Chapter 9 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

ANSWERS TO QUESTIONS - CHAPTER 9
1. Long-term operational assets are those assets that are

used by a business to generate revenue. In contrast,
investments are simply held for the production of
interest and dividends and/or for price appreciation.
2. Tangible assets are those assets that have a physical

existence. Some examples include buildings and
equipment. Intangible assets are those assets that
represent some rights and privileges associated with
owning the asset. Some examples include copyrights,
leases, and trademarks.
3. Specifically identifiable intangible assets are those

assets that are purchased for a specific value or have a
known value. Examples include patents, leases, and
copyrights. Intangible assets that are not specifically
identifiable are those purchased as part of the
purchase of a whole business or group of assets. The
value of these assets are determined by the excess of
the purchase price of the group over the value of the
specifically identifiable assets. The most common
assets in this group include goodwill and covenants
not to compete.
4. Depreciation is the systematic allocation of the cost of

property, plant and equipment to the accounting
periods over which they are to be used. Some
examples of assets that are depreciated include
buildings, machinery, and office equipment.
5. Natural resources are assets that are produced by

nature. Some examples include oil, coal, minerals,
timber, etc. They are called wasting assets because
their value "wastes away" as the resources are
removed from the earth.
9-1
6. Land is not a depreciable asset because land has an
infinite life. Land is not destroyed by its use. Natural
resources can be removed but the land will remain.
When land and natural resources are purchased together,
the cost of each must be accounted for separately.
7. Amortization is the systematic allocation of the cost of
intangible assets over their estimated useful lives.
8. The historical cost concept requires that long-term

operational assets be recorded at the amount paid for
them. This is the amount that will be shown on the
balance sheet as long as the asset is owned. As time
passes the asset may increase or decline in value, but
this change is not reflected on the books of the
company. However, the historical cost of assets may
be reduced by depreciation over their lives.
9. The cost of a building includes the amount paid for the

building plus any amounts that are paid to put it to its
intended use. Some common costs include the
purchase price, title search fee, legal fees, sales
commissions, remodeling, and improvements.
10. A basket purchase of assets is the purchase of a group

of assets for a single purchase price. For example,
building, land and equipment could be purchased for
one price, $80,000. When a group of assets are
purchased together, the purchase price must be
allocated among the different assets. One of the more
common methods of making the allocation is the
relative fair market value method. The fair market
value of each asset is determined and then its ratio to
the total fair market value of all assets is applied to
the total purchase price.
11. The life cycle of a long-term operational asset simply

describes the process of acquiring, using, and retiring
the asset. This process includes obtaining the funding
9-2
to acquire the asset, acquiring the asset, using the
asset, and disposing of the asset.
12. Straight-line depreciation. This method allocates an

equal amount of depreciation to each period over the
useful life of the asset. Example: Asset cost of $4,000
with a 4-year life and no salvage value would produce
a depreciation expense of $1,000 per year. This
method is appropriate when the usefulness of an asset
is consistent over the asset's life.
Units-of-production depreciation. When this method of

depreciation is used, depreciation is calculated for
each estimated unit of use, e.g. cost per mile. This
estimated unit cost is then applied to the actual use of
the asset for the period. Example: Asset cost of
$4,000 with estimated use of 20,000 miles would
produce a cost per mile of .20. If the asset was used
4,000 miles in the year, the depreciation would be
$800 (.20 X 4,000). This method is more appropriate
when the usefulness of an asset is related to the
amount of use.
Double-declining balance depreciation. This is an

accelerated depreciation method that allocates more
of the cost of an asset to expense in the early years of
the asset's life. It is called double-declining balance
because the method applies twice the straight-line
rate to the book value of the asset.
Example: Asset cost of $4,000 with an estimated

useful life of 4 years would produce an expense of
$2,000 in the first year [$4,000 X (2 X .25)]. The
amount of depreciation expense will decrease each
year of the asset's life. This method is appropriate
when the usefulness of an asset decreases more in the
early years of life than it does in the later years of the
asset's life.
9-3
13. Recognition of depreciation expense reduces total
assets; while the asset account containing the asset
that is being depreciated is not changed, the contra
asset account, accumulated depreciation, is increased
which, in turn, reduces total assets. Total equity is
decreased when an expense is recognized.
14. The recognition of depreciation expense does not

affect cash flows. Depreciation recognition is simply
the allocation of part of a previously acquired asset to
expense. Cash is affected when the asset is
purchased, an improvement is made to the asset and
when it is sold.
15. Total assets will be lower at the end of the first year of
the asset’s life if MalMax chooses the double-declining
balance method of computing depreciation rather than
straight-line. This results because more expense is
recognized in the early years of an asset’s life when
double declining balance is used. However, at the end
of the asset’s life, total assets will be the same
regardless of the method chosen because the amount
of total depreciation recognized over the asset’s life is
the same regardless of the depreciation method
chosen.
16. When the total cost of an asset is expensed in the year

acquired, total expense will be overstated and net
income will be understated. Because all of a plant
asset's cost is erroneously expensed, assets will be
understated and retained earnings will be understated
because net income was understated.
17. Salvage value is the estimated value of a plant asset at

the end of its useful life to the business.
18. Accumulated depreciation is a contra asset account.

As the cost of a plant asset is expensed, a contra asset
account is credited, rather than a direct reduction of
9-4
the related asset account. This method is used
because the expired cost is an estimate, not an exact
amount. In addition, this method provides more
information to financial information users, in that the
original cost is shown in the asset account and the
estimated expired cost is shown as accumulated
depreciation.
19. Recording the depreciation recognized in the contra

asset account allows the total cost of the asset and the
total amount expensed to be shown in the accounts
and on the balance sheet. This provides more
information to the reader of the financial statements,
e.g., some judgment can be made about the age and
use of the asset.
20. Book value is computed as the cost of an asset less the

accumulated depreciation of that equipment, $5,000 −
$3,000 = $2,000. This does not represent the fair
market value of the equipment because the
accumulated depreciation is only an estimate of the
expired cost. In addition, the value of the equipment
may not be related to its original cost.
21. The method of depreciation chosen should represent

as closely as possible the expiration of the cost of that
piece of equipment. For instance, double-declining
balance may be used for an asset that will decline in
usefulness more in the early years of the life of the
piece of equipment. Straight-line depreciation should
be used when the cost expires at a constant rate.
22. MACRS, Modified Accelerated Cost Recovery System, is

the prescribed method to be used for tax purposes.
Under MACRS, useful lives are classified in set
recovery periods. The prescribed method of MACRS
uses, in most cases, the double-declining balance
method switching to straight-line in the later years.
The straight-line method of MACRS can also be used.
9-5
MACRS is generally required for tax reporting. It is not
GAAP.
23. The method required for tax purposes, MACRS, does

not necessarily reflect the use of the asset. The
recovery period and method is set by the Internal
Revenue Service with no regard for how each piece of
equipment will be used. This method promotes
consistency in recovery periods and methods in similar
assets regardless of use or type of business. For most
property, MACRS is based on the double-declining
balance method, switching to straight-line. Generally,
other methods may not be used for tax purposes.
24. Deferred taxes are taxes that will be paid in future

years that result from different accounting methods
being used for financial statement reporting and
income tax reporting. Deferred taxes are generally
shown as a liability on the balance sheet.
25. When an asset is purchased and put into service, an

estimate is made of the expected useful life of the
asset. However, as the asset is used, it may become
apparent that the estimate was incorrect or
circumstances may have changed (i.g., the asset is
used more than expected) to cause the estimate to be
incorrect. When these situations arise, it is necessary
to revise the estimated useful life of the asset and,
consequently, the amount of depreciation expense per
period. The revised estimated useful life will affect the
amount of depreciation per year. If the estimated life
is longer than originally expected, the amount of
depreciation per year will decrease; if the estimated
useful life is shorter than originally expected, the
amount of depreciation per year will be larger.
26. When an expenditure to an asset improves the quality,

this improvement is accounted for as if a new asset is
purchased; the equipment account is debited. The
9-6
improvement is depreciated over the remaining life of
the original asset, since the life of the asset is not
extended, only the quality is improved.
When an expenditure extends the life of the asset, this

expenditure in effect reduces some of the depreciation
already taken on the asset. This is accomplished by
reducing the accumulated depreciation account (a
debit to accumulated depreciation). Depreciation is
recalculated by spreading the remaining book value,
reduced by salvage value, over the remaining
estimated life of the asset.
27. When a long-term operational asset is sold for a gain,

total assets increase by the amount of the gain. The
gain is the amount the asset is sold for over the book
value of the asset. However, the cash flow from the
sale of the equipment is the amount the asset is sold
for (assuming it is sold for cash). The total amount of
cash received is shown as a cash inflow in the
investing section of the statement of cash flows.
28. Depletion is the process of systematically allocating

the cost of natural resources to expense based on
estimated production of the asset. The most common
method used to calculate depletion is units-of-
production. An estimated cost per unit of resource is
determined by dividing the cost of the asset by the
estimated production. The amount of expense for
each period is based on the number of units extracted
and sold.
29. Some of the most common intangible assets include

patents, copyrights, and goodwill. Amortization is
generally based on the legal life of the asset, the
useful life of the asset, or, if these do not apply, a
maximum period of 40 years. The asset is generally
amortized over the shortest of these possible lives.
The period over which an intangible asset can be
9-7
amortized for tax purposes is generally determined
according to terms specified by tax law. These terms
are generally different from those used for financial
accounting.
30. Most countries have developed accounting principles

that they apply to financial statements. While there are
many similarities, some significant differences do exist.
For example, in Britain, any purchased goodwill is
charged to retained earnings in the year of the purchase,
while in the U.S., goodwill is set up as an asset.
Japanese accounting principles report research and
development expense differently from U.S. GAAP. In
Japan, R&D is set up as an asset and expensed over a
period of time, whereas, in the U.S., R&D is expensed in
the year incurred.
31. Some industries are very capital intensive while others

are labor intensive. When evaluating managerial
performance, one must understand the industry that a
company is in and compare within the industry.
9-8
SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 9
EXERCISE 9-1A
Note: There are many possibilities for answers to this question. The answers
given are only a few examples of long-term operational assets that these
companies may own. Also note that even though the companies have very
different business activities, they may have some of the same kinds of long-term
operational assets.
Greyhound Bus Company:
Buses, Buildings, Office Equipment, Computer Equipment, Land, etc.
Exxon/Mobile:
Ships, Automobiles, Drilling Equipment, Oil Wells, Office Equipment,

Buildings, Land, Communications Equipment, etc.
Merry Maids:
Automobiles, Vans, Cleaning Equipment, Maintenance Tools, Buildings,

Land, Office Equipment, etc.
Placer/Dome Gold Mining Company:
Mining Equipment, Office Equipment, Buildings, Land, Gold Mine, etc.
9-9
EXERCISE 9-2A
Long-Term Operational Assets:

a. No
b. Yes
c. Yes (If the company is in a business that uses or sells timber)
d. Yes (As long as it is not held for investment purposes)
e. Yes
f. Yes
g. No
h. Yes
i. Yes
j. No
k. No (Even if it were for a period of one year or longer, it would be
classified as an investment.)
l. Yes
EXERCISE 9-3A
a. Delivery Van T
b. Land T
c. Franchise I
d. Computer T
e. Copyright I
f. Copper Mine T
g. Plant Warehouse T
h. Drill Press T
i. Patent I
j. Oil Well T
k. Desk T
l. Goodwill I
9-10
EXERCISE 9-4A
Costs that are to be capitalized:

List Price $90,000
Less: Discount (4,500)
Freight Cost 1,000
Training Fee 900
Total Costs $87,400
The operator salary and increase in insurance are operating expenses.
EXERCISE 9-5A
a. Basket Purchase
b. % of* Purchase Allocated

Total Appraised Value App. Val. Price Cost
Land $140,000 .20 x $600,000 = $120,000
Building 560,000 .80 x 600,000 = 480,000
Total $700,000
*Land: $140,000 ÷ $700,000 = .20; Building: $560,000 ÷ $700,000 = .80
c. No, the historical cost concept requires that assets be recorded at the
amount paid for them.
d.
Balance Sheet Income Statement Statemt. of

Assets = Liab. + S. Equity Rev. − Exp. = Net Inc. Cash Flows
Cash + Land + Bldg. = +
(600,000) + 120,000 + 480,000 = NA + NA NA − NA = NA (600,000) IA
9-11
EXERCISE 9-6A
a.
Asset Appraised Value Percent of Appraised Value
Land $120,000 20%
Building 300,000 50%
Equipment 180,000 30%
Total $600,000 100%
Asset % of App. Value Purchase Price Allocated Cost

Land 20% x $500,000 = $100,000
Building 50% x 500,000 = 250,000
Equipment 30% x 500,000 = 150,000
Total $500,000
b.
Assets = Liab. Rev. − Exp. = Net. Inc. Cash Flow
Cash + Land + Building + Equip. = N. Pay.
(100,000) + 100,000 + 250,000 + 150,000 = 400,000 NA − NA = NA (100,000) IA
c.
Account Titles Debit Credit
Land 100,000
Buildings 250,000
Equipment 150,000
Cash 100,000
Notes Payable 400,000
9-12
EXERCISE 9-7A
Depreciation Calculation: (Cost − Accumulated Depr.) x (2 x SL Rate)
Year 1 ($160,000 − $ -0-) x (2 x .20) = $64,000

Year 2 ($160,000 − $64,000) x (2 x .20) = $38,400
Swift Company
T-Accounts
Assets = Stockholders’ Equity
Cash Common Stock Retained Earnings
2001 2001 2001
160,000 160,000 160,000 cl 28,000
92,000 Bal. 160,000 Bal. 28,000
Bal. 92,000 2002
2002 26,600
65,000 Bal. 54,600
Bal. 157,000
Service Revenue
2001
Asset 92,000
2001 cl 92,000
160,000 Bal. -0-
Bal. 160,000 2002
65,000
cl 65,000
Accumulated Depr. Bal. -0-
2001
64,000 Depreciation Expense
Bal. 64,000 2001
2002 64,000 cl 64,000
38,400 Bal. -0-
Bal. 102,400 2002
38,400 cl 38,400
Bal. -0-
9-13
EXERCISE 9-7A (cont.)
Swift Company
Financial Statements
2001 2002
Income Statements
Service Revenue $92,000 $65,000

Depreciation Expense (64,000) (38,400)
Net Income $28,000 $26,600
Balance Sheets
Assets
Cash $ 92,000 $157,000
Asset 160,000 160,000
Accumulated Depreciation (64,000) (102,400)
Total Assets $188,000 $214,600
Stockholders’ Equity
Common Stock $160,000 $160,000
Retained Earnings 28,000 54,600
Total Stockholders’ Equity $188,000 $214,600
Statements of Cash Flows
Cash Flows From Operating Activities:
Inflow from Customers $92,000 $ 65,000
Cash Flows From Investing Activities:
Outflow to Purchase Asset (160,000) -0-
Cash Flows From Financing Activities:
Inflow from Stock Issue 160,000 -0-
Net Change in Cash 92,000 65,000
Plus: Beginning Cash Balance -0- 92,000
Ending Cash Balance $92,000 $157,000
9-14
EXERCISE 9-8A
a. Calculation of Depreciation:
Van Cost $30,000
Sales Tax 1,000
Total Cost $31,000
Depreciable Cost: $31,000 − $6,000 = $25,000

Depreciation: $25,000 ÷ 5 years = $5,000 per year
2002 Depreciation: $5,000

b. 2002
Debit Credit
Depreciation Expense ……………….. 5,000
Accumulated Depreciation ….. 5,000
c. Cost $31,000
Less: Accumulated Depreciation (15,000) ($5,000 x 3)
Book Value, 1/1/2005 $16,000
Gain on Sale = $20,000 − $16,000 = $4,000
2005
Debit Credit
Cash ………………………………… 20,000
Accumulated Depreciation ……….. 15,000
Delivery Van …………………. 31,000
Gain on Sale …………………. 4,000
9-15
EXERCISE 9-9A
a.
1. Straight-Line Calculation:
Cost $40,000
Less: Salvage ( 2,000)
Cost to Be Depreciated $38,000 ÷ 5 = $7,600 depr. per year
2. Double-Declining Balance Calculation:

Cost − Accumulated Depreciation x (2 x Straight-Line Rate)
Year 1 ($40,000 − $0 ) x (2 x .20) = $16,000

Year 2 ($40,000 − $16,000) x (2 x .20) = 9,600
Year 3 ($40,000 − $25,600) x (2 x .20) = 5,760
Year 4 ($40,000 − $31,360) x (2 x .20) = 3,456
Year 5 ($40,000 − $34,816) x (2 x .20) = 3,184*
Total $38,000
*Since the total depreciable cost is $38,000 ($40,000 − $2,000), the balance
must be expensed in Year 5 ($38,000 − $34,816).
b.
Expert Manufacturing
Statements Model
Balance Sheet Income Statement Stmt. of
Assets = S. Equity Rev − Exp. = Net Inc. Cash Flows
Cash + D. Press − Acc. Depr = Ret. Ear.
(40,000) + 40,000 − NA = NA NA − NA = NA (40,000) IA
Straight-Line
NA + NA − 7,600 = (7,600) NA − 7,600 = (7,600) NA
DDB
NA + NA − 16,000 = (16,000) NA − 16,000 = (16,000) NA
9-16
c. 1.
General Journal
Date Account Title Debit Credit
Yr. 1 Depreciation Expense 7,600

Accumulated Depreciation 7,600
Entries for years 2-5 will be the same.
c. 2.
General Journal





9-17
EXERCISE 9-10A
a. Historical Cost $20,000

Less: Accumulated Depreciation (15,000)
Book Value $ 5,000
b. Sales Price $ 6,000

Less: Book Value ( 5,000)
Gain on Sale $ 1,000
c. Net income would increase by $1,000, the amount of the gain, in the year of
the sale.
d. Total assets would increase by $1,000, the amount of the gain. Cash would
increase by $6,000; plant assets would decrease by $20,000; and
accumulated depreciation would decrease by $15,000.
e. Cash would increase by $6,000 (Inflow from Investing Activities).
9-18
EXERCISE 9-11A
a. Double-Declining Balance
(Cost − Accum. Depr.) x (2 x SL Rate) = Depr. Exp. Per Year
2005: ($40,000 − $0) x (2 x .20) = 16,000

2006: ($40,000 − $16,000) x (2 x .20) = $9,600
2007: ($40,000 − $25,600) x (2 x .20) = 5,760
2008: ($40,000 − $31,360) x (2 x .20) = 3,456
2009: ($40,000 − $34,816) x (2 x .20) = 2,074 1,184*
Total Accumulated Depreciation $36,000
*Since the total depreciable cost is $36,000 ($40,000 − $4,000), the total
depreciation taken in 2009 is $1,184 ($36,000 − $34,816).
b. Units-of-Production
(Cost − Salvage) ÷ Estimated Production = Depr. Cost per Unit
$40,000 − $4,000 = $36,000

$36,000 ÷ 2,000,000 = $.018 cost per unit
Annual Depreciation = Depr. Cost per Unit x Actual Annual Units
2005: $.018 x 550,000 = $ 9,900

2006: $.018 x 480,000 = 8,640
2007: $.018 x 380,000 = 6,840
2008: $.018 x 390,000 = 7,020
2009 $.018 x 240,000 = 4,320 3,600*
Total Accumulated Depr. $36,000
*The total depreciable cost is $36,000 ($40,000 − $4,000). The depreciation taken
in 2009 is limited to $3,600 [$36,000 − ($9,900 + $8,640 + $6,840 + $7,020)].
9-19
c. Calculation of Book Value
Double-Declining Balance
Cost $40,000
Less: Accumulated Depr. (36,000)
Book Value $ 4,000
Units-of-Production
Cost $40,000
Book Value $ 4,000
Calculation of Gain
Units-of-
DDB Production
Sales Price $5,200 $5,200
Book Value (4,000) (4,000)
Gain $1,200 $1,200
9-20
EXERCISE 9-12A
a. MACRS depreciation = Cost x Table %
7-year property
2002 $120,000 x .1429 = $17,148

2003 $120,000 x .2449 = $29,388
b. 5-year property
2002 $120,000 x .20 = $24,000

2003 $120,000 x .32 = $38,400
EXERCISE 9-13A
Depreciation
Expense
2001: $48,000 − $6,000 = $42,000; $42,000 ÷ 3 = $14,000
2002: (Same as year 2001) $14,000
2003:
Cost $48,000
Less: Acc.Depr. (28,000)
Book Value $20,000 − $4,000* = $16,000
New Book Value: $16,000 ÷ 2** = $8,000

*revised salvage
**revised remaining life
2004: (Same as year 2003) $8,000
9-21
EXERCISE 9-14A
Delivery Truck:
Book value would still be $5,000; the $700 repair cost will be
expensed.
Building:
$56,000 will be the new book value. Old book value was $50,000
($90,000 − $40,000), plus the $6,000 cost of the new roof that will
reduce accumulated depreciation. Or, the cost of $90,000 less new
accumulated depreciation of $34,000 ($40,000 − $6,000) yields a book
value of $56,000.
9-22
EXERCISE 9-15A
a.
Assets = Stockholders’ Equity Rev. - Exp. = Net Inc. Cash Flow
Cash + F. Lift − A. Dep. = C. Stock + Ret. Ear.

12,000 + 106,000 − 50,000 = 24,000 + 44,000 NA − NA = NA NA
(10,000) + NA − NA = NA + (10,000) NA − 10,000 = (10,000) (10,000) OA
b.
Assets = Stockholders’ Rev. − Exp. = Net Inc. Cash Flow
Equity
Cash + F. Lift - A. Depr. = C. Stock + Ret. Ear.

12,000 + 106,000 − 50,000 = 24,000 + 44,000 NA − NA = NA NA
(10,000) + NA − (10,000) = NA + NA NA − NA = NA (10,000) IA
c.
Equity
Cash + F. Lift - A. Dep. = C. Stock + Ret. Ear.

12,000 + 106,000 − 50,000 = 24,000 + 44,000 NA − NA = NA NA
(10,000) + 10,000 − NA = NA + NA NA − NA = NA (10,000) IA
9-23
EXERCISE 9-16A
a. $30,000 ÷ 2 = $15,000 additional depreciation expense for 2005 and 2006.
b. $30,000 of expense would be recognized in 2005 and $-0- in 2006.
c. $-0- cash outflow from operating activities in 2005, $-0- cash outflow from
operating activities in 2006 (cash outflow is from investing activities).
d. $30,000 cash outflow from operating activities in 2005 and $-0- in 2006.
9-24
EXERCISE 9-17A
a. Depletion charge per unit: $500,000 ÷ 800,000 cubic yds = $.625 per cubic
yd.
b.
Depletion Calculation:
Year 1$.625 x 350,000 = $218,750
Year 2$.625 x 380,000 = $237,500
Valley Sand and Gravel

Statements Model
Assets = Stockholders’ Equity Rev. − Exp. = Net Inc. Cash Flow
Cash + Sand Res. = C. Stock + Ret. Ear.
800,000 + NA = 800,000 + NA NA − NA = NA NA
(500,000) + 500,000 = NA + NA NA − NA = NA (500,000) IA
Depletion for Year 1

NA + (218,750) = NA + (218,750) NA − 218,750 = (218,750) NA

NA + (237,500) = NA + (237,500) NA − 237,500 = (237,500) NA
c.
Year 1
Debit Credit
Depletion Expense 218,750
Sand Reserves 218,750
Year 2
Sand Reserves 237,500
9-25
EXERCISE 9-18A
a. Patent $28,000 ÷ 5 = $5,600 per year
b.
Dallas Manufacturing
Statements Model
Assets = S. Equity Rev. - Exp. = Net Inc. Cash Flow

Cash + Patent + G. Will =
94,000 + NA + NA = 94,000 NA − NA = NA NA
Pur. (88,000) +28,000 + 60,000 = NA NA − NA = NA (88,000) IA
Pat. NA + (5,600) + NA = (5,600) NA − 5,600 = (5,600) NA
Debit
Credit
c. Patents 28,000
Goodwill 60,000
Cash 88,000
Amortization Expense - Patents 5,600

Patents 5,600
9-26
EXERCISE 9-19A
a. Purchase Price:
Cash Paid $300,000
Liabilities Assumed 30,000
Total 330,000
FMV of Assets (270,000)
Goodwill $ 60,000
b.
Alpha Peripherals
Statements Model
Assets = Liab. + S. Equity Rev. − Exp. = Net Inc. Cash Flow

Cash + Assets + G. Will = +
400,000 + NA + NA = + 400,000 NA − NA = NA NA
Pur. (300,000) + 270,000 + 60,000 = 30,000 + NA NA − NA = NA (300,000) IA
9-27
SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 9
PROBLEM 9-20A
Office Equipment:
List Price $25,000
Discount (250)
Transportation-In 900
Installation 650
$26,300
Note: The $450 damage from unloading is not a part of the cost of the equipment. The
$90 is routine maintenance.
Basket Purchase:
Allocation is based on relative market values:
Asset Fair Market Value Percent of FMV
Office Furn. $ 6,000 12%
Copier 6,000 12%
Computers 28,000 56%
Laser Printers 10,000 20%
Total $50,000 100%
% of Fair Allocated
Asset Market Value x Purchase Price = Costs
Office Furn. 12% x $40,000 = $ 4,800
Copier 12% x 40,000 = 4,800
Computers 56% x 40,000 = 22,400
Laser Printers 20% x 40,000 = 8,000
Total $40,000
Land and Building:

Land
Purchase Price $ 60,000
Demolition of Barn 3,000
Proceeds of Barn (2,000)
Site Preparation 6,000
Total Cost of Land $ 67,000
Building
Construction Costs $180,000
9-28
PROBLEM 9-21A
Astro Company
Income Statements
2005 2006 2007 2008 2009
Revenue $6,000 $6,200 $6,500 $7,000 $ -0-
Depr. Expense* (5,500) (5,500) (5,500) (5,500) -0-
Operating Income 500 700 1,000 1,500 -0-
Loss -0- -0- -0- -0- (500)**
Net Income $ 500 $700 $1,000 $1,500 $ (500)
Statements of Changes in Stockholders’ Equity
Beg. Com. Stock $ -0- $25,000 $25,000 $25,000 $25,000

Plus: Stk. Issued 25,000 -0- -0- -0- -0-
End. Com. Stock 25,000 25,000 25,000 25,000 25,000
Beg. Ret. Earn. -0- 500 1,200 2,200 3,700

Plus: Net Income 500 700 1,000 1,500 (500)
End. Ret. Earn. 500 1,200 2,200 3,700 3,200
Total Stk. Equity $25,500 $26,200 $27,200 $28,700 $28,200
*Depreciation: $25,000 − $3,000 (salvage value) = $22,000;

$22,000 ÷ 4 = $5,500 per year
**Sale of Asset: Sales price $2,500 less book value $3,000=$500 loss
9-29
PROBLEM 9-21A (cont.)
Astro Company
Balance Sheets
2005 2006 2007 2008 2009
Assets
Cash $ 6,000 $12,200 $18,700 $25,700 $28,200
Equipment 25,000 25,000 25,000 25,000 -0-
Less, Acc. Dep. (5,500) (11,000) (16,500) (22,000) -0-
Total Assets $25,500 $26,200 $27,200 $28,700 $28,200
Common Stock $25,000 $25,000 $25,000 $25,000 $25,000
Retained Earnings 500 1,200 2,200 3,700 3,200
Total Stk. Equity $25,500 $26,200 $27,200 $28,700 $28,200
Operating Act.:
Inflow from Cust. $6,000 $ 6,200 $ 6,500 $ 7,000 $ -0-
Net Cash Op. Act. 6,000 6,200 6,500 7,000 -0-
Investing Act.:
Inflow from Sale -0- -0- -0- -0- 2,500
Outflow for Equip. (25,000) -0- -0- -0- -0-
Net Cash Inv. Act. (25,000) -0- -0- -0- 2,500
Financing Act.
Inflow from Stock 25,000 -0- -0- -0- -0-
Net Cash Fin. Act. 25,000 -0- -0- -0- -0-
Net Change in Cash 6,000 6,200 6,500 7,000 2,500

Plus: Beg. Cash Bal. -0- 6,000 12,200 18,700 25,700
Ending Cash Bal. $6,000 $12,200 $18,700 $25,700 $28,200
9-30
PROBLEM 9-22A
a.
Business Solutions Services

Horizontal Statements Model
Event Assets = Liab. + S. Equity Net Income Cash Flow
2007
1. + NA + NA + FA
2. +− NA NA NA − IA
4. + NA + + + OA
5. − NA − − − OA
6. − NA − − NA
7. NA NA +− NA NA
2008
1. − NA − − − OA
2. − NA − − − OA
3. + NA + + + OA
4. − NA − − − OA
5. − NA − − NA
6. NA NA +− NA NA
2009
2. − NA − − − OA
3. + NA + + + OA
4. − NA − − NA
5. NA NA +− NA NA
9-31
Note: The journal entries are provided for the use of the instructor.
General Journal
Event Account Titles Debit Credit
2007
1. Cash 50,000
Common Stock 50,000
2. Computer 15,000
Cash 15,000
3. Computer 500
Cash 500
4. Cash 20,000
Service Revenue 20,000
5. Service Fee Expense 800
Cash 800
6. Depreciation Expense1 6,200
7. cl Service Revenue 20,000
Service Fee Expense 800
Depreciation Expense 6,200
Retained Earnings 13,000
2008
1. Maintenance Expense 550
Cash 550
Cash 600
3. Cash 30,000
1
($15,500 − -0-) x (2 x .20) = $6,200
9-32
PROBLEM 9-22A b. (cont.)
General Journal
2008
Cash 900


Maintenance Expense 1,150
2009
1. Accumulated Depreciation 2,500
Cash 2,500

Cash 800
3. Cash 35,000


2
($15,500 − $6,200) x (2 x .20) = $3,720 depreciation for 2008
3
[$15,500 − ($9,920 − $2,500)] x (2 x .25) = $4,040 depreciation for 2009
9-33
Note: T-accounts are provided for the use of the instructor.
T-Accounts
2007 2007 2007
1. 50,000 2. 15,000 1. 50,000 7. 13,000
4. 20,000 3. 500 Bal. Bal.
50,000 13,000
5. 800 2008
Bal.53,700 6. 24,230
2008 Bal.
37,230
3. 30,000 1. 550 2009
2. 600 5. 30,160
4. 900 Bal.
67,390
Bal.81,650
2009 Service Revenue
3. 35,000 1. 2,500 2007
2. 800 7. 20,000 4. 20,000
Bal. Bal. -0-
113,350
2008
6. 30,000 3. 30,000
Computer Bal. -0-
2007 2009
2. 15,000 5. 35,000 3. 35,000
3. 500 Bal. -0-
Bal.15,500
Maintenance
Expense
Accumulated Depr. 2008
2007 1. 550
6. 6,200 2. 600 6. 1,150
Bal. 6,200 Bal. -0-
2008
5. 3,720
Bal.9,920
2009
1. 2,500 4. 4,040
Bal.
11,460
9-34

T-Accounts
Service Fee Expense

2007
5. 800 7. 800
Bal. -0-
2008
4. 900 6. 900
Bal. -0-
2009
2. 800 5. 800
Bal. -0-
Depreciation
Expense
2007
6. 6,200 7. 6,200
Bal. -0-
2008
5. 3,720 6. 3,720
Bal. -0-
2009
4. 4,040 5. 4,040
Bal. -0-
9-35

Income Statements
2007 2008 2009
Service Revenue $20,000 $30,000 $35,000
Expenses
Maintenance Expense -0- (1,150) -0-
Service Fee Expense (800) (900) (800)
Depreciation Expense (6,200) (3,720) (4,040)
Total Expenses (7,000) (5,770) (4,840)
Net Income $13,000 $24,230 $30,160
Beginning Common Stock $ -0- $50,000 $ 50,000

Plus: Stock Issue 50,000 -0- -0-
Ending Common Stock 50,000 50,000 50,000
Beginning Retained Earnings -0- 13,000 37,230

Plus: Net Income 13,000 24,230 30,160
Ending Retained Earnings 13,000 37,230 67,390
Total Stockholders’ Equity $63,000 $87,230 $117,390
9-36
PROBLEM 9-22A b.(cont.)
Balance Sheets
2007 2008 2009
Assets
Cash $53,700 $81,650 $113,350
Computer 15,500 15,500 15,500
Less: Accumulated Depr. (6,200) (9,920) (11,460)
Total Assets $63,000 $87,230 $117,390
Liabilities $ -0- $ -0- $ - 0-
Common Stock 50,000 50,000 50,000
Retained Earnings 13,000 37,230 67,390
Total Stockholders’ Equity 63,000 87,230 117,390
Total Liab. and Stkholders’ Equity $63,000 $87,230 $117,390

Cash Flows From Oper. Act.:
Inflow from Revenue $20,000 $30,000 $ 35,000
Outflow for Expenses (800) (2,050) (800)
Net Cash Flow from Oper. Act. 19,200 27,950 34,200
Cash Flows From Inv. Act.:
Cash Outflow for Computer (15,500) -0- (2,500)
Net Cash Flow from Inv. Act. (15,500) -0- (2,500)
Cash Flows From Fin. Act.:
Cash Inflow from Stock Issue 50,000 -0- -0-
Net Cash Flow from Fin. Act. 50,000 -0- -0-
Net Change in Cash 53,700 27,950 31,700
Plus: Beginning Cash Balance -0- 53,700 81,650
Ending Cash Balance $53,700 $81,650 $113,350
9-37
PROBLEM 9-23A
a. Straight-line
Cost $5,000
Delivery Cost 200
Total 5,200
Less: Salvage Value (1,200)
Depreciable Cost $4,000 ÷ 4 = $1,000 per year
2008: $1,000
2009: $1,000
Total Estimated
[Cost − Salvage Value] ÷ Units of Production = Cost per Unit
$5,200 − $1,200
1,000,000 = $.004 Per Copy
Current Units of Annual

Cost per Copy x Production = Depreciation
2008: $.004 x 230,000 = $920

2009: $.004 x 250,000 = $1,000
c. Double-Declining Balance
Accum. Depreciation Annual

Cost − at Beginning of Period x (2 x SL Rate) = Depreciation
2008: ($5,200 − -0-) x (2 x .25) =

$5,200 x .50 = $2,600
2009: ($5,200 − 2,600) x (2 x .25) =

$2,600 x .50 = $1,300
9-38
d. MACRS
Cost x MACRS % = Annual Depreciation
2008: $5,200 x .20 = $1,040

2009: $5,200 x .32 = $1,664
9-39
PROBLEM 9-24A
a. Straight-Line
(Cost − Salvage Value) ÷ Useful Life = Annual Depreciation
Year 1 ($38,000 − 3,000) ÷ 5 = $7,000 per year

2 7,000
3 7,000
4 7,000
5 7,000
b. Double-Declining Balance

Year 1 ($38,000 − $-0-) x (2 x .20) = $15,200

2 ($38,000 − $15,200) x .40 = 9,120
3 ($38,000 − $24,320) x .40 = 5,472
4 ($38,000 − $29,792) x .40 = 3,283
5 ($38,000 − $33,075) x .40 = 1,970 1,925*
*Balance of depreciable costs [$38,000 − ($33,075 + $3,000)]
c. The amount of depreciation expense does not affect cash flow because
depreciation is a non-cash item. However, if different methods are compared
for tax reporting, then differences in cash flow can occur.
d. Straight-Line
Book value $38,000 − $21,000* = $17,000
Sales Price $20,000

Book Value (17,000)
Gain $ 3,000
*7,000 x 3 = $21,000
9-40
PROBLEM 9-24A d. (cont.)
Double-Declining-Balance
Book Value $38,000 − $29,792* = $8,208
Sales Price $20,000

Book Value ( 8,208)
Gain $11,792
*$15,200 + $9,120 + $5,472 = $29,792
9-41
PROBLEM 9-25A
Units-of-Production
Total Estimated
(Cost − Salvage Value) ÷ Units of Production = Cost per Unit
Annual
Cost per Unit x Current Units of Production = Depreciation
a. $35,000 − $5,000
150,000 = $.20 per mile
2007 $.20 x 50,000 = $10,000

2008 $.20 x 70,000 = 14,000
2009 $.20 x 58,000 = 11,600 6,000*
*Limited to remaining cost to be depreciated [$35,000 − ($24,000 + $5,000)]
9-42
b.
Stubbs Corporation
Balance Sheet Income Statement Statement of

Assets = Stockholders’ Equity Rev. − Exp. = Net Inc. Cash Flows
Event Cash + Van − A. Dep. = C. Stock + Ret. Ear. − =
Bal. 50,000 + NA − NA = 50,000 + NA NA − NA = NA NA
Van (35,000) + 35,000 − NA = NA + NA NA − NA = NA (35,000) IA
Rev. 21,000 + NA − NA = NA + 21,000 21,000 − NA = 21,000 21,000 OA
Depr. NA + NA − 10,000 = NA + (10,000) NA − 10,000 = (10,000) NA
Bal. 36,000 + 35,000 − 10,000 = 50,000 + 11,000 21,000 − 10,000 = 11,000 (14,000) NC
c. Sales Price $ 4,000

Book Value (5,000) (depreciated to salvage value; see a. above)
Loss on Sale $(1,000)
Debit Credit
Cash 4,000
Loss on Sale 1,000
Equipment 35,000
9-43
PROBLEM 9-26A
Depreciation Calculation:
Straight Line:
Company A ($60,000 − $4,000) ÷ 5 = $11,200 per year
Double-Declining Balance:
Company B
2005 ($60,000 − $-0-) x (2 x .20) = $24,000
2006 ($60,000 − $24,000) x .4 = 14,400
2007 ($60,000 − $38,400) x .4 = 8,640
2008 ($60,000 − $47,040) x .4 = 5,184
2009 ($60,000 − $52,224) x .4 = 3,110 *3,776
*Increased to remaining depreciable cost.
Units-of-Production:
Company C Depr. Rate: $60,000 − $4,000

200,000 = $.28 per hour
2005 $.28 x 50,000 = $14,000

2006 $.28 x 55,000 = 15,400
2007 $.28 x 40,000 = 11,200
2008 $.28 x 44,000 = 12,320
2009 $.28 x 31,000 = 8,680 limited to $3,080*
*Limited to remaining depreciable cost: [$60,000 - ($52,920 + $4,000)].
9-44
a. Company A - 2005
Revenue $30,000
Depreciation Expense (11,200)
Net Income $18,800
Company B - 2005
Revenue $30,000
Net Income $ 6,000
Company C - 2005
Revenue $30,000
Net Income $16,000
Company A has the highest net income in 2005.
b. Company A - 2007
Revenue $30,000
Net Income $18,800
Company B - 2007
Revenue $30,000
Depreciation Expense ( 8,640)
Net Income $21,360
Company C - 2007
Revenue $30,000
Net Income $18,800
Companies A and C have the lowest net income for 2007.
9-45
c. Company A Accumulated Depreciation

2005 $11,200
2006 11,200
2007 11,200
$33,600
Cost $60,000
Accumulated Depreciation (33,600)
Book Value $26,400
Company B Accumulated Depreciation

2005 $24,000
2006 14,400
2007 8,640
$47,040
Cost $60,000
Book Value $12,960
Company C Accumulated Depreciation

2005 $14,000
2006 15,400
2007 11,200
$40,600
Cost $60,000
Book Value $19,400
Highest book value, 2007: Company A
9-46
d. Company A: Sales (four years) $120,000

Depreciation (four years) (44,800)
Retained Earnings - 2008 $ 75,200
Company B: Sales (four years) $120,000

Company C: Sales (four years) $120,000

Company A has the highest amount of reported Retained Earnings on the 2008
Balance Sheet. The Instructor should point out that at the end of the asset's
five-year life, the effect on retained earnings is the same under all three
methods.
e. The cash flow from operating activities will be the same for each company if
income tax is not considered. Depreciation expense is not a cash flow item.
9-47
PROBLEM 9-27A
a.
General Journal
Date Account Titles Debit Credit
2007
1/1 Coal Mine 720,000
Cash 720,000
7/1 Timber 1,650,000

Land 150,000
Cash 1,800,000
12/31 Depletion Expense (80,000 x $3.60) 288,000

Coal Mine 288,000
12/31 Depletion Expense (1,100,000 x $.55) 605,000

Timber 605,000
2008
2/1 Silver Mine 900,000
Cash 900,000
8/1 Oil Reserves 880,000

Cash 880,000

Coal Mine 223,200
12/31 Depletion Expense (1,450,000 x $.55) 797,500

Timber 797,500
12/31 Depletion Expense (9,000 x $30) 270,000

Silver Mine 270,000

Oil Reserves 312,000
9-48
Computations:
Coal Mine - Depletion

Cost $720,000
Estimated Tons 200,000 = $3.60 per ton
Timber - Depletion
Cost $1,800,000 − $150,000
Estimated Board Feet 3,000,000 = .55 per board foot
Silver Mine - Depletion

Cost $900,000
Estimated Tons 30,000 = $30 per ton
Oil Reserves - Depletion

Cost $880,000
Estimated Barrels 250,000 − 30,000 = $4.00 per barrel
(profitable)
9-49
b. Natural Resources
Coal Mine (less depletion) $ 208,800
Timber (less depletion) 247,500
Silver Mine (less depletion) 630,000
Oil Reserves (less depletion) 568,000
Total 1,654,300
Land 150,000
Total Natural Resources $1,804,300
c. Undepleted Cost of Coal Mine at 1/1/2009: $208,800
Revised Estimated Tons of Coal: 50,000
Revised Depletion Rate per Ton: $208,800 ÷ 50,000 = $4.176 per ton
2009 depletion: $4.176 x 35,000 = $146,160
Debit Credit
Coal Mine 146,160
9-50
PROBLEM 9-28A
a.
Date Assets = Liab. + S. Equity Net Income Cash Flows

1/1/02 +− NA NA NA − IA
12/31/02 − NA − − NA
5/5/03 − NA − − − OA
12/31/03 − NA − − NA
1/1/04 +− NA NA NA − IA
12/31/04 − NA − − NA
3/1/05 − NA − − − OA
12/31/05 − NA − − NA
1/1/06 +− NA NA NA − IA
12/31/06 − NA − − NA
7/1/07* − NA − − NA
7/1/07** + NA + + + IA
*To record depreciation for 2007.

**To record sale of asset. The plus in the assets column represents the net increase in
assets resulting from the sale of the equipment. Cash increases by a greater amount
than the decrease in the book value of the equipment.
b.
Year Computation Depr. Exp.
2002 ($24,000 − $4,000) ÷ 5 $4,000
2003 Same as 2002 4,000
2004 ($24,000 + $3,000 − $8,000 − $4,000) ÷ 3 5,000
2005 Same as 2004 5,000
2006 ($27,000 − $4,000 − $12,400 acc. depr.) ÷ 3 3,533
9-51
c.
Computation of Book Value
Year Cost − Acc. Depr. = Book Value

2002 $24,000 − $4,000 = $20,000
2003 24,000 − 8,000 = 16,000
2004 27,000 − 13,000 = 14,000
2005 27,000 − 18,000 = 9,000
2006 27,000 − 15,933 = 11,067
d. Computation of Depreciation Expense for 2007:

$3,533 x 6/12 = $1,767
Book Value at Date of Sale:

12/31/06 $11,067 (see above)
2007 Depreciation (1,767)
Book Value $ 9,300
Selling Price $9,500

Less: Book Value (9,300)
Gain on Sale $ 200
9-52
PROBLEM 9-29A
a.
Kaye Manufacturing
Statements Model

Date Cash + Equip. − A. Depr. = C. Stock + Ret. Ear.
Bal. 15,000 + 26,000 − 11,000 = 8,000 + 22,000 NA − NA = NA NA
1/2 (6,000) + 6,000 − NA = NA + NA NA − NA = NA (6,000) IA
8/1 (920) + NA − NA = NA + (920) NA − 920 = (920) (920) OA
10/2 (620) + NA − NA = NA + (620) NA − 620 = (620) (620) OA
12/31 NA + NA − 4,500* = NA + (4,500) NA − 4,500 = (4,500) NA
Bal. 7,460 + 32,000 − 15,500 = 8,000 + 15,960 -0- − 6,040 = (6,040) (7,540) NC
*Depreciation Calculation: ($26,000 + $6,000) − $11,000 = $21,000; ($21,000 − $3,000) ÷ 4 = $4,500
9-53
b.
Kaye Manufacturing
General Journal

1/2/05 Machinery 6,000
Cash 6,000
8/1/05 Maintenance Expense 920

Cash 920

Cash 620
12/31/05 Depreciation Expense 4,500

9-54
PROBLEM 9-30A
a. Purchase Price $1,395,000

Less: FMV of Assets Acquired
Equipment $600,000
Land 250,000
Building 155,000
Franchise 150,000 (1,155,000)
Goodwill Purchased $ 240,000
b. Debit Credit
1
Amortization Expense 30,000
Franchise 30,000
1
$150,000 ÷ 5 = $30,000
9-55
PROBLEM 9-31A
a. Any permanent impairment will be written off in the year the impairment is
determined.
b.
2003 Impairment Loss 50,000
Goodwill 50,000
9-56
SOLUTIONS TO EXERCISES - SERIES B - CHAPTER 9
EXERCISE 9-1B
Note: There are many possibilities for answers to this question. The answers given
are only a few examples of long-term operational assets that these companies may
own. Also note that even though the companies have very different business
activities, they may have some of the same kinds of long-term operational assets.
Lansing Farms:
Farm Equipment, Buildings, Office Equipment, Computer Equipment, Land, etc.
American Airlines:
Airplanes, Machinery & Equipment, Office Equipment, Buildings, Land,

Communications Equipment, etc.
IBM:
Manufacturing Equipment, Computer Equipment, Buildings, Land, Office

Equipment, etc.
Northwest Mutual Insurance Co.:
Office Equipment, Buildings, Land, etc.
9-57
EXERCISE 9-2B
Long-Term Operational Assets:
a. No
b. Yes
c. Yes
d. No
e. No
f. Yes
g. Yes
h. No
i. No
j. No
k. Yes
l. Yes
EXERCISE 9-3B
No. Tangible (T), Intangible (I)

a. Retail Store Building T
b. Shelving for Inventory T
c. Trademark I
d. Gas Well T
e. Drilling Rig T
f. FCC License for TV Station I
g. 18-Wheel Truck T
h. Timber T
i. Log Loader T
j. Dental Chair T
k. Goodwill I
l. Business Web Page T
9-58
EXERCISE 9-4B
Costs that are to be capitalized:

List Price $100,000
Less: Discount (4,000)
Freight Cost 500
Training Fee 1,000
Total Costs $97,500
The operator salary and increase in insurance are operating expenses.
EXERCISE 9-5B
a. % of* Purchase Allocated
Total Appraised Value App. Val. Price Cost
Land $270,000 .30 x $800,000 = $240,000
Building 630,000 .70 x 800,000 = 560,000
Total $900,000 $800,000
*Land: $270,000 ÷ $900,000 = .30; Building: $630,000 ÷ $900,000 = .70
b. No, the historical cost concept requires that assets be recorded at the amount
paid for them.
c.
Balance Sheet Income Statement Statemt. of

Assets = Liab. + S. Equity Rev. − Exp. = Net Inc. Cash Flows
Cash + Land + Bldg. = +
(800,000) + 240,000 + 560,000 = NA + NA NA − NA = NA (800,000) IA
9-59
EXERCISE 9-6B
a.
Asset Appraised Value Percent of Appraised Value
Land $105,000 30%
Building 210,000 60%
Furniture 35,000 10%
Total $350,000 100%
Asset % of App. Value Purchase Price Allocated Cost

Land 30% x $300,000 = $ 90,000
Building 60% x 300,000 = 180,000
Furniture 10% x 300,000 = 30,000
Total $300,000
b.
Assets = Liab. Rev. − Exp. = Net. Inc. Cash Flow
Cash + Land + Buildings + Furn. = N. Pay.
(50,000) + 90,000 + 180,000 + 30,000 = 250,000 NA − NA = NA (50,000) IA
c.
Account Titles Debit Credit
Land 90,000
Buildings 180,000
Furniture 30,000
Cash 50,000
Notes Payable 250,000
9-60
EXERCISE 9-7B
Depreciation Calculation: (Cost − Accumulated Depr.) x (2 x SL Rate)
Year 1 ($120,000 − $ -0-) x (2 x .1667) = $40,000

Year 2 ($120,000 − $40,000) x (2 x .1667) = $26,667
Jet Manufacturing Company

T-Accounts
2001 2001 2001
120,000 120,000 120,000 cl 36,000
76,000 Bal. 120,000 Bal. 36,000
Bal. 76,000 2002
2002 58,533
85,200 Bal. 94,533
Bal. 161,200
Sales Revenue
2001
Asset 76,000
2001 cl 76,000
120,000 Bal. -0-
Bal. 120,000 2002
85,200
cl 85,200
Accumulated Depr. Bal. -0-
2001
40,000 Depreciation Expense
Ba 40,000 2001
l.
2002 40,000 cl 40,000
26,667 Bal. -0-
Ba 66,667 2002
l.
26,667 cl 26,667
Bal. -0-
9-61
EXERCISE 9-7B (cont.)
Jet Manufacturing Company

2001 2002
Income Statements
Sales Revenue $76,000 $85,200

Depreciation Expense (40,000) (26,667)
Net Income $36,000 $58,533
Balance Sheets
Assets
Cash $ 76,000 $161,200
Asset 120,000 120,000
Total Assets $156,000 $214,533
Common Stock $120,000 $120,000
Total Stockholders’ Equity $156,000 $214,533
Cash Flows From Operating Activities:
Inflow from Customers $76,000 $85,200
Cash Flows From Investing Activities:
Outflow to Purchase Asset (120,000) -0-
Cash Flows From Financing Activities:
Inflow from Stock Issue 120,000 -0-
Net Change in Cash 76,000 85,200
Plus: Beginning Cash Balance -0- 76,000
Ending Cash Balance $76,000 $161,200
9-62
EXERCISE 9-8B
a. Calculation of Depreciation:
Taxi Cost $27,000
Sales Tax 500
Total Cost $27,500
Depreciable Cost: $27,500 − $2,500 = $25,000

Depreciation: $25,000 ÷ 5 years = $5,000 per year

b. 2002
Debit Credit
Depreciation Expense ……………….. 5,000
Accumulated Depreciation ….. 5,000
c. Cost $27,500
Less: Accumulated Depreciation (10,000) ($5,000 x 2)
Book Value, 1/1/2004 $17,500
Loss on Sale = $15,000 − $17,500 = $2,500
2004
Debit Credit
Cash ………………………………… 15,000
Accumulated Depreciation ……….. 10,000
Loss on Sale………………………….. 2,500
Taxi ……………………..…… 27,500
9-63
EXERCISE 9-9B
a.
1. Straight-Line Calculation:
Cost $48,000
Less: Salvage ( 3,000)
Cost to Be Depreciated $45,000 ÷ 5 = $9,000 depr. per year
2. Double-Declining Balance Calculation:

Cost − Accumulated Depreciation x (2 x Straight-Line Rate)
Year 1 ($48,000 − $0 ) x (2 x .20) = $19,200

Year 2 ($48,000 − $19,200) x (2 x .20) = 11,520
Year 3($48,000 − $30,720) x (2 x .20) = 6,912
Year 4($48,000 − $37,632) x (2 x .20) = 4,147
Year 5($48,000) −$41,779) x (2 x .20) = 2,488 3,221*
Total $45,000
*Since the total depreciable cost is $45,000 ($48,000 − $3,000), the balance of
depreciable cost is expensed in year 5. ($45,000 − $41,779)
b.
Sun Drugstore
Statements Model
Balance Sheet Income Statement Stmt. of
Assets = S. Equity Rev − Exp. = Net Inc. Cash Flows
Cash + Comp. − Acc. Depr = Ret. Ear.
(48,000) + 48,000 − NA = NA NA − NA = NA (48,000) IA
Straight-Line
NA + NA − 9,000 = (9,000) NA − 9,000 = (9,000) NA
DDB
NA + NA − 19,200 = (19,200) NA − 19,200 = (19,200) NA
9-64
c. 1.
Sun Drugstore
General Journal

Entries for years 2-5 will be the same.
c. 2.
Sun Drugstore
General Journal





9-65
EXERCISE 9-10B
a. Historical Cost $27,000

Less: Accumulated Depreciation (13,000)
Book Value $14,000
b. Sales Price $14,000

Gain on Sale $ -0-
c. Net income would not be affected.
d. Total assets would not be affected. However, cash would increase by $14,000;
plant assets would decrease by $27,000; and accumulated depreciation would
decrease by $13,000.
e. Cash would increase by $14,000 (Inflow from Investing Activities).
9-66
EXERCISE 9-11B
a. Double-Declining Balance
(Cost − Accum. Depr.) x (2 x SL Rate) = Depr. Exp. Per Year
2006: ($28,000 − $0) x (2 x .25) = $14,000

2007: ($28,000 − $ 14,000) x (2 x .25) = 7,000
2008: ($28,000 − $21,000) x (2 x .25) = 3,500
2009: ($28,000 − $24,500) x (2 x .25) = 1,750 1,500*
Total Accumulated Depreciation $26,000
*Since the total depreciable cost is $26,000 ($28,000 − $2,000), the total
depreciation taken in 2009 is $1,500 ($26,000 − $24,500).
(Cost − Salvage) ÷ Estimated Production = Depr. Cost per Unit
$28,000 − $2,000 = $26,000

$26,000 ÷ 1,300,000 = $.020 cost per page
Annual Depreciation = Depr. Cost per Page x Actual Annual Units
2006: $.020 x 350,000 = $ 7,000

2007: $.020 x 370,000 = 7,400
2008: $.020 x 280,000 = 5,600
2009: $.020 x 320,000 = 6,400 6,000*
Total Accumulated Depr. $26,000
*The total depreciable cost is $26,000 ($28,000 − $2,000). The depreciation taken in
2009 is $6,000 [$26,000 − ($7,000 + $7,400 + $5,600)].
9-67
c. Calculation of Book Value
Cost $28,000
Book Value $ 2,000
Units-of-Production
Cost $28,000
Book Value $ 2,000
Calculation of Gain (Loss)

Units-of-
DDB Production
Sales Price $1,500 $1,500
Book Value (2,000) (2,000)
Gain (Loss) $ (500) $ (500)
9-68
EXERCISE 9-12B
a. MACRS depreciation = Cost x Table %
7-year property
2001: $40,000 x .1429 = $ 5,716

2002: $40,000 x .2449 = $ 9,796
b. 5-year property
2001: $40,000 x .20 = $8,000

2002: $40,000 x .32 = $12,800
EXERCISE 9-13B
Depreciation
Expense
2001: $36,000 − $6,000 = $30,000; $30,000 ÷ 3 = $10,000
2002: (Same as year 2001.) $10,000
2003:
Cost $36,000
Less: Acc.Depr. (20,000)
Book Value $16,000 − $4,000* = $12,000
New Book Value: $12,000 ÷ 2** = $6,000

*revised salvage
**revised remaining life
2004: (Same as year 2003.) $6,000
9-69
EXERCISE 9-14B
Tow Truck:
Book value would still be $5,600; the $620 repair cost will be expensed.
Building:
$67,500 will be the new book value. Old book value was $63,500 ($90,000
− $26,500), plus the $4,000 cost of the new roof that will reduce
accumulated depreciation. Or, the cost of $90,000 less new accumulated
depreciation of $22,500 ($26,500 − $4,000) yields a book value of $67,500.
9-70
EXERCISE 9-15B
a.
Assets = Stockholders’ Equity Rev. - Exp. = Net Inc. Cash Flow
Cash + Comp. − A. Dep. = C. Stock + Ret. Ear.

37,000 + 42,000 − 19,000 = 40,000 + 20,000 NA − NA = NA NA
(3,000) + NA − NA = NA + (3,000) NA − 3,000 = (3,000) (3,000) OA
b.
Equity
Cash + Comp. - A. Depr. = C. Stock + Ret. Ear.

37,000 + 42,000 − 19,000 = 40,000 + 20,000 NA − NA = NA NA
(3,000) + NA − (3,000) = NA + NA NA − NA = NA (3,000) IA
c.
Equity
Cash + Comp. - A. Dep. = C. Stock + Ret. Ear.

37,000 + 42,000 − 19,000 = 40,000 + 20,000 NA − NA = NA NA
(3,000) + 3,000 − NA = NA + NA NA − NA = NA (3,000) IA
9-71
EXERCISE 9-16B
a. $26,000 ÷ 2 = $13,000 additional depreciation expense for 2001 and 2002.
b. $26,000 of expense would be recognized in 2001 and $-0- in 2002.
c. $-0- cash outflow from operating activities in 2001, $-0- cash outflow from
operating activities in 2002 (cash outflow is from investing activities).
d. $26,000 cash outflow from operating activities in 2001 and $-0- in 2002.
9-72
EXERCISE 9-17B
a. Depletion charge per unit: $450,000 ÷ 22,500 tons = $20 per ton
b.
Depletion Calculation:
Year 1$20 x 10,000 = $200,000
Year 2$20 x 8,000 = $160,000
Stover Coal
Statements Model
Cash + Coal Res. = C. Stock + Ret. Ear.
600,000 + NA = 600,000 + NA NA − NA = NA NA
(450,000) + 450,000 = NA + NA NA − NA = NA (450,000) IA

NA + (200,000) = NA + (200,000) NA − 200,000 = (200,000) NA

NA + (160,000) = NA + (160,000) NA − 160,000 = (160,000) NA
c.
Year 1
Debit Credit
Coal Reserves 200,000
Year 2
Coal Reserves 160,000
9-73
EXERCISE 9-18B
a. Patent $24,000 ÷ 2 = $12,000 per year

The goodwill is not amortized under FASB Statement No. 142.
b.
Bevel Manufacturing
Statements Model
Assets = S. Equity Rev. - Exp. = Net Inc. Cash Flow

Cash + Patent + G. Will =
90,000 + NA + NA = 90,000 NA − NA = NA NA
Pur. (44,000) +24,000 + 20,000 = NA NA − NA = NA (44,000) IA
Pat. NA + (12,000) + NA = (12,000) NA − 12,000 = (12,000) NA
Debit Credit
c. Patents 24,000
Goodwill 20,000
Cash 44,000
Amortization Expense - Patents 12,000

Patents 12,000
9-74
EXERCISE 9-19B
a. Purchase Price:
Cash Paid $200,000
Liabilities Assumed 40,000
Total 240,000
FMV of Assets (185,000)
Goodwill $ 55,000
b.
Sea Corp.
Statements Model
Assets = Liab. + S Equity Rev. − Exp. = Net Inc. Cash Flow

Cash + Assets + G. Will = +
300,000 + NA + NA = + 300,000 NA − NA = NA NA
Pur. (200,000) + 185,000 + 55,000 = 40,000 + NA NA − NA = NA (200,000) IA
c. Goodwill will not be written off under the new guidelines unless it is determined that the amount of purchased
goodwill has been impaired. Impairment is tested by comparing the purchase cost of the goodwill with its current
fair market value. If fair market value is determined to be less than historical cost, the decline is recorded as an
impairment loss.
9-75
SOLUTIONS TO PROBLEMS -SERIES B - CHAPTER 9
PROBLEM 9-20B
Office Equiptment
List Price $60,000
Discount (1,200)
Transportation-In 1,600
Installation 2,200
$62,600
Note: The $1,000 damage from unloading is not a part of the cost of the equipment.
The $300 is routine maintenance.
Basket Purchase
Allocation is based on relative market values:
Asset Fair Market Value Percent FMV Value

Copier $10,000 50%
Computer 6,000 30%
Scanner 4,000 20%
Total 20,000 100%
% of Fair Market Allocated
Asset Value x Purchase Price = Costs
Copier 50% x $15,000 = $ 7,500
Computer 30% x 15,000 = 4,500
Scanner 20% x 15,000 = 3,000
Total $15,000
Land and Building
c. Land
Purchase Price $200,000
Demolition of Old Building 10,000
Proceeds from Old Building (7,000)
Site Preparation 14,000
Total Cost of Land $217,000
Building
Construction Costs $500,000
9-76
PROBLEM 9-21B
Hobart Company
Income Statements
2001 2002 2001 2004 2005
Revenue $15,200 $14,400 $13,000 $12,000 $ -0-
Depr. Expense* (12,000) (12,000) (12,000) (12,000) -0-
Operating Income 3,200 2,400 1,000 -0- -0-
Gain/(Loss) -0- -0- -0- -0- (5,200)**
Net Income $3,200 $2,400 $1,000 $ -0- $(5,200)
Beg. Com. Stock $ -0- $60,000 $60,000 $60,000 $60,000

Plus: Stock Issued 60,000 -0- -0- -0- -0-
End. Com. Stock 60,000 60,000 60,000 60,000 60,000
Beg. Ret. Earn. -0- 3,200 5,600 6,600 6,600

Plus: Net Income 3,200 2,400 1,000 -0- (5,200)
End. Ret. Earn. 3,200 5,600 6,600 6,600 1,400
Total Stk. Equity $63,200 $65,600 $66,600 $66,600 $61,400
*Depreciation: $60,000 − $12,000 (salvage value) = $48,000;

$48,000 ÷ 4 = $12,000 per year
**Sale of Asset: Sales Price $6,800 less book value $12,000=$5,200 loss
9-77
PROBLEM 9-21B (cont.)
Hobart Company
Balance Sheets
2001 2002 2003 2004 2005
Assets
Cash $15,200 $29,600 $42,600 $54,600 $61,400
Equipment 60,000 60,000 60,000 60,000 -0-
Less, Acc. Dep. (12,000) (24,000) (36,000) (48,000) -0-
Total Assets $63,200 $65,600 $66,600 $66,600 $61,400
Common Stock $60,000 $60,000 $60,000 $60,000 $60,000
Retained Earn. 3,200 5,600 6,600 6,600 1,400
Total Stkhldrs’ Equity $63,200 $65,600 $66,600 $66,600 $61,400
Operating Act.:
Inflow from Cust. $15,200 $14,400 $13,000 $12,000 $ -0-
Net Cash Op. Act. 15,200 14,400 13,000 12,000 -0-
Investing Act.:
Inflow from Equip. -0- -0- -0- -0- 6,800
Outflow for Equip. (60,000) -0- -0- -0- -0-
Net Cash Inv. Act. (60,000) -0- -0- -0- 6,800
Financing Act.
Inflow from Stock 60,000 -0- -0- -0- -0-
Net Cash Fin. Act. 60,000 -0- -0- -0- -0-
Net Change in Cash 15,200 14,400 13,000 12,000 6,800

Plus: Beg. Cash Bal. -0- 15,200 29,600 42,600 54,600
Ending Cash Bal. $15,200 $29,600 $42,600 $54,600 $61,400
9-78
PROBLEM 9-22B
a.
Jim’s Towing Service

Event Assets = Liab. + S. Equity Net Income Cash Flow
2007
1. + NA + NA + FA
4. + NA + + + OA
5. − NA − − − OA
6. − NA − − NA
7. NA NA +− NA NA
2008
1. − NA − − − OA
2. − NA − − − OA
3. + NA + + + OA
4. − NA − − − OA
5. − NA − − NA
6. NA NA +− NA NA
2009
2. − NA − − − OA
3. + NA + + + OA
4. − NA − − NA
5. NA NA +− NA NA
9-79
Note: Journal entries are not required, but are provided for the use of the instructor.
Jim’s Towing Service, General Journal
2007
1. Cash 40,000
Common Stock 40,000
2. Wrecker 26,000
Cash 26,000
3. Wrecker 1,800
Cash 1,800
4. Cash 17,600
5. Gas & Oil Expense 3,000
Cash 3,000
6. Depreciation Expense* 8,600
Gas & Oil Expense 3,000
2008
Cash 400
Cash 600
3. Cash 18,000
*$26,000 + $1,800 = $27,800; $27,800 − $2,000 = $25,800; $25,800 ÷ 3 = $8,600
depreciation per year
9-80
PROBLEM 9-22B b. (cont.)
Note: Journal entries are provided for the use of the instructor.
General Journal
2008
Cash 4,200
5. Depreciation Expense 8,600


Maintenance Expense 1,000
2009
1. Accumulated Depreciation 1,400
Cash 1,400

Cash 3,600
3. Cash 30,000
4. Depreciation Expense* 5,000


*$27,800 − $2,000 − $17,200 + $1,400 = $10,000; $10,000 ÷ 2 = $5,000 depreciation per

year
9-81
Note: The T-accounts are provided for the use of the
instructor.
T-Accounts

2007 2007 2007
1. 40,000 2. 26,000 1. 40,000 7. 6,000
4. 17,600 3. 1,800 Bal. Bal. 6,000
40,000
5. 3,000 2008
Bal. 6. 4,200
26,800
2008 Bal.
10,200
3. 18,000 1. 400 2009
2. 600 5. 21,400
4. 4,200 Bal.
31,600
Bal.
39,600
2009 Service Revenue
3. 30,000 1. 1,400 2007
2. 3,600 7. 17,600 4. 17,600
Bal. Bal. -0-
64,600
2008
6. 18,000 3. 18,000
Wrecker Bal. -0-
2007 2009
2. 26,000 5. 30,000 3. 30,000
3. 1,800 Bal. -0-
Bal.
27,800
Maintenance
Expense
Accumulated Depr. 2008
2007 1. 400
6. 8,600 2. 600
Bal. 8,600 Bal.1,000
2008 6. 1,000
5. 8,600 Bal. -0-
Bal.
17,200
9-82
2009
1. 1,400 4. 5,000
Bal.
20,800
9-83

T-Accounts
Gas & Oil Expense

2007
5. 3,000 7. 3,000
Bal. -0-
2008
4. 4,200 6. 4,200
Bal. -0-
2009
2. 3,600 5. 3,600
Bal. -0-
Depreciation
Expense
2007
6. 8,600 7. 8,600
Bal. -0-
2008
5. 8,600 6. 8,600
Bal. -0-
2009
4. 5,000 5. 5,000
Bal. -0-
9-84
b.
Income Statements
2007 2008 2009
Service Revenue $17,600 $18,000 $30,000
Expenses
Maintenance Expense -0- (1,000) -0-
Gas & Oil Expense (3,000) (4,200) (3,600)
Total Expenses (11,600) (13,800) (8,600)
Net Income $6,000 $4,200 $21,400
Beginning Common Stock $ -0- $40,000 $40,000

Plus: Stock Issued 40,000 -0- -0-
Ending Common Stock 40,000 40,000 40,000
Beginning Retained Earnings -0- 6,000 10,200

Plus: Net Income 6,000 4,200 21,400
Ending Retained Earnings 6,000 10,200 31,600
Total Stockholders’ Equity $46,000 $50,200 $71,600
9-85
PROBLEM 9-22Bb. (cont.)

Balance Sheets
2007 2008 2009
Assets
Cash $26,800 $39,600 $64,600
Wrecker 27,800 27,800 27,800
Less: Accumulated Depr. (8,600) (17,200) (20,800)
Total Assets $46,000 $50,200 $71,600
Liabilities $ -0- $ -0- $ -0-

Common Stock 40,000 40,000 40,000
Retained Earnings 6,000 10,200 31,600
Total Liabilities and Stkhld. Equity $46,000 $50,200 $71,600
Cash Flows From Oper. Act.:
Inflow from Revenue $17,600 $18,000 $30,000
Outflow for Expenses (3,000) (5,200) (3,600)
Net Cash Flow from Oper. Act. 14,600 12,800 26,400
Cash Flows From Inv. Act.:
Cash Outflow for Wrecker (27,800) -0- (1,400)
Net Cash Flow from Inv. Act. (27,800) -0- (1,400)
Cash Flows From Fin. Act.:
Cash Inflow from Stock Issue 40,000 -0- -0-
Net Cash Flow from Fin. Act. 40,000 -0- -0-
Net Change in Cash 26,800 12,800 25,000
Plus: Beginning Cash Balance -0- 26,800 39,600
Ending Cash Balance $26,800 $39,600 $64,600
9-86
PROBLEM 9-23B
a. Straight-Line
Cost $70,000
Delivery Cost 2,000
Installation Charge 1,000
Total Cost 73,000
Less: Salvage Value ( 3,000)
$70,000 ÷ 5 = $14,000 per year
2001 $14,000
2002 $14,000

2001 ($73,000 − $0) x (2 x .2) = $29,200
2002 ($73,000 − $29,200) x (2 x .2) = $17,520
c. Units-of-Production
1. Total Estimated
$73,000 − $3,000
140,000 = $.50 per unit
2. Cost per Unit x Current Units of = Annual

Production Depreciation
2001 $.50 x 26,000 = $13,000

2002 $.50 x 21,000 = $10,500
9-87
d. MACRS
Cost x MACRS % = Annual Depreciation
2001 $73,000 x .1429 = $10,432

2002 $73,000 x .2449 = $17,878
9-88
PROBLEM 9-24B
a. Straight-Line
(Cost − Salvage Value) ÷ Useful Life = Annual Depreciation
Year 1 ($60,000 − $5,000) ÷ 5 = $11,000 per year

2 11,000
3 11,000
4 11,000
5 11,000

Year 1 ($60,000 − $-0-) x (2 x .20) = $24,000

2 ($60,000 − $24,000) x .40 = 14,400
3 ($60,000 − $38,400) x .40 = 8,640
4 ($60,000 − $47,040) x .40 = 5,184
5 ($60,000 − $52,224) x .40 = 3,110 2,776*
*Balance of depreciable cost ($55,000 − $52,224= $2,776)
c. Depreciation expense is a non-cash item and does not affect cash flow. However,
when different methods are used for tax purposes, this can cause differences in
taxable income and the amount of tax paid.
9-89
d. Straight-Line
Book Value: $60,000 − 44,000* = $16,000
Sales Price $15,000

Book Value (16,000)
Loss $ (1,000)
*$11,000 x 4 = $44,000
Book Value: $60,000 − 52,224** = $7,776
Sales Price $15,000

Book Value ( 7,776)
Gain $ 7,224
**$24,000 + $14,400 + $8,640 + $5,184 = $52,224
e. The $8,224 difference in gain is caused by the additional depreciation expense

recorded in years 1-4 under the double-declining balance method ($52,224 − $44,000 =
$8,224).
9-90
PROBLEM 9-25B
Units-of-Production
Total Estimated
Cost per Unit x Current Units of Production = Annual Depreciation
a. $700,000 − $20,000
100,000 = $6.8 per machine hour
2001 $6.8 x 32,000 = $ 217,600

2002 $6.8 x 33,000 = 224,400
2003 $6.8 x 35,000 = 238,000
2004 $6.8 x 28,000 = 190,400* -0-
2005 = -0- (no remaining cost)
*Limited to remaining cost to be depreciated [$700,000 − ($680,000 + $20,000)]
9-91
b.
Telcom

Event Cash + Equip. − A. Dep. = C. Stock + Ret. Ear. − =
Bal. 800,000 + NA − NA = 800,000 + NA NA − NA = NA NA
Equ. (700,000) + 700,000 − NA = NA + NA NA − NA = NA (700,000) IA
Rev. 320,000 + NA − NA = NA + 320,000 320,000 − NA = 320,000 320,000 OA
Depr. NA + NA − 217,600 = NA + (217,600) NA − 217,600 = (217,600) NA
Bal. 420,000 + 700,000 − 217,600 = 800,000 + 102,400 320,000 − 217,600 = 102,400 (380,000) NC
c. Sales Price $18,000

Book Value (20,000)
Loss on Sale $ (2,000)
Debit Credit
Cash 18,000
Loss on Sale 2,000
Equipment 700,000
9-92
PROBLEM 9-26B
Depreciation Computations:
Straight-Line
Company A: $40,000 − $5,000 ÷ 4 = $8,750 per year
Company B: 2001 $ 40,000 − $ -0- x (2 x .25) = $20,000

2002 40,000 − 20,000 x .5 = 10,000
2003 40,000 − 30,000 x .5 = 5,000
2004 -0-**
**No remaining cost to be depreciated
Units-of-Production
Per Unit Cost: ($40,000 − $5,000) ÷ 200,000 = .175 per mile
Company C:
2001 $.175 x 66,000 = $11,550
2002 $.175 x 42,000 = 7,350
2003 $.175 x 40,000 = 7,000
2004 $.175 x 60,000 = 10,500 limited to 9,100*
*Limited to remaining cost to be depreciated [$35,000 − ($11,550 + $7,350 + $7,000)
9-93
a. Company A - 2001
Revenue $30,000
Net Income $21,250
Company B - 2001
Revenue $30,000
Net Income $ 10,000
Company C - 2001
Revenue $30,000
Net Income $18,450
A has the highest net income in 2001.
b. Company A - 2004
Revenue $30,000
Net Income $21,250
Company B - 2004
Revenue $30,000
Depreciation Expense ( -0-)
Net Income $30,000
Company C - 2004
Revenue 30,000
Net Income $20,900
Company C has the lowest net income for 2004.
9-94
c. Company A Accumulated Depreciation

2001 $ 8,750
2002 8,750
2003 8,750
$26,250
Cost $40,000
Book Value $13,750
Company B Accumulated Depreciation

2001 $20,000
2002 10,000
2003 5,000
$35,000
Cost $40,000
Book Value $ 5,000
Company C Accumulated Depreciation

2001 $11,550
2002 7,350
2003 7,000
$25,900
Cost $40,000
Book Value $14,100
Highest book value for 2003: Company C, $14,100
9-95
d. Sales (four years) $120,000

Retained Earnings $ 85,000
All companies have the same retained earnings because over the four-year period,
the total depreciation is the same.
e. The cash flow from operating activities will be the same for each company if
income tax is not considered. Depreciation expense is not a cash flow item.
9-96
PROBLEM 9-27B
a.
General Journal
2001
1/1 Silver Mine 1,600,000
Cash 1,600,000
7/1 Timber 1,400,000
Land 100,000
Cash 1,500,000
12/31 Depletion Expense (12,000 x $16)1 192,000
Silver Mine 192,000
12/31 Depletion Expense (500,000 x $1.40)2 700,000
Timber 700,000
2002
2/1 Gold Mine 1,800,000
Cash 1,800,000
9/1 Oil Reserves 1,360,000
Cash 1,360,000
12/31 Depletion Expense (20,000 x $16) 320,000
Silver Mine 320,000
Timber 420,000
Gold Mine 240,000
Oil Reserves 250,000
Computations:
1
Silver Mine depletion: $1,600,000 ÷ 100,000 = $16 per ton
2
Timber depletion: ($1,500,000 − $100,000) ÷ 1,000,000 = $1.40 per bd. ft.
3
Gold Mine depletion: $1,800,000 ÷ 30,000 = $60 per ton
4
Oil Reserves depletion: $1,360,000 ÷ 272,000 (profitable) = $5 per barrel
9-97
b. Natural Resources
Silver Mine (less depletion) $1,088,000
Timber (less depletion) 280,000
Gold Mine (less depletion) 1,560,000
Oil Reserves (less depletion) 1,110,000
Total Natural Resources 4,038,000
Land 100,000
Total $4,138,000
c. Gold Mine Undepleted Cost at 1/2003 $1,560,000

(Cost $1,800,000 − $240,000)
$1,560,000 ÷ 20,000 = $78 per ton
Debit Credit
Depletion Expense (6,000 x $78) 468,000
Gold Mine 468,000
9-98
PROBLEM 9-28B
a.
Date Assets = Liab. + S. Equity Net Income Cash Flows

1/1/01 +− NA NA NA − IA
12/31/01 − NA − − NA
9/30/02 − NA − − − OA
12/31/02 − NA − − NA
1/1/03 +− NA NA NA − IA
12/31/03 − NA − − NA
6/1/04 − NA − − − OA
12/31/04 − NA − − NA
1/1/05 +− NA NA NA − IA
12/31/05 − NA − − NA
10/1/06* − NA − − NA
10/1/06** + NA + + + IA
*To record depreciation for 2006.

**To record sale of asset. The plus in the assets column represents the net
increase in assets resulting from the sale of the equipment. Cash increases by
a greater amount than the decrease in the book value of the equipment.
b.
Year Computation Depr. Exp.
2001 ($80,000 − $5,000) ÷ 5 $15,000
2002 Same as 2001 15,000
2003 ($80,000 + $3,000 − $30,000 − $5,000) ÷ 3 16,000
2004 Same as 2003 16,000
2005 ($83,000 − $5,000 − $54,000 acc. depr) ÷ 3 8,000
9-99
c.
Computation of Book Value
Year Cost − Acc. Depr. = Book Value

2001 $80,000 − $15,000 = $65,000
2002 80,000 − 30,000 = 50,000
2003 83,000 − 46,000 = 37,000
2004 83,000 − 62,000 = 21,000
2005 83,000 − 62,000 = 21,000
d. Computation of Depreciation Expense for 2006:

$8,000 x 9/12 = $6,000
Book Value at Date of Sale:

12/31/05 $21,000 (see above)
2006 Depreciation (6,000)
Book Value $15,000
Selling Price $18,000

Gain on Sale $ 3,000
9-100
PROBLEM 9-29B
a.
Mercury Company
Statements Model

No. Cash + Equip. − A. Depr. = C. Sock + Ret. Ear.
Bal. 14,000 + 20,000 − 12,000 = 4,000 + 18,000 NA − NA = NA NA
1/4 (4,000) + NA − (4,000) = NA + NA NA − NA = NA (4,000) IA
7/6 (160) + NA − NA = NA + (160) NA − 160 = (160) (160) OA
8/7 (360) + NA − NA = NA + (360) NA − 360 = (360) (360) OA
12/31 (5,000) + NA − NA = NA + (5,000) NA − 5,000 = (5,000) (5,000) OA
12/31 NA + NA − 4,500* = NA + (4,500) NA − 4,500 = (4,500) NA
Tot. 4,480 20,000 12,500 4,000 7,980 NA 10,020 (10,020) 9,520 NC
*Computation of Depreciation Expense:

Cost $20,000
2007 Depr. $6,000
2008 Depr. 6,000
2009 Overhaul (4,000) (8,000)
Book Value $12,000 − $3,000 salvage = $9,000 new depreciable cost
New Depreciable Cost: 9,000 ÷ 2 = $4,500
9-101
b.
Mercury Company
General Journal
1/4/09 Accumulated Depreciation 4,000
Cash 4,000
Cash 160
Cash 360
12/31/09 Gasoline Expense 5,000
Cash 5,000
12/31/09 Depreciation Expense 4,500
9-102
PROBLEM 9-30B
a. Purchase Price $1,200,000

Less: FMV of Assets Purchased:
Equipment $400,000
Land 100,000
Building 400,000
Franchise 20,000 (920,000)
Goodwill Purchased $ 280,000
b. Debit Credit
Amortization Expense 2,000*
Franchise 2,000
Computation:
*$20,000÷10 = $2,000 per year
9-103
PROBLEM 9-31B

2001 Impairment Loss 50,000
Goodwill 50,000
9-104
ATC 9-1
a. Straight-line. See note 1 on page 31 of the annual report.
b. “..goodwill and other intangibles….” See Note 1 on page 32 of the annual report.
c. 3 to 8 years. Also from Note 1, page 32.
d. In 2001, the percentage of identifiable assets located in the Americas was: 60.2%
($2,553 ÷ $4,244). Therefore, 39.8% of the assets were located outside the
Americas. See Note 10 on page 44 of the annual report.
9-105
ATC 9-2
Computation of depreciation expense:
Straight-line:
(Cost − Salvage Value) ÷ useful life = depreciation per year
($46,000 − $6,000) ÷ 4 = $10,000 per year
Double-declining balance:
(Cost − Accumulated depreciation) x (2 x SL rate)
($46,000 − $0-) x (2 x .25) = $23,000 depreciation for year 1
MACRS:
Cost x MACRS table factor
$46,000 x .20 = $9,200
9-106
ATC 9-2 (cont.)
Note: It is useful to prepare a horizontal statements model before preparing the financial statements.
Horizontal Statement Model

Using Straight-line Depreciation

1. 60,000 + NA − NA = 60,000 + NA NA − NA = NA 60,000 FA
2. (46,000) + 46,000 − NA = NA + NA NA − NA = NA (46,000) IA
3. 42,000 + NA − NA = NA + 42,000 42,000 − NA = 42,000 42,000 OA
4. (8,200) + NA − NA = NA + (8,200) NA − 8,200 = (8,200) (8,200)OA
5. (12,000) + NA − NA = NA + (12,000) NA − 12,000 = (12,000) (12,000)OA
6. NA + NA − 10,000 = NA + (10,000) NA − 10,000 = (10,000) NA
7.* (3,540) + NA − NA = NA + (3,540) NA − 3,540 = (3,540) (3,540)OA
Bal. 32,260 + 46,000 − 10,000 = 60,000 + 8,260 42,000 − 33,740 = 8,260 32,260 NC
*$42,000 − $8,200 − $12,000 − $10,000 = $11,800 net income before income tax. $11,800 x .30 = $3,540.
9-107
ATC 9-2 (cont.)

Using Double-Declining Balance Depreciation

1. 60,000 + NA − NA = 60,000 + NA NA − NA = NA 60,000 FA
2. (46,000) + 46,000 − NA = NA + NA NA − NA = NA (46,000) IA
3. 42,000 + NA − NA = NA + 42,000 42,000 − NA = 42,000 42,000 OA
4. (8,200) + NA − NA = NA + (8,200) NA − 8,200 = (8,200) (8,200)OA
5. (12,000) + NA − NA = NA + (12,000) NA − 12,000 = (12,000) (12,000)OA
6. NA + NA − 23,000 = NA + (23,000) NA − 23,000 = (23,000) NA
7.* NA + NA − NA = NA + NA NA − NA = NA NA
Bal. 35,800 + 46,000 − 23,000 = 60,000 + (1,200) 42,000 − 43,200 = (1,200) 35,800 NC
* Since the company has a net loss of $1,200, there is no income tax expense.
9-108
ATC 9-2 (cont.)

Using MACRS Depreciation

1. 60,000 + NA − NA = 60,000 + NA NA − NA = NA 60,000 FA
2. (46,000) + 46,000 − NA = NA + NA NA − NA = NA (46,000) IA
3. 42,000 + NA − NA = NA + 42,000 42,000 − NA = 42,000 42,000 OA
4. (8,200) + NA − NA = NA + (8,200) NA − 8,200 = (8,200) (8,200)OA
5. (12,000) + NA − NA = NA + (12,000) NA − 12,000 = (12,000) (12,000)OA
6. NA + NA − 9,200 = NA + (9,200) NA − 9,200 = (9,200) NA
7.* (3,780) + NA − NA = NA + (3,780) NA − 3,780 = (3,780) (3,780)OA
Bal. 32,020 + 46,000 − 9,200 = 60,000 + 8,820 42,000 − 33,180 = 8,820 32,020 NC
*$42,000 − $8,200 − $12,000 −$9,200 = $12,600 net income before tax. $12,600 x .30 = $3,780
9-109
ATC 9-2 (cont.)
a.
Sweet’s Bakery
Income Statements
SL DDB MACRS
Sales Revenue $42,000 $42,000 $42,000
Expenses
Supplies Expense (8,200) (8,200) (8,200)
Operating Expenses (12,000) (12,000) (12,000)
Income Tax Expense (3,540) -0- (3,780)
Total Expenses (33,740) (43,200) (33,180)
Net Income $ 8,260 $ (1,200) $ 8,820
Balance Sheets
Assets
Cash $32,260 $35,800 $32,020
Equipment 46,000 46,000 46,000
Less: Accumulated Depreciation (10,000) (23,000) (9,200)
Total Assets 68,260 58,800 68,820
Liabilities $ -0- $ -0- $ -0-
Common Stock 60,000 60,000 60,000
Ending Retained Earnings 8,260 (1,200) 8,820

Total Liab. and Stkholders’ Equity $68,260 $58,800 $68,820
b. Net income is different for the year because of the difference in depreciation
expense for the three methods. Because income before tax is different, the
amount of income tax paid will also be different. However over the life of the
asset, the total amount of depreciation taken will be the same for each of the
methods.
9-110
ATC 9-3
Real World Case -- Different Numbers for Different Industries

The companies and the set of ratios to which each relates are as follows:
Anheuser Busch (A-B) Company 4
Darden Restaurants (Darden) Company 3
Deere & Co. (Deere) Company 1
Pfizer Company 2
Students can probably identify Darden as Company 3 based on the lengths of the
operating cycles. Company 3 had the shortest at 21 days. The fact that “sales
per employee” is lowest at Company 3 is another indication that it is Darden. If
not for the length of the operating cycles, and high sales per employee, Company
1 might be associated with Darden due to the relatively high percentage of
current assets at Company 1.
Students who know anything about beer brewing will probably determine that A-
B’s operating cycle is not longer than 300 days, so this will eliminate Companies
1 and 2, and leave Company 4, which has a 51-day operating cycle, as being A-B.
However, students may be confused by the high level of sales per employee at A-
B if they think of A-B as a company that has a lot of employees driving trucks to
deliver beer to stores. Some students may not be aware that the delivery truck
drivers are employees of the distributor, not the brewer.
The analysis above leaves Companies 1 and 2 as being Deere and Pfizer.
Perhaps the easiest way to identify Company 2 as being Pfizer is its VERY high
gross margin percentage. Although most students may not know that
pharmaceutical companies usually have such high margins, they should be able
to conclude that an equipment manufacturer does not.
One factor that may seem odd for Company 1 being identified as Deere is the fact
that most of its assets are current assets. It seems logical to assume that most of
the assets of a manufacturer of heavy equipment would consist of property, plant,
and equipment. Deere has a lot of receivables that it finances for its customers.
9-111
ATC 9-4
The Greentree Publishing Company

Straight-Line Double-Declining
Using: Depreciation Balance Depreciation
Income Statement
Revenue $25,000 $25,000
Expense, Depreciation (9,000)1 (20,000)2
Net Income $16,000 $ 5,000
Balance Sheets
Assets
Cash $25,000 $25,000
Equipment 80,000 80,000
Total Assets $96,000 $85,000
Liabilities $ -0- $ -0-
Common Stock 80,000 80,000
Total Stockholders’ Equity 96,000 85,000
Total Liab. and Stk. Equity $96,000 $85,000
1
$80,000 − $8,000 = $72,000; $72,000 ÷ 8 = $9,000 depreciation
2
$80,000 x (2 x .125) = $20,000 depreciation
a. $16,000 ÷ $96,000 = 16.7%

b. $5,000 ÷ $85,000 = 5.9%
c. It appears that Greentree is utilizing its assets more effectively using the
straight-line method, when in reality, there is no difference in performance.
9-112
ATC 9-5
a. 1. Compute depreciation expense for 2001:
Qin : ($40,000 − $4,000) ÷ 5 yrs = $7,200

Roche: ($40,000 x (2 x .20) = $16,000
2. Compute the book value of the equipment as of 12/31/01:

Qin : $40,000 − $7,200 = $32,800
Roche: $40,000 − $16,000 = $24,000
3. Compute the total expenses and net earnings for 2001:

Qin Roche
Revenue $100,000 $100,000
Exp. (excl depr.) (60,000) (60,000)
Depr. expense (7,200) (16,000)
Net earnings $ 32,800 $ 24,000
Note: Total exp. $ 67,200 $ 76,000
4. Compute the total assets as of 12/31/01:

Oin Roche
Assets at 1/1/01 $200,000 $200,000
Add net earnings 32,800 24,000
Assets at 12/31/01 $232,800 $224,000
5. Compute the total Stockholders’ Equity as of 12/31/01:

Qin
Stockholders’ Equity at 1/1/01 $120,000 $120,000
Add net earnings 32,800 24,000
Stockholders’ Equity at 12/31/01 $152,800 $144,000
Note: Total liabilities did not change for either company; they remained at
$80,000.
9-113
ATC 9-5 (cont.)
b. 1. Debt-to-Assets:
Qin: $80,000 ÷ $232,800 = 34.4%
Roche: $80,000 ÷ $224,000 = 35.7%
2. Return-on-Assets:
Qin : $32,800 ÷ $232,800 = 14.1%
Roche: $24,000 ÷ $224,000 = 10.7%
3. Return-on-Equity:
Qin: $32,800 ÷ $152,800 = 21.5%
Roche: $24,000 ÷ $144,000 = 16.7%
c. They each produced the same amount of cash flows, therefore, neither
produced more or less real wealth than the other.
9-114
ATC 9-6
This problem is used to test thinking and writing skills. Students should realize that
the equipment of the two companies had originally cost different amounts. Also,
the numbers indicate that the equipment of Company A is older than that of
Company B assuming both companies use the same depreciation methods.
9-115
ATC 9-7
a. Posey’s predictions are correct if her belief about asset usage is correct.
Using straight-line depreciation will allow Bailey to depreciate his
equipment evenly over the equipment’s life. If actual usage of the
equipment is greater in the early years, corresponding revenue would be
high while depreciation expense would be low compared to actual usage.
The result would be to overstate net income. In future periods when usage
declines, revenues will decline. Since depreciation expense will remain the
same, net income will decline. Depending on the severity of the decline in
usage (i.e., lower revenue), net losses could occur. Posey, on the other
hand, will show a correlation between revenues and depreciation expense.
When revenues are high, corresponding with high equipment usage, her
depreciation expense will be high. As revenues decline there will be a
parallel decline in expense; thereby resulting in a more stable amount of
reported income.
b. Assuming that Posey’s belief about asset usage is accurate, then Bailey’s
approach may be questionable but not illegal. Accountants strive to
accurately report on the financial condition of a company. Accordingly,
accountants are ethically bound to make fair representations in the
financial reports that they prepare or audit.
c. The usage of a single depreciation method may in fact thwart

comparability. Suppose that Bailey, in fact, uses assets evenly over their
useful lives while Posey’s company uses its assets more in the early years
and less as the assets age. Under these circumstances comparisons
between Bailey and Posey would be facilitated if Bailey used straight-line
depreciation while Posey used accelerated depreciation. Companies need
alternative recording procedures in order to accurately reflect their
financial condition. Accountants prepare and audit statements under the
assumption that users have a reasonable grasp of accounting practices
and procedures. It is the investor’s responsibility to become reasonably
informed of generally accepted accounting principles before they attempt
to use financial statements to make business decisions.
9-116
ATC 9-7 (cont.)
d. Featherson obviously has little understanding of accounting or how to

interpret accounting information. He apparently does not understand that
different accounting procedures can result in financial reports that differ
when no differences exist in the underlying substance between companies.
Further, he appears to have a misunderstanding of the auditor’s role in
financial reporting. The auditor merely attests to whether the statements
are prepared in accordance with GAAP. An unqualified opinion is not
intended to constitute a recommendation to invest. Featherson’s lack of
accounting knowledge is likely to adversely affect his investment
decisions. When it does, he will have no one to blame but himself. As
stated above, it is the users’ responsibility to attain a reasonable level of
knowledge prior to attempting to use accounting reports when making
business decisions.
9-117
ATC 9-8
Using the EDGAR Database
NOTE: This solution was accurate as of January 3, 2002. However, the

EDGAR database is subject to update at any time, so this solution
will likely be “dated” at the time you assign this case to your
students.
The data for Microsoft is from the June 30, 2001, financial statements and
the data for Intel are from December 30, 2000. Dollars amounts are in
millions.
a.
Current Property, Plant Total
Assets and Equipment Assets
Microsoft:
Dollar Amount: $39,637 $ 2,309 $ 59,257
% of Total Assets: 66.9% 3.9% 100%
Intel:
Dollar Amount: $21,150 $15,013 $ 47,945
% of Total Assets: 44.1% 31.3% 100%
b. Intel manufactures computer hardware (chips). This requires the use of

lots of expensive equipment. Microsoft produces software. Writing
software uses more people than equipment. Thus, Intel has more of its
assets invested in equipment than does Microsoft. Also, it appears that
Intel has more total assets than Microsoft, but keep in mind that a lot of
Microsoft’s important assets, personnel, goodwill, market share, etc. do not
show-up on traditional financial statements.
9-118

Chapter 9 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

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ANSWERS TO QUESTIONS - CHAPTER 9

1. Long-term operational assets are those assets that are

2. Tangible assets are those assets that have a physical

3. Specifically identifiable intangible assets are those

4. Depreciation is the systematic allocation of the cost of

5. Natural resources are assets that are produced by

8. The historical cost concept requires that long-term

9. The cost of a building includes the amount paid for the

10. A basket purchase of assets is the purchase of a group

11. The life cycle of a long-term operational asset simply

12. Straight-line depreciation. This method allocates an

Units-of-production depreciation. When this method of

Double-declining balance depreciation. This is an

Example: Asset cost of $4,000 with an estimated

14. The recognition of depreciation expense does not

16. When the total cost of an asset is expensed in the year

17. Salvage value is the estimated value of a plant asset at

18. Accumulated depreciation is a contra asset account.

19. Recording the depreciation recognized in the contra

20. Book value is computed as the cost of an asset less the

21. The method of depreciation chosen should represent

22. MACRS, Modified Accelerated Cost Recovery System, is

23. The method required for tax purposes, MACRS, does

24. Deferred taxes are taxes that will be paid in future

25. When an asset is purchased and put into service, an

26. When an expenditure to an asset improves the quality,

When an expenditure extends the life of the asset, this

27. When a long-term operational asset is sold for a gain,

28. Depletion is the process of systematically allocating

29. Some of the most common intangible assets include

30. Most countries have developed accounting principles

31. Some industries are very capital intensive while others

Greyhound Bus Company:

Buses, Buildings, Office Equipment, Computer Equipment, Land, etc.

Ships, Automobiles, Drilling Equipment, Oil Wells, Office Equipment,

Automobiles, Vans, Cleaning Equipment, Maintenance Tools, Buildings,

Placer/Dome Gold Mining Company:

Mining Equipment, Office Equipment, Buildings, Land, Gold Mine, etc.

Long-Term Operational Assets:

Costs that are to be capitalized:

The operator salary and increase in insurance are operating expenses.

b. % of* Purchase Allocated

Balance Sheet Income Statement Statemt. of

Asset % of App. Value Purchase Price Allocated Cost

Depreciation Calculation: (Cost − Accumulated Depr.) x (2 x SL Rate)

Year 1 ($160,000 − $ -0-) x (2 x .20) = $64,000

Service Revenue $92,000 $65,000

Depreciable Cost: $31,000 − $6,000 = $25,000

2002 Depreciation: $5,000

Gain on Sale = $20,000 − $16,000 = $4,000

2. Double-Declining Balance Calculation:

Year 1 ($40,000 − $0 ) x (2 x .20) = $16,000

Date Account Title Debit Credit

Yr. 1 Depreciation Expense 7,600

Entries for years 2-5 will be the same.

Date Account Title Debit Credit

Yr. 1 Depreciation Expense 16,000

Yr. 2 Depreciation Expense 9,600