Chapter 9
Chapter 12 Capital Assets and Goodwill
Questions
1. A capital asset is long-lived in that it has a service life of longer than one accounting period; it is used in the production or sale of products or services.
2. Land held for future expansion is classified as a long-term investment. It is not a capital asset because it is not being used in the production or sale of other assets or services.
3. The cost of a capital asset includes all normal, reasonable, and necessary costs of getting the asset in place and ready to use.
4. Land is an asset with an unlimited life and, therefore, is not subject to amortization. Land improvements have limited lives and are subject to amortization.
5. No. The Accumulated Amortization, Machinery account is a contra asset account with a credit balance that cannot be used to buy anything. Funds available for buying machinery would be shown on the balance sheet as liquid assets with debit balances. The balance of the Accumulated Amortization, Machinery account shows the portion of the machinery's original cost that has been charged to amortization expense, and gives some indication of how soon the asset will need to be replaced.
6. Repairs are made to keep a capital asset in normal, good operating condition, and should be charged to expense of the current period. Betterments are made to extend the service potential or the life of a capital asset beyond the original estimated life and are charged to the capital asset account.
7. Because the $75 cost of the capital asset is not likely to be material to the users of the financial statements, the materiality principle justifies charging it to expense.
8. WestJet amortizes its aircraft on the basis of flight hours, a units-of-production basis.
9. A company might sell or exchange an asset when it reaches the end of its useful life, or if it becomes inadequate or obsolete, or because the company has changed its business plans. An asset may be damaged or destroyed by fire or some other accident.
10. The process of allocating the cost of natural resources to expense is called amortization.
11. An intangible capital asset has no physical existence. Its value comes from the unique legal and contractual rights held by its owner. Although goodwill is an intangible asset, it is not an intangible capital asset.
12. Not usually, amortization of natural resources should be calculated on a units-of-production basis that relates to the natural resource that is being cut, pumped, or extracted.
13. Intangible assets are generally recorded at their cost and amortized over their predicted useful life. However, some costs are not included, such as the research and development costs leading up to a patent. The amortization period may not exceed 20 years according to current GAAP (unless it can be shown the benefits will extend past 20 years).
14. A business has goodwill when the price paid for a company being purchased exceeds the fair market value of this company’s net assets (assets minus liabilities) if purchased separately.
15. Goodwill is an intangible asset but it is not subject to amortization. Goodwill must be tested annually for impairment and adjusted if the results of the test indicate that there has been a decline in value.
Quick Study
QUICK STUDY 12-1 (5 MINUTES)
$18,000 + $180,000 + $3,000 + $600 = $201,600
Quick Study 12-2 (10 minutes)
1. (a) R
(B) C
(c) R
(d) C
2.
|(A) | | | |
|MAR. 15 |REPAIRS EXPENSE |120 | |
| | CASH | |120 |
| | TO RECORD REPAIRS. | | |
|(B) | | | |
|MAR. 15 |REFRIGERATION EQUIPMENT |40,000 | |
| | CASH | |40,000 |
| | TO RECORD CAPITAL EXPENDITURE. | | |
|© | | | |
|MAR. 15 |REPAIRS EXPENSE |200 | |
| | CASH | |200 |
| | TO RECORD REPAIRS. | | |
|(D) | | | |
|MAR. 15 |OFFICE BUILDING |175,000 | |
| | CASH | |175,000 |
| | TO RECORD CAPITAL EXPENDITURE. | | |
Quick Study 12-3 (10 minutes)
| |(a) |(b) |(c) |
| | |Ratio of Individual Appraised Value to Total Appraised |Cost Allocation |
|Capital Asset |Appraised Values |Value |(b) x Total Actual Cost |
| | |(a) ( Total Appraised Value | |
|Land |$ 320,000 |320,000 ( 500,000 = .64 or 64% |$ 345,6001 |
|Building | 180,000 |180,000 ( 500,000 = .36 or 36% | 194,4002 |
|Totals |$ 500,000 | |$ 540,000 |
| | | | |
1. 64% x 540,000 = 345,600
2. 36% x 540,000 = 194,400
|2011 | | | |
|Apr. 14 |Land |345,600 | |
| |Building |194,400 | |
| | Cash | |85,000 |
| | Notes Payable | |455,000 |
| | To record purchase of land and | | |
| |building. | | |
Quick Study 12-4 (10 minutes)
|TechCom |
|Partial Balance Sheet |
|October 31, 2011 |
|Assets |
|Current assets: |
| |Cash | |$ 9,000 | |
| |Accounts receivable |$16,400 | | |
| | Less: Allowance for doubtful accounts | 800 | 15,600 | |
| |Total current assets | | |$ 24,600 |
|Property, plant and equipment: |
| |Land | | $48,000 | |
| |Vehicles |$62,000 | | |
| | Less: Accumulated amortization | 13,800 |48,200 | |
| |Equipment |$25,000 | | |
| | Less: Accumulated amortization | 3,800 | 21,200 | |
| |Total property, plant and equipment | | |117,400 |
|Intangible assets: | | | |
| |Patent |$20,100 | | |
| | Less: Accumulated amortization, patent | 3,100 | | 17,000 |
|Total assets | | |$159,000 |
Quick Study 12-5 (10 minutes)
($55,900 – $1,900)/4 = $13,500/year
Quick Study 12-6 (10 minutes)
Rate per copy = ($45,000 – $5,000)/4,000,000 copies = $0.01/copy
| | |Annual Amortization |
|Year |Calculation | |
|2011 |$.01 × 650,000 |= |$6,500 |
|2012 |$.01 × 798,000 |= |7,980 |
|2013 |$.01 × 424,000 |= |4,240 |
|2014 |$.01 × 935,000 |= |9,350 |
|2015 |$.01 × 1,193,000 |= | 11,930 |
| | |$40,000 |
Quick Study 12-7 (10 minutes)
Annual rate of amortization = 2/5 = .40 or 40% per year
| | |Annual Amortization | |
|Year |Calculation | | |
|2011 |40% × $86,000 = |$34,400 | |
|2012 |40% × ($86,000 – $34,400) = |20,640 | |
|2013 |40% × ($86,000 – $34,400 – $20,640) = |12,384 | |
|2014 |40% × ($86,000 – $34,400 – $20,640 – $12,384) = |2,576 |* |
|2015 | | 0 | |
| | |$70,000 | |
* The calculation shows $7,430 of amortization but that amount would cause accumulated amortization to exceed the maximum allowed of cost less residual ($86,000 – $16,000 = $70,000). Therefore, the amortization for 2014 must be adjusted to $2,576.
Quick Study 12-8 (10 minutes)
| |2011 |2012 |
|a. |$5,000 |$6,000 |
|b. |$3,000 |$6,000 |
Calculations:
a. 60,000 - 0 = 6,000/year x 10/12 = 5,000
10 years
b. 6,000/year x 6/12 = 3,000
Quick Study 12-9 (10 minutes)
| |2011 |2012 |
|a. |$10,000 |$10,000 |
|b. |$6,000 |$10,800 |
Calculations:
a. 2/10 = .2 or 20%; 20% x 60,000 = 12,000 x 10/12 = 10,000 for 2011
20% x (60,000 – 10,000) = 10,000 for 2012
b. 20% x 60,000 = 12,000 x 6/12 = 6,000 for 2011
20% x (60,000 – 6,000) = 10,800 for 2012
Quick Study 12-10 (10 minutes)
| |2011 |2012 |
|a. |10,000 |14,000 |
|b. |10,000 |14,000 |
Calculations:
75,000 – 15,000 = 60,000/120,000 = $0.50 amortization expense per unit produced
$0.50 x 20,000 = $10,000 for 2011; $0.50 x 28,000 = $14,000 for 2012
NOTE: The units-of-production method is a useage-based method as opposed to a time-based method (such as straight-line and double-declining-balance) therefore partial periods do not affect the calculations.
Quick Study 12-11 (10 minutes)
[ ($35,720 – $11,8201) – $1,570]/ 72 years remaining = $3,190
1. ($35,720 – $4,200)/8 = $3,940/year × 3 years = $11,820
2. 10 – 3 = 7
Quick Study 12-12 (15 minutes)
|2014 | | | |
|Dec. 31 |Amortization Expense, Machinery |3,400 | |
| | Accumulated Amortization, Machinery | |3,400 |
| | To record revised amortization. | | |
Calculations:
REMAINING BOOK VALUE – RESIDUAL + BETTERMENT = 25,000 – 15,0001 – 5,000 + 12,000
Remaining Useful Life 8 – 3 = 5 years
= 3,400 revised amortization for 2014
1. 25,000 – 5,000 = 5,000 amortization/year for 2011 + 2012 + 2013 = $15,000
4 years accumulated
amortization
Quick Study 12-13 (10 minutes)
|a. | | | |
|2011 | | | |
|Oct. 1 |Accumulated Amortization, Equipment |39,000 | |
| |Cash |17,000 | |
| | Equipment | |56,000 |
| | To record sale of equipment. | | |
|b. | | | |
|Oct. 1 |Accumulated Amortization, Machinery |96,000 | |
| |Cash |27,000 | |
| | Machinery | |109,000 |
| | Gain on Disposal | |14,000 |
| | To record sale of equipment. | | |
|c. | | | |
|Oct. 1 |Accumulated Amortization, Truck |33,000 | |
| |Cash |11,000 | |
| |Loss on disposal |4,000 | |
| | Delivery truck | |48,000 |
| | To record sale of equipment. | | |
|d. | | | |
|Oct. 1 |Accumulated Amortization, Furniture |21,000 | |
| |Loss on disposal |5,000 | |
| | Furniture | |26,000 |
To record disposal of equipment.
Quick Study 12-14 (10 minutes)
|2011 | | | |
|Dec 31 |Accumulated Amortization, Automobile |13,500 | |
| |Computer* |5,750 | |
| | Automobile | |15,000 |
| | Cash | |2,750 |
| | Gain on Disposal | |1,500 |
| | To record exchange. | | |
*Computer = FV of assets given up = $2,750 + 3,000 = $5,750
Quick Study 12-15 (15 minutes)
a.
|2011 | | | |
|Mar. 1 |Accumulated Amortization, Machine (old) |36,000 | |
| |Machine (new) 1 |120,000 | |
| | Cash | |63,000 |
| | Machine (old) | |90,000 |
| | Gain on disposal2 | |3,000 |
| | To record exchange of machines. | | |
1. Machine (new) = Fair Value of Assets Given Up
= $63,000 + $57,000 = $120,000
2. Gain on Disposal = Proceeds – Book Value of Assets Given Up
= $120,000 – [($90,000 – $36,000) + $63,000] = $3,000
b.
|2011 | | | |
|Mar. 1 |Accumulated Amortization, Machine (old) |36,000 | |
| |Machine (new) 1 |111,000 | |
| |Loss on disposal2 |6,000 | |
| | Cash | |63,000 |
| | Machine (old) | |90,000 |
| | To record exchange of machines. | | |
1. Machine (new) = Fair Value of Assets Given Up
= $63,000 + $48,000 = $111,000
2. Loss on Disposal = Proceeds – Book Value of Assets Given Up
= $111,000 – [($90,000 – $36,000) + $63,000] = $6,000
Quick Study 12-16 (10 minutes)
|2011 | | | |
|a. | | | |
|May 4 |Mine |1,500,000 | |
| | Cash | |1,500,000 |
| | To record purchase of mine. | | |
| | | | |
|b. | | | |
|Dec. 31 |Amortization Expense, Mine |243,000* | |
| | Accumulated Amortization, Mine | |243,000 |
| | To record amortization on mine. | | |
*(1,500,000 – 150,000)/500,000 tonnes = $2.70/tonne × 90,000 tonnes
Quick Study 12-17 (10 minutes)
|Jan. 4 |Franchise |95,000 | |
| | Cash | |95,000 |
| | To record purchase of franchise. | | |
| | | | |
|Dec. 31 |Amortization Expense, Franchise |9,500 | |
| | Accumulated Amortization, Franchise | |9,500 |
| | To record amortization of franchise; | | |
| |$95,000/10 years = $9,500 per year | | |
Exercises
EXERCISE 12-1 (10 MINUTES)
|Invoice cost |$11,500 |
|Freight costs | 260 |
|Steel mounting | 795 |
|Assembly | 375 |
|Raw materials for testing | 30 |
|Less: discount ($11,500 × 2%) | 230 |
| Total acquisition costs |$12,730 |
Note: The $190 repairs are an expense and therefore not capitalized.
Exercise 12-2 (15 minutes)
Cost of land:
|Purchase price for land |$1,000,000 |
|Purchase price for old building |480,000 |
|Demolition costs for old building |138,000 |
|Levelling the lot | 204,000 |
|Total cost of land |$1,822,000 |
Cost of new building:
|Construction costs |$2,880,000 |
|Less: Cost of land improvements* | 342,000 |
|Cost of new building |$2,538,000 |
|*The land improvements are a distinct capital asset that amortizes at a different rate than the building. Therefore it |
|should be debited to an account separate from the building. |
Journal entry:
|2011 | | | |
|Mar. 10 |Land |1,822,000 | |
| |Land Improvements |342,000 | |
| |Building |2,538,000 | |
| | Cash | |4,702,000 |
| | To record costs of plant assets. | | |
Exercise 12-3 (15 minutes)
Allocation of total cost:
| |(a) |(b) |(c) |
| | |Ratio of Individual Appraised Value to Total Appraised | |
|Capital Asset |Appraised Values |Value |Cost Allocation |
| | |(a) ( Total Appraised Value |(b) x Total Actual Cost |
|Land |$166,320 |166,320 ( 396,000 = .42 or 42% |$ 162,8972 |
|Land Imprv. |55,440 |55,440 ( 396,000 = .14 or 14% |54,2993 |
|Building | 174,240 |174,240 ( 396,000 = .44 or 44% | 170,6544 |
|Totals |$396,000 | |$ 387,8501 |
1. 368,250 + 19,600 = 387,850
2. 42% x 387,850 = 162,897
3. 14% x 387,850 = 54,299
4. 44% x 387,850 = 170,654
Journal entry:
|2011 | | | |
|Apr. 12 |Land |162,897 | |
| |Land Improvements |54,299 | |
| |Building |170,654 | |
| | Cash | |387,850 |
| | To record costs of lump-sum purchase. | | |
Exercise 12-4 (20 minutes)
|2011 | | | |
|Jan. 1 |Land |1,080,000 | |
| |Building |1,260,000 | |
| |Equipment |936,000 | |
| |Tools |324,000 | |
| | Cash | |920,000 |
| | Notes Payable | |2,680,000 |
| | To record lump sum purchase. | | |
Calculations:
| |(a) |(b) |(c) |
| | |Ratio of Individual Appraised Value to Total Appraised Value | |
|Capital Asset |Appraised Values |(a) ( Total Appraised Value |Cost Allocation |
| | | |(b) x Total Actual Cost |
|Land |$ 960,000 |960,000 ( 3,200,000 = .30 or 30% |$ 1,080,0001 |
|Building |1,120,000 |1,120,000 ( 3,200,000 = .35 or 35% |1,260,0002 |
|Equipment |832,000 |832,000 ( 3,200,000 = .26 or 26% |936,0003 |
|Tools | 288,000 |288,000 ( 3,200,000 = .09 or 9% | 324,0004 |
|Totals |$ 3,200,000 | |$ 3,600,000 |
1. 30% x 3,600,000 = 1,080,000
2. 35% x 3,600,000 = 1,260,000
3. 26% x 3,600,000 = 936,000
4. 9% x 3,600,000 = 324,000
Exercise 12-5 (10 minutes)
2011
Dec. 31 Amortization Expense, Truck 7,400
Accumulated Amortization, Truck 7,400
To record amortization.
Calculation:
[ (25,000 + 9,000 + 4,500 + 3,500) – 5,000] / 5 years = 7,400
Exercise 12-6 (15 minutes)
| | (a) |(b) |(c) |
| | |Double-declining-balance |Units-of-production |
|Year |Straight-line |(Rate = 2/4 = .50 or 50%) |(Rate = [(84,600 – 12,000)/181,500] = .40/unit) |
|2011 |18,150 |1 |50% × 84,600 = 42,300 |15,320 (.40 × 38,300) |
|2012 |18,150 | |50% × (84,600 – 42,300) = 21,150 |16,460 (.40 × 41,150) |
|2013 |18,150 | |$9,1502 |21,040 (.40 × 52,600) |
|2014 |18,150 | |0 |19,7803 |
1. (84,600 – 12,000)/4 = 18,150/year
2. Maximum amortization is limited to $72,600 which is cost less residual ($84,600 – $12,000) therefore amortization
FOR 2013 IS $9,150 CALCULATED AS $72,600 – $63,450 ACCUMULATED AMORTIZATION RECORDED TO DATE.
3. MAXIMUM AMORTIZATION IS LIMITED TO $72,600 WHICH IS COST LESS RESIDUAL ($84,600 – $12,000) THEREFORE AMORTIZATION
FOR 2014 IS 19,780 CALCULATED AS $72,600 – $52,820 ACCUMULATED AMORTIZATION RECORDED TO DATE.
EXERCISE 12-7 (15 MINUTES)
a. (119,200 – 23,200)/5 = $19,200
b. Rate = 2/5 = .40 or 40%
40% × 119,200 = $47,680
c. Rate = (119,200 – 23,200)/240,000 km = $0.40/km
$0.40/km × 38,000 km = $15,200
Analysis Component:
The units-of-production method will produce the highest net income in 2011 because it is the lowest amortization expense for 2011.
Exercise 12-8 (30 minutes)
| |Straight-Line1 |Double-Declining-Balance2 |Units-of-Production3 |
| |Amortization Expense |Book Value at December|Amortization Expense |Book Value at December |Amortization Expense|Book Value at December |
|Year | |31 | |31 | |31 |
|2011 |42,500 |208,000 |100,200 |150,300 |33,750 |216,750 |
|2012 |42,500 |165,500 |60,120 |90,180 |44,500 |172,250 |
|2013 |42,500 |123,000 |36,072 |54,108 |60,000 |112,250 |
|2014 |42,500 |80,500 |16,108 |38,000 |74,250 |38,000 |
|2015 |42,500 |38,000 |0 |38,000 |0 |38,000 |
Calculations:
1. 250,500 – 38,000 = 212,500/5 = 42,500
2. 2/5 = .4 or 40%; .4 x 250,500 = 100,200; .4 x (250,500 – 100,200) = 60,120;
.4 x (250,500 – 100,200 – 60,120) = 36,072;
.4 x (250,500 – 100,200 – 60,120 – 36,072) = 21,643.20; maximum = 16,108
3. 250,500 – 38,000 = 212,500/8,500 = $25/hour;
2011 – 25 x 1,350 = 33,750;
2012 – 25 x 1,780 = 44,500;
2013 – 25 x 2,400 = 60,000;
2014 – 25 x 2,980 = 74,500; maximum = 74,250
Analysis component:
a. 2011 – Units-of-production; 2014 – Straight-line
b. 2011 – Double-declining-balance; 2014 – Units-of-production
Exercise 12-9 (30 minutes)
| |(a) |(b) |(c) |
| | |Ratio of Individual Appraised Value to Total Appraised Value |Cost Allocation |
|Capital Asset |Appraised Values |(a) ( Total Appraised Value |(b) x Total Actual Cost |
|Land |$ 500,000 |500,000 ( 1,500,000 = .33 or 33.33% |$ 600,0001 |
|Building |800,000 |800,000 ( 1,500,000 = .533 or 53.33% |960,0002 |
|Equipment |150,000 |150,000 ( 1,500,000 = .10 or 10% |180,0003 |
|Tools | 50,000 |50,000 ( 1,500,000 = .033 or 3.33% | 60,0004 |
|Totals |$ 1,500,000 | |$ 1,800,000 |
1. 33.33% x 1,800,000 = 600,000
2. 53.33% x 1,800,000 = 960,000
3. 10.00% x 1,800,000 = 180,000
4. 3.33% x 1,800,000 = 60,000
|Capital Asset |Cost |2011 Amortization |2012 Amortization |
|Land |$ 600,000 |N/A5 |N/A5 |
|Building |960,000 |960,000 × 2/10 = 192,000 |(960,000 – 192,000) × 2/10 = 153,600 |
|Equipment |180,000 |180,000 × 2/5 = 72,000 |(180,000 – 72,000) × 2/5 = 43,200 |
|Tools |60,000 |60,000 × 2/3 = 40,000 |(60,000 – 40,000) × 2/3 = 13,333 |
Analysis component:
We do not amortize the cost of land as it has an unlimited life and is not consumed when used.
Exercise 12-10 (20 minutes)
|Cost Information |Amortization |
| | | |
| |Date of Purchase |Amortization Method |
|Description | | |
|Property, plant and equipment: |
| |Land | | $240,000 | |
| |Building |$650,000 | | |
| | Less: Accumulated amortization | 226,667 |423,333 | |
| |Truck |$ 80,000 | | |
| | Less: Accumulated amortization | 45,313 | 34,687 | |
| |Total property, plant and equipment | | | 698,020 |
|Total assets | | |$1,036,020 |
Exercise 12-12 (15 minutes)
a. Straight-line amortization:
| | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |5-Year Totals |
|Income before |$114,000 |$114,000 |$114,000 |$114,000 |$114,000 |$570,000 |
| amortization | | | | | | |
|Amortization expense1 |48,720 |48,720 |48,720 |48,720 |48,720 | 243,600 |
|Net income |$65,280 |$65,280 |$65,280 |$65,280 |$65,280 |$326,400 |
b. Double-declining-balance amortization:
| | YEAR 1 | YEAR 2 | YEAR 3 | YEAR 4 | YEAR 5 |5-YEAR TOTALS |
|INCOME BEFORE |$114,000 |$114,000 |$114,000 |$114,000 |$114,000 |$570,000 |
| AMORTIZATION | | | | | | |
|AMORTIZATION EXPENSE2 |125,440 |75,264 |42,896 |0 |0 | 243,600 |
|NET INCOME (LOSS) |$(11,440) |$38,736 |$71,104 |$114,000 |$114,000 |$326,400 |
1. (313,600 – 70,000)/5 = 48,720
2. Rate = 2/5 = .40 or 40%
Year 1: 313,600 × 40% = 125,440
Year 2: (313,600 – 125,440) × 40% = 75,264
Year 3: [(313,600 – 70,000) – (125,440 + 75,264)] = 42,896 max. amort. expense
Analysis Component
Rock Energy will choose straight-line amortization to amortize the equipment if its goal is to show the highest value possible for the equipment on the Year 1 balance sheet. Straight-line will result in lower amortization than double declining balance in Year 1. The lower the amortization, the greater the net value (cost less accumulated amortization appearing in the balance sheet).
Exercise 12-13 (20 minutes)
| |Straight-Line1 |Double-Declining-Balance2 |Units-of-Production3 |
| | | |Book Value, Dec. | | |Book Value, Dec. | | |Book Value, Dec. |
| |Amort. Expense |Accum. Amort. |31 |Amort. Expense |Accum. Amort. |31 |Amort. Expense |Accum. Amort. |31 |
|Year | | | | | | | | | |
|2011 |18,000 |18,000 |88,000 |53,000 |53,000 |53,000 |22,950 |22,950 |83,050 |
|2012 |18,000 |36,000 |70,000 |19,000 |72,000 |34,000 |20,700 |43,650 |62,350 |
|2013 |18,000 |54,000 |52,000 |0 |72,000 |34,000 |23,400 |67,050 |38,950 |
|2014 |18,000 |72,000 |34,000 |0 |72,000 |34,000 |4,950 |72,000 |34,000 |
Calculations:
1. 106,000 – 34,000 = 72,000/4 = 18,000/year
2. 106,000 x 2/4 = 53,000; (106,000 – 53,000) x 2/4 = 26,500;
maximum amortization in 2012 is 106,000 – 34,000 = 72,000 – 53,000 = 19,000.
3. 106,000 – 34,000 = 72,000/160,000 = .45/unit;
2011 - .45 x 51,000 = 22,950;
2012 - .45 x 46,000 = 20,700;
2013 - .45 x 52,000 = 23,400;
2014 - .45 x 39,000 = 17,550;
72,000 – 22,950 – 20,700 – 23,400 = 4,950 maximum allowed in 2014.
Analysis component:
a. 2011 – Straight-line; 2014 – Double-declining-balance
b. 2011 – Straight-line; 2014 – Double-declining-balance
Exercise 12-14 (15 minutes)
| |Amortization |
|Year |Straight-Line1 |Units-of-Production3 |
|2011 |6,000 |16,740 |
|2012 |18,000 |36,180 |
|2013 |18,000 |28,080 |
1. 130,000 – 22,000 = 108,000/6 = 18,000 x 4/12 = 6,000
2. 130,000 – 22,000 = 108,000/200,000 = $0.54/km;
.54 x 31,000 = 16,740; .54 x 67,000 = 36,180; .54 x 52,000 = 28,080
Analysis component:
If amortization is not recorded, expenses are understated and net income is overstated on the income statement and on the balance sheet, assets and equity would be overstated.
Exercise 12-15 (25 minutes)
| |Amortization |
|Year |Straight-Line1 |Double-Declining-Balance2 |
|2011 |5,000 |10,000 |
|2012 |10,000 |16,000 |
|2013 |10,000 |9,600 |
Calculations:
1. 50,000/5 = 10,000 x 6/12 = 5,000
2. 2/5 = .4 or 40%; .4 x 50,000 x 6/12 = 10,000;
.4 x (50,000 – 10,000) = 16,000; .4 x (50,000 – 10,000 – 16,000) = 9,600
Analysis component:
If the furniture had been debited to an expense account when purchased instead of being recorded as a capital asset, expenses would have been overstated and net income would have been understated on the income statement in the year of purchase while assets and equity would have been understated on the balance sheet for the same year. In subsequent years, the expenses would have been understated and net income would have been overstated on the income statement while on the balance sheet assets and equity would continue to be understated until the end of the asset’s useful life.
Exercise 12-16 (10 minutes)
| |(a) |(b) |
|Year |Straight-Line |Double-Declining-Balance |
|2011 |(250,000 – 25,000)/5 = 45,000 x 9/12 = 33,750 |Rate = 2/5 = .40 or 40% |
| | |250,000 × 40% × 9/12 = 75,000 |
|2012 |(250,000 – 25,000)/5 = 45,000 |(250,000 – 75,000) × 40% = 70,000 |
Exercise 12-17 (10 minutes)
1. (43,500 – 5,000)/4 = 9,625/year × 2 years = 19,250 accumulated amortization
Book value = 43,500 – 19,250 = 24,250
2. [(43,500 – 19,250) – 3,850]/3 = 6,800
Exercise 12-18 (15 minutes)
|2014 | | | |
|Dec. 31 |Amortization Expense, Machine |19,059 | |
| | Accumulated Amortization, Machine | |19,059 |
| | To record amortization. | | |
Calculations:
REVISED AMORTIZATION = (178,000 – 77,000*) – 20,000 = 19,059/YEAR
7 – 2 9/12 = 4.25 yrs or 51 months
*2011 AMORTIZATION = 21,000 (178,000 – 38,000)/5 = 28,000 × 9/12
2012 amortization = 28,000
2013 amortization = 28,000
Accumulated
amortization 77,000
Exercise 12-19 (15 minutes)
| | |
|a. |(561,000 – 0)/20 = 28,050/year; 420,750/28,050 = 15 years |
| | | | |
|b. | | | |
|2012 | | | |
|Jan. 11 |Building |67,200 | |
| | Cash | |67,200 |
| | To record capital repairs. | | |
| | | | |
|c. |(561,000 + 67,200) – 420,750 = 207,450 | | |
| | | | |
|d. | | | |
|2012 | | | |
|Dec. 31 |Amortization Expense, Building* |17,288 | |
| | Accumulated Amortization, Building | |17,288 |
| | To record revised amortization. | | |
| |*207,450/(20 + 7 – 15 = 12 years remaining) = 17,288 | | |
EXERCISE 12-20 (15 MINUTES) PART 1
|2015 | | | |
|Feb. 20 |Equipment |56,000 | |
| | Cash | |56,000 |
| | To record installation of new motor. | | |
| |
|Part 2 |
|2011 | | | |
|Dec. 31 |Amortization Expense, Equipment |30,000 | |
| | Accumulated Amortization, Equipment | |30,000 |
| | To record amortization for 2011; | |
| |(214,000 – 34,000)/5 = 36,000; 36,000 × 10/12 = 30,000. | |
|2012 | | | |
|Dec. 31 |Amortization Expense, Equipment |36,000 | |
| | Accumulated Amortization, Equipment | |36,000 |
| | To record amortization for 2012. | | |
|2013 | | | |
|Dec. 31 |Amortization Expense, Equipment |36,000 | |
| | Accumulated Amortization, Equipment | |36,000 |
| | To record amortization for 2013. | | |
|2014 | | | |
|Dec. 31 |Amortization Expense, Equipment |36,000 | |
| | Accumulated Amortization, Equipment | |36,000 |
| | To record amortization for 2014. | | |
| |
|Part 3 |
|2015 | | | |
|Dec. 31 |Amortization Expense, Equipment |32,667 | |
| | Accumulated Amortization, Equipment | |32,667 |
| | To record total amortization for 2015. | | |
Calculations:
Revised
amortization = (214,000 + 56,000 – 144,000*) – 30,000 × 10/12 =
for 7 – 4** = 3 years remaining
2015 OR 36 MONTHS
* ACCUMULATED AMORTIZATION, EQUIPMENT
| | |30,000 |2011 |(10/12) |
| | |36,000 |2012 |(12/12) |
| | |36,000 |2013 |(12/12) |
| | |36,000 |2014 |(12/12) |
| | |6,000 |To Feb. 20/15 |(2/12) |
| | | |Balance at | |
| | |144,000 |Feb. 20, 2015 |(**4 years) |
Exercise 12-21 (20 minutes)
|a. | | | |
|2011 | | | |
|Mar. 1 |Accumulated Amortization, Van |21,850 | |
| |Cash |16,650 | |
| | Van | |38,500 |
| | To record the sale of the van for $16,650. | | |
| | | | |
|b. | | | |
|Mar. 1 |Accumulated Amortization, Van |21,850 | |
| |Cash |18,400 | |
| | Van | |38,500 |
| | Gain on Disposal | |1,750 |
| | To record the sale of the van for $18,400. | | |
| | | | |
|c. | | | |
|Mar. 1 |Accumulated Amortization, Van |21,850 | |
| |Cash |13,000 | |
| |Loss on Disposal |3,650 | |
| | Van | |38,500 |
| | To record the sale of the van for $13,000. | | |
| | | | |
|d. | | | |
|Mar. 1 |Accumulated Amortization, Van |21,850 | |
| |Loss on Disposal |16,650 | |
| | Van | |38,500 |
| | To record the sale of the van for $0; it was | | |
| |scrapped. | | |
Exercise 12-22 (15 minutes)
|To record partial year’s amortization in 2015: |
| | | | |
|2015 | | | |
|July 1 |Amortization Expense |13,250 | |
| | Accumulated Amortization, Machine | |13,250 |
| | To record partial year amortization in | | |
| |year of disposal; (185,500/7) × 6/12 = 13,250. | | |
|(a) |
|July 1 |Accumulated Amortization, Machine |119,250 |* | |
| |Cash |70,000 | | |
| | Machine | | |185,500 |
| | Gain on Disposal | | |3,750 |
| | To record sale of machine for $70,000. | | |
| | | | | |
|(b) |
|1 |Accumulated Amortization, Machine |119,250 |* | |
| |Cash |60,000 | | |
| |Loss on Disposal |6,250 | | |
| | Machine | | |185,500 |
| | To record receipt of $60,000 from insurance settlement. | |
| | | | | |
|*(185,500/7) × 4.5 years = 119,250 |
Exercise 12-23 (10 minutes)
a. 190,000 – 105,000 = 85,000 book value
b. Book value of the assets given up = (85,000 + 164,000) = 249,000
Less: Fair value of assets given up (56,000 + 164,000) = 220,000
Loss on exchange 29,000
c. 220,000
d.
|2011 | | | | |
|Oct. 6 |Truck* |220,000 | | |
| |Accumulated Amortization, Tractor |105,000 | | |
| |Loss on Exchange |29,000 | | |
| | Cash | | |164,000 |
| | Tractor | | |190,000 |
| | To record exchange of tractor for a truck. | | | |
| |*$56,000 + $164,000 = $220,000. | | | |
Exercise 12-24 (20 minutes)
a.
|2011 | | | |
|Nov. 3 |Accumulated Amortization, Capital Asset (old) |65,000 | |
| |Capital Asset (new)1 |177,000 | |
| | Capital Asset (old) | |150,000 |
| | Cash | |90,000 |
| | Gain on Disposal2 | |2,000 |
| | To record exchange of capital assets. | | |
1. Capital Asset (new) = Fair Value of Assets Given Up
= $87,000 + $90,000 = $177,000
2. Gain on Disposal = Proceeds – Book Value of Assets Given Up
= $177,000 – [($150,000 – $65,000) + $90,000] = $2,000
b.
|2011 | | | |
|Nov. 3 |Accumulated Amortization, Capital Asset (old) |65,000 | |
| |Capital Asset (new)1 |174,000 | |
| |Loss on Disposal2 |1,000 | |
| | Capital Asset (old) | |150,000 |
| | Cash | |90,000 |
| | To record exchange of capital assets. | | |
1. Capital Asset (new) = Fair Value of Assets Given Up
= $84,000 + $90,000 = $174,000
2. Loss on Disposal = Proceeds – Book Value of Assets Given Up
= $174,000 – [($150,000 – $65,000) + $90,000] = $1,000
Analysis component
The dollar value that will be used to amortize the new capital asset is $174,000 because the Cost Principle requires that all transactions are to be recorded at their original cost. $174,000 was determined to be the cost.
Exercise 12-25 (25 minutes)
|(a) |
| | | | |
|Jan. 2 |Accumulated Amortization, Machine |45,250 | |
| |Cash |32,500 | |
| |Loss on Disposal |6,250 | |
| | Machine | |84,000 |
| | To record sale of machine; | | |
| |32,500 – (84,000 – 45,250) = 6,250 loss. | | |
| | | | |
|(b) |
|Jan. 2 |Accumulated Amortization, Machine |45,250 | |
| |Tools |117,000 | |
| | Cash | |77,000 |
| | Machine | |84,000 |
| | Gain on Disposal | |1,250 |
| | To record exchange of machine; | | |
| |117,000 – (77,000 + 38,750) = 1,250 gain. | | |
| | | | |
|(c) |
|Jan. 2 |Accumulated Amortization, Machine |45,250 | |
| |Van |104,000 | |
| |Loss on Disposal |2,750 | |
| | Cash | |68,000 |
| | Machine | |84,000 |
| | To record exchange of machine; | | |
| |104,000 – (68,000 + 38,750) = 2,750 loss. | | |
| | | | |
|(d) |
|Jan. 2 |Accumulated Amortization, Machine |45,250 | |
| |Land |75,000 | |
| | Machine | |84,000 |
| | Cash | |25,000 |
| | Gain on Disposal | |11,250 |
| | To record exchange; | | |
| |75,000 – (25,000 + 38,750) = 11,250 gain. | | |
Exercise 12-26 (10 minutes)
|2011 | | | |
|Dec. 31 |Amortization Expense, Ore Deposit |398,310 | |
| | Accumulated Amortization, Ore Deposit | |398,310 |
| | To record amortization; | | |
| |3,633,750/1,425,000 = 2.55/tonne | | |
| |2.55 × 156,200 tonnes = 398,310 | | |
| | | | |
| 31 |Amortization Expense, Machinery |18,744 | |
| | Accumulated Amortization, Machinery | |18,744 |
| | To record amortization; | | |
| |171,000/1,425,000 = 0.12/tonne | | |
| |0.12 × 156,200 tonnes = 18,744 | | |
Exercise 12-27 (10 minutes)
|2011 | | | |
|Jan. 1 |Copyrights |118,320 | |
| | Cash | |118,320 |
| | To record purchase of copyright. | | |
| | | | |
|Dec. 31 |Amortization Expense, Copyrights |9,860 | |
| | Accumulated Amortization, Copyrights | |9,860 |
| | To record amortization of copyright; | | |
| |118,320/12 = 9,860 | | |
Exercise 12-28 (10 minutes)
1.
|2012 | | | |
|Jan. 1 |Current assets |236,000 | |
| |Land |294,000 | |
| |Building |69,000 | |
| |Equipment |42,000 | |
| |Goodwill |211,500 | |
| | Liabilities | |132,500 |
| | Cash | |100,000 |
| | Notes Payable | |620,000 |
| | To record the purchase of net | | |
| | identifiable assets and goodwill. | | |
Exercise 12-28 (continued)
2.
|Fair value of enterprise |$ 520,000 |
|Current fair value of net identifiable assets | 468,500 |
|Fair value of goodwill |$ 51,500 |
|Carrying amount of goodwill | 211,500 |
|Impairment loss of goodwill |$ 160,000 |
| | |
|2014 | | | |
|Dec. 31 |Loss on Impairment of Goodwill |160,000 | |
| | Goodwill | |160,000 |
| | To record impairment loss. | | |
PROBLEMS
PROBLEM 12-1A (25 MINUTES)
Part 1
| | | | |Land |Land |
| | |Building |Building |Impmnts. |Impmnts. |
| |Land |Two |Three |One |Two |
| Purchase price* |$3,584,000 |$1,232,000 | |$784,000 | |
| Demolition |845,200 | | | | |
| Landscaping |334,400 | | | | |
| New building | | |$4,038,000 | | |
| New improvements | | | | |$316,000 |
| Totals |$4,763,600 |$1,232,000 |$4,038,000 |$784,000 |$316,000 |
*Allocation of purchase price:
| |APPRAISED |PERCENT |APPORTIONED |
| |VALUE |OF TOTAL |COST |
|LAND |$3,731,200 |64 |% |$3,584,000 |
|BUILDING TWO |1,282,600 |22 | |1,232,000 |
|LAND IMPROVEMENTS ONE | 816,200 | 14 | | 784,000 |
|TOTALS |$5,830,000 |100% |$5,600,000 |
| | |% | |
Part 2
|Mar. 31 |Land |4,763,600 | |
| |Building Two |1,232,000 | |
| |Building Three |4,038,000 | |
| |Land Improvements One |784,000 | |
| |Land Improvements Two |316,000 | |
| | Cash | |11,133,600 |
| | To record costs of plant | | |
| |assets. | | |
Problem 12-2A (25 minutes)
Nymark Services
Balance Sheet
December 31
| |2011 |2010 |
|Assets | | | | |
| Current assets: | | | | |
| Cash | $ 15,000 | | $ 36,000 | |
| Prepaid rent |50,000 | |60,000 | |
| Office supplies | 3,000 | | 2,900 | |
| Total current assets | |$ 68,000 | |$ 98,900 |
| Property, plant and equipment: | | | | |
| Equipment |$200,000 | |$125,000 | |
| Less: Accumulated amortization | 91,000 |109,000 | 81,000 | 44,000 |
| Tools |$179,900 | |$126,000 | |
| Less: Accumulated amortization | 56,000 |123,900 | 53,000 |73,000 |
| Vehicles |$316,000 | |$316,000 | |
| Less: Accumulated amortization |136,000 |180,000 |122,000 |194,000 |
| Total property, plant and equipment | |412,900 | |311,000 |
| Intangible assets: | | | | |
| Franchise |$ 52,000 | |$ 52,000 | |
| Less: Accumulated amortization | 24,000 |28,000 | 14,000 |38,000 |
| Patent |$ 20,000 | |$ 20,000 | |
| Less: Accumulated amortization | 5,000 | 15,000 | 3,000 | 17,000 |
| Total intangible assets | | 43,000 | | 55,000 |
|Total assets | |$523,900 | |$464,900 |
| | | | | |
|Liabilities | | | | |
| Current liabilities: | | | | |
| Accounts payable |$ 71,000 | |$ 12,000 | |
| Salaries payable | 41,000 | | 33,000 | |
| Total current liabilities | |$ 112,000 | |$ 45,000 |
| Long-term liabilities: | | | | |
| Notes payable, due in 2020 | | 300,000 | | 162,000 |
| Total liabilities | |$412,000 | |$207,000 |
|Owner’s Equity | | | | |
| Reg Nymark, capital | | 111,900 | | 257,900 |
|Total liabilities and owner’s equity | |$523,900 | |$464,900 |
Analysis component:
Nymark’s assets are financed mainly by equity in 2010. In 2011, the assets are financed largely by debt. The change from 2010 to 2011 in how assets were mainly financed (from equity to debt) is unfavourable because the greater the debt the greater the risk associated with debt (is/will Nymark be in a position to pay the interest and principal as it comes due).
Problem 12-3A (25 minutes)
|Year |Amortization Method1: |
| | | | |
| |Straight-line |Double-declining balance |Units-of-production2 |
|2011 |(690,000 – 160,000)/10 = |Rate = 2/10 = .20 or 20% |Rate = (690,000 – 160,000)/13,250 = 40/hour |
| |53,000/year × 10/12 = 44,167 |690,000 × 20% × 10/12 = |40 × 720 = |
| | |115,000 |28,800 |
|2012 |53,000 |(690,000 – 115,000) × 20% = |40 × 1,780 = |
| | |115,000 |71,200 |
|2013 |53,000 |(690,000 – 115,000 – 115,000) × 20% = |40 × 1,535 = |
| | |92,000 |61,400 |
1. Amortization is calculated to the nearest month.
2. Assume actual hours of service were: 2011: 720; 2012: 1,780; 2013: 1,535.
Analysis component:
If you could ignore the matching principle, you might record the purchase of the boats as a revenue expenditure which means the entire cost of $690,000 would have been expensed in 2011, the year of purchase. This would have resulted in the net income being understated in 2011 and overstated in the remaining years of the asset’s useful life. On the balance sheet, this would have caused assets to be understated in each year of the asset’s life and equity in 2011 would have been understated and overstated in the remaining years of the asset’s useful life.
Problem 12-4A (25 minutes)
|Year |Amortization Method1: |
| | | | |
| |Straight-line |Double-declining balance |Units-of-production2 |
|2011 |(690,000 – 160,000)/10 = |Rate = 2/10 = .20 or 20% |Same as Problem 12-3A; Units-of-production is |
| |53,000/year × 6/12 = |690,000 × 20% × 6/12 = |usage based and not affected by time |
| | | | |
| |26,500 |69,000 |28,800 |
|2012 | |(690,000 – 69,000) × 20% = | |
| |53,000 |124,200 |71,200 |
|2013 | |(690,000 – 69,000 – 124,200) × 20% = | |
| |53,000 |99,360 |61,400 |
1. Amortization is calculated using the half-year convention.
2. Assume actual hours of service were: 2011: 720; 2012: 1,780; 2013: 1,535.
Problem 12-5A (25 minutes)
| | 2011 | | 2012 | | 2013 |
|1. Double-declining-balance method | | | | | |
| | | | | | |
|Equipment |$450,000 | |$450,000 | |$450,000 |
|Less: Accumulated amortization |56,250 | |154,688 | |228,516 |
|Year-end book value |$393,750 | |$295,312 | |$221,484 |
|Amortization expense for the year1 |$56,250 | |$98,438 | |$73,828 |
| | | | | | |
|2. Straight-line method | | | | | |
| | | | | | |
|Equipment |$450,000 | |$450,000 | |$450,000 |
|Less: Accumulated amortization |23,438 | |70,313 | |117,188 |
|Year-end book value |$426,562 | |$379,687 | |$332,812 |
|Amortization expense for the year2 |$23,438 | |$46,875 | |$46,875 |
1. Rate = 2/8 = 0.25 or 25%
2011: 0.25% × 450,000 × 6/12 = 56,250
2012: 0.25% × (450,000 – 56,250) = 98,438
2013: 0.25% × (450,000 – 56,250 – 98,438) = 73,828
2. (450,000 – 75,000)/8 = 46,875 × 6/12 = 23,438
Problem 12-6A (15 minutes)
1.
|2012 | | | |
|Apr. 30 |Amortization Expense, Building |130,000 | |
| | Accumulated Amortization, Building | |130,000 |
| | To record annual amortization; | | |
| | 1,950,000/15 = 130,000. | | |
| | | | |
| 30 |Amortization Expense, Equipment |172,800 | |
| | Accumulated Amortization, Equipment | |172,800 |
| | To record annual amortization; | | |
| | Rate = 2/10 = .20 or 20%; | | |
| | 864,000 × 20% = 172,800. | | |
Problem 12-6A (continued)
2.
AVIS COMPANY
Partial Balance Sheet
April 30, 2012
|Property, plant and equipment: |
| |Land | | |$1,300,000 |
| | | | | |
| |Building |$1,950,000 | | |
| | Less: Accumulated amortization |1,560,000 | |390,000 |
| | | | | |
| |Equipment |1,500,000 | | |
| | Less: Accumulated amortization |808,800 | |691,200 |
| |Total property, plant and equipment | | |$2,381,200 |
Problem 12-7A (50 minutes)
Part 1
Market Percentage Apportioned
Value of Total Cost
Building $816,000 48% $756,000
Land 578,000 34 535,500
Land improvements 85,000 5 78,750
Vehicles 221,000 13 204,750
Total $1,700,000 100% $1,575,000
2011
|Mar. 1 |Building |756,000 | |
| |Land |535,500 | |
| |Land Improvements |78,750 | |
| |Vehicles |204,750 | |
| | Cash | |1,575,000 |
| | To record asset purchases. | | |
Part 2 2011 straight-line amortization on building:
($756,000 – $51,300)/15 × 10/12 = $39,150
Part 3 2011 double-declining-balance amortization on land
improvements:
Rate = 2/5 = .40 or 40%
$78,750 × 40% × 10/12 = $26,250
Problem 12-7A (concluded)
Analysis component:
If the assets purchased on March 1, 2011 were put into service on May 23, 2011 the amortization expense calculated in parts 2 and 3 above would be based on 7 months instead of 10 months because straight-line and double-declining-balance amortization are both based on the time the assets are actually USED during the period.
Problem 12-8A (30 minutes)
| | | |Double- |
| |Straight- |Units-of- |Declining- |
|Year |Linea |Productionb |Balancec |
|2011 |$ 31,667 |$ 17,120 |$ 70,000 | |
|2012 |95,000 |97,920 |175,000 | |
|2013 |95,000 |95,680 |87,500 | |
|2014 |95,000 |94,560 |43,750 | |
|2015 | 63,333 | 74,720 | 3,750 | |
|Totals |$380,000 |$380,000 |$380,000 | |
aStraight-line:
Cost per year = (420,000 – 40,000)/4 years = $95,000 per year × 4/12
= 31,667
BUNITS-OF-PRODUCTION:
Cost per unit = (420,000 – 40,000)/475,000 units = $0.80 per unit
|Year |Units |Unit Cost |Amortization | |
|2011 |21,400 | $0.80 |$ 17,120 | |
|2012 |122,400 | 0.80 |97,920 | |
|2013 |119,600 | 0.80 |95,680 | |
|2014 |118,200 |0.80 |94,560 | |
|2015 |102,000 | 0.80 | 74,720 |* |
|Total | | |$380,000 | |
*Take only enough amortization in Year 2015 to reach the maximum
accumulated amortization of $380,000.
CDOUBLE-DECLINING-BALANCE:
Rate = 2/4 = .50 or 50%
2011: 50% × 420,000 × 4/12 = 70,000
2012: 50% × (420,000 – 70,000) = 175,000
2013: 50% × (420,000 – 70,000 – 175,000) = 87,500
2014: 50% × (420,000 – 70,000 – 175,000 – 87,500) = 43,750
2015: 380,000 – 376,250* = 3,750
*Take only enough amortization in Year 2015 to reach the maximum
accumulated amortization of $380,000.
Problem 12-9A (30 minutes)
|Cost Information |Amortization |
|Description |Date of Purchase |Amortization |Cost |
| | |Method | |
|Mar. 26 |Delivery Truck |41,160 | |
| | Cash | |41,160 |
| | To record purchase of new truck; | | |
| |$38,830 plus $2,330 provincial sales tax. | | |
| | | | |
|Dec. 31 |Amortization Expense, Delivery Truck1 |5,274 | |
| | Accumulated Amortization, Delivery Truck | |5,274 |
| | To record amortization from Mar. 26 to | | |
| |Dec. 31, 2011. | | |
| | | | |
|2012 | | | |
|Dec. 31 |Amortization Expense, Delivery Truck2 |8,888 | |
| | Accumulated Amortization, Delivery Truck | |8,888 |
| | To record amortization. | | |
1. (41,160 – 6,000)/5 × 9/12 = 5,274
2. 41,160 – 5,274 – 7,000 = 8,888
4 – 9/12 = 3.25
or 39 months
Problem 12-11A (30 minutes)
|2012 | | | |
|Dec. 31 |Amortization Expense, Machinery1 |86,143 | |
| | Accumulated Amortization, Machinery | |86,143 |
| | To record annual amortization. | | |
| | | | |
|31 |Amortization Expense, Office Furniture2 |14,667 | |
| | Accumulated Amortization, Office Furniture | |14,667 |
| | To record annual amortization. | | |
Calculations:
1. Amortization from January 1/2012 to July 7/2012:
|Cost |Accumulated Amortization |Residual | | | |
|696,000 – |308,000 – | 80,000 | × 6/12 | = 38,500 | |
| |4 | | | | |
| | | | | | |
| | | | | | |
|Amortization from July 7/2012 to December 31/2012: | | |
| | | | | | |
|Cost |Accumulated Amortization |Residual | | | |
| | | | | | |
|(696,000 + 104,000) – | (308,000 + 38,500) |– 120,000 | × 6/12 |= 47,643 | |
| |4 – 6/12 = 3.5 years | | | | |
| | | | |86,143 | |
| | | | | | |
| |Cost |Accumulated |Residual | |
| | |Amortization | | |
|2. |112,000 – |62,000 – |(14,000 – 8,000) |= 14,667 |
| | |5 – 2 = 3 | | |
Problem 12-12A (40 minutes)
|2011 | | | |
|Dec. 31 |Amortization Expense, Truck |23,750 | |
| | Accumulated Amortization, Truck | |23,750 |
| | To record amortization; | | |
| |(120,000 – 40,000 + 45,000) – 30,000]/4 = 23,750. | | |
| | | | |
|31 |Amortization Expense, Machinery |37,500 | |
| | Accumulated Amortization, Machinery | |37,500 |
| | To record amortization; | | |
| |(750,000 – 340,000 – 110,000)/8 = 37,500. | | |
| | | | |
|2012 | | | |
|Dec. 31 |Amortization Expense, Truck |23,750 | |
| | Accumulated Amortization, Truck | |23,750 |
| | To record amortization; | | |
| |[(120,000 – 40,000 + 45,000) – 30,000]/4 = 23,750. | | |
| | | | |
|31 |Amortization Expense, Machinery |37,500 | |
| | Accumulated Amortization, Machinery | |37,500 |
| | To record amortization; | | |
| |(750,000 – 340,000 – 110,000)/8 = 37,500. | | |
| | | | |
Analysis component:
Debiting revenue expenditures to capital asset accounts is inappropriate treatment as these should be debited to expense accounts; this is a violation of the conservatism principle and, indirectly, the matching and cost principles. This error will cause assets and equity to be overstated on the balance sheet and on the income statement, expenses will be understated causing net income to be overstated.
Problem 12-13A (40 minutes)
|2011 | | | |
|July 1 |Aircraft1 |545,800 | |
| | Cash | |545,800 |
| | To record costs of aircraft. | | |
| | | | |
|Oct. 2 |Aircraft |7,320 | |
| | Cash | |7,320 |
| | To record betterment. | | |
| | | | |
|Dec. 31 |Amortization Expense, Aircraft 2 |59,940 | |
| | Accumulated Amortization, Aircraft | |59,940 |
| | To record amortization. | | |
| | | | |
|2012 | | | |
|Feb. 17 |Repair and Maintenance Expense |1,840 | |
| | Cash | |1,840 |
| | To record repairs. | | |
| | | | |
|June 30 |Aircraft |9,000 | |
| | Cash | |9,000 |
| | To record betterment. | | |
| | | | |
|Dec. 31 |Amortization Expense, Aircraft 3 |97,348 | |
| | Accumulated Amortization, Aircraft | |97,348 |
| | To record amortization. | | |
Problem 12-13A (continued)
1. 510,000 + 30,800 + 5,000 = 545,800
2. Amortization from July 1/2011 to Oct. 2/2011:
|Cost |Residual | | | | |
|545,800 – | 69,000 |× 3/12 | |= 29,800 | |
|4 | | | | | |
| | | | | | |
| | | | | | |
|Amortization from Oct. 2/2011 to Dec. 31/2011: | | |
| | | | | | |
|Cost |Accumulated |Residual | | | |
| |Amortization | | | | |
| | | | | | |
|(545,800 + 7,320) – |29,800 – |(69,000 + 2,220) | = 120,560 × 3/12 |= 30,140 | |
| |4 – 3/12 = 3.75 years | | | |
| | | | |59,940 | |
| | | | | | |
3. Amortization from Jan. 1/2012 to June 30/2012:
|120,560 × 6/12 |= 60,280 | |
| | | |
| | | |
|Amortization from June 30/2012 to Dec. 31/2012: | | |
| | | | | | |
|Cost |Accumulated Amortization |Residual | | | |
| | | | | | |
|(545,800 + 7,320+ 9,000) – | (59,940 + 60,280) – |(69,000 + 2,220) | × 6/12 |= 37,068 | |
| |4 + 2 – 1 = 5 | | | |
| | | | |97,348 | |
| | | | | | |
Problem 12-14A (30 minutes)
|1. | | | |
|2012 | | | |
|Sept. 27 |Amortization Expense, Building |6,188 | |
| | Accumulated Amortization, Building1 | |6,188 |
| | To record building amortization for 2012. | | |
| | | | |
|27 |Cash |740,000 | |
| |Accumulated Amortization, Building2 |498,188 | |
| | Gain on Disposal | |84,188 |
| | Land | |496,000 |
| | Building | |658,000 |
| | To record sale of land and building. | | |
| | | | |
|2. | | | |
|Nov. 2 |Amortization Expense, Equipment |20,167 | |
| | Accumulated Amortization, Equipment3 | |20,167 |
| | To record equipment amortization for 2012. | | |
| | | | |
|2 |Cash |71,000 | |
| |Accumulated Amortization, Equipment4 |113,167 | |
| |Loss on Disposal |29,833 | |
| | Equipment | |214,000 |
| | To record sale of equipment. | | |
1. Amortization from Jan. 1, 2012 to Sept. 27, 2012
[(658,000 – 492,000) – 100,000]/8 = 8,250/year × 9/12 = 6,188
2. Accumulated Amortization, Building =
6,188 + 492,000 = 498,188
3. Amortization from Jan. 1, 2012 to Nov. 2, 2012
Rate = 2/10 = .20 or 20%
214,000 – 93,000 = 121,000 × 20% = 24,200 × 10/12 = 20,167
4. Accumulated Amortization, Equipment =
20,167 + 93,000 = 113,167
Problem 12-15A (45 minutes)
1.
|2011 | | | |
|Jan. 2 |Machine |83,500 | |
| | Cash | |83,500 |
| | To record purchase of machine. | | |
| | | | |
| 3 |Machine |3,420 | |
| | Cash | |3,420 |
| | To record capital repairs on machine. | | |
| | | | |
| 3 |Machine |1,080 | |
| | Cash | |1,080 |
| | To record installation of machine. | | |
|2. | | | |
|2011 | | | |
|Dec. 31 |Amortization Expense, Machine |12,200 | |
| | Accumulated Amortization, Machine | |12,200 |
| | To record amortization; | | |
| |88,000 – 14,800)/6 = 12,200. | | |
| | | | |
|2016 | | | |
|Sept. 30 |Amortization Expense, Machine |9,150 | |
| | Accumulated Amortization, Machine | |9,150 |
| | To record partial year’s amortization; | | |
| | 12,200 × 9/12 = 9,150. | | |
|3(a). | | | |
| 30 |Accumulated Amortization, Machine1 |70,150 | |
| |Cash |15,000 | |
| |Loss on Disposal2 |2,850 | |
| | Machine | |88,000 |
| | Sold machine for $15,000. | | |
|3(b). | | | |
| 30 |Accumulated Amortization, Machine |70,150 | |
| |Cash |19,500 | |
| | Machine | |88,000 |
| | Gain on Disposal3 | |1,650 |
| | Sold machine for $19,500. | | |
|3(c). | | | |
| 30 |Accumulated Amortization, Machine |70,150 | |
| |Cash |18,400 | |
| | Machine | |88,000 |
| | Gain on Disposal4 | |550 |
| | Received insurance settlement. | | |
Problem 12-15A (continued)
| |Amort. for 2011, 2012, |Amort. | |
| |2013, 2014, and 2015. |for 2016. | |
1. Accumulated amortization = (12,200 × 5 years) + 9,150 = 70,150
2. Gain (Loss) = Cash Proceeds – Book Value
= 15,000 – (88,000 – 70,150) = (2,850)
3. Gain (Loss) = Cash Proceeds – Book Value
= 19,500 – (88,000 – 70,150) = 1,650
4. Gain (Loss) = Cash Proceeds – Book Value
= 18,400 – (88,000 – 70,150) = 550
Problem 12-16A (15 minutes)
|2011 | | | |
|July 5 |Accumulated Amortization, Truck |6,000 | |
| |Loss on Disposal* |10,500 | |
| |Furniture |45,100 | |
| | Truck | |36,000 |
| | Cash | |25,600 |
| | To record exchange. | | |
| | | | |
|Dec. 31 |Amortization Expense, Furniture |3,236 | |
| | Accumulated Amortization, Furniture | |3,236 |
| | To record amortization; | | |
| |(45,100 – 6,268)/6 × 6/12 = 3,236. | | |
* Gain (Loss) = Proceeds – Book Value of Assets Given Up
= 45,100 – [25,600 + (36,000 – 6,000)
= 45,100 – 55,600
= (10,500)
Problem 12-17A (45 minutes)
a. Amortization expense on first December 31 of each machine’s life
|2011 | | | |
|Dec. 31 |Amortization Expense, Machine 15-501 |12,150 | |
| | Accumulated Amortization, Machine 15-50 | |12,150 |
| | To record amortization. | | |
|2014 | | | |
|Dec. 31 |Amortization Expense, Machine 17-953 |46,500 | |
| | Accumulated Amortization, Machine 17-95 | |46,500 |
| | To record amortization. | | |
|2015 | | | |
|Dec. 31 |Amortization Expense, Machine BT-3115 |155,620 | |
| | Accumulated Amortization, | | |
| |Machine BT-311 | |155,620 |
| | To record amortization. | | |
b. Purchase/exchange/disposal of each machine.
|2011 | | | |
|Apr. 1 |Machine 15-50 |105,800 | |
| | Cash | |105,800 |
| | To record purchase of Machine 15-50. | | |
|2014 | | | |
|Mar. 29 |Machine 17-95 |124,000 | |
| |Accumulated Amortization, Machine 15-502 |48,600 | |
| | Machine 15-50 | |105,800 |
| | Cash | |63,580 |
| | Gain on Disposal | |3,220 |
| | To record exchange of Machine 15-50. | | |
|2015 | | | |
|Oct. 2 |Machine BT-311 |1,074,000 | |
| |Accumulated Amortization, Machine 17-954 |75,563 | |
| |Loss on Disposal |8,437 | |
| | Machine 17-95 | |124,000 |
| | Cash | |1,034,000 |
| | To record exchange of Machine 17-95. | | |
|2018 | | | |
|Aug. 21 |Cash |162,400 | |
| |Accumulated Amortization, Machine BT-3116 |697,780 | |
| |Loss on Disposal |213,820 | |
| | Machine BT-311 | |1,074,000 |
| | To record sale of Machine BT-311. | | |
| | | | |
Problem 12-17A (continued)
Calculations:
1. 105,800 – 8,600 = 16,200/year × 9/12 = 12,150
6
2. AMORTIZATION 2011: 12,150
2012: 16,200
2013: 16,200
2014: 4,050 (16,200 × 3/12)
Accum. Amort. 48,600
2. Rate = 2/4 = .50 or 50%
50% × 124,000 × 9/12 = 46,500 (amort. for 2014)
3. 50% × (124,000 – 46,500) × 9/12 = 29,063 (amort. for 2015)
+ 46,500 (amort. for 2014)
75,563 (accum. amort.)
4. (1,074,000 – 70,000)/200,000 = 5.02/unit
2015: 31,000 units × 5.02/unit = 155,620
5. Amortization for Jan. 1/2010 to August 21/2012
= 108,000 units × 5.02/unit = 542,160
+ 155,620 (2015)
697,780 (accum. amort.)
Problem 12-18A (20 minutes)
|2011 |(a) | | |
|Feb. 20 |Mineral Deposit |4,640,000 | |
| | Cash | |4,640,000 |
| | To record purchase of mineral deposit. | | |
| | | | |
| |(b) | | |
|May 24 |Machinery |696,000 | |
| | Cash | |696,000 |
| | To record costs of machinery. | | |
| | | | |
| |(c) | | |
|Dec. 31 |Amortization Expense, Mineral Deposit |297,600 | |
| | Accum. Amortization, Mineral Deposit | |297,600 |
| | To record amortization [$4,640,000/ | |
| |11,600,000 tonnes = $0.40 per tonne; | |
| |744,000 tonnes × $0.40 = $297,600]. | |
| | | | |
| |(d) | | |
|Dec. 31 |Amortization Expense, Machinery |44,640 | |
| | Accum. Amortization, Machinery | |44,640 |
| | To record amortization [$696,000/ | |
| |11,600,000 tonnes = $0.06 per tonne | |
| |744,000 tonnes × $0.06 = $44,640]. | |
| | | | |
Problem 12-19A (10 minutes)
| |(a) | | |
|2011 | | | |
|Nov. 1 |Copyright |240,000 | |
| | Cash | |240,000 |
| | To record purchase of copyright. | | |
| | | | |
| |(b) | | |
|Dec. 31 |Amortization Expense |20,000 | |
| | Accumulated Amortization, Copyright | |20,000 |
| | To record amortization of copyright; | | |
| |240,000/3 × 3/12 = 20,000. | | |
Alternate Problems
PROBLEM 12-1B (25 MINUTES)
Part 1
| | | | |Land |Land |
| | |Building |Building |Imprmnts. |Imprmnts. |
| |Land |B |C |B |C |
|Purchase price* |$ 769,500 |$459,000 | |$121,500 | |
|Demolition |117,000 | | | | |
|Landscaping |172,500 | | | | |
|New building | | |$1,356,000 | | |
|New improvements | | | | |$101,250 |
|Totals |$1,059,000 |$459,000 |$1,356,000 |$121,500 |$101,250 |
*Allocation of purchase price:
| |Appraised |Percent |Apportioned |
| |Value |of Total |Cost |
|Land |$ 792,585 | 57 |% |$ 769,500 |
|Building B |472,770 |34 | |459,000 |
|Land Improvements B | 125,145 | 9 | | 121,500 |
|Totals |$1,390,500 | 100 % |$1,350,000 |
| | |% | |
Part 2
|June 1 |Land |1,059,000 | |
| |Building B |459,000 | |
| |Building C |1,356,000 | |
| |Land Improvements B |121,500 | |
| |Land Improvements C |101,250 | |
| | Cash | |3,096,750 |
| | To record costs of plant assets. | | |
Problem 12-2B (25 minutes)
Aidan Consulting
Balance Sheet
December 31
| |2011 |2010 |
|Assets | | | | |
| Current assets: | | | | |
| Cash | $ 500 | |$ 1,500 | |
| Accounts receivable |1,000 | |2,400 | |
| Prepaid insurance | -0- | | 850 | |
| Total current assets | |$ 1,500 | |$ 4,750 |
| | | | | |
| Property, plant and equipment: | | | | |
| Land | | 38,000 | | 38,000 |
| Machinery |$164,000 | | $ 64,000 | |
| Less: Accumulated amortization | 50,000 |114,000 | 46,000 |18,000 |
| Building |$125,000 | |$125,000 | |
| Less: Accumulated amortization | 30,000 | 95,000 | 28,000 | 97,000 |
| Total property, plant and equipment | |247,000 | |153,000 |
| Intangible assets: | | | | |
| Copyright |$ 4,000 | |$ 4,000 | |
| Less: Accumulated amortization | 600 | 3,400 | 300 | 3,700 |
|Total assets | |$251,900 | |$161,450 |
| | | | | |
|Liabilities | | | | |
| Current liabilities: | | | | |
| Accounts payable |$ 2,400 | |$ 1,750 | |
| Unearned fees |46,000 | |3,100 | |
| Total current liabilities | |$ 48,400 | |$ 4,850 |
| Long-term liabilities: | | | | |
| Notes payable, due in 2016 | |127,900 | | 31,000 |
| Total liabilities | |$176,300 | |$ 35,850 |
|Owner’s Equity | | | | |
| Aidan Cummings, capital | | 75,600 | | 125,600 |
|Total liabilities and owner’s equity | |$251,900 | |$161,450 |
Analysis component:
Aidan’s assets were mainly financed by equity in 2010. In 2011, Aidan’s assets were mainly financed by debt. The increase in the debt financing has weakened the balance sheet as opposed to strengthening it.
Problem 12-3B (30 minutes)
|Year |Amortization Method: |
| | |Double-declining balance | |
| |Straight-line | |Units-of-production |
|2011 |(145,000 – 25,000)/5 = 24,000/year × |Rate = 2/5 = .40 or 40% |Rate = (145,000 – 25,000)/100,000 = 1.20/km |
| |2/12 = 4,000 |145,000 × 40% × 2/12 = |1.20 × 5,800 = |
| | |9,667 |6,960 |
|2012 | |(145,000 – 9,667) × 40% = |1.20 × 19,400 = |
| |24,000 |54,133 |23,280 |
|2013 | |(145,000 – 9,667 – 54,133) × 40% = |1.20 × 22,850 = |
| |24,000 |32,480 |27,420 |
|2014 |24,000 |(145,000 – 9,667 – 54,133 – 32,480) × 40% = |1.20 × 25,700 = |
| | |19,488 |30,840 |
|2015 | | |1.20 × 19,980 = |
| |24,000 |4,232* |23,976 |
|2016 | | |120,000 – 112,476 = |
| |20,000 |0 |7,524** |
|Totals |120,000 |120,000 |120,000 |
*Maximum allowed = $4,232 [$120,000 – ($9,667 + $54,133 + $32,480 + $19,488)]
**Maximum allowed = $7,524 [$120,000 – ($6,960 + $23,280 + $27,420 + $30,840 + $23,976)]
Problem 12-4B (30 minutes)
|Year |Amortization Method: |
| | |Double-declining balance | |
| |Straight-line | |Units-of-production |
|2011 |(145,000 – 25,000)/5 = 24,000/year × |Rate = 2/5 = .40 or 40% |Same as Problem 12-3B; Units-of-production is usage based and not |
| |6/12 = 12,000 |145,000 × 40% × 6/12 = |affected by time |
| | |29,000 |6,960 |
|2012 | |(145,000 – 29,000) × 40% = |1.20 × 19,400 = |
| |24,000 |46,400 |23,280 |
|2013 | |(145,000 – 29,000 – 46,400) × 40% = |1.20 × 22,850 = |
| |24,000 |27,840 |27,420 |
|2014 | |(145,000 – 29,000 – 46,400 – 27,840) × 40% = |1.20 × 25,700 = |
| |24,000 |16,704 |30,840 |
|2015 | | |1.20 × 19,980 = |
| |24,000 |56* |23,976 |
|2016 | | |120,000 – 112,476 = |
| |12,000 |0 |7,524** |
|Totals |120,000 |120,000 |120,000 |
* Maximum allowed = $56 [$120,000 – ($29,000 + $46,400 + $27,840 + $16,704)]
** MAXIMUM ALLOWED = $7,524 [$120,000 – ($6,960 + $23,280 + $27,420 + $30,840 + $23,976)]
PROBLEM 12-5B (30 MINUTES)
| |2011 | |2012 | |2013 |
|Part 1. Double-declining balance method | | | | | |
| | | | | | |
|Machinery |$420,000 | |$420,000 | |$420,000 |
|Less: Accumulated amortization |42,000 | |117,600 | |178,080 |
|Year-end book value |$378,000 | |$302,400 | |$241,920 |
|Amortization expense for the year1 |$42,000 | |$75,600 | |$60,480 |
| | | | | | |
|Part 2. Straight-line method | | | | | |
| | | | | | |
|Machinery |$420,000 | |$420,000 | |$420,000 |
|Less: Accumulated amortization |19,000 | |57,000 | |95,000 |
|Year-end book value |$401,000 | |$363,000 | |$325,000 |
|Amortization expense for the year2 |$19,000 | |$38,000 | |$38,000 |
1. Rate = 2/10 = .20 or 20%
2011: 20% × 420,000 × 6/12 = 42,000
2012: 20% × (420,000 – 42,000) = 75,600
2013: 20% × (420,000 – 42,000 – 75,600) = 60,480
2. (420,000 – 40,000)/10 = 38,000 × 6/12 = 19,000
Problem 12-6B (15 minutes)
Part 1.
|2012 | | | |
|Dec. 31 |Amortization Expense, Van |13,750 | |
| | Accumulated Amortization, Van | |13,750 |
| | To record annual amortization; | | |
| | (125,000 – 15,000)/8 = 13,750 | | |
| | | | |
| 31 |Amortization Expense, Machinery |31,667 | |
| | Accumulated Amortization, | | |
| |Machinery | |31,667 |
| | To record annual amortization; | | |
| | Rate = 2/4 = .50 or 50%; | | |
| | 50% × (320,000 – 256,667) = 31,667 | | |
Part 2.
ACE MECHANICAL
Partial Balance Sheet
December 31, 2012
|Property, plant and equipment: |
| |Delivery van |$125,000 | |
| | Less: Accumulated amortization | 96,250 |$28,750 |
| | | | |
| |Machinery |320,000 | |
| | Less: Accumulated amortization | 288,334 | 31,666 |
| | Total property, plant and equipment | |$60,416 |
Problem 12-7B (30 minutes)
Part 1
Market Percentage Apportioned
Value of Total Cost
Building $ 552,750 55% $478,500
Land 331,650 33 287,100
Land improvements 100,500 10 87,000
Truck 20,100 2 17,400
Total $1,005,000 100% $870,000
Problem 12-7B (continued) Part 1
| 2011 | | | |
|Sept. 30 |Building |478,500 | |
| |Land |287,100 | |
| |Land Improvements |87,000 | |
| |Truck |17,400 | |
| | Cash | |870,000 |
| | To record asset purchases. | | |
Part 2 2011 straight-line amortization on building:
($478,500 – 37,500)/15 × 3/12 = $7,350
Part 3 2011 double-declining-balance amortization on land
improvements:
Rate = 2/8 = .25 or 25%
$87,000 × 25% × 3/12 = $5,438
Problem 12-8B (45 minutes)
| | | |Double- |
| |Straight- |Units-of- |Declining- |
|Year |Linea |Productionb |Balancec |
|2011 |$ 22,360 |$ 23,520 |$ 52,000 | |
|2012 |33,540 |36,960 |57,200 | |
|2013 |33,540 |33,600 |34,320 | |
|2014 |33,540 |31,920 |20,592 | |
|2015 |33,540 | 26,600 |3,588 |* |
|2016 | 11,180 | 15,100 | 0 | |
|Totals |$167,700 |$167,700 |$167,700 | |
aStraight- line:
Cost per year = (195,000 – 27,300)/5 years = $33,540 per year × 8/12
= $22,360 for 2011
= $33,540 per year × 4/12 = $11,180 for 2016
Problem 12-8B (continued)
bUnits-of-production:
Cost per unit = (195,000 – 27,300)/120,000 units = $1.40 per unit
(rounded)
| |YEAR |UNITS |UNIT COST |AMORTIZATION |
| |2011 |16,800 |$1.40 |$ 23,520 | |
| |2012 |26,400 |1.40 |36,960 | |
| |2013 |24,000 |1.40 |33,600 | |
| |2014 |22,800 |1.40 |31,920 | |
| |2015 |19,000 |1.40 |26,600 | |
| |2016 |22,100 |1.40 | 15,100 |* |
| |TOTAL | | | $167,700 | |
*Take only enough amortization in Year 2016 to reach the maximum
accumulated amortization of $167,700.
cDouble-declining-balance:
Rate = 2/5 = .40 or 40%
2011: 40% × 195,000 × 8/12 = 52,000
2012: 40% × (195,000 – 52,000) = 57,200
2013: 40% × (195,000 – 52,000 – 57,200) = 34,320
2014: 40% × (195,000 – 52,000 – 57,200 – 34,320) = 20,592
2015: 167,700 – 164,112* = 3,588
*Take only enough amortization in Year 2015 to reach the maximum
accumulated amortization of $167,700.
Problem 12-9B (40 minutes)
|Cost Information |Amortization |
|Description |Date of Purchase |Amortization |Cost! |Residual |Life |Balance of Accum. |Amortization Expense |Balance of Accum. |
| | |Method | | | |Amort. |for 2012 |Amort. |
| | | | | | |Apr. 30, 2011 | |Apr. 30, 2012 |
|Hangar |Oct. 3/08 |Straight-line |$ 52,000 |$ 14,000 |20 yr. |4,7501 |1,9002 |6,6503 |
|Helicopter |Oct. 28/08 |Units-of-production |$540,000 |$180,000 |10,000 flying hours |73,3324 |38,1245 |111,4566 |
|Tools |Nov. 3/08 |Double-declining balance |$ 64,000 |$ 15,000 |5 yr. |45,5687 |3,4328 |49,0009 |
1. (52,000 – 14,000)/20 = 1,900/year × 2 6/12 = 4,750
2. (52,000 – 14,000)/20 = 1,900/year
3. 4,750 + 1,900 = 6,650
4. Rate = (540,000 – 180,000)/10,000 = 36.00/hour;
2009: 94 × 36 = 3,384
2010: 1,015 × 36 = 36,540
2011: 928 × 36 = 33,408
73,332
5. 1,059 × 36 = 38,124
6. 73,332 + 38,124 = 111,456
7. Rate = 2/5 = .40 or 40%
2009: 40% × 64,000 × 6/12 = 12,800
2010: 40% × (64,000 – 12,800) = 20,480
2011: 40% × (64,000 – 12,800 – 20,480) = 12,288
Accumulated amortization at Apr. 30, 2011 = $45,568
8. 2012: (64,000 – 15,000) – 45,568 = 3,432
9. 45,568 + 3,432 = 49,000
Problem 12-10B (20 minutes)
|2011 | | | |
|June 26 |Truck |35,910 | |
| | Cash | |35,910 |
| | To record purchase of new truck; | | |
| |$34,200 + 1,710 sales tax. | | |
| | | | |
|July 5 |Truck |1,890 | |
| | Cash | |1,890 |
| | To record installation of special racks. | | |
| | | | |
|Dec. 31 |Amortization Expense, Truck1 |3,600 | |
| | Accumulated Amortization, Truck | |3,600 |
| | To record amortization for half-year. | | |
| | | | |
|2012 | | | |
|JAN. 5 |NO ENTRY. | | |
|MAR. 15 |REPAIR AND MAINTENANCE EXPENSE |330 | |
| | CASH | |330 |
| | TO RECORD REPAIRS. | | |
| | | | |
|DEC. 31 |AMORTIZATION EXPENSE, TRUCK2 |5,300 | |
| | ACCUMULATED AMORTIZATION, TRUCK | |5,300 |
| | TO RECORD REVISED AMORTIZATION | | |
1. [(35,910 + 1,890) – 9,000]/4 × 6/12 = 3,600
2. [(35,910 + 1,890) – 3,600 – 5,050]/(6 – .5 = 5.5) = 5,300
Problem 12-11B (40 minutes)
|2012 | | | |
|Dec. 31 |Amortization Expense, Building1 |5,905 | |
| | Accumulated Amortization, Building | |5,905 |
| | To record annual amortization. | | |
| | | | |
| 31 |Amortization Expense, Equipment2 |6,100 | |
| | Accumulated Amortization, Equipment | |6,100 |
| | To record annual amortization. | | |
Problem 12-11B (continued)
1. Amortization from January 1/2012 to Sept. 28/2012:
|Cost |Accumulated |Residual | | | |
| |Amortization | | | | |
|229,000 – |112,000 | – 50,000 | × 9/12 |= 3,350 | |
| |15 | | | | |
| | | | | | |
| | | | | | |
|Amortization from Sept. 28/2012 to Dec. 31/2012: | | |
| | | | | | |
|Cost |Accumulated Amortization |Residual | | | |
| | | | | | |
|(229,000 + 152,000) – | (112,000 + 3,350) – | 120,000 | × 3/12 |= 2,555 | |
| |15 – 9/12 years = 14.25 years | | | |
| | | | |5,905 | |
| | | | | | |
| |Cost |Accumulated |Residual | |
| | |Amortization | | |
|2. |98,000 – |32,000 – |5,000 | = 6,100 |
| | |10 | | |
Problem 12-12B
|2011 | | | |
|Dec. 31 |Amortization Expense, Clubhouse |30,500 | |
| | Accumulated Amortization, Clubhouse | |30,500 |
| | To record amortization; |
| |(820,000 – 670,000)/5 × 11/12 = 27,500 plus |
| |(820,000 – 670,000 – 27,500 + 417,500/15 = 36,000/year × 1/12 = 3,000; |
| |Total amortization for 2011 of $30,500. |
| | | | |
|31 |Amortization Expense, Equipment |76,000 | |
| | Accumulated Amortization, Equipment | |76,000 |
| | To record amortization; | | |
| |(450,000 – 140,000 – 82,000)/3 = 76,000. | | |
| | | | |
|2012 | | | |
|Dec. 31 |Amortization Expense, Clubhouse |36,000 | |
| | Accumulated Amortization, Clubhouse | |36,000 |
| | To record amortization. | | |
| | | | |
|31 |Amortization Expense, Equipment |38,800 | |
| | Accumulated Amortization, Equipment | |38,800 |
| | To record amortization; | | |
| |(450,000 – 140,000 – 76,000 – 40,000)/5 = 38,800. | | |
| | | | |
Analysis component:
If GolfWorld had revised the remaining useful life and residual value of the clubhouse to 30 years and $150,000 on December 31, 2011, the annual amortization expense for 2011 and beyond would have been significantly less causing net income to be higher on the income statement and, on the balance sheet, assets and equity both overstated. It is important to correctly estimate the useful life and residual value of capital assets, to the greatest extent possible, otherwise the capital asset costs will not be matched appropriately to income which is in violation of both the matching and conservatism principles.
Problem 12-13B (45 minutes)
| |(1) | | |
|2011 | | | |
|Jan. 9 |Machine |68,400 | |
| | Cash | |68,400 |
| | To record costs of machine. | | |
| | | | |
|Jan. 10 |Machine |14,400 | |
| | Cash | |14,400 |
| | To record betterment and installation; | | |
| |8,100 + 6,300 = 14,400. | | |
| | | | |
| |(2) | | |
|Dec. 31 |Amortization Expense, Machine |24,000 | |
| | Accumulated Amortization, Machine | |24,000 |
| | To record amortization; | | |
| |[(68,400 + 14,400) – 10,800]/3 = 24,000. | | |
| | | | |
|2013 | | | |
|Mar. 29 |Amortization Expense, Machine |6,000 | |
| | Accumulated Amortization, Machine | |6,000 |
| | To record amortization; | | |
| |24,000 × 3/12 = 6,000. | | |
| | | | |
| |(3a) | | |
|Mar. 29 |Accumulated Amortization, Machine |54,000 | |
| |Cash |35,250 | |
| | Machine | |82,800 |
| | Gain on Disposal | |6,450 |
| | To record sale for cash of $35,250; 2011 – 24,000 + | | |
| |2012 – 24,000 + 2013 – 6,000 = 54,000. | | |
| | | | |
| |(3b) | | |
|Mar. 29 |Accumulated Amortization, Machine |54,000 | |
| |Cash |24,150 | |
| |Loss on Disposal |4,650 | |
| | Machine | |82,800 |
| | To record sale for cash of $24,150. | | |
| |(3c) | | |
|Mar. 29 |Accumulated Amortization, Machine |54,000 | |
| |Cash |22,050 | |
| |Loss on Disposal |6,750 | |
| | Machine | |82,800 |
| | To record insurance settlement. | | |
Problem 12-14B (45 minutes)
| |Part 1 | | |
|2011 | | | |
|Mar. 2 |Amortization Expense, Van |1,125 | |
| | Accumulated Amortization, Van1 | |1,125 |
| | To record amortization on van for 2011. | | |
| | | | |
|2 |Cash |12,800 | |
| |Accumulated Amortization, Van1 |30,125 | |
| |Loss on Disposal |3,075 | |
| | Van | |46,000 |
| | To record sale of van. | | |
| | | | |
| |Part 2 | | |
|Aug. 27 |Amortization Expense, Machinery |9,030 | |
| | Accumulated Amortization, Machinery2 | |9,030 |
| | To record amortization on machinery for 2011. | | |
| | | | |
|27 |Cash |68,370 | |
| |Accumulated Amortization, Machinery2 |23,630 | |
| | Machinery | |92,000 |
| | To record sale of machinery. | | |
| | | | |
| |Part 3 | | |
|June 29 |Amortization Expense, Equipment |2,500 | |
| | Accumulated Amortization, Equipment3 | |2,500 |
| | To record amortization on equipment for 2011. | | |
| | | | |
|29 |Cash |19,800 | |
| |Accumulated Amortization, Equipment3 |34,500 | |
| | Gain on Disposal | |300 |
| | Equipment | |54,000 |
| | To record sale of equipment. | | |
Calculations:
1. Amortization from Feb. 1/11 to Mar. 2/11:
46,000 – 29,000 – 7,000 = $0.25/km × 4,500 km = 1,125
40,000
+ 29,000
30,125
(calculations continued on next page)
Problem 12-14B (concluded)
2. Amortization from Feb. 1/11 to Aug. 27/11:
92,000 – 14,600 = 77,400 Book Value
Rate = 2/10 = .20 or 20%
77,400 × 20% × 7/12 = 9,030
+ 14,600
23,630
3. Amortization from Feb. 1/11 to June 29/11:
54,000 – 32,000 – 4,000 × 5/12 = 2,500
3. + 32,000
34,500
Problem 12-15B (60 minutes)
Part 1
|2011 | | | |
|Jan. 1 |Machine |130,000 | |
| | Cash | |130,000 |
| | To record purchase of machine. | | |
| | | | |
| 2 |Machine |3,390 | |
| | Cash | |3,390 |
| | To record capital repairs on machine. | | |
| | | | |
| 2 |Machine |4,800 | |
| | Cash | |4,800 |
| | To record installation of machine. | | |
| | | | |
| Part 2 |
|Dec. 31 |Amortization Expense, Machine |17,170 | |
| | Accumulated Amortization, Machine | |17,170 |
| | To record amortization; | | |
| |(138,190 – 18,000)/7 = 17,170 | | |
| | | | |
|2016 | | | |
|Apr. 1 |Amortization Expense, Machine |4,293 | |
| | Accumulated Amortization, Machine | |4,293 |
| | To record partial year’s amortization; | | |
| | 17,170 × 3/12 = 4,293. | | |
| | | | |
Problem 12-15B (concluded)
| Part 3(a) |
| Apr. 30 |Accumulated Amortization, Machine1 |90,143 | |
| |Cash |30,000 | |
| |Loss on Disposal2 |18,047 | |
| | Machine | |138,190 |
| | Sold machine for $30,000. | | |
| | | | |
| Part 3(b) |
| 30 |Accumulated Amortization, Machine |90,143 | |
| |Cash |50,000 | |
| | Machine | |138,190 |
| | Gain on Disposal3 | |1,953 |
| | Sold machine for $50,000. | | |
| | | | |
| Part 3(c) |
| 30 |Accumulated Amortization, Machine |90,143 | |
| |Cash |20,000 | |
| |Loss on Disposal4 |28,047 | |
| | Machine | |138,190 |
| | Received insurance settlement. | | |
Calculations:
|1. |Accumulated amortization = (17,170 × 5 years) + 4,293 = |90,143 |
2. Gain (Loss) = Cash Proceeds – Book Value
|= 30,000 – (138,190 – 90,143) = |(18,047) |
3. Gain (Loss) = Cash Proceeds – Book Value
|= 50,000 – (138,190 – 90,143) = |1,953 |
4. Gain (Loss) = Cash Proceeds – Book Value
|= 20,000 – (138,190 – 90,143) = |(28,047) |
Problem 12-16B (20 minutes)
|2011 | | | |
|Aug. 31 |Accumulated Amortization, Furniture |12,900 | |
| |Computer Equipment |37,200 | |
| | Furniture | |21,000 |
| | Cash | |28,200 |
| | Gain on Disposal* | |900 |
| | To record exchange. | | |
| | | | |
|Sept. 4 |Computer Equipment |3,690 | |
| | Cash | |3,690 |
| | Addition of upgraded components. | | |
| | | | |
|Dec. 31 |Amortization Expense, Computer Equipment |3,477 | |
| | Accumulated Amortization, Computer Equipment | |3,477 |
| | To record amortization; | | |
| |[(37,200 + 3,690) – 9,600] /3 × 4/12. | | |
* Gain (Loss) = Proceeds – Book Value of Assets Given Up
= 37,200 – [28,200 + (21,000 – 12,900)]
= 37,200 – 36,300 = 900
Problem 12-17B (45 minutes)
1. Amortization expense on first December 31 of each machine’s life
|2011 | | | |
|Dec. 31 |Amortization Expense, Machine 366-901 |7,200 | |
| | Accumulated Amortization, Machine 366-90 | |7,200 |
| | To record amortization. | | |
|2013 | | | |
|Dec. 31 |Amortization Expense, Machine 366-913 |6,000 | |
| | Accumulated Amortization, Machine 366-91 | |6,000 |
| | To record amortization. | | |
|2016 | | | |
|Dec. 31 |Amortization Expense, Machine 367-115 |4,800 | |
| | Accumulated Amortization, | | |
| |Machine 367-11 | |4,800 |
| | To record amortization. | | |
2. Purchase/exchange/disposal of each machine
|2011 | | | |
|May 1 |Machine 366-90 |48,600 | |
| | Cash | |48,600 |
| | To record purchase of Machine 366-90. | | |
|2013 | | | |
|Aug. 5 |Machine 366-91 |36,000 | |
| |Accumulated Amortization, Machine 366-902 |24,300 | |
| | Machine 366-90 | |48,600 |
| | Cash | |9,000 |
| | Gain on Disposal | |2,700 |
| | To record exchange of Machine 366-90. | | |
|2016 | | | |
|Feb. 1 |Cash |9,000 | |
| |Accumulated Amortization, Machine 366-914 |25,560 | |
| |Loss on Disposal |1,440 | |
| | Machine 366-91 | |36,000 |
| | To record sale of Machine 366-91. | | |
| | | | |
| 1 |Machine 367-11 |53,100 | |
| | Cash | |53,100 |
| | To record purchase of Machine 367-11. | | |
| | | | |
|2017 | | | |
|Oct. 3 |Cash |36,000 | |
| |Accumulated Amortization, Machine 367-116 |12,000 | |
| |Loss on Disposal |5,100 | |
| | Machine 367-11 | |53,100 |
| | To record sale of Machine 367-11. | | |
Problem 12-17B (continued)
Calculations:
1. 48,600 – 5,400 = 10,800/year × 8/12 = 7,200
4
2. AMORTIZATION 2011 7,200
2012: 10,800
2013: 6,300 (10,800 × 7/12)
Accum. Amort 24,300
3. Rate = 2/5 = .40 or 40%
40% × 36,000 × 5/12 = 6,000
4. 2013: 6,000
2014: 40% × (36,000 – 6,000) = 12,000
2015: 40% × (36,000 – 6,000 – 12,000) = 7,200
2016: 40% × (36,000 – 6,000 – 12,000 – 7,200) × 1/12 = 360
25,560
5. (53,100 – 5,400)/75,000 = $0.64/unit (rounded)
2016: 7,500 units × 0.64/unit = 4,800
6. Amortization for Jan. 1/2017 to Oct. 3/2017:
= 11,250 units × 0.64/unit = 7,200
4,800
Accum. Amort. 12,000
Problem 12-18B (20 minutes)
| |(1) | | |
|May 8 |Mineral Deposit |1,080,000 | |
| | Cash | |1,080,000 |
| | To record purchase of mineral deposit. | | |
| | | | |
| |(2) | | |
|June 28 |Machinery |187,500 | |
| | Cash | |187,500 |
| | To record costs of machinery. | | |
| | | | |
| |(3) | | |
|Dec. 31 |Amortization Expense, Mineral Deposit |86,400 | |
| | Accum. Amortization, Mineral Deposit | |86,400 |
| | To record amortization [$1,080,000/ | |
| |9,000,000 tonnes = $0.12 per tonne; | |
| |720,000 tonnes × $0.12 = $86,400]. | |
Problem 12-18B (continued)
| |(4) | | |
|Dec. 31 |Amortization Expense, Machinery |15,000 | |
| | Accum. Amortization, Machinery | |15,000 |
| | To record amortization [$187,500/ | |
| |9,000,000 tonnes × | |
| |720,000 tonnes = $15,000]. | |
Problem 12-19B (20 minutes)
Part 1
a.
|2011 | | | |
|Feb. 3 |Patent |184,000 | |
| | Cash | |184,000 |
| | To record purchase of patent. | | |
|b. | | | |
|Dec. 31 |Amortization Expense, Patent |16,867 | |
| | Accumulated Amortization, Patent | |16,867 |
| | To record amortization on patent; | | |
| |184,000 ÷ 10 = 18,400/year; | | |
| |18,400 x 11/12 = 16,867. | | |
Part 2
Letsin Pharmacy Products
Partial Balance Sheet
December 31, 2011
|Assets | | | |
| Current assets: | | | |
| Cash | |$ 86,000 | |
| Accounts receivable (net) | |231,000 | |
| Merchandise inventory | | 113,000 | |
| Total current assets | | |$ 430,000 |
| Property, plant and equipment: | | | |
| Land | | $ 92,000 | |
| Building |$ 496,000 | | |
| Less: Accumulated amortization, building | 157,500 | 338,500 | |
| Equipment |$ 398,000 | | |
| Less: Accumulated amortization, equipment | 216,000 |182,000 | |
| Total property, plant and equipment | | | 612,500 |
| Intangible assets: | | | |
| Patent | | | 167,133* |
|Total assets | | |$1,209,633 |
*184,000 – 16,867 = 167,133 book value
Analytical and Review Problems
A&R PROBLEM 12-1
The following points should be set out in the report:
1. Assets on which amortization was charged were purchased for use in the business and not for resale. Therefore, the fact that they may be sold for more than cost is not relevant.
2. Because these assets are subject to both physical and economic (obsolescence) deterioration, they have a limited useful life span, however long it may be, and their cost, less any residual value, must be allocated over their useful life.
3. Maintenance expenditures maintain these assets in a properly functioning order. They, however, do not eliminate the fact of physical and economic deterioration.
4. Not charging periodic amortization is in violation of the matching principle and results in an understatement of expenses and overstatement of net income.
5. Amortization is a process of allocation not of valuation.
Ethics Challenge
1. When managers acquire new assets a variety of decisions relative to amortization must be made. The asset must be assigned a useful life and residual value, and a method of amortization must be chosen.
2. It is true that when assets are placed in service on a day other than the first day of the month an assumption is usually made that the assets are placed into service on the first of the month nearest to the date of the purchase. For assets purchased on the 1st-15th days the first day of the month of purchase is assumed. For assets purchased on 16th-EOM then the first day of the next month is assumed.
3. By always selecting the first day of the next month Marcia is getting a one-time deferral of some partial months of amortization. She is still employing a systematic and rational method of allocating costs if she consistently chooses the first day of the next month. However, since she appears to be using this method only with respect to current-year additions it appears more that she is manipulating the accounting practices in order to get a small reduction in amortization expense this year. Also Marcia’s practice is not in keeping with general business practices. The facts of the situation more strongly support an ethical violation than a legitimate amortization decision.
4. By always assuming the later first of the month as date of deployment a few days’ less amortization will be accrued for the assets employed. Marcia’s company’s amortization expense will be less than if assets were considered employed on the first of the month closest to the date of purchase. With smaller amortization charges, net income will be higher. Therefore, this practice of Marcia’s will result in a higher profit margin for the company.
FOCUS ON FINANCIAL STATEMENTS
FFS 12-1
a.
|Cost Information |Amortization |
|Description |Date of Purchase |Amort. Method |Cost |
|Office Equipment |48,000 |48/84 x 57,000 | = 32,571 |
|Furniture |36,000 |36/84 x 57,000 | = 24,429 |
|Totals |84,000 | | 57,000 |
| | | | |
12. 32,571 x 2/4 x 9/12 = 12,214 for 2011
13. 24,429 x 2/5 x 9/12 = 7,329 for 2011
FFS 12-1 (continued)
b.
|GelCo |
|Income Statement |
|For Year Ended December 31, 2011 |
|Revenues: | | | |
| Fees earned | |$475,000 | |
|Expenses: | | | |
| Salaries expense |$147,000 | | |
| Amortization expense |84,411 | | |
| Insurance expense | 15,000 | | |
| Loss on disposal of furniture | 2,592 | | |
| Total expenses | | 249,003 | |
|Net income | |$225,997 | |
|GelCo |
|Statement of Owner’s Equity |
|For Year Ended December 31, 2011 |
|Ted Gel, capital, January 1, 2011 | |$232,190 |
|Add: Net income | | 225,997 |
| Total | |458,187 |
|Less: Withdrawals by owner | |102,000 |
|Ted Gel, capital, December 31, 2011 | |$356,187 |
1.
GelCo
Balance Sheet
December 31, 2011
|Assets | | | |
|Current assets: | | | |
| Cash | |$ 15,000 | |
| Accounts receivable | |36,000 | |
| Prepaid insurance | | 7,800 | |
| Total current assets | | |$ 58,800 |
| | | | |
| Property, plant and equipment: | | | |
| Land | | $140,000 | |
| Building |$227,000 | | |
| Less: Accumulated amortization | 57,500 | 169,500 | |
| Machinery |$ 75,000 | | |
| Less: Accumulated amortization | 52,080 |22,920 | |
| Truck |$171,000 | | |
| Less: Accumulated amortization | 70,000 |101,000 | |
| Office equipment |$ 32,571 | | |
| Less: Accumulated amortization | 12,214 |20,357 | |
| Furniture |$ 24,429 | | |
| Less: Accumulated amortization | 7,329 | 17,100 | |
| Total property, plant and equipment | | | 470,877 |
| Intangible assets: | | | |
| Patent |$51,900 | | |
| Less: Accumulated Amortization |22,490 | | 29,410 |
|Total assets | | |$ 559,087 |
| | | | |
| Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable |$ 34,000 | | |
| Unearned revenue | 26,900 |$ 60,900 | |
| Total current liabilities | | | |
| Long-term liabilities: | | | |
| Notes payable, due 2014 | | 142,000 | |
| Total liabilities | | |$ 202,900 |
| | | | |
| Owner’s Equity | | | |
| Ted Gel, capital | | | 356,187 |
|Total liabilities and owner’s equity | | |$ 559,087 |
FFS 12-2
Part 1
a. The $25,314 (thousand) represents the book value of the capital assets. The June 25, 2005, book value is the $52,581 (thousand) total cost of the capital assets less the $27,267 (thousand) total accumulated amortization of the capital assets. (Note to instructor: Point out to students that this additional information — cost and accumulated amortization — is found in Danier’s Note 4 of the financial statements.)
b. The full disclosure principle requires financial statements to report all relevant information about the operations and financial position of the entity. In conformance with the full disclosure principle, information in addition to the $25,314 (thousand) book value is reported in Note 1 (amortization methods) and Note 4 (cost, accumulated amortization, and book value).
c. The amortization expense for the year ended June 25, 2005, was $6,216 (thousand) for continuing operations and $1,330 (thousand) for discontinued operations. Although amortization expense typically appears on the income statement, Danier does not detail it here but these amounts do appear on the cash flow statement.
d. Note 1 of the June 25, 2005, financial statements show that Danier used the declining balance method to amortize capital assets and straight-line to amortize leasehold improvements.
Part 2
a. The total cost and accumulated amortization (depreciation) of WestJet’s capital assets at December 31, 2005, was $2,008,583 (thousand) and $205,086 (thousand) respectively.
b. Total amortization expense recorded for the year ended December 31, 2005, was $106,624 (thousand).
c. According to Note 1(h) of its December 31, 2005, financial statements, WestJet used the units-of-production and straight-line methods to record 2005 amortization.
Critical Thinking Question
CT 12-1
Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity.
Problem:
— Taking the perspective of both the external and internal auditors, there is a problem with how a number of revenue expenditures were recorded as capital expenditures.
Goal:*
— To identify which transactions were recorded incorrectly, correct them, and restate net income on the income statement and restate assets and equity on the balance sheet.
— Another goal, from the perspective of the auditor, would be to bring these issues to the attention of the board of directors for their action because there may be ethical concerns regarding the behaviour of the business manager (bonus is tied to income so he/she may be manipulating the recording of transactions to maximize income).
Principles:
— The matching principle has been violated; it requires costs to be allocated or matched to the period in which it helped generate revenues.
— The conservatism principle was also violated; it states that assets and income should never be overstated.
— Another GAAP requires consideration: materiality. If the misstatements are not material in nature (not significant in dollar amount so that the decisions of shareholders would not have been affected), the conclusions are affected. Therefore, we must look at the numbers to determine whether materiality has been violated or not.
CT 12-1 (continued)
Facts:
— as stated in the mini case
— The insurance was incorrectly debited to the Truck account; it should have been debited to a current asset account: Prepaid Insurance. The result of this error is an overstatement of net income in 2009 of $7,800 (36,000/24 months = 1,500/month insurance used x 10 months = 15,000 for 2009 vs 36,000/5 yrs useful life = 7,200; 15,000 – 7,200 = 7,800). 2009 net income is not known but if it is assumed that it approximates 2010 net income as reported ($78,000), then the $7,800 overstatement of net income in 2009 is material in nature since it approximates 10%. The net income in 2010 would also have been materially overstated; by $10,800 (1,500 insurance expense per month x 12 months used = 15,000 – amortization of insurance of 7,200 = 10,800). Net income in 2011 would have been understated by $4,200 (7,200 amortization of insurance – 3,000 insurance used = 4,200). It is unclear from the information provided how the insurance renewal was treated: as a capital or revenue expenditure; this would have affected the impact of the misstatement in 2011. It is unclear from the information provided whether revised amortization was calculated when the subsequent expenditures (motors) was debited to the truck account (which is correct assuming that the motors enhanced the trucks which is likely). We will assume that this was treated correctly (capital expenditure with resulting calculation of revised amortization) given no information to the contrary. The $32,000 and $2,500 costs regarding the tires and brakes were capitalized in error; they should have been expensed when incurred in 2010. Therefore, net income in 2010 is overstated by a potential $34,500 (32,000 + 2,500) — I say potential because it is unclear whether revised amortization was calculated on the truck; this additional amortization would affect the amount of any misstatement in 2010 and 2011. There is also the issue of when the bonus was recorded; these were recorded in the incorrect accounting periods (recorded when paid as opposed to the period which triggered the cost — violation of matching and realization principles). In addition, because the bonuses were based on overstated net income amounts, the bonuses would have been overstated for 2009 and 2010 and potentially in 2011.
— It appears that the 2010 net income was overstated by almost 50%.
CT 12-1 (concluded)
Conclusions/Consequences:
— To do ‘nothing’ would mean that shareholders/owners are making decisions based on inaccurate information.
— If the manager did, in fact, engage in unethical actions, a longer term implication from the perspective of the manager is that he/she may lose their job and future employability prospects in addition to damaging the credibility of the company and its share values assuming it is publicly held.
— The board of directors need to be made aware of the errors made in recording capital expenditures so that they can deal appropriately with the manager responsible and negative repercussions with shareholders/owners.
*The goal is highly dependent on :perspective.”
-----------------------
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
50 Fundamental Accounting Principles, Twelfh Canadian Edition
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
Solutions Manual for Chapter 8 49
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
Solutions Manual for Chapter 8 55
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
Solutions Manual for Chapter 8 35
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
Solutions Manual for Chapter 12 13
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
16 Fundamental Accounting Principles, Twelfth Canadian Edition
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
Solutions Manual for Chapter 8 15
26,667
Mar. to Dec.
2015
+
6,000
32,667
Total amort.
for 2015
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
18 Fundamental Accounting Principles, Twelfth Canadian Edition
Amort. for 2011, 2012, 2013, 2014, and 2015.
Amort. for 2016.
................
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