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Chapter 7

Plant Assets & Intangibles


Short Exercises
(5 min.) S 7-1
1.

Property and Equipment, at Cost


Millions
Aircraft

$ 2,392

Package handling and ground support


equipment

12,229

Computer and electronic equipment.

28,159

Vehicles.

581

Facilities and other.

1,432

Total cost..
Less: Accumulated depreciation.
Net property and equipment

2.

44,793
(14,900)
$29,893

Cost
= $44,793 million
Book value = $29,893 million

Book value is less than cost because accumulated depreciation is subtracted from
cost to compute book value.

Chapter 7

Plant Assets & Intangibles

(5 min) S 7-2

Land ($210,000 .30*)..


Building ($210,000 .10)..
Equipment ($210,000 .60).
Note Payable..

63,000
21,000
126,000
210,000

*Supporting computations:
Current
Market
Value

Percent of Total

Land.

$ 66,000

$66,000 / $220,000

30.0%

Building...

22,000

$22,000 / $220,000

10.0%

Equipment..

132,000

$132,000 / $220,000

60.0%

Total.

$220,000

100.0%

(5 min.) S 7-3
Income Statement
Revenues

CORRECT

Expenses

UNDERSTATED

Net income

OVERSTATED

(10 min.) S 7-4


1. First-year depreciation:
Straight-line ($44,400,000 $5,400,000) / 5 years.............
Units-of-production [($44,400,000 $5,400,000) /

$ 7,800,000

6,500,000 miles] 725,000 miles..


Double-declining-balance ($44,400,000 40%).................

$ 4,350,000
$17,760,000

Second-year depreciation:
Straight-line ($44,400,000 $5,400,000) / 5 years.............

$ 7,800,000

Units-of-production [($44,400,000 $5,400,000) /


6,500,000 miles] 1,225,000 miles................

$ 7,350,000

Double-declining-balance [($44,400,000 $17,760,000) .40%]


.

$10,656,000

2. Book value:

StraightLine
Cost
Less: Accumulated
Depreciation
Book value, Year 1..

$44,400,000

(7,800,000)
$36,600,000

Chapter 7

Units-ofProduction
$44,400,000

(4,350,000)
$40,050,000

DoubleDecliningBalance
$44,400,000

(17,760,000)
$26,640,000

Plant Assets & Intangibles

(10 min.) S 7-5


1. Double-declining-balance (DDB) depreciation offers the tax advantage for the
first year of an assets use. Because DDBs first-year depreciation is greater
than first-year depreciation under other methods, net income is lower. Lower net
income results in lower taxes and more cash that the taxpayer can invest in
order to earn a return.
2.
DDB depreciation..
Straight-line depreciation...
Excess depreciation tax deduction.
Income tax rate..
Income tax savings for first year..

$17,760,000
(7,800,000)
$ 9,960,000
.36
$ 3,585,600

(5-10 min.) S 7-6


First-year depreciation (for a partial year):
a. Straight-line (41,000,000 5,200,000) / 5 years
3/12
b. Units-of-production (41,000,000 5,200,000) /
5,200,000 miles 390,000 miles) or
2,683,200 if depletion per unit is rounded
c. Double-declining-balance (41,000,000 2/5
3/12)..

1,790,000

2,685,000

4,100,000

SL depreciation produces the highest net income (lowest depreciation). DDB


depreciation produces the lowest net income (highest depreciation).
(10 min.) S 7-7
Depreciation Expense Concession Stand......
Accumulated Depreciation Concession Stand

15,000
15,000

Depreciation for years 15:


$90,000 / 10 years = $ 9,000 per year
$9,000 5 years

= $45,000 for years 1-5

Assets remaining
depreciable
book value

(New) Estimated
useful life remaining

(New) Annual
depreciation

$90,000 $45,000

3 years

$15,000 per year

$45,000

(5-10 min.) S 7-8


1. ($67,850,000 $2,950,000) / 11 years 5 = $29,500,000
2.
2017
Jan. 1

Cash...........
Accumulated Depreciation...
Loss on Sale of Airplane...
Airplane.

Chapter 7

8,000,000
29,500,000
30,350,000
67,850,000

Plant Assets & Intangibles

(5-10 min.) S 7-9


1.

2.

Units-of-production depreciation method is similar to the method used to


calculate depletion.

Oil Inventory ($18* .8).


Oil Reserves...
*$18 = $234 / 13

Billions
14.4
14.4

Billions
3.

Cost of Oil Sold ($18 .2)


Oil Inventory..

3.6
3.6

(5-10 min.) S 7-10


Req. 1
Cost of goodwill purchased:
Millions
$8.2

Purchase price paid for Seacoast Snacks, Inc..............


Market value of Seacoast Snacks net assets:
Market value of Seacoast Snacks assets
Less: Seacoast Snacks liabilities
Market value of Seacoast Snacks net assets
Cost of goodwill

Req. 2

$12.0
(10.0)
2.0
$6.2

In future years, PTL, Inc. will determine whether its goodwill has been impaired. If
the goodwills value has not been impaired, there is nothing to record. But if
goodwills value has been impaired, PTL, Inc. will record a loss and write down the
book value of the goodwill.

(5 min.) S 7-11
(Dollar amounts in millions)
Return on assets
15%

=
=

Net income
$18

Average total assets


$120

(5 min.) S 7-12
2012 Return on assets

Net income

Average total assets

17.7%

$42,500

$240,000

2013 Return on assets

Net income

Average total assets

18.0%

$45,000

$250,000

(5 min.) S 7-13

Southeast Satellite Systems, Inc.


Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from investing activities:
7

Millions
Chapter 7

Plant Assets & Intangibles

Purchase of other companies.

$(15.0)

Capital expenditures.........

(8.0)

Proceeds from sale of North American operations......

13.0

Net cash (used for) investing activities.......

$(10.0)
(5 min.) S 7-14

Asset

a.
b.
c.
d.

Equipment
Trademark
Land
Factory
building

Book
Value
$160,000
$320,000
$56,000
$3 million

Estimated
Future Cash
Flows
$120,000
$420,000
$30,000
$3 million

Fair
Value
$100,000
$380,000
$28,000
$2 million

Impaired?
(Y or N)
Y
N
Y
N

Amount
of Loss
$60,000
-$28,000
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