Exercise 11-1
Exercise 11-1
1. Straight-line:
$22,000 - 2,000
= $4,000 per year
5 years
2. Sum-of-the-years’ digits:
| | | | | | |
| | | | | | |
| |Depreciable | |Depreciation | | |
|Year |Base |X |Rate per Year |= |Depreciation |
|2003 |$20,000 | | | |$6,667 |
|2004 |20,000 | | | |5,333 |
|2005 |20,000 | | | |4,000 |
|2006 |20,000 | | | |2,667 |
|2007 |20,000 | | | | 1,333 |
| Total | | | | |$20,000 |
| | | | | | |
Exercise 11-1 (concluded)
3. Double-declining balance:
Straight-line rate of 20% (1 ÷ 5 years) x 2 = 40% DDB rate.
| | | | | |
| |Book Value Beginning |Depreciation | | |
| |of Year X |Rate per | |Book Value |
|Year | |Year = |Depreciation |End of Year |
|2003 |$22,000 |40% |$ 8,800 |$13,200 |
|2004 | 13,200 |40% | 5,280 | 7,920 |
|2005 | 7,920 |40% | 3,168 | 4,752 |
|2006 | 4,752 |40% | 1,901 | 2,851 |
|2007 | 2,851 |* | 851 * | 2,000 |
|Total | | |$20,000 | |
| | | | | |
|* Amount necessary to reduce book value to residual value | | | | |
| | | | | |
4. Units-of-production:
$22,000 - 2,000
= $.20 per mile depreciation rate
100,000 miles
| | | | | |
| | Actual |Depreciation | |Book Value |
| |Miles |Rate per | |End of |
|Year |Driven X |Mile = |Depreciation |Year |
|2003 | 22,000 |$.20 |$4,400 |$17,600 |
|2004 | 24,000 | .20 | 4,800 | 12,800 |
|2005 | 15,000 | .20 | 3,000 | 9,800 |
|2006 | 20,000 | .20 | 4,000 | 5,800 |
|2007 | 21,000 | * | 3,800 * | 2,000 |
|Totals |102,000 | |$20,000 | |
| | | | | |
|* Amount necessary to reduce book value to residual value | | | | |
| | | | | |
Exercise 11-2
1. Straight-line:
$115,000 - 5,000
= $11,000 per year
10 years
2. Sum-of-the-years’ digits:
Sum-of-the-digits is {[10 (10 + 1)]÷2} = 55
2003 $110,000 x 10/55 = $20,000
2004 $110,000 x 9/55 = 18,000
3. Double-declining balance:
Straight-line rate is 10% (1 ÷ 10 years) x 2 = 20% DDB rate
2003 $115,000 x 20% = $23,000
2004 ($115,000 - 23,000) x 20% = $18,400
4. One hundred fifty percent declining balance:
Straight-line rate is 10% (1 ÷ 10 years) x 1.5 = 15% rate
2003 $115,000 x 15% = $17,250
2004 ($115,000 - 17,250) x 15% = $14,663
5. Units-of-production:
$115,000 - 5,000
= $.50 per unit depreciation rate
220,000 units
2003 30,000 units x $.50 = $15,000
2004 25,000 units x $.50 = $12,500
Exercise 11-8
Requirement 1
Cost of the equipment:
Purchase price $135,000
Freight charges 1,000
Installation charges 4,000
$140,000
Straight-line rate of 12.5% (1 ÷ 8 years) x 2 = 25% DDB rate.
| | | | | | | |
| |Book Value Beginning of| | | | | |
| |Year | |Depreciation | | |Book Value |
|Year | |X |Rate per Year |= |Depreciation |End of Year |
|2003 |$140,000 | |25% | |$ 35,000 |$105,000 |
|2004 | 105,000 | |25% | | 26,250 | 78,750 |
|2005 | 78,750 | |25% | | 19,688 | 59,062 |
|2006 | 59,062 | |25% | | 14,766 | 44,296 |
|2007 | 44,296 | |* | | 3,574 | 40,722 |
|2008 | 40,722 | |* | | 3,574 | 37,148 |
|2009 | 37,148 | |* | | 3,574 | 33,574 |
|2010 | 33,574 | |* | | 3,574 | 30,000 |
|Total | | | | |$110,000 | |
| | | | | | | |
|* Switch to straight-line in 2007: | | | | | | |
| | | | | | | |
|Straight-line depreciation: | | | | | | |
| | | | | | | |
|$44,296 - 30,000 | | | | | | |
|= $3,574 per year | | | | | | |
|4 years | | | | | | |
| | | | | | | |
Requirement 2
For plant and equipment used in the manufacture of a product, depreciation is a product cost and is included in the cost of inventory. Eventually, when the product is sold, depreciation will be included in cost of goods sold.
Exercise 11-11
Requirement 1
a. To record the purchase of a patent.
January 1, 2001
Patent 600,000
Cash 600,000
To record amortization on the patent.
December 31, 2001 and 2002
Amortization expense ($600,000 ÷ 10 years) 60,000
Patent 60,000
b. To record the purchase of a franchise.
2003
Franchise 500,000
Cash 500,000
c. To record research and development expenses.
2003
Research and development expense 380,000
Cash 380,000
Exercise 11-11 (concluded)
Year-end adjusting entries
Patent: To record amortization on the patent.
December 31, 2003
Amortization expense (determined below) 96,000
Patent 96,000
Calculation of annual amortization after the estimate change:
($ in thousands)
$600 Cost
$60 Old annual amortization ($600 ÷ 10 years)
x 2 years 120 Amortization to date (2001-2002)
480 Unamortized cost (balance in the patent account)
÷ 5 Estimated remaining life
$ 96 New annual amortization
Franchise: To record amortization of franchise.
December 31, 2003
Amortization expense ($500,000 ÷ 10 years) 50,000
Franchise 50,000
Requirement 2
Intangible assets:
Patent $384,000 [1]
Franchise 450,000 [2]
Total intangibles $834,000
[1] $480,000 - 96,000
[2] $500,000 - 50,000
Exercise 11-17
Requirement 1
Correct Incorrect
(Should Have Been Recorded) (As Recorded)
2000 Machine 350,000 Expense 350,000
Cash 350,000 Cash 350,000
2000 Expense 70,000 Depreciation entry omitted
Accum. deprec. 70,000
2001 Expense 70,000 Depreciation entry omitted
Accum. deprec. 70,000
2002 Expense 70,000 Depreciation entry omitted
Accum. deprec. 70,000
During the three-year period, depreciation expense was understated by $210,000, but other expenses were overstated by $350,000, so net income during the period was understated by $140,000, which means retained earnings is currently understated by that amount.
During the three-year period, accumulated depreciation was understated, and continues to be understated by $210,000.
To correct incorrect accounts
Machine 350,000
Accumulated depreciation ($70,000 x 3 years) 210,000
Retained earnings ($350,000 – 210,000) 140,000
Requirement 2
Correcting entry:
Assuming that the machine had been disposed of, no correcting entry would be required because, after five years, the accounts would show appropriate balances.
Exercise 11-18
Requirement 1
Book value $6.2 million
Fair value 3.5 million
Impairment loss 2.7 million
Requirement 2
Because the undiscounted sum of future cash flows of $6.5 million exceeds book value of $6.2 million, there is no impairment loss.
Exercise 11-19
Requirement 1
Determination of implied goodwill:
Fair value of Centerpoint, Inc. $220 million
Fair value of Centerpoint’s net assets (excluding goodwill) 200 million
Implied value of goodwill $ 20 million
Measurement of impairment loss:
Book value of goodwill $50 million
Implied value of goodwill 20 million
Impairment loss $30 million
Requirement 2
Because the fair value of the reporting unit, $270 million, exceeds book value, $250 million, there is no impairment loss.
Problem 11-10
a. This is a change in estimate.
No entry is needed to record the change.
2003 adjusting entry:
Depreciation expense (determined below) 37,500
Accumulated depreciation 37,500
Calculation of annual depreciation after the estimate change:
$1,000,000 Cost
$25,000 Old depreciation ($1,000,000 ÷ 40 years)
x 3 yrs (75,000) Depreciation to date (2000-2002)
925,000 Undepreciated cost
(700,000) New estimated salvage value
225,000 To be depreciated
÷ 6 Estimated remaining life (6 years: 2003-2008)
$ 37,500 New annual depreciation
A disclosure note should describe the effect of a change in estimate on income before extraordinary items, net income, and related per-share amounts for the current period.
Problem 11-10 (concluded)
b. This is a change in accounting principle.
To record the change:
Accumulated depreciation (determined below) 72,000
Cumulative effect of accounting change * 72,000
*Cumulative effect of the change: ($ in 000s)
SYD Straight-line
1999 depreciation $60 ($330 x 10/55) $33 ($330 ÷ 10)
2000 depreciation 54 ($330 x 9/55) 33 ($330 ÷ 10)
2001 depreciation 48 ($330 x 8/55) 33 ($330 ÷ 10)
2002 depreciation 42 ($330 x 7/55) 33 ($330 ÷ 10)
Accumulated depreciation and
1999-02 reduction in income $204 ( ($132
difference
$72
2003 adjusting entry:
Depreciation expense ($330,000 ÷ 10 years) 33,000
Accumulated depreciation 33,000
The cumulative income effect, net of income taxes, is reported as a separate item of income between extraordinary items and net income. The effect of the change on certain key income numbers should be disclosed for the current period and on a pro forma basis for the financial statements of all prior periods that are included for comparison with the current financial statements. Also, the nature of and justification for the change should be described in the disclosure notes.
c. This is a change in accounting principle.
Because the change will be effective only for assets placed in service after the date of change, there would be no cumulative effect on prior years’ earnings because the change doesn’t affect assets depreciated in prior periods.
The nature of and justification for the change should be described in the disclosure notes. Also, the effect of the change on the current period’s income before extraordinary items, net income, and related per-share amounts should be disclosed.
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