Relates to Expanded Material.

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427

in just a few classes and through the ignoring of salvage values. Acceleration of tax
depreciation deductions comes through
shortened asset lives and use of accelerated depreciation methods like doubledeclining-balance.

20. The original reasons for the development of


the ACRS income tax depreciation method
were simplification of the tax depreciation
computations and acceleration of tax depreciation deductions to reduce income
taxes and stimulate investment. Simplification comes through the grouping of assets

Relates to Expanded Material.

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PRACTICE EXERCISES
PRACTICE 111

RECORDING DEPRECIATION EXPENSE

Depreciation Expense ...............................................................................


Accumulated Depreciation..................................................................
PRACTICE 112

1,000
1,000

COMPUTING STRAIGHT-LINE DEPRECIATION

1.

($108,000 $20,000)/5 years = $17,600 annual depreciation expense

2.

Depreciation Expense ........................................................................


Accumulated Depreciation...........................................................

3.

17,600
17,600

Book value: $108,000 $17,600 = $90,400

PRACTICE 113

COMPUTING SUM-OF-THE-YEARS-DIGITS DEPRECIATION

1. and 2.
Year
1
2
3
4
5

Computation
($115,000 $20,000) (5/15)
($115,000 $20,000) (4/15)
($115,000 $20,000) (3/15)
($115,000 $20,000) (2/15)
($115,000 $20,000) (1/15)

PRACTICE 114

Depreciation
Amount
$31,667
25,333
19,000
12,667
6,333

Accumulated
Depreciation
$31,667
57,000
76,000
88,667
95,000

Book
Value
$83,333
58,000
39,000
26,333
20,000

COMPUTING DOUBLE-DECLINING-BALANCE DEPRECIATION

1. and 2.
Double-declining-balance percentage: (100%/4 years) 2 = 50%
Year
1
2
3
4

Computation
$100,000 0.50
$50,000 0.50
$25,000 0.50
$12,500 $10,000

Depreciation
Amount
$50,000
25,000
12,500
2,500

Accumulated
Depreciation
$50,000
75,000
87,500
90,000

Book
Value
$50,000
25,000
12,500
10,000

The depreciation amount in the final year is the amount that reduces the machines
book value to equal the estimated residual value.

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PRACTICE 115

COMPUTING SERVICE-HOURS DEPRECIATION

1. and 2.
Rate per service hour: [($81,000 $15,000)/20,000 hours] = $3.30 per hour
Year
1
2
3
4

Computation
9,000 hours $3.30 per hour
5,000 hours $3.30 per hour
4,000 hours $3.30 per hour
2,000 hours $3.30 per hour

PRACTICE 116

Depreciation
Amount
$29,700
16,500
13,200
6,600

Accumulated
Depreciation
$29,700
46,200
59,400
66,000

Book
Value
$51,300
34,800
21,600
15,000

COMPUTING PRODUCTIVE-OUTPUT DEPRECIATION

1. and 2.
Rate per unit: [($70,000 $5,000)/13,000 units)] = $5 per unit
Year
1
2
3
4

Computation
3,000 units $5 per unit
5,000 units $5 per unit
2,000 units $5 per unit
3,000 units $5 per unit

PRACTICE 117

Asset 1
Asset 2
Asset 3
Asset 4
Totals

Depreciation
Amount
$15,000
25,000
10,000
15,000

Accumulated
Depreciation
$15,000
40,000
50,000
65,000

Book
Value
$55,000
30,000
20,000
5,000

COMPUTING GROUP DEPRECIATION


Acquisition
Cost
$ 64,000
90,000
42,000
30,000
$226,000

Salvage
Value
$ 4,000
10,000
6,000
0

Useful
Life
6 years
10
9
5

Expense
$10,000
8,000
4,000
6,000
$28,000

$28,000/$226,000 = 0.12389
This percentage is applied to the total original cost of all assets in the group in order to
compute total annual depreciation expense.

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PRACTICE 118
1.

GROUP DEPRECIATION: RECORDING ASSET SALES

With group depreciation, gains and losses are typically not recognized on the sale
of individual assets.
Cash .....................................................................................................
Accumulated Depreciation ................................................................
Asset 3 ...........................................................................................

22,000
20,000
42,000

Accumulated Depreciation is the plug figure in this entry. We assume that the
overall depreciation policy is accurate, so no gains or losses are recorded when
disposing of group assets.
2.

The group rate percentage is normally left the same unless there is persuasive
evidence for the need of a change.
($64,000 + $90,000 + $30,000 + $50,000) 0.12389 = $28,990

PRACTICE 119

ASSET RETIREMENT OBLIGATION

The present value of the asset retirement obligation is computed as follows:


Business calculator keystrokes:
FV = $250,000; I = 6%; N = 12 years $124,242
The total cost of the landfill site is $649,242 = $525,000 + $124,242
Depreciation expense: $649,242/12 years = $54,104
Accretion expense: $124,242 0.06 = $7,455
PRACTICE 1110
1.

COMPUTING DEPLETION EXPENSE

Depletion rate = (January 1 cost Residual value)/January 1 tons


($100,000 $20,000)/5,000 tons = $16.00 per ton
900 tons $16.00 per ton = $14,400 depletion expense

2.

Depletion Expense .............................................................................


Accumulated Depletion (or Mine)................................................

PRACTICE 1111

CHANGE IN ESTIMATED LIFE

Annual depreciation using the original estimates:


($40,000 $4,000)/9 years = $4,000 annual depreciation expense
Total accumulated depreciation after three years:
$4,000 annual depreciation expense 3 years = $12,000

14,400
14,400

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PRACTICE 1111

431

(Concluded)

Remaining useful life after three years:


New estimate of 7 years 3 years already elapsed = 4 years remaining
Annual depreciation using the revised estimates in the fourth year:
[($40,000 $12,000 accumulated depreciation) $8,000]/4 years = $5,000 annual
depreciation expense
PRACTICE 1112
1.

CHANGE IN ESTIMATED UNITS OF PRODUCTION

Depletion rate for Year 1 = January 1 cost/January 1 tons


$300,000/2,000 tons = $150.00 per ton
900 tons $150.00 per ton = $135,000 depletion expense

2.

Depletion rate for Year 2 = January 1 cost/January 1 tons


($300,000 $135,000 + $120,000)/(600 tons + 700 tons) = $219.23 per ton
600 tons $219.23 per ton = $131,538

PRACTICE 1113

CHANGE IN DEPRECIATION METHOD

Annual depreciation using the original estimates:


($80,000 $8,000)/8 years = $9,000 annual depreciation expense
Total accumulated depreciation after three years:
$9,000 annual depreciation expense 3 years = $27,000
Book value at the end of three years:
$80,000 $27,000 = $53,000
Straight-line rate 100%/5 = 20%
Double the straight-line rate: 20% 2 = 40%
Year 4 depreciation expense: $53,000 40% = $21,200
PRACTICE 1114

DETERMINING WHETHER A TANGIBLE ASSET IS IMPAIRED

The equipment is not impaired. The relevant comparison is the book value of the
asset to the sum of the expected future cash flows.
Sum of future cash flows ($65,000 14 years)
Book value ($1,500,000 $600,000)

$910,000
900,000

Because the sum of future cash inflows is more than the book value of the asset, no
impairment has occurred. In testing for impairment, the current value of the asset is
not used. Therefore, the equipment should continue to be reported in the companys
books at its net book value of $900,000.

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PRACTICE 1115
1.

RECORDING A TANGIBLE ASSET IMPAIRMENT

The building is impaired. The relevant comparison is the book value of the building
to the sum of the expected future cash flows.
Sum of future cash flows ($40,000 30 years)
Book value ($1,500,000 $250,000)

$1,200,000
1,250,000

Because the sum of future cash inflows is less than the book value of the asset,
the building is impaired.
2.

Accumulated Depreciation ................................................................ 250,000


Loss on Impairment ($1,250,000 $600,000)................................... 650,000
Building..........................................................................................
900,000

PRACTICE 1116

RECORDING UPWARD ASSET REVALUATIONS

Building ($730,000 $500,000).......................................................... 230,000


Accumulated Depreciation ................................................................ 40,000
Revaluation Equity Reserve ........................................................
270,000
PRACTICE 1117

RECORDING AMORTIZATION EXPENSE

Amortization Expense........................................................................
Accumulated Amortization ..........................................................

62,500
62,500

$250,000/4 years = $62,500 annual amortization expense


(Note: Straight-line amortization is used unless there is compelling evidence for
using another method.)
PRACTICE 1118

GOODWILL IMPAIRMENT

Estimated fair value of the Manufacturing reporting unit:


Present value of $700 per year for 10 years at 10% = $4,301
With a business calculator:
Make sure to toggle so that the payments are assumed
to occur at the end (END) of the period.
PMT = $700; N = 10; I = 10% PV = $4,301
Net book value of the assets and liabilities of the Manufacturing reporting unit:
Assets ($7,000 + $2,000) Liabilities ($4,000) = $5,000
Because the estimated fair value of the reporting unit ($4,301) is less than the net book
value of the reporting unit ($5,000), further computations are needed to determine the
amount of a goodwill impairment loss, if any.

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PRACTICE 1118

433

(Concluded)

Implied fair value of goodwill as of December 31:


Fair value of identifiable assets + Fair value of goodwill Fair value of liabilities =
Total fair value
$8,000 + Fair value of goodwill $4,000 = $4,301
Fair value of goodwill = $301
Journal entry necessary to recognize the goodwill impairment loss:
Goodwill Impairment Loss.................................................................
Goodwill ($2,000 $301) ..............................................................
PRACTICE 1119

1,699
1,699

EXCHANGE OF ASSETS

1.

Land ..................................................................................................... 400,000


Accumulated Depreciation ................................................................ 340,000
Gain on Exchange ($400,000 $360,000) ...................................
40,000
Building..........................................................................................
700,000

2.

Land ..................................................................................................... 200,000


Accumulated Depreciation ................................................................ 340,000
Loss on Exchange ($360,000 $200,000) ........................................ 160,000
Building..........................................................................................
700,000

PRACTICE 1120

CLASSIFYING AN ASSET AS HELD FOR SALE

1.

BuildingHeld for Sale ($145,000 $9,000) .................................... 136,000


Loss on Held-for-Sale Classification ................................................ 14,000
Accumulated DepreciationBuilding .............................................. 225,000
Building..........................................................................................
375,000

2.

Building Held for Sale ........................................................................


Gain on Recovery of ValueHeld for Sale.................................

14,000
14,000

Computation of gain: ($170,000 $9,000) $136,000 = $25,000; maximum gain that


can be recognized is the amount of the initial loss recognized upon classification
as held for sale = $14,000.
PRACTICE 1121
1.

EXCHANGE OF ASSETS

New Asset............................................................................................
Accumulated Depreciation (old asset) .............................................
Old Asset .......................................................................................

150
850
1,000

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PRACTICE 1121
2.

3.

(Concluded)

Cash .....................................................................................................
New Asset............................................................................................
Accumulated Depreciation (old asset) .............................................
Gain on Exchange ($400 $150 book value) .............................
Old Asset .......................................................................................

300
100
850

Cash .....................................................................................................
New Asset............................................................................................
Accumulated Depreciation (old asset) .............................................
Gain on Exchange.........................................................................
Old Asset .......................................................................................

80
120
850

250
1,000

50
1,000

Market value of old asset = $400


Indicated gain on exchange of old asset = $400 $150 book value = $250 implied
gain
Recognized gain = [$80/($80 + $320)] $250 = $50
Recorded asset value = $320 less deferred gain of $200 = $120
PRACTICE 1122
1.

DEPRECIATION FOR PARTIAL PERIODS

Depreciation expense this year:


($100,000 $15,000) (5/15) (9/12) = $21,250
Depreciation expense next year:
($100,000 $15,000) (4.25/15) = $24,083

2.

Double-declining-balance percentage: (100%/5 years) 2 = 40%


Depreciation expense this year:
$100,000 0.40 (9/12) = $30,000
Depreciation expense next year:
($100,000 $30,000) 0.40 = $28,000

PRACTICE 1123

INCOME TAX DEPRECIATION

According to the MACRS class-life definitions, ships are 10-year property, and 200%
declining-balance depreciation, with a half-year convention, is used.
Double-declining-balance percentage: (1.00/10 years) 2 = 0.20, or 20%
Depreciation deduction this year:
$850,000 0.20 (6/12) = $85,000
Depreciation deduction next year:
($850,000 $85,000) 0.20 = $153,000

Relates to Expanded Material.

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EXERCISES
1124.

1. Purchase price ...................................................


Freight costs.......................................................
Installation costs................................................
Machine cost ......................................................

$38,400
3,000
1,600
$43,000

2. (a) Straight-line method: ($43,000 $600) 1/8 = $5,300


(b) Service-hours method: ($43,000 $600) = $1.33 * per hr. 3,000 hrs.
32,000 hours
used = $3,990
*Rounded
1125.
Purchase of mixer:
2013
Jan. 1 Mixing Equipment................................................
Prepaid Maintenance ..........................................
Cash ................................................................
To record purchase of mixer.

54,000
3,000
57,000

Dec. 31 Depreciation Expense .........................................


6,750*
Accumulated DepreciationMixing
Equipment ......................................................
To record depreciation for year.
*($54,000/20,000 = $2.70 per hour 2,500 hrs. = $6,750)
31 Maintenance Expense .........................................
Prepaid Maintenance.....................................
Assume written off over two years of
contract.

1,500
1,500

2014
Dec. 31 Depreciation Expense .........................................
8,100*
Accumulated DepreciationMixing
Equipment ......................................................
*($54,000/20,000 = $2.70 per hour 3,000 hrs. = $8,100)
31 Maintenance Expense .........................................
Prepaid Maintenance.....................................

6,750

8,100

1,500
1,500

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1126.

1. Equipment:
Total depreciable cost
Annual depreciation expense

($680,000 $68,000)
($250,000 $160,000)
2. Buildings:
Total depreciable cost
Annual depreciation expense
($2,450,000 $245,000)
($340,000 $230,000)

= Average useful life


= 6.8 years

= Average useful life


= 20.0 years

1127.

1. Double-declining-balance method:
$196,000 0.22222 6/12 = $21,778
2. Productive-output method:
$ 196,000
20,000
$ 176,000/375,000 yds. = $0.46933 49,500 yds. = $23,232
3. Service-hours method:
$ 196,000
20,000
$ 176,000/50,000 hrs. = $3.52 6,500 hrs. = $22,880
4. Straight-line method:
$ 196,000
20,000
$ 176,000 0.1111 6/12 = $9,777
The productive-output method allows the greatest depreciation expense for
2013.

1128.

1.

Depreciation rate per


thousand units produced:

End of
Year
2011
2012
2013

Unit
Output

$100,000 $4,000
= $320
300

Depreciation Expense

80,000 (80 $320) = $25,600


120,000 (120 320) = 38,400
40,000 (40 320) = 12,800
240,000
$76,800

Balance of
Accumulated
Depreciation
$25,600
64,000
76,800

2. Accumulated DepreciationEquipment ..........................


Loss on Disposal of Damaged Equipment.......................
Equipment......................................................................
To write off damaged equipment.

Asset
Book Value
$100,000
74,400
36,000
23,200
76,800
23,200
100,000

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1129.

437

Description
Delivery truck .........
Circular saws .........
Workbench .............
Forklift.....................
Totals ..................

Cost
$37,000
725
460
11,000
$49,185

Salvage
$8,000
180
0
950
$9,130

Base
$29,000
545
460
10,050
$40,055

Life
7 yrs.
5
10
6

Depr.
$4,143
109
46
1,675
$5,973

1. $5,973
2. $5,973/$49,185 = 12.14%
3. $40,055/$5,973 = 6.7 years
1130.

1. 2013 Furniture .........................................................


Cash .............................................................
Cash ................................................................
Accumulated DepreciationFurniture........
Furniture ......................................................
Depreciation Expense ...................................
Accumulated DepreciationFurniture .....
*[($125,000 + $35,000 $27,000) 0.21
= $27,930]
2014 Furniture .........................................................
Cash .............................................................
Cash ................................................................
Accumulated DepreciationFurniture........
Furniture ......................................................
Depreciation Expense ...................................
Accumulated DepreciationFurniture .....
*[($133,000 + $27,600 $15,000) 0.21
= $30,576]
2015 Furniture .........................................................
Cash .............................................................
Cash ................................................................
Accumulated DepreciationFurniture........
Furniture ......................................................
Depreciation Expense ...................................
Accumulated DepreciationFurniture .....
*[($145,600 + $24,500 $32,000) 0.21
= $29,001]

35,000
35,000
8,000
19,000
27,000
27,930*
27,930

27,600
27,600
6,000
9,000
15,000
30,576*
30,576

24,500
24,500
8,000
24,000
32,000
29,001*
29,001

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1130. (Concluded)
2. Furniture account:
Debit
Beginning balance ...............................
2013 purchases.....................................
2013 sales..............................................
2014 purchases.....................................
2014 sales..............................................
2015 purchases.....................................
2015 sales..............................................

35,000
27,000
27,600
15,000
24,500

Accumulated depreciationfurniture account:


Debit
Beginning balance ...............................
2013 sales..............................................
19,000
2013 depreciation expense..................
2014 sales..............................................
9,000
2014 depreciation expense..................
2015 sales..............................................
24,000
2015 depreciation expense..................
1131.

1. Depreciation for 2008:


Main unit
Component

Credit

32,000
Credit
27,930
30,576
29,001

($71,200/10) 9/12 = $ 5,340


1,500
($12,000/6) 9/12 =
$ 6,840

2. Depreciation for 2014:


Main unit
$71,200/10 = $ 7,120
Component 1
($12,000/6) 3/12 =
500
Component 2
$16,500 Cost
4,125 Salvage value
=
2,320
$12,375/4 9/12
$ 9,940
3. Depreciation for 2015:
Main unit
Component

$71,200/10 = $ 7,120
$12,375/4 =
3,094
$10,214

Balance
$125,000
160,000
133,000
160,600
145,600
170,100
138,100
Balance
$61,000
42,000
69,930
60,930
91,506
67,506
96,507

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1132.
The present value of the asset retirement obligation is computed as follows:
Business calculator keystrokes:
FV = $4,200,000; I = 8%; N = 14 years $1,429,936
The total cost of the uranium mine is $2,229,936 = $800,000 + $1,429,936
Depletion per ton of ore: $2,229,936/1,000 tons = $2,230 per ton
1.
2.

Depreciation (or depletion) expense: $2,230 per ton 100 tons = $223,000
Accretion expense: $1,429,936 0.08 = $114,395

1133.
2012 depletion expense:
Cost of natural resources less residual value ...........
Land improvementsroads ........................................
Total cost to be depleted..............................................
Estimated tons of ore ...................................................
Depletion cost per ton$9,975,000/3,000,000 ...........
Depletion expense2012 (75,000 $3.33) .................
2013 depletion expense:
2012 cost from above ...................................................
Less: 2012 depletion expense from above.................
Remaining cost to deplete at beginning of 2013 .......
Remaining tons of ore as of beginning of 2013.........
(4,500,000 estimated at year-end + 265,000
extracted during the year)
Depletion cost per ton$9,725,250/4,765,000 ...........
Depletion expense2013 (265,000 $2.04) ...............
1134.

Depreciation for the first 5 years:


$250,000/20 = $12,500 per year
$12,500 5 = $62,500 depreciation for first 5 years
Remaining amount to be depreciated:
$250,000 $62,500 = $187,500
Annual rate for remaining 10 years:
$187,500/10 = $18,750
Depreciation expense in 2013 is $18,750.

$9,000,000
975,000
$9,975,000
3,000,000
$
3.33
$ 249,750
$9,975,000
249,750
$9,725,250
4,765,000

$
2.04
$ 540,600

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1135.

Depreciation for the first 2 1/2 years:


$225,000 $15,000 = $210,000/12 = $17,500 2 1/2 = $43,750
Book value at December 31, 2012:
$225,000 $43,750 = $181,250
Remaining life is 5 years.
Charge for 2013: $181,250/5 = $36,250

1136.

Depreciation for the first 2 years:


($150,000 $30,000)/8 years = $15,000 per year
$15,000 2 = $30,000 for the first 2 years.
Remaining amount to be depreciated:
$150,000 $30,000 = $120,000
Depreciation for 2012:
($120,000 $30,000) 6/21 = $25,714

1137.

1. Annual depreciation for the building has been $78,000 [($2,600,000


$260,000)/30 years]. The current book value of the building is computed
as follows:
Original cost .............................................................
Accumulated depreciation ($78,000 10 years) ...
Book value ................................................................

$2,600,000
780,000
$1,820,000

The book value of $1,820,000 is compared to the $1,500,000 ($100,000 15


years) undiscounted sum of future cash flows to determine whether the
building is impaired. The sum of future cash flows is less, so an impairment loss should be recognized.
2. The impairment loss is equal to the $1,060,000 ($1,820,000 $760,000) difference between the book value of the building and its fair value. The impairment loss would be recorded as follows:
Accumulated DepreciationBuilding.....................
Loss on Impairment of Building ..............................
Building ($2,600,000 $760,000) .........................

780,000
1,060,000
1,840,000

3. The answer to (1) is unaffected by the fair value of the asset. The existence of an impairment loss is determined solely using the undiscounted
sum of estimated future cash flows, not the fair value of the asset.

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1138.

441

1. Annual depreciation for the building has been 78,000 [($2,600,000


$260,000)/30 years]. The current book value of the building is computed
as follows:
Original cost.................................................................
Accumulated depreciation ($78,000 10 years).......
Book value....................................................................

$2,600,000
780,000
$1,820,000

According to IAS 36, the existence of impairment is determined by comparing the book value of $1,820,000 to the fair value of $760,000. The fair
value is lower, so an impairment loss should be recognized. In this case,
the determination of whether an impairment loss exists is based on a
comparison of book value and fair value; under U.S. GAAP, the test is
based on a comparison of book value and the undiscounted sum of future cash flows.
2. The impairment loss is equal to the $1,060,000 ($1,820,000 $760,000) difference between the book value of the building and its fair value. The impairment loss would be recorded as follows:
Accumulated DepreciationBuilding.....................
Loss on Impairment of Building ..............................
Building ($2,600,000 $760,000) .........................
3.

780,000
1,060,000

Because the fair value of $2,500,000 is greater than the book value of
$1,820,000, Della Bee will recognize $680,000 ($2,500,000 $1,820,000) as
an upward asset revaluation. The upward revaluation is recorded as follows:
Accumulated DepreciationBuilding.....................
Revaluation Equity Reserve ................................
Building ($2,600,000 $2,500,000) ......................

1139.

1.

1,840,000

2008
Jan. 1 Patents.............................................................
Cash.............................................................
2010
Jan. 1 Patents.............................................................
Cash.............................................................
2013
Jan. 1 Patents.............................................................
Cash.............................................................

780,000
680,000
100,000

31,195
31,195
9,350
9,350
32,400
32,400

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1139. (Concluded)
2.

2008
Dec. 31 Amortization Expense ($31,195 1/16) ........
Accumulated AmortizationPatents .......
2010
Dec. 31 Amortization Expense....................................
Accumulated AmortizationPatents .......
*($31,195 1/16) + ($9,350 1/14) = $2,618 or
$36,645 1/14 = $2,618
2013
Dec. 31 Amortization Expense....................................
Accumulated AmortizationPatents .......
*($31,195 1/16) + ($9,350 1/14) + ($32,400
1/11) = $5,563 or $61,191 1/11 = $5,563

1,950
1,950
2,618*
2,618

5,563*
5,563

1140.
1. December 31, 2013
Amortization Expense ($300,000/10 years).................
Accumulated Amortization .....................................

30,000
30,000

With intangible assets, the presumption is that in the absence of strong


evidence to the contrary, the residual value is zero and the straight-line
method should be used.
January 1, 2014
Impairment test:
Book value: $300,000 $30,000 = $270,000
Undiscounted future cash flows = $25,000 9 years = $225,000
Because the undiscounted future cash flows are less than the book value
($225,000 < $270,000), the asset is impaired. The asset should be written
down to its fair value.
Estimated fair value:
Business calculator keystrokes:
PMT = $25,000; I = 5%; N = 9 years $177,696
Impairment Loss ($270,000 $177,696)............................
Accumulated Amortization ................................................
Intangible Asset ($300,000 $177,696) .......................

92,304
30,000
122,304

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1140. (Concluded)
2. December 31, 2013
The useful life is indefinite, so no amortization expense is recognized.
January 1, 2014
Impairment test:
Book value: $300,000
Estimated fair value of an infinite annuity:
$25,000/0.05 $500,000
Because the estimated fair value is higher than the book value ($500,000
> $300,000), the asset is not impaired. No journal entry is necessary.
1141.
Estimated fair value of the Production reporting unit:
Revenues $13,000 1.60 = $20,800 estimated fair value
Net book value of the assets and liabilities of the Production reporting unit:
Assets ($21,300 + $10,000) Liabilities ($7,600) = $23,700
Because the estimated fair value of the reporting unit ($20,800) is less than
the net book value of the reporting unit ($23,700), further computations are
needed to determine the amount of a goodwill impairment loss, if any.
Implied fair value of goodwill as of December 31:
Estimated fair value of Production reporting unit............
Fair value of identifiable assets fair value of liabilities
($20,500 $7,600)...........................................................
Implied fair value of goodwill .............................................

$20,800
12,900
$ 7,900

Journal entry necessary to recognize the goodwill impairment loss:


Goodwill Impairment Loss .................................................
Goodwill ($10,000 $7,900)..........................................

2,100
2,100

In addition to the goodwill impairment, the fact that the fair value of the identifiable assets is less than the book value of those assets suggests that there
may be other impaired assets.

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1142.

2013
Dec. 31 Cash ..........................................................................
Notes Receivable .....................................................
Accumulated DepreciationEquipment ...............
Equipment...........................................................
Discount on Notes Receivable .........................
Gain on Sale of Equipment ...............................

3,000
12,000
75,000
84,000
1,300*
4,700

*Discount on notes receivable:


Present value of an ordinary annuity of $1 for 2
periods at 8% (from Table IV of the Time Value
of Money module) = 1.7833
1.7833 $6,000 = $10,700 present value of note
$12,000 face value of note $10,700 present
value = $1,300 discount
Using business calculator keystrokes:
PMT = $6,000, N = 2, I = 8% PV = $10,700

Gain on sale of equipment:


Down payment...........................................................
Present value of note receivable .............................
Selling price (present value) of equipment ............
Less: Book value of equipment...............................
Gain on sale of equipment .......................................

$ 3,000
10,700
$ 13,700
9,000
$ 4,700

2014
Dec. 31 Cash ..........................................................................
6,000
Discount on Notes Receivable ...............................
856
Notes Receivable ...............................................
6,000
Interest Revenue ($10,700 0.08).....................
856
2015
Dec. 31 Cash ..........................................................................
6,000
Discount on Notes Receivable ...............................
444
Notes Receivable ...............................................
6,000
Interest Revenue ................................................
444*
*Interest revenue 2015:
$1,300 $856 = $444 unamortized discount at Dec. 31, 2015
Interest revenue for 2015 can also be computed as follows:
$10,700 $6,000 payment in 2014 + $856 discount amortized in
2014 = $5,556; $5,556 0.08 = $444 (rounded)

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1143.
1. MachineHeld for Sale ($10,000 $1,000) .........................
Loss on Held-for-Sale Classification ...................................
Accumulated DepreciationMachine .................................
Machine .............................................................................

9,000
16,000
75,000
100,000

2. No depreciation expense is recognized on assets classified as held for


sale.
3. Machine Held for Sale ...........................................................
Gain on Recovery of ValueHeld for Sale....................

4,400
4,400

Computation of gain: ($15,000 $1,600) $9,000 = $4,400


The maximum gain that can be recognized is the amount of the initial loss
recognized upon classification as held for sale = $16,000. In this case, the
entire increase can be recognized.
1144. (a) The truck should be valued at $40,000 because in a nonmonetary exchange
not involving similar assets, the new asset should be recorded at the fair
value of the asset surrendered, if determinable. List price is not necessarily
the same as fair value.
(b) The new machine should be valued at $35,000, the book value of the old
machine. Because this exchange was for similar productive assets with a
company in the same line of business with no cash involved, the indicated
gain would be deferred. This treatment is consistent with the FASBs assertion that the exchange has no commercial substance.
(c) The new machine should be valued at $55,000 ($40,000 + $15,000). Because
the exchange involves cash that is considered a large amount (25% or
greater of the transaction amount), it is a monetary transaction, and the asset is recorded at the fair value of the old machine plus the cash paid. A
gain of $5,000 would be recognized by Coaltown. The list price of $62,000 is
not used because it does not represent fair value.
(d) On Coaltowns books, the new machine should be valued at $38,000
($35,000 + $3,000). Because the exchange is made with a company in the
same line of business and involves similar assets and cash paid is considered a small amount (less than 25% of the transaction amount), there is
no culmination of the earnings process. The asset is thus recorded at the
book value of the old machine plus the cash paid.

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1144. (Concluded)
Coaltown Corporation
Machinery (new)...................................................................
38,000
Accumulated DepreciationMachinery ............................
17,000
Machinery (old) ................................................................
52,000
Cash ..................................................................................
3,000
To record exchange of old machinery costing $52,000 with
accumulated depreciation of $17,000 for new machinery
recorded at $38,000, the carrying value of the old machinery
plus cash paid.
Newton Inc.
Machinery (new) ............................................................
Accumulated DepreciationMachinery .....................
Cash .............................................................................
Machinery (old)..........................................................
Gain on Exchange of Machinery .............................
To record exchange of old machinery
costing $55,000 with accumulated depreciation of $42,000 for new machinery
(fair value, $40,000) and $3,000 cash.
New machinery recorded at $12,093, or
$13,000 $3,000 + $2,093.

12,093
42,000
3,000
55,000
2,093*

*Indicated gain: $43,000 $13,000 = $30,000


$3,000
Recognized gain:
$30,000 = $2,093
$3,000 + $40,000
1145.

1. Truck (new) .....................................................................


Accumulated DepreciationTruck ..............................
Loss on Trade-ln of Truck.............................................
Truck (old).................................................................
Cash...........................................................................
*Book value of trade-in...................................... $3,750
Less: Amount allowed on trade-in
($23,100 $20,900) ........................................... 2,200
Loss recognized on trade-in............................ $1,550

23,100
19,000
1,550*
22,750
20,900

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1145. (Concluded)
2. Truck (new) .....................................................................
Accumulated DepreciationTruck ..............................
Truck (old).................................................................
Cash...........................................................................
Gain on Trade-ln of Truck........................................

23,100
19,000
22,750
18,000
1,350*

*Amount allowed on trade-in


($23,100 $18,000) ........................................... $5,100
Less: Book value of trade-in ........................... 3,750
Gain recognized on trade-in ............................ $1,350
(Note: Because the exchange involved a large amount of cash, the exchange is considered to have commercial substance and the gain is recognized.)

1146.

1. Double-declining-balance depreciation:
($180,000 0.20* 4/12) = $12,000
*1/10 = 0.10; 0.10 2 = 0.20
2. Sum-of-the-years-digits depreciation:
Depreciation for full year [($180,000 $18,000) 10/55*] = $29,455
Four months of depreciation ($29,455 4/12) = $9,818
*[(10 + 1) 10]/2 = 55
3. Productive-output depreciation:
($180,000 $18,000)/750,000 units = $0.22* per unit
21,000 units $0.22* per unit = $4,620
*Rounded
4. Service-hours depreciation:
($180,000 $18,000)/36,000 hours = $4.50 per hour
1,500 hours $4.50 per hour = $6,750
The double-declining-balance method gives the highest depreciation expense for 2013, $12,000.

Relates to Expanded Material.

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1147.

1. (a)

Double-declining-balance method:
2012: $110,000 0.167* 6/12 = $ 9,185
= $16,836
2013: $100,815 0.167
*1/12 = 0.0833; 0.0833 2 = 0.167

(b)

Sum-of-the-years-digits (SYD) method:


$110,000 $17,000 = $93,000 depreciable base
[(12 + 1)/2] 12 = 78SYD fraction denominator
12/78 $93,000 = $14,308 6/12 = $ 7,154
11/78 93,000 = 13,115 6/12 =
6,558
Total for 2013 = $13,712
2. 2012: $110,000 0.25* 6/12 = $13,750
= $24,063
2013: $96,250 0.25
*1/8 = 0.125 2 = 0.25, or 25%

1148.

Year
2013
2014
2015
2016
2017
2018
2019
2020

Depreciation Schedule
Cost
Computation
Recovery Amount
($29,200 0.2857 6/12)
($25,029 0.2857)
($17,878 0.2857)
($12,770 0.2857)
($9,122 0.2857)
($6,516/2.5)*
($3,910/1.5)

$4,171
7,151
5,108
3,648
2,606
2,606
2,607
1,303

Asset
Book Value
$29,200
25,029
17,878
12,770
9,122
6,516
3,910
1,303
0

*Switched to straight-line depreciation because depreciation of


$2,606 exceeds the double-declining-balance depreciation of
$1,862 ($6,516 0.2857)

Relates to Expanded Material.

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PROBLEMS
1149.
(a) Straight-line method:
End of
Year
Depreciation
2013
2014
2015

Accumulated
Depreciation

$20,000
20,000
20,000
$60,000

$20,000
40,000
60,000

(b) Sum-of-the-years-digits method:


End of
Year
Depreciation
2013
2014
2015

(3/6 $60,000) =
(2/6 60,000) =
(1/6 60,000) =

Accumulated
Depreciation
$ 30,000
20,000
10,000
$60,000

(c) Double-declining-balance method:


End of
Year
Depreciation
2013
2014
2015

(66.7%* $80,000) = $ 53,360


6,640
0
$ 60,000

$ 30,000
50,000
60,000

Accumulated
Depreciation
$53,360
60,000
60,000

Asset
Book Value
$80,000
60,000
40,000
20,000

Asset
Book Value
$80,000
50,000
30,000
20,000

Asset
Book Value
$80,000
26,640
20,000
20,000

*Straight-line rate = 33 1/3%; 2.0 0.333 = 66.7%.

Double-declining-balance depreciation of $17,769 ($26,640 0.667)


would cause asset book value to fall below residual value ($20,000).
Therefore, depreciate the $6,640 difference between the book value
and residual value.

No additional depreciation because asset book value equals the


residual value of $20,000.
1150.

Cost of tractor and front-end loader:


Tractor..............................................
Front-end loader .............................
Shipping...........................................
Installation .......................................
Total cost ......................................

$100,000
7,000
600
800
$108,400

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1150. (Concluded)
1.

Straight-line depreciation2013:
$108,400 $15,000 salvage value
= $11,675
8 years

2.

Double-declining-balance depreciation2013:
End of
Depreciation
Accumulated
Year
Computation
Amount
Depreciation
$27,100
$27,100
2010
$108,400 0.25
20,325
47,425
2011
81,300 0.25
15,244
62,669
2012
60,975 0.25
11,433
74,102
2013
45,731 0.25

3.

Sum-of-the-years-digits depreciation2013:
Sum of years digits = 36
$108,400 $15,000 = $93,400 5/36 = $12,972

4.

Service-hours depreciation2013:
$93,400/12,500 hours = $7.47 per hour
1,725 hours $7.47 = $12,886

Book Value
$81,300
60,975
45,731
34,298

1151.
1.

End
of
Year

Depreciation
Expense

Additional
Depreciation
Expense

Accumulated
Depreciation
Balance

Asset
Book
Value

Maintenance
Expense

Cost
$61,700
2010
$5,609*
$ 5,609
56,091
$4,900
2011
5,609
11,218
50,482
4,700
2012
5,609
$5,165**
21,992
47,508
4,600

2013
5,939
27,931
41,569
4,800
COMPUTATIONS:
*$61,700/11 = $5,609
**The portion of total depreciation related to the motor:
$7,100/11 = $645 per year
Accumulated depreciation related to the motor at time of replacement:
$645 per year 3 years = $1,935
Remaining book value related to the motor at time of replacement:
$7,100 $1,935 = $5,165

($61,700 $21,992) + $7,800 = $47,508

$47,508/8 = $5,939

Total
Expense

$10,509
10,309
15,374
10,739

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1151. (Concluded)
2.

Depreciation
Expense
Motor

Year

2010
2011
2012
2013

$1,775*
1,775
1,775
1,950

Additional Depreciation
Depreciation Expense
of Motor
Frame

$1,775

$4,200**
4,200
4,200
4,200

Maintenance
Expense

Total
Expense

$4,900
4,700
4,600
4,800

$10,875
10,675
12,350
10,950

COMPUTATIONS:
*$7,100/4 = $1,775 per year
**$54,600/13 = $4,200 per year

$7,100 3($1,775) = $1,775 additional depreciation for remaining book value of


motor.

$7,800/4 = $1,950 per year


3.

The depreciation method used in (1) was a group method that did not incorporate
the shorter useful life of the motor and thus resulted in a higher amount of extra
depreciation recognized at the time of the motor replacement in 2012. The method
used in (2) recognized the motor and frame as separate assets. In this case, method (2) is probably a better depreciation procedure because of the large difference in service lives between the frame and the motor.

1152.
1. (a) Straight-line method: ($14,000 $800)/3 years = $4,400
2011
Truck 2
$
0
4,400
4,400
4,400

2012
Truck 3
$
0
0
4,400
4,400

2013
Truck 4
$
0
0
0
4,400

Yearly
Total
$ 4,400
8,800
13,200
13,200

(b) Sum-of-the-years-digits method:


2010
2011
Truck 1
Truck 2
2010
$6,600
$
0
2011
4,400
6,600
2012
2,200
4,400
2013
0
2,200

2012
Truck 3
$
0
0
6,600
4,400

2013
Truck 4
$
0
0
0
6,600

Yearly
Total
$ 6,600
11,000
13,200
13,200

2010
2011
2012
2013

2.

2010
Truck 1
$4,400
4,400
4,400
0

For a firm that is expanding, an accelerated depreciation method, such as sum-ofthe-years-digits, yields a higher annual depreciation expense than does straight
line. However, for a firm of steady size, where capital expenditures are made just to
replace worn-out assets, all depreciation methods yield the same total depreciation expense.

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1153.
2008:
Depreciation Expense ($150,000 0.20).................................
Accumulated DepreciationMachinery.............................

30,000

2009:
Depreciation Expense ($150,000 0.20).................................
Accumulated DepreciationMachinery.............................

30,000

2010:
Depreciation Expense ($150,000 0.20).................................
Accumulated DepreciationMachinery.............................

30,000

Accumulated DepreciationMachinery.................................
Machinery .............................................................................
Retirement of two machines at $7,500 each.
2011:
Depreciation Expense ($135,000 0.20).................................
Accumulated DepreciationMachinery.............................
Accumulated DepreciationMachinery.................................
Machinery .............................................................................
Retirement of four machines at $7,500 each.
2012:
Depreciation Expense ($105,000 0.20).................................
Accumulated DepreciationMachinery.............................
Accumulated DepreciationMachinery.................................
Machinery .............................................................................
Retirement of eight machines at $7,500 each.
2013:
Depreciation Expense ($45,000 0.20)...................................
Accumulated DepreciationMachinery.............................
Accumulated DepreciationMachinery.................................
Loss on Retirement of Machinery...........................................
Machinery .............................................................................
Retirement of six machines at $7,500 each.

30,000

30,000

30,000
15,000
15,000

27,000
27,000
30,000
30,000

21,000
21,000
60,000
60,000

9,000
9,000
42,000*
3,000

*Closing group asset requires closing group allowance balance.

45,000

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1154.
1.
Machines
Cost
511
$ 27,000
512
31,000
513
52,000
514
38,000
515
23,000
$171,000

Estimated
Residual
Depreciable Estimated
Value
Cost
Life in Years
$ 5,000
$ 22,000
11
7,000
222224,000
6
10,000
42,000
7
0
38,000
8
4,000
19,000
5
$26,000
$145,000

Annual
Depreciation
$ 2,000
4,000
6,000
4,750
3,800
$20,550

Group depreciation rate to be applied to cost: $20,550/$171,000 = 12.02%


2.

Group or average life of machines: $145,000/$20,550 = 7.06 years

3.

Depreciation ExpenseMachinery ................................................. 15,416*


Accumulated DepreciationMachinery .....................................
*$171,000 0.1202 9/12 = $15,416

1155.
(a)

Initial cost ..........................................................................


Less: Salvage value ..........................................................
Depreciable cost ...............................................................
Life of bicycle ....................................................................

$6,500
1,500
$5,000
4 years

Depreciation per year ($5,000 4) ...................................

$1,250

2013 depreciation:
Original cost.................................................................
Less: Two years depreciation ...................................
Book value beginning of 2013....................................
Upgrade ........................................................................
Less: Salvage...............................................................
New depreciable cost..................................................

$6,500
2,500
$4,000
900
$4,900
1,500
$3,400

Remaining life ..............................................................


Depreciation for 2013 ($3,400/3) ................................

3 years
$1,133

15,416

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1155. (Concluded)
(b)

7-year life = 28.6% double-declining-balance


2010 $7,400 0.286 = $2,116
$7,400 $2,116 = $5,284
2011 $5,284 0.286 = $1,511
$5,284 $1,511 = $3,773
2012 $3,773 0.286 = $1,079
However, only $773 can be depreciated because salvage value is $3,000.
2013 No depreciation because book value is equal to salvage value (cannot depreciate below salvage value).

(c)

Cost of bicycle...................................................................
Salvage...............................................................................
Depreciable cost ...............................................................
Total estimated kilometers...............................................
Depreciation per kilometer:
$6,500/25,000 = $0.26 per kilometer
Depreciation:
2010 7,500 $0.26 ....................................................
2011 9,000 $0.26 ....................................................
Total accumulated depreciation ................................
2013

Original cost ...................................................


Upgrade ...........................................................
Prior depreciation ...........................................
Remaining book value....................................
Salvage ............................................................
Remaining depreciable amount ....................
Remaining kilometers ....................................

Depreciation per kilometer:


$3,960/19,500 = $0.20 per kilometer
Depreciation for 2013: 11,500 $0.20 = $2,300

$ 8,000
1,500
$ 6,500
25,000

$ 1,950
2,340
$ 4,290
$ 8,000
1,750
$ 9,750
(4,290)
$ 5,460
(1,500)
$ 3,960
19,500

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1156.
Roscoe Corp.
Work Sheet for Preparation of Financial Statements
For the Year Ended December 31, 2013

Account
Cash .......................................................

(a)
(e)
Ore Inventory ........................................
(h)
Mining Property ....................................
(b)
Accumulated DepletionMining Property
Mine Buildings and Equipment ...........
(c)
Accumulated DepreciationMine
Buildings and Equipment...............
Dividends Payable (Jan. 15, 2014) ......
Common Stock .....................................
Dividends Declared ..............................
Sales ......................................................
Mining Costs .........................................
Delivery Expense ..................................
General and Administrative Expenses ..
DepletionMining Property ................
DepreciationMine Buildings and
Equipment........................................
*Income Summary..................................
Net Income ............................................

(i)
(d)
(d)
(d)
(f)
(g)

Transactions
During 2013
Debit
Credit
1,000,000 (c)
350,000
1,139,000 (d)
213,000
45,616
...............
2,700,000
...............
............... (f)
225,000
350,000
...............

Income
Statement
Debit
Credit
............... ..............
............... ..............
............... ..............
............... ..............
............... ..............
............... ..............

...............
...............
...............
...............
148,000
...............
173,500
20,000
19,500
225,000

(g)
29,167
(i)
148,000
(a) 1,000,000
(b) 2,700,000
...............
(e) 1,139,000
...............
...............
...............
...............

...............
...............
...............
...............
...............
...............
173,500
20,000
19,500
225,000

..............
..............
..............
..............
..............
1,139,000
..............
..............
..............
..............

..............
..............
..............
..............
148,000
..............
..............
..............
..............
..............

29,167
148,000
..............
3,700,000
..............
..............
..............
..............
..............
..............

29,167
...............
5,849,783

...............
(h)
45,616
5,849,783

29,167
...............
467,167
717,449
1,184,616

..............
45,616
1,184,616

..............
..............
4,819,616

1,184,616

4,819,616

..............
..............
4,102,167
717,449
4,819,616

Balance Sheet
Debit
Credit
..............
..............
1,576,000 ..............
45,616 ..............
2,700,000 ..............
..............
225,000
350,000 ..............

*This account represents inventoried costs that have not been sold and should be deducted in arriving at cost of
goods sold for the period.

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1156. (Continued)
Legend for work sheet:
(a) To record sale of 20,000 shares of common stock for $50 per share.
(b) To record exchange of 54,000 shares of common stock for mining property
valued at $2,700,000.
(c) To record expenditures for mine buildings and equipment.
(d) To record expenses paid in cash.
(e) To record sales: 67,000 tons at $17 = $1,139,000.
(f) To record depletion: 75,000/900,000 $2,700,000 = $225,000. (Depletion per
ton: $2,700,000/900,000 = $3.00.)
(g) To record depreciation: 75,000/900,000 $350,000 = $29,167. (Depreciation
per ton: $350,000/900,000 = $0.3889 rounded.)
(h) To record the ore inventory as of Dec. 31, 2013calculated as follows:
Mining costs ................................................................
$173,500
Depletion ......................................................................
225,000
Depreciation.................................................................
29,167
$427,667
Cost per ton: $427,667/75,000 = $5.702
Cost of ending inventory: 8,000 tons $5.702 = $45,616.
(i) To record dividend declaration.
Roscoe Corp.
Income Statement
For the Year Ended December 31, 2013
Sales ...............................................................................................
Cost of goods sold:
Mining costs..................................................
$173,500
Depletionmining property ........................
225,000
Depreciationmine buildings and
equipment .................................................
29,167
Less: Ending ore inventory..................................................
Cost of goods sold ........................................................................
Gross profit ....................................................................................
Operating expenses:
Delivery expense .......................................................................
General and administrative expenses.....................................
Net income .....................................................................................
Earnings per share ($717,449/74,000 shares) .............................

$1,139,000

$427,667
45,616
382,051
$ 756,949
$ 20,000
19,500

39,500
$ 717,449
$

9.70

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Chapter 11

457

1156. (Concluded)
Roscoe Corp.
Balance Sheet
December 31, 2013
Assets
Current assets:
Cash........................................................................................
Ore inventory .........................................................................
Properties:
Mining property .....................................................................
Less: Accumulated depletionmining property ...............
Mine buildings and equipment.............................................
Less: Accumulated depreciationmine buildings and
equipment ...........................................................................
Total assets ................................................................................

$ 1,576,000
45,616
$ 2,700,000
225,000
$ 350,000
29,167

Liabilities and Stockholders Equity


Dividends payable .....................................................................
Common stock (74,000 shares)................................................ $ 3,700,000
Retained earnings ($717,449 $148,000) ................................
569,449
Total liabilities and stockholders equity .............................

$1,621,616
2,475,000
320,833
$4,417,449
$ 148,000
4,269,449
$4,417,449

1157.
2009 No depreciation or depletion expense.
2010 Cost of land................................................................................
2009 developmental costs........................................................
2010 developmental costs........................................................
Total 2010 cost ..........................................................................
Less: Residual value.................................................................
Cost subject to depletion .........................................................

$5,400,000
300,000
200,000
$5,900,000
700,000
$5,200,000

Depletion per ton:


$5,200,000/4,000,000 tons = $1.30 per ton
2010 depletion: 1,200,000 $1.30 ........................................

$1,560,000

Building cost..............................................................................
Depreciation per ton:
$500,000/4,000,000 tons = $0.125 per ton
2010 depreciation: 1,200,000 $0.125 ...............................

$ 500,000

$ 150,000

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1157. (Concluded)
2011 Remaining 20092010 cost to be depleted:
Original cost to be depleted.................................................
2010 depletion .......................................................................
Remaining cost .....................................................................
New depletion per ton:
$3,640,000/2,900,000 tons = $1.26 per ton
2011 depletion: 1,100,000 $1.26 ............................................

$ 5,200,000
(1,560,000)
$ 3,640,000

$ 1,386,000

Remaining 2009 building cost to be depreciated:


Original cost to be depreciated ...........................................
2010 depreciation..................................................................
Remaining cost .....................................................................

$ 500,000
(150,000)
$ 350,000

New depreciation per ton:


$350,000/2,900,000 tons = $0.12 per ton
2011 depreciation: 1,100,000 $0.12 .................................

$ 132,000

2012 Remaining costbeginning of 2011 .......................................


2011 depletion ...........................................................................
Remaining costbeginning of 2012 .......................................
2012 developmental costs........................................................
New cost to be depleted ...........................................................

$ 3,640,000
(1,386,000)
$ 2,254,000
700,000
$ 2,954,000

New depletion per ton:


$2,954,000/1,700,000 tons = $1.74 per ton
2012 depletion: 800,000 $1.74 ...........................................

$ 1,392,000

Remaining 2009 building cost to be depreciated:


Original cost to be depreciated ...........................................
2010 depreciation..................................................................
2011 depreciation..................................................................
Remaining cost .....................................................................

$ 500,000
(150,000)
(132,000)
$ 218,000

New depreciation per ton:


$218,000/1,700,000 tons = $0.13 per ton
2012 depreciation: 800,000 $0.13......................................

$ 104,000

2013 Because the resources are all used by the end of 2013, depreciation and depletion will be the remaining cost to be depleted or depreciated of the natural resources and the building.
Natural resources remaining cost:
2012 Book valuebeginning ...............................................
2012 depletion .......................................................................
2013 depletion .......................................................................

$ 2,954,000
(1,392,000)
$ 1,562,000

Building remaining cost:


2012 Book valuebeginning ...............................................
2012 depreciation..................................................................
2013 depreciation..................................................................

$ 218,000
(104,000)
$ 114,000

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1158.
1.
2011 Cost of land2008 ....................................................................
2009 cost to build road .............................................................
2009 mine improvements .........................................................
Total 20082009 cost ................................................................
Less: Residual value.................................................................
Cost subject to depletion .........................................................

$ 50,000
5,000,000
750,000
$5,800,000
600,000
$5,200,000

Depletion per ton:


$5,200,000/4,000,000 tons = $1.30 per ton
2011 depletion: 5,000 $1.30 ...............................................

Building cost (2010) ..................................................................


Less: Salvage value ..................................................................
Cost subject to depreciation ....................................................

$1,500,000
250,000
$1,250,000

Depreciation per ton:


$1,250,000/4,000,000 tons = $0.31 per ton
2011 depreciation: 5,000 $0.31..........................................

2012 Remaining 20082009 cost to be depleted:


Original cost to be depleted.................................................
2011 depletion .......................................................................
Remaining cost .....................................................................
2012 mine improvements .....................................................
New cost to deplete ..............................................................

6,500

1,550

$5,200,000
(6,500)
$5,193,500
275,000
$5,468,500

New depletion per ton:


4,000,000 tons original estimate 5,000 tons extracted
+ 3,000,000 tons discovered = 6,995,000 tons
$5,468,500/6,995,000 tons = $0.78 per ton
2012 depletion: 1,000,000 $0.78 ........................................

$ 780,000

Remaining 2010 building cost to be depreciated:


Original cost to be depreciated ...........................................
2011 depreciation..................................................................
Remaining cost .....................................................................
2012 new building .................................................................
New cost to depreciate .........................................................

$1,250,000
(1,550)
$1,248,450
225,000
$1,473,450

New depreciation per ton:


$1,473,450/6,995,000 tons = $0.21 per ton
2012 depreciation: 1,000,000 $0.21 ..................................

$ 210,000

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460

1158. (Concluded)
2013 Remaining costbeginning of 2012 .......................................
2012 depletion ...........................................................................
Remaining costbeginning of 2013 .......................................
2013 mine improvements .........................................................
New cost to be depleted ...........................................................

$5,468,500
(780,000)
$4,688,500
1,100,000
$5,788,500

New depletion per ton:


$5,788,500/5,995,000 tons = $0.97 per ton
2013 depletion: 2,500,000 $0.97 ........................................

$2,425,000

2013 depreciation: 2,500,000 $0.21 ..................................

$ 525,000

2.

Depletion Expense .........................................................


Depreciation Expense....................................................
Accumulated DepletionMine .................................
Accumulated DepreciationBuildings....................

2,425,000
525,000
2,425,000
525,000

1159.
(a)

(b)

Book value of tooling machine at beginning of 2013


($85,000 1/2 depreciated) ......................................
Overhaul costs ...............................................................
Total remaining book value, Jan. 2013 ........................
Estimated remaining life (30 15 + 5) ..........................
Depreciation expense for year ($59,500/20) ................
Purchase cost of machine.............................................
Freight cost.....................................................................
Installation cost ..............................................................
Testing costs prior to regular operation......................
Less: Estimated salvage value .....................................
Depreciable cost.............................................................
Estimated life ..................................................................
Depreciation expense per year: Original asset
($45,600/15) ...............................................................
Accessories purchased in January 2013.....................
Remaining life of machine.............................................
Depreciation expense for year: Accessories
($2,925/13) .................................................................
Depreciation expense for year 2013.............................

$42,500
17,000
$59,500
20 years
$2,975
$50,000
900
1,900
800
$53,600
8,000
$45,600
15 years
$3,040
$2,925
13 years
225
$3,265

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461

1159. (Concluded)
(c)

(d)

(e)

Cost of equipment..........................................................
Double-declining-balance rate for 5 years...................
(Salvage is not considered when using doubledeclining-balance method.)
Depreciation expense for full year: 40% of $48,000....
Depreciation expense for 6 months: 1/2 of $19,200....
Cost of land.....................................................................
Less: Estimated salvage value .....................................
Cost subject to depletion ..............................................

48,000
40%

19,200
$

9,600

$14,000,000
800,000
$13,200,000

Expected reserves..........................................................
4,000,000 tons
Cost per ton ($13,200,000/4,000,000)............................ $
3.30
Number of tons mined ...................................................
950,000
Depletion expense for 2013: (950,000 $3.30) ............
$3,135,000
Cash price limit on capitalized value ........................... $ 150,000
Installation cost ..............................................................
10,000
$ 160,000
Less: Salvage .................................................................
20,000
Depreciable cost............................................................. $ 140,000
Depreciation expense for 2013: ($140,000/16).............
$
8,750

1160.
Cash flows from operating activities:
Net income............................................................................
Depreciation in cost of goods sold ....................................
Decrease in work-in-process inventory.............................
Increase in finished goods inventory ................................
Increase in depreciation content of work-in-process
inventory ............................................................................
Decrease in depreciation content of finished goods
inventory ............................................................................
Net cash flow provided by operating activities ................
ALTERNATIVE SOLUTION:
Cash flows from operating activities:
Net income............................................................................
Depreciation in cost of goods sold ....................................
Decrease in nondepreciation portion of work-inprocess inventory .............................................................
Increase in nondepreciation portion of finished goods
inventory ............................................................................
Net cash flow provided by operating activities ................
COMPUTATIONS:
*$62,500 $55,000 = $7,500

$81,000 $97,000 = $(16,000)

$90,000
22,000
5,000
(13,000)
2,500
(3,000)
$103,500

$90,000
22,000
7,500*
(16,000)
$103,500

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1161.
1.

Annual depreciation for the buildings has been $617,500 [($13,000,000


$650,000)/20 years]. The current book value of the buildings is computed as follows:
Original cost ........................................................................
$13,000,000
3,705,000
Accumulated depreciation ($617,500 6 years) ..............
Book value.......................................................................
$ 9,295,000
The book value of $9,295,000 is compared to the $8,000,000 ($800,000 10 years)
undiscounted sum of future cash flows to determine whether the building is impaired. The sum of future cash flows is less, so an impairment loss should be
recognized.
The impairment loss is equal to the $4,295,000 ($9,295,000 $5,000,000) difference between the book value of the four buildings and their total fair value. The
impairment loss would be recorded as follows:
Accumulated DepreciationBuildings ..................... 3,705,000
Loss on Impairment of Buildings ............................... 4,295,000
Buildings ($13,000,000 $5,000,000).....................
8,000,000

2.

Total depreciation expense for 2013:


Depreciation expense is $500,000 ($5,000,000 new book value/10-year remaining
life).

3.

The total book value of $9,295,000 is compared to the $11,000,000 ($1,100,000


10 years) undiscounted sum of future cash flows to determine whether the building is impaired. The sum of future cash flows is greater, so no impairment loss
should be recognized, even though total fair value of $6,000,000 is less than the
recorded book value.
Annual depreciation expense for 2013 must be revised based on the fact that the
buildings have a remaining useful life of only 10 years:
2013 Depreciation expense: $9,295,000,000/10 years ..
$929,500

1162.
1.

Annual depreciation for the building has been $600,000 ($12,000,000/20 years).
The current book value of the building is computed as follows:
Original cost ...............................................................................
$12,000,000
2,400,000
Accumulated depreciation ($600,000 4 years) .....................
Book value..............................................................................
$ 9,600,000
According to U.S GAAP, impairment is determined by comparing the book value,
$9,600,000, to the undiscounted sum of future cash flows $10,200,000 ($850,000
12 years). The undiscounted sum of future cash flows is greater, so no impairment loss should be recognized.

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1162. (Continued)
According to IAS 36, the existence of impairment is determined by comparing the book value, $9,600,000, to the fair value, $6,800,000. The fair
value is lower, so an impairment loss should be recognized.
Note that in this problem, U.S. GAAP results in no impairment loss being
recognized even though the fair value of the building is significantly below its book value. This inconsistency does not exist in IAS 36.
2. No impairment loss is recognized. Depreciation expense for 2013 is computed as follows:
Remaining amount to be depreciated:
$12,000,000 $2,400,000 = $9,600,000
Annual rate for remaining 12 years:
$9,600,000/12 = $800,000
Depreciation expense in 2013 is $800,000.
3. The impairment loss is equal to the $2,800,000 ($9,600,000 $6,800,000)
difference between the book value of the building and its fair value. The
impairment loss is recorded as follows:
Accumulated DepreciationBuilding .................
Loss on Impairment of Building...........................
Building ($12,000,000 $6,800,000).................

2,400,000
2,800,000
5,200,000

Depreciation expense for 2013 is computed as follows:


Remaining amount to be depreciated:
Fair value = $6,800,000
Annual rate for remaining 12 years:
$6,800,000/12 = $566,667
Depreciation expense in 2013 is $566,667.
4. Because the fair value of $14,000,000 is higher than the book value of
$9,600,000, JJS will recognize $4,400,000 ($14,000,000 $9,600,000) as an
upward asset revaluation. The upward revaluation is recorded as follows:
Accumulated DepreciationBuilding .................
Building ($14,000,000 $12,000,000) ...................
Revaluation Equity Reserve .............................

2,400,000
2,000,000
4,400,000

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1162. (Concluded)
Depreciation expense for 2013 is computed as follows:
Remaining amount to be depreciated:
Revalued amount = $14,000,000
Annual rate for remaining 12 years:
$14,000,000/12 = $1,166,667
Depreciation expense in 2013 is $1,166,667.
1163.
2005
Jan. 3 Patents ..............................................................................
Cash ..............................................................................
Dec. 31 Amortization Expense ($89,000/10 years) .....................
Accumulated AmortizationPatents.........................

89,000
89,000
8,900
8,900

2006
Dec. 31 Amortization Expense .....................................................
Accumulated AmortizationPatents.........................

8,900

2007
Dec. 31 Amortization Expense .....................................................
Accumulated AmortizationPatents.........................

8,900

2008
Dec. 31 Amortization Expense .....................................................
Accumulated AmortizationPatents.........................

8,900

2009
Jan. 1 Patents ..............................................................................
Cash ..............................................................................
To record cost of successful infringement suit.

8,900

8,900

8,900
16,000
16,000

2009
Dec. 31 Amortization Expense .....................................................
11,567*
Accumulated AmortizationPatents.........................
*$89,000 $35,600 amortization to date + $16,000 = $69,400
$69,400/6 = $11,567
2010
Jan. 1 Patents ..............................................................................
Cash ..............................................................................
To record cost of prolonging life of original patent.

11,567

37,000
37,000

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465

1163. (Concluded)
Dec. 31 Amortization Expense .....................................................
Accumulated AmortizationPatents.........................
*Patent amortization:
($89,000 $44,500 amortization to date)/10
estimated years of remaining life...........................
($16,000 $2,667 amortization to date)/10
estimated years of remaining life...........................
$37,000/10 estimated years of remaining life............
Total amortization ........................................................
2011
Dec. 31 Amortization Expense .....................................................
Accumulated AmortizationPatents.........................
2012
Dec. 31 Amortization Expense .....................................................
Accumulated AmortizationPatents.........................
2013
July 1 Amortization Expense .....................................................
Accumulated AmortizationPatents.........................
Accumulated AmortizationPatents.............................
Loss from Patent Obsolescence ....................................
Patents .........................................................................
*Patent amortization:
1/2 of annual charge of $9,483 = $4,742

Remaining patent book value:


$89,000 + $16,000 + $37,000........................................
Accumulated amortization..........................................
Amount of loss.............................................................

9,483*
9,483

$ 4,450
1,333
3,700
$ 9,483
9,483
9,483
9,483
9,483
4,742*
4,742
80,358
61,642
142,000

$142,000
80,358
$ 61,642

1164.
(a)
The useful life is indefinite, so no amortization expense is recognized.
Impairment test:
Book value: $30,000
Estimated fair value of an infinite annuity:
$1,000/0.06 $16,667
Because the estimated fair value is less than the book value ($16,667 < $30,000), the
asset is impaired. The necessary journal entry is as follows:
2013
Dec. 31 Impairment Loss ($30,000 $16,667).............................
Trademark ...................................................................

13,333
13,333

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Chapter 11

466

1164. (Concluded)
(b)
Estimated fair value of the Abacus Manufacturing reporting unit:
Business calculator keystrokes:
PMT = $25,000; I = 6%; N = 22 years $301,040
Net book value of the assets and liabilities of the Abacus Manufacturing reporting
unit:
Assets ($270,000 + $150,000) Liabilities ($180,000) = $240,000
Because the estimated fair value of the reporting unit ($301,040) is greater than the
net book value of the reporting unit ($240,000), the goodwill is presumed not to be
impaired, and no further computations are needed. In this case, it was not necessary
to determine the fair values of the identifiable assets and liabilities.
(c)
The journal entry to recognize amortization expense is as follows:
2013
Dec. 31 Amortization Expense ($22,000/3 years) .......................
Accumulated Amortization .........................................

7,333
7,333

With intangible assets, the presumption is that in the absence of strong evidence to
the contrary, the residual value is zero and the straight-line method should be used.
Impairment test:
Book value: $22,000 $7,333 = $14,667
Undiscounted future cash flows = $12,000 + $8,000 = $20,000
Because the undiscounted future cash flows are greater than the book value ($20,000
> $14,667), the asset is not impaired. Accordingly, no additional journal entry is necessary. (Note: It makes sense to recognize amortization expense first before doing
the impairment test. It is not correct to compare the book value as of the beginning of
the year to the undiscounted cash flows remaining as of the end of the year. Alternatively, think of this impairment test as being done in early 2014.)
1165.
(a)

Gain on Exchange of Buildings and Equipment..................


Buildings and Equipment...................................................
To reverse entry made incorrectly on
Lakeshores books.

10,000

Buildings and Equipment (new) ............................................


Accumulated DepreciationBuildings and Equipment......
Buildings and Equipment (old)..........................................
To record exchange of equipment.
No gain recognized.

20,000
30,000

10,000

50,000

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467

1165. (Continued)
(b)

Gain on Exchange of Buildings and Equipment..................


Cash .....................................................................................
Buildings and Equipment...................................................
To reverse entry made incorrectly on
Lakeshores books.

30,000

Buildings and Equipment (new) ............................................


Cash .........................................................................................
Accumulated DepreciationBuildings and Equipment .....
Buildings and Equipment (old)..........................................
Gain on Exchange of Buildings and Equipment..............
To record exchange of machine.

8,750
5,000
2
60,000

Fair value of new asset ....................................


Less: Gain deferred ($30,000 $3,750) ..........
Valuation of new asset .....................................

(c)

(d)

5,000
25,000
1

70,000
3
3,750

$35,000
26,250
$ 8,750

Cost Book value = Accumulated depreciation


$70,000 $10,000 = $60,000

Fair value Book value = Indicated gain


$40,000 $10,000 = $30,000
$5,000
$30,000 = $3,750 gain to be recognized
$5,000 + $35,000

Buildings and Equipment.......................................................


Accumulated DepreciationBuildings and Equipment .
Cash .....................................................................................
Loss on Exchange of Buildings and Equipment .............
To reverse entry made incorrectly on
Lakeshores books.
Buildings and Equipment (new) ............................................
Accumulated DepreciationBuildings and Equipment......
Cash..........................................................................................
Loss on Exchange of Buildings and Equipment
($40,000 $30,000)..............................................................
Buildings and Equipment (old)..........................................
To record exchange of building.

118,000
110,000
6,000
2,000

24,000
110,000
6,000
10,000
150,000

No entry required. Because the assets are dissimilar, the entire gain on the exchange is recognized and the entry made is correct.

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468

1165. (Concluded)
(e) Cash..........................................................................................
Intangible Assets ................................................................
To reverse incorrect entry.
Patent (new).............................................................................
Accumulated Amortization.....................................................
Loss on Exchange of Patents ................................................
Patent (old) ..........................................................................
Cash .....................................................................................
To record exchange of patents.

1,000
1,000
4,000
6,000
3,000
12,000
1,000

1166.
2013
Mar. 15 Equipment (new) ..............................................................
Accumulated DepreciationEquipment .......................
Equipment (old)............................................................
To record exchange of three small lathes for a
large lathe. No gain recognized because the
transaction has no commercial substance.
June 1 Land...................................................................................
Common Stock.............................................................
Paid-ln Capital in Excess of Par .................................
To record purchase of land with common stock,
market value, $75 per share.

15,000
13,000
28,000

240,000

July 15 Cash ..................................................................................


35,000
Equipment.........................................................................
120,000
Accumulated DepreciationMachinery ........................
38,000
Machinery .....................................................................
Land ..............................................................................
Gain on Exchange of Assets ......................................
To record acquisition of new earth-moving
equipment in exchange for various assets.
Gain is recognized because the gain has
commercial substance.
*Market value of land and molding machine less their
book value equals gain: $155,000 $122,000 = $33,000.

3,200
236,800

50,000
110,000
33,000*

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Chapter 11

469

1166. (Concluded)
Aug. 15 Patent ................................................................................
Franchise ..........................................................................
Copyright ..........................................................................
Accumulated DepreciationMachinery ........................
Machinery .....................................................................
Gain on Exchange of Assets ......................................
To record acquisition of patent, franchise, and
copyright in exchange for milling machines.

7,200*
7,200*
3,600*
9,000
17,000
10,000

*Market value of two milling machines: $18,000


Ratio of market values for acquired assets:
Patent and franchise are equal. Copyright is 50% of patent
or franchise value
Let x = patent; x also equals franchise, and 0.5x equals copyright
x + x + 0.5x = $18,000
2.5x = $18,000
x = $7,200 cost assigned to patent and franchise
0.5x = $3,600 cost assigned to copyright
Nov. 1 Machinery (new) ...............................................................
Accumulated DepreciationMachinery ........................
Machinery (old) ............................................................
Gain on Exchange of Assets ......................................
To record exchange of packaging machines.
Indicated gain is recognized because the
transaction is deemed to have commercial
substance.

60,000
52,000
72,000
40,000

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470

1167.
1.

Hedlund Corporation
Depreciation and Amortization Expense
For the Year Ended December 31, 2013

Building:
Book value 1/1/2013 ($1,200,000 $263,100) .........
$ 936,900
150% declining-balance rate
[(100%/25) 1.5] .....................................................

6%
Total depreciation on building ...........................
$ 56,214
Machinery and equipment:
Balance, 1/1/2013 ...................................................... $900,000
Deduct: Machine destroyed by fire .........................
23,000 $ 877,000

10% $ 87,700
Depreciation ..............................................................
Machine destroyed by fire, 4/1/2013........................
$ 23,000
Depreciation from 1/1 to 4/1/2013 (0.10 3/12) ......
2.5%
575
Purchased 7/1/2013...................................................
$ 310,000
Depreciation from 7/1 to 12/31/2013
(0.10 6/12) .............................................................

5%
15,500
Total depreciation on machinery and
equipment.......................................................
$103,775
Automotive equipment:
Depreciation on $115,000 balance, 1/1/2013 ..........
$ 18,000
Deduct depreciation on car traded in, 1/2/2013
(SYD 3rd year 2/10 $18,000) ...............................
3,600 $ 14,400
Car purchased, 1/2/2013...........................................
$ 24,000
Depreciation SYD 1st year .......................................

4/10
9,600
Total depreciation on automotive equipment ..
$ 24,000
Leasehold improvements:
Cost, 5/1/2013 ............................................................
$ 168,000
Amortization period (5/1/2013 to 12/31/2019) .........
80 mos.
Amortization per month ...........................................
$ 2,100
Amortization for 2013 (5/1 to 12/31/2013) ...............
8 mos.
Total amortization on leasehold improvements
$ 16,800
Total depreciation and amortization expense
for 2013 .........................................................................
$200,789

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Chapter 11

471

1167. (Continued)
Hedlund Corporation
Accumulated Depreciation and Amortization
December 31, 2013
Accumulated depreciationbuildings at 12/31/2013:
Balance, 1/1/2013 ..................................................................................
Depreciation for 2013 ...........................................................................
Balance, 12/31/2013 ..............................................................................
Accumulated depreciationmachinery and equipment at 12/31/2013:
Balance, 1/1/2013 ..................................................................................
Depreciation for 2013 ...........................................................................
Deduct: Machine destroyed by fire (5 10% $23,000)....................
Balance, 12/31/2013 ..............................................................................
Accumulated depreciationautomotive equipment at 12/31/2013:
Balance, 1/1/2013 ..................................................................................
Depreciation for 2013 ...........................................................................

$263,100
56,214
$319,314
$250,000
103,775
$353,775
11,500
$342,275

Deduct: Car traded in ($18,000 $5,400)............................................


Balance, 12/31/2013 ..............................................................................

$ 84,600
24,000
$108,600
12,600
$ 96,000

Accumulated amortizationleasehold improvements at 12/31/2013:


Amortization for 2013 ...........................................................................
Balance, 12/31/2013 ..............................................................................
Total accumulated depreciation and amortization at 12/31/2013

$ 16,800
$ 16,800
$774,389

2.

Hedlund Corporation
Gain or Loss from Disposal of Assets
For the Year Ended December 31, 2013

Gain on machine destroyed by fire:


Insurance recovery ..............................................................
Book value of machine destroyed
[$23,000 (5 0.10 $23,000)] .......................................
Loss on car traded in on new car purchase:
Book value of car traded in.................................................
Trade-in allowed ($24,000 $20,000) .................................
Net gain on asset disposals for 2013.................................

$15,500
11,500
$ 5,400
4,000

$ 4,000
(1,400)
$ 2,600

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Chapter 11

472

1167. (Concluded)
3.

Hedlund Corporation
Noncurrent Operating Assets Section of Balance Sheet
December 31, 2013

Land ...............................................
Buildings .......................................
Machinery and equipment ...........
Automotive equipment.................
Leasehold improvements ............
Totals ..........................................

Cost
$ 150,000
1,200,000
1,187,000*
121,000
168,000
$2,826,000

Accumulated
Depreciation
and Amortization
$319,314
342,275
96,000
16,800
$774,389

Explanations of Amounts
*Machinery and equipment at 12/31/2013:
Balance, 1/1/2013 ...............................................................................
Purchased, 7/1/2013 ($280,000 + $5,000 + $25,000)........................
Deduct: Machine destroyed by fire 4/1/2013 ...................................
Balance, 12/31/2013 ...........................................................................

Book
Value
$ 150,000
880,686
844,725
25,000
151,200
$2,051,611

$ 900,000
310,000
$1,210,000
23,000
$1,187,000

Automotive equipment at 12/31/2013:


Balance, 1/1/2013 ...............................................................................
Car purchased, 1/2/2013....................................................................
Deduct: Car traded in ........................................................................
Balance, 12/31/2013 ...........................................................................

$ 115,000
24,000
$ 139,000
18,000
$ 121,000

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473

1168.
Oteron Company
Depreciation and Amortization Expense
For the Year Ended December 31, 2013
Land improvements:
Cost .......................................................................................
Straight-line rate (15 years).................................................
Annual depreciation ............................................................
Depreciation on land improvements for 2013
(4/6 to 12/31/2013, or 9 months) .................................
Buildings:
Carrying amount, 1/1/2013 ($1,500,000 $320,500)..........
Building acquired 1/6/2013..................................................
Total amount subject to depreciation ................................
150% declining-balance rate [(100%/30) 1.5]..................
Depreciation on buildings for 2013 ..............................
Machinery and equipment:
Balance, 1/1/2013 .................................................................
Straight line (12 years) ........................................................
Purchased 7/1/2013..............................................................
Depreciation for 2013 (12 years).........................................

$ 210,000

15
$ 14,000

9/12

$ 1,179,500
600,000
$ 1,779,500

5%
$ 88,975
$ 825,000

12
$ 315,000

12
$ 26,250

6/12

Depreciation on machinery and equipment


for 2013.........................................................................
Automobiles and trucks:
Carrying amount, 1/1/2013 ($146,000 $94,600)...............
Deduct: Carrying amount, 1/1/2013 on
truck sold 9/30/2013 ($10,841 + $2,502) ..........................
Amount subject to depreciation .........................................
150% declining-balance rate [(1.00/6) 1.5]......................
Automobile purchased 8/30/2013 .......................................
Depreciation for 2013 (0.25 4/12) .....................................
Truck sold 9/30/2013depreciation for 2013
(1/1 to 9/30/2013) ...............................................................
Depreciation on automobiles and trucks for 2013......
Leasehold improvements:
Carrying amount, 1/1/2013 ($205,000 $102,500).............
Amortization period (1/1/2013 to 12/31/2017) ....................
Amortization of leasehold improvements for 2013 ..........
Total depreciation and amortization expense for 2013 .........
*Limited to total 8-year useful life of leasehold improvement.

$ 10,500

$ 68,750

13,125
$ 81,875

51,400

13,343
38,057
25%
18,000
8.33%

9,514
1,500

2,502
$ 13,516
$ 102,500
5 years*
$ 20,500
$ 215,366

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474

1169.
1.

The correct answer is b. The total cost of the mineral mine will include the
$2,820,000 spent to acquire the mine and the $360,000 in development costs for a
total of $3,180,000. This will be reduced by the estimated recoverable value of the
property of $300,000 for a net cost of $2,880,000. Since 1,200,000 tons are
expected to be extracted, depletion will be $2,880,000/1,200,000, or $2.40 per ton.
The depletion on 60,000 tons extracted in 2013 will be 60,000 $2.40, or $144,000.

2.

The correct answer is b. Under double-declining-balance depreciation over a


5-year life, depreciation on the $50,000 machine would have been 40% or $20,000
in the first year, and 40% of the remaining $30,000 or $12,000 in the second year,
for a total of $32,000. The remaining $18,000 would be depreciated straight-line
over the remaining three years at the rate of $6,000 per year. As a result, after the
first three years, accumulated depreciation would have been $32,000 + $6,000, or
$38,000.

1170.
1.

For each depreciation method, the total amount of tax reduction over the 5-year
life of the equipment is $170,000 ($425,000 0.40). Different depreciation methods change the timing of the recognition of the depreciation but do not affect the
total amount of depreciation.

2.

2013
2014
2015
2016
2017
2018
Total

PV Factor
Table ll
i = 10%
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645

Straight Line
Depr. Tax
Present
Savings
Value
$ 17,000*
$ 15,455
34,000
28,098
34,000
25,544
34,000
23,222
34,000
21,111
17,000
9,597
$170,000
$123,027

COMPUTATIONS:
* $170,000/5 = $34,000 1/2 year = $17,000
** $170,000 0.40 = $68,000 1/2 year = $34,000

$136,000 0.40 = $54,400


$81,600 0.40 = $32,640
$48,960 0.40 = $19,584

Relates to Expanded Material.

200% Declining Balance


Depr. Tax
Present
Savings
Value
$ 34,000**
$ 30,909
54,400
44,956
32,640
24,522
19,584
13,376
19,584
12,160
9,792
5,528
$ 170,000
$ 131,451

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Chapter 11

1170.
3.

475

(Concluded)

Tax accounting and financial accounting are used for different purposes. In the
Thor Power Tool case (1979), the Supreme Court stated:
The primary goal of financial accounting is to provide useful information to management, shareholders, creditors, and others
properly interested; the major responsibility of the accountant is
to protect these parties from being misled.
In addition, Congress frequently uses the tax code to encourage or discourage
certain behaviors. Accelerated depreciation is allowed for tax purposes because
Congress wishes to increase the present value of the depreciation deductions
and thus encourage investment. This is one case in which a firm can easily justify using different accounting methods for taxes and for financial accounting.

Relates to Expanded Material.

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CASES
Discussion Case 1171
Both of these arguments demonstrate common misunderstandings as to the nature of depreciation. Depreciation is a cost allocation procedure, not a valuation technique. Thus, even though the assets of
Guzman Co. may be understated due to inflation, current GAAP does not recognize changing prices in
the basic financial statements. If valuation data are found to be more useful to users than cost allocation
depreciation, there would be justification for using techniques other than cost allocation. Even though
Liebnitz spends considerable money for repairs, the basic asset still has a limited life, and the original
cost must be allocated against revenue.
This case provides a vehicle for class discussion as to the exact nature of depreciation under current
GAAP. Because there are other possible ways to look at depreciation, students should be made aware of
various approaches.

Discussion Case 1172


The FASB has concluded that an entity should recognize an impairment loss only when the undiscounted
sum of estimated future cash flows from an asset is less than the carrying amount of the asset and that
the impairment loss should be measured based on the present value of estimated future cash flows from
the asset. In this case, the carrying value of the building at January 1, 2013, is $3,750,000.
($5,000,000/40 years = $125,000 depreciation per year, or $1,250,000 for the 10-year period 2003
2012.) If it is assumed the building can be rented for $240,000 over the entire 30-year remaining life of
the building, the undiscounted sum of the estimated future cash flows of $7,200,000 ($240,000 30)
suggests that no impairment write-down is necessary. If it is assumed that the building can be rented for
only 10 years, the undiscounted future cash flows sum to only $2,400,000, and an impairment write-down
is necessary. The amount of the write-down would be based on the present value of the expected future
cash flows of $1,474,696 (PMT = $240,000, N = 10, I = 10%). The difference of approximately $2.275
million is an estimate of the impairment loss.
There are several uncertainties in the case that add complexities to Julies assignment. Because the
building is leased for only 10 years, there is no assurance that the entire 30-year period should be used in
the computation of the impairment. Julie should review the renewal clause in the lease for any unusual
provisions. Because there is the possibility that Ferris Bueller may use the building again for operating
purposes at the end of the 10-year period, the question of permanent impairment is more uncertain. Perhaps the buildings value would exceed the rental value if it were again used as a manufacturing facility.
The other possibility is that the building could be sold at the end of the 10-year period. Market values for
real estate should also be reviewed to determine any impairment computation.
This case provides a basis for a good class discussion on how uncertainties in the area of long-lived operating assets make resolution of issues such as impairment very complex. For Julie Ramos to make a
specific recommendation, she must make certain assumptions about the future. If Ferris Bueller does not
want to write the asset down, it could refute the assumptions and thus provide justification for retaining
the $3,750,000 book value. Students should be encouraged to explore the ramifications of this complex
area.

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Chapter 11

477

Discussion Case 1173


(a)

Arguments for straight-line:


1. Easy to apply.
2. Same depreciation charge each year.
3. Most commonly used method.
4. Easily understood by users.
Arguments against straight-line:
1. Usually different from that used on tax returns, thus requiring interperiod tax allocation.
2. May not follow pattern of use of asset.

(b) Arguments for productive-output:


1. Is directly related to use of asset.
2. Produces better matching of costs against revenues than other methods.
Arguments against productive-output:
1. Requires estimate of number of units asset will produce, which is more difficult to estimate than
number of years.
2. More difficult to apply than some others because numerator changes each year.
3. Requires accurate records of number of units produced.
4. If asset is used to produce different kinds of items, requires weighting different items in some
fashion to arrive at depreciation percentage. Because this machine performs only one function,
this is not a serious objection for this case.
(c)

Arguments for sum-of-the-years-digits:


1. Produces a declining pattern of depreciation that is consistent with the pattern of use for many
assets.
2. Compared with other declining patterns, allocates full cost without need to change methods.
3. Permits applying a predetermined percentage against original costeasier to apply than doubledeclining-balance.
Arguments against sum-of-the-years-digits:
1. Not as commonly used as double-declining-balance.
2. More complex to apply than straight-line.
3. Misunderstood by users.

Discussion Case 1174


This case is designed to let students explore the amortization question without relying on the FASB to
provide the answers. Resourceful students may learn that FASB ASC Subtopic 926-20 (Entertainment
FilmsOther AssetsFilm Costs) requires that the costs to produce a motion picture should be capitalized and amortized. The amortization method mandated is not based on an estimate of useful life but is
based on an estimate of total expected gross revenues from the film. Film production cost amortization in
any given year is accomplished by amortizing the total production cost in the same ratio that current gross
revenue bears to anticipated total gross revenue. For example, assume that a film cost $40 million to produce and that total expected gross revenues are $100 million. During the first year after its production, the
film generates total gross revenue of $25 million. Because the film generated 25% ($25 million/$100 million) of total expected gross revenue during the year, 25% of the production cost of the film, or $10 million, should be shown as amortization expense for the year.

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Chapter 11

478

Discussion Case 1174

(Concluded)

Conceptually, this method is very similar to the productive-output method described in the text, and students should note that this method is superior to the straight-line method because revenue is usually received in an uneven pattern. The estimated total gross revenue can be thought of as the estimate of total
productive output for the film. Forecasting motion picture gross revenues is certainly a subjective process,
but it is probably no more subjective than estimating the economic useful life of a patent or trademark
and certainly no more subjective than estimating the economic life of that same motion picture. Because
of the inherent uncertainty involved, any film cost allocation mechanism will involve a substantial amount
of subjectivity; however, management does not have complete latitude in making the total gross revenue
estimates. Just as with useful-life estimates, the choice is somewhat constrained by the degree with
which the firms auditors are comfortable with the estimate.

Discussion Case 1175


The first year of a new management is a unique opportunity for making asset write-offs and restructuring
charges because the negative impact on earnings will be blamed on the previous management. Managements are typically replaced because of dissatisfaction with their performance. Accordingly, restructuring and reevaluations of the assets are expected. In calculating these charges, the new management has
no incentive to understate their magnitude. When faced with a difficult decision of whether or not to write
off an asset, new management would always have an incentive to write it off in the first year when old
management will be blamed rather than waiting until subsequent years when the new management will
be held responsible for poor earnings.

Discussion Case 1176


An increase in estimated useful life would decrease depreciation expense for the year, increase net income, and increase the book value of the asset (above what it would have been without the change in
useful life). The effects on net income can be quite significant.
The most theoretically correct reason for increasing the estimated useful life of an asset is that new technology has made it possible to prolong the life of the asset, or new engineering studies reveal that the
previous estimate understated the life of the asset. For example, on July 1, 1986, Delta Air Lines changed
the depreciation period for its flight equipment from 10 years to 15 years. This change had the effect of
decreasing Deltas depreciation expense for the year ended June 30, 1987, by $130 million and increasing Deltas net income for the year by $69 milliona 35% increase.
In practice, a reason often given for increasing an estimated useful life is that the change will bring the
firms accounting practices more in line with other firms in the industry. For example, in 1987 General Motors increased the estimated service lives of its plant, equipment, and special tools, bringing GMs estimates more in line with Chrysler and Ford. The increases reduced depreciation expense for 1987 by $1.2
billion, resulting in an increase in operating income of 93%.
Clearly, these useful-life changes can have an enormous impact on earnings. Accordingly, it is natural to
suspect that at least some of these changes are motivated by managements desire to improve reported
earnings.

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Chapter 11

479

Case 1177
1.

The following information was extracted from Note 2 Summary of Significant Accounting Policies to
Disneys 2009 financial statements:
Parks, resorts and other property are carried at historical cost. Depreciation is computed on the
straight-line method over estimated lives as follows:
Attractions
Buildings and improvements
Leasehold improvements
Land improvements
Furniture, fixtures and equipment

2540 years
2040 years
life of lease or asset life if less
2040 years
325 years

Film and television production, participation and residual costs are expensed based on the ratio
of the current periods revenues to estimated remaining total revenues (Ultimate Revenues) from
all sources on an individual production basis. Ultimate Revenues for film productions include revenues that will be earned within ten years from the date of the initial theatrical release. For television network series, we include revenues that will be earned within ten years from delivery of the
first episode, or if still in production, five years from delivery of the most recent episode, if later.
2.

In order to find out Disneys total depreciation and amortization expense for 2009, one has to look at
the statement of cash flows. Depreciation and amortization total $1,631 million.

3.

The following comes from Note 8 on Film and Television Costs:


Based on managements total gross revenue estimates as of October 3, 2009, approximately
84% of unamortized film and television costs for released productions (excluding amounts allocated to acquired film and television libraries) are expected to be amortized during the next three
years...The Company expects to amortize, based on current estimates, approximately $1.5 billion
in capitalized film and television production costs during fiscal 2010.

4.

The reason for the difference is that since the Pixar acquisition, Disney has disposed of some of its
other assets that had goodwill associated with them. When Disney sells assets that have goodwill allocated to them, that goodwill is removed from Disneys books, and this is why goodwill is only
$21.683 billion in 2009.

Case 1178
1.

Depreciable cost for 1998 was as follows:


Flight equipment held all of 1998 ..................................................
Acquired during year [($11,180 $9,619) 1/2] ..........................
Total depreciable cost for 1998 .................................................

$ 9,619.00
780.50
$10,399.50

Estimated depreciation expense for 1998:


[$10,399.5 $10,399.5(0.05)] 20 years = $494
[$10,399.5 $10,399.5(0.05)] 25 years = $395
2.

The assumption of no disposals during 1998 is not reasonable. The change in accumulated depreciation during the year is $385 ($3,895 $3,510). Because this is significantly less than the estimated depreciation expense for the year ($494), it appears that there have been some disposals.

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com
Chapter 11

480

Case 1179
To:
FASB Members
From:
New Research Staff Member
Subject: DepreciationOne Method Only
Recently, a recommendation was received from a financial analysts group urging the FASB to address
the area of depreciation accounting with the objective of designating just one method as acceptable. Below are reasons for and against adding such a project to the FASBs agenda.
For:

Current GAAP allows companies many choices of depreciation method. This diversity impairs the
comparability of financial statements.
Choice of depreciation method gives managers one more way to manipulate the reported financial
statement numbers.

Against:

All assets are not used in the same way. Some are used uniformly throughout their useful lives; others are used more heavily in early years. GAAP should have the flexibility to allow for this difference
in circumstances.

FASB resources are limited. Depreciation accounting is an area that has been settled and quiet for
years. The Board should work on more pressing matters.

Over 90% of large firms use straight-line depreciation. Why worry about the small number who do
not?

Case 1180
There are two extreme possible courses of action:
1.

Do nothing to the depreciation numbers. Present the financial statements, as they are, to the employee committee. Some risk is inherent in this strategy because if the employee committee discovers the questionable depreciation calculations, the atmosphere in the negotiations will turn nasty
very quickly. In addition, doing nothing when you know that the numbers are deceiving is an unethical approach.

2.

Insist that your partner revise the financial statements using more realistic depreciation calculations.
Refuse to cooperate with any attempt to deceive the employee committee. Of course, this approach
runs the risk of angering your partner and long-time friend, perhaps harming your entire business relationship.
The dilemma here is that two important relationships of trust must be maintainedyour relationship
with the employees and your relationship with your partner. Neither of the two courses of action described above preserves both of those relationships.
A possible alternative is to redirect the focus of the negotiations from the reported financial numbers
back to the real issuewhat is a fair wage for your employees. It seems that, in this case, the most
relevant information is comparative wage data for employees in other firms in the area who do similar work. In addition, you and your partner must consider what costs there are in potentially losing a
number of your existing employees. Focusing on these issues, rather than arguing about financial
statement assumptions, would probably be more fruitful for both sides of the negotiation.

Case 1181
Solutions to this problem can be found on the Instructors Resource CD-ROM or downloaded from the
Web at www.cengage.com/accounting/stice.