SOLUTIONS TO PROBLEMS SET A25 Minutes, Easy PROBLEM 9.1A

WILMET COLLEGE

a.

b. (1)

(2)

(3)

(4)

(5)

(6)

OBLEM 9.1AWILMET COLLEGE (concluded)

c. Expenditures that should be debComputing Equipment account:

The cost of plant and equipment includes all expenditures that are reasonable and necessary in acquiring the asset and placing it in a position and condition for use in the operation of the business.

The purchase price of $250,000 is part of the cost of the equipment. The list price ($275,000) is not relevant, as this is not the actual price paid by Wilmet. The $4,500 in interest charges are a charge for borrowing money, not part of the cost of the equipment. These interest charges should be

Sales tax is a reasonable and necessary expenditure in the purchase of plant assets and should be included in the cost of the equipment.

Freight charges are part of the cost of getting the equipment to a usable location and, therefore, are part of the cost of the equipment.

To be used in college operations, the equipment must first be installed. Thus, normal installation charges should be included as part of the cost of the equipment.

The accidental damage to one of the terminals was not a “reasonable andnecessary” part of the installation process and, therefore, should not be includedin the cost of the equipment. The repairs do not make the equipment any moreuseful than it was before the damage was done. Therefore, the $500 cost ofrepairing the damage should be offset against revenue of the current period.

Advertising is viewed by accountants as a revenue expenditure—that is, charged to expense when the advertising occurs. There is not sufficient objective evidence of future benefit for accountants to regard advertising expenditures as creating an asset.

Purchase price ### Sales tax 15,000

Freight charges 1,000 Installation charges 5,000 ###

d.General Journal

Dec 31 Depreciation Expense: Comput 27,100

Accumulated Depreciation: Com 27,100

To record depreciation of computing equipment inthe year of acquisition ($271,000 cost ÷ 5 years) x 1/2.

45 Minutes, Medium PROBLEM 9.2ASWANSON & HILLER, INC.

a. (1) Straight-Line Schedule:Depreciation Expense

Year Computation2004 $ 10,000 $10,0002005 20,000 30,0002006 20,000 50,0002007 20,000 70,0002008 20,000 90,0002009 10,000 100,000

(2) 200% Declining-Balance Schedule:Depreciation Expense Accumulated

Year Computation Depreciation2004 $21,600 $21,6002005 34,560 56,1602006 20,736 76,8962007 12,442 89,3382008 7,465 96,8032009 100,000 – 96,803 3,197 100,000

(3) 150% Declining-Balance Schedule:Depreciation Expense Accumulated

Year Computation Depreciation2004 $16,200 $16,2002005 27,540 43,7402006 19,278 63,0182007 13,495 76,513

2008* 11,744 88,2572009* 11,743 100,000

* Switch to straight-line

PROBLEM 9.2ASWANSON & HILLER, INC. (concluded)

b.

c. Computation of gains or losses upon disposal:

1. Straight-Line

Accumulated Depreciation

$100,000 ´ 1¤5 ´ 1¤2100,000 ´ 1¤5

100,000 ´ 1¤5100,000 ´ 1¤5100,000 ´ 1¤5

100,000 ´ 1¤5 ´ 1¤2

$108,000 ´ 40% x 1¤286,400 ´ 40%

51,840 ´ 40%31,104 ´ 40%18,662 ´ 40%

$108,000 ´ 30% x 1¤291,800 ´ 30%

64,260 ´ 30%44,982 ´ 30%

($31,487 – $8,000) ¸ 2 yrs.($31,487 – $8,000) ¸ 2 yrs.

Swanson & Hiller will probably use the straight-line method for financial reporting purposes, as this method results in the least amount of depreciation expense in the early years of the asset’s useful life.

Cash proceedsBook value on 12/31/07Loss on disposal

2. 200% Declining-Balance:

Cash proceedsBook value on 12/31/07Gain on disposal

3. 150% Declining-Balance:

Cash proceedsBook value on 12/31/07Loss on disposal

The reported gain or loss on the sale of an asset has no direct cash effects. The only direct cash effect associated with the sale of this machine is the $28,000 received by Swanson & Hiller, Inc. from the sale of the machine.

PROBLEM 9.2ASWANSON & HILLER, INC.

a. (1) Straight-Line Schedule:BookValue$98,000

78,00058,00038,00018,000

8,000

(2) 200% Declining-Balance Schedule:Accumulated BookDepreciation Value

$86,400 51,84031,10418,66211,197

8,000

(3) 150% Declining-Balance Schedule:Accumulated BookDepreciation Value

$91,80064,26044,98231,48719,743

8,000

PROBLEM 9.2ASWANSON & HILLER, INC. (concluded)

Computation of gains or losses upon disposal:

1. Straight-Line

Accumulated Depreciation

Swanson & Hiller will probably use the straight-line method for financial reporting purposes, as this method results in the least amount of depreciation expense in the early years of the

$ 28,000 (38,000) $ 10,000

$ 28,000 (18,662) $ 9,338

$ 28,000 (31,487) $ 3,487

The reported gain or loss on the sale of an asset has no direct cash effects. The only direct cash effect associated with the sale of this machine is the $28,000 received by Swanson & Hiller, Inc. from the sale of the machine.

50 Minutes, Strong PROBLEM 9.3ASMART HARDWARE

a. Costs to be depreciated include:

Cost of shelving $ 12,000

Freight charges 520

Sales taxes 780

Installation 2,700

Total cost to be depreciated $ 16,000

(1) Straight-Line Schedule (nearest whole month):Depreciation Expense

Year Computation2005 $600 $6002006 800 1,4002007 800 2,2002008 800 3,000

(2) 200% Declining-Balance (half-year convention):Depreciation Expense

Year Computation

2005 $800 $8002006 1,520 2,3202007 1,368 3,6882008 1,231 4,919

(3) 150% Declining-Balance (half-year convention):Depreciation Expense

Year Computation

2005 $600 $6002006 1,155 1,7552007 1,068 2,8232008 988 3,811

Accumulated Depreciation

$16,000 ´ 1¤20 ´ 9¤1216,000 ´ 1¤2016,000 ´ 1¤2016,000 ´ 1¤20

Accumulated

Depreciation

$16,000 ´ 10% ´ 1¤215,200 ´ 10%

13,680 ´ 10%$12,312 ´ 10%

Accumulated

Depreciation

$16,000 ´ 7.5% ´ 1¤215,400 ´ 7.5%

14,245 ´ 7.5%13,177 ´ 7.5%

PROBLEM 9.3ASMART HARDWARE (concluded)

b.

c.

d.

1. Journal entries assuming that the shelving was sold for $1,200:

Cash 1,200Accumulated Depreciation: Shelving 8,600 Shelving Gain on Disposal of Assets

To record sale of shelving for $1,200 cash.

2. Journal entries assuming that the shelving was sold for $200:

Cash 200Accumulated Depreciation: Shelving 8,600Loss on Sale of Asset 200 Shelving

To record sale of shelving for $200 cash.

Smart may use the straight-line method in its financial statements to achieve the least amount of depreciation expense in the early years of the shelving’s useful life. In its federal income tax return, Smart may use an accelerated method (called MACRS). The use of MACRS will reduce Smart’s income as much as possible in the early year’s of the shelving’s useful life. Thus, management’s goals are really not in conflict.

The 200% declining-balance method results in the lowest reported book value at the end of 2008 ($11,081). Depreciation, however, is not a process of valuation. Thus, the $11,081 book value is not an estimate of the shelving’s fair market value at the end of 2008.

A book value of $400 means that accumulated depreciation at the time of the disposal was $8,600.

PROBLEM 9.3ASMART HARDWARE

a. Costs to be depreciated include:

(1) Straight-Line Schedule (nearest whole month):BookValue$15,400

14,60013,80013,000

(2) 200% Declining-Balance (half-year convention):Book

Value

$15,20013,68012,31211,081

(3) 150% Declining-Balance (half-year convention):Book

Value

$15,40014,24513,17712,189

Accumulated Depreciation

PROBLEM 9.3ASMART HARDWARE (concluded)

9,000800

9,000

Smart may use the straight-line method in its financial statements to achieve the least amount of depreciation expense in the early years of the shelving’s useful life. In its federal income tax return, Smart may use an accelerated method (called MACRS). The use of MACRS will reduce Smart’s income as much as possible in the early year’s of the shelving’s useful life. Thus, management’s goals are really not in

The 200% declining-balance method results in the lowest reported book value at the end of 2008 ($11,081). Depreciation, however, is not a process of valuation. Thus, the $11,081 book value is not an estimate of the shelving’s fair market value at the end

A book value of $400 means that accumulated depreciation at the time of the

25 Minutes, Medium OBLEM 9.4ARAMIREZ DEVELOPERS

a.General Journal

Feb 10 Loss on Disposal of Plant Asse 200

Accumulated Depreciation: Off 25,800 Office Equipment 26,000 Scrapped office equipment; received no salvag

Apr 1 Cash 100,000 Notes Receivable 800,000 Accumulated Depreciation: Bui 250,000 Land 50,000 Building 550,000 Gain on Sale of Plant Assets 550,000 Sold land and building for a $100,000 ca payment and a 5-year, 9% note for the ba

Aug 15 Vehicles (new truck) 39,000 Accumulated Depreciation: Vehi 18,000 Vehicles (old truck) 26,000 Gain on Disposal of 2,000 Cash 29,000 To record trade-in of old truck on new; tra allowance exceeded book value by $2,000

Oct 1 Office Equipment (new comput 8,000 Loss on Trade-in of Plant Asse 3,500 Accumulated Depreciation: Office 11,000 Office Equipment (old computer 15,000 Cash 1,500 Notes Payable 6,000 Acquired new computer system computer, paying part cash, and issuing a 8% note payable. Recognized loss equal to boo old computer ($4,000) minus trade-in allowanc

b.

c.

Gains and losses on asset disposals do not affect gross profit because they are not part of the cost of goods sold. Such gains and losses do, however, affect net income reported in a firm’s income statement.

Unlike realized gains and losses on asset disposals, unrealized gains and losses on marketable securities are not generally reported in a firm’s income statement. Instead, they are