Chapter 11 Solutions to Brief Exercises Part 1

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 11-1 2017: ($50,000 – $2,000) X 23,000 160,000 = $6,900 2018: ($50,000 – $2,000) X 31,000 160,000 = $9,300 LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None BRIEF EXERCISE 11-2 (a) $80,000 – $8,000 8 = $9,000 (b) $80,000 – $8,000 8 X 4/12 = $3,000 LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None BRIEF EXERCISE 11-3 (a) ($80,000 – $8,000) X 8/36* = $16,000 (b) [($80,000 – $8,000) X 8/36] X 9/12 = $12,000 *[8(8 + 1)] ÷ 2 LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None BRIEF EXERCISE 11-4 (a) $80,000 X 25%* = $20,000 (b) ($80,000 X 25%) X 3/12 = $5,000 *(1/8 X 2) LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None 11-12 BRIEF EXERCISE 11-5 Depreciable Base = ($28,000 + $200 + $125 + $500 + $475) – $3,000 = $26,300. LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None BRIEF EXERCISE 11-6 Asset A B C Depreciation Expense ($70,000 – $7,000)/10 = $ 6,300 ($50,000 – $5,000)/5 = 9,000 ($82,000 – $4,000)/12 = 6,500 $21,800 Composite rate = $21,800/$202,000 = 10.8% Composite life = $186,000*/$21,800 = 8.5 years *($63,000 + $45,000 + $78,000) LO: 2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None BRIEF EXERCISE 11-7 Annual depreciation expense: ($8,000 – $1,000)/5 = $1,400 Book value, 1/1/18: $8,000 – (2 x $1,400) = $5,200 Depreciation expense, 2018: ($5,200 – $500)/2 = $2,350 LO: 2, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None BRIEF EXERCISE 11-8 Recoverability test: Future net cash flows ($500,000) < Carrying amount ($520,000); therefore, the asset has been impaired. y:rent noalJur Loss on Impairment..........................................................120,000 Accumulated Depreciation— Equipment ($520,000 – $400,000)...................... 120,000 LO: 3, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None 11-13 BRIEF EXERCISE 11-9 Inventory Coal Mine 73,500 73,500 $400,000 + $100,000 + $80,000 – $160,000 = $105 per ton 4,000 700 X $105 = $73,500 LO: 4, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None BRIEF EXERCISE 11-10 (a) Asset turnover: $8,268 $8,113 + $8,323 2 (b) Profit margin on sales: $807 = 9.76% $8,268 (c) Return on assets: 1. 2. = 1.01 times 1.006 X 9.7605% = 9.82% $807 $8,113 + $8,323 2 = 9.82% LO: 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None *BRIEF EXERCISE 11-11 2017: 2018: 2019: 2020: 2021: 2022: $50,000 X 20% $50,000 X 32% $50,000 X 19.2% $50,000 X 11.52% $50,000 X 11.52% $50,000 X 5.76% = = = = = = $10,000 16,000 9,600 5,760 5,760 2,880 $50,000 LO: 6, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None 11-14 SOLUTIONS TO EXERCISES EXERCISE 11-1 (15–20 minutes) (a) Straight-line method depreciation for each of Years 1 through 3 = $469,000 – $40,000 = $35,750 12 (b) Sum-of-the-Years’-Digits = (c) 12 X 13 = 78 2 12/78 X ($469,000 – $40,000) = $66,000 depreciation Year 1 11/78 X ($469,000 – $40,000) = $60,500 depreciation Year 2 10/78 X ($469,000 – $40,000) = $55,000 depreciation Year 3 Double-Declining Balance method depreciation rate. $469,000 X 16.67% = ($469,000 – $78,182) X 16.67% = ($469,000 – $78,182 – $65,149) X 16.67% = 100% 12 X 2 = 16.67% $78,182 depreciation Year 1 $65,149 depreciation Year 2 $54,289 depreciation Year 3 LO: 1, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None EXERCISE 11-2 (20–25 minutes) (a) If there is any salvage value and the amount is unknown (as is the case here), the cost would have to be determined by looking at the data for the double-declining balance method. 100% 5 = 20%; 20% X 2 = 40% Cost X 40% = $20,000 $20,000 ÷ .40 = $50,000 Cost of asset (b) $50,000 cost [from (a)] – $45,000 total depreciation = $5,000 salvage value. 11-15 EXERCISE 11-2 (Continued) (c) The highest charge to income for Year 1 will be yielded by the doubledeclining balance method. (d) The highest charge to income for Year 4 will be yielded by the straight-line method. (e) The method that produces the highest book value at the end of Year 3 would be the method that yields the lowest accumulated depreciation at the end of Year 3, which is the straight-line method. Computations: St.-line = $50,000 – ($9,000 + $9,000 + $9,000) = $23,000 book value, end of Year 3. S.Y.D. = $50,000 – ($15,000 + $12,000 + $9,000) = $14,000 book value, end of Year 3. D.D.B. = $50,000 – ($20,000 + $12,000 + $7,200) = $10,800 book value, end of Year 3. (f) The method that will yield the highest gain (or lowest loss) if the asset is sold at the end of Year 3 is the method which will yield the lowest book value at the end of Year 3, which is the double-declining balance method in this case. LO: 1, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None EXERCISE 11-3 (15–20 minutes) (a) 20 (20 + 1) = 210 2 9/12 X 20/210 X ($711,000 – $60,000) = $46,500 for 2017 + 11-16 3/12 X 20/210 X ($711,000 – $60,000) 9/12 X 19/210 X ($711,000 – $60,000) = = $15,500 44,175 $59,675 for 2018 EXERCISE 11-3 (Continued) (b) 100% = 5%; 5% X 2 = 10% 20 9/12 X 10% X $711,000 = $53,325 for 2017 10% X ($711,000 – $53,325) = $65,768 for 2018 LO: 1, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None EXERCISE 11-4 (15–25 minutes) (a) $315,000 – $15,000 = $300,000; $300,000 ÷ 10 yrs. = $30,000 (b) $300,000 ÷ 240,000 units = $1.25; 25,500 units X $1.25 = $31,875 (c) $300,000 ÷ 25,000 hours = $12.00 per hr.; 2,650 hrs. X $12.00 = $31,800 (d) 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55 OR 10 X $300,000 X 4/12 = 55 $18,182 9 X $300,000 X 8/12 = 55 32,727 Total for 2018 (e) n(n + 1) 2 = $50,909 $315,000 X 20% X 4/12 = $21,000 [$315,000 – ($315,000 X 20%)] X 20% X 8/12 = 33,600 Total for 2018 10(11) = 55 2 $54,600 [May also be computed as 20% X ($315,000 – 2/3 X 20% X $315,000)] LO: 1, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None 11-17 EXERCISE 11-5 (20–25 minutes) (a) ($117,900 – $12,900) = $21,000/yr. = $21,000 X 5/12 = $8,750 5 2017 Depreciation—Straight line = $8,750 (b) ($117,900 – $12,900) = $5.00/hr. 21,000 2017 Depreciation—Machine Usage = 800 X $5.00 = $4,000 (c) Machine Year 1 2 Allocated to Total 5/15 X $105,000* = $35,000 4/15 X $105,000 = $28,000 2017 $14,583** ______ $14,583 * $117,900 − $12,900 ** $35,000 X 5/12 = $14,583 *** $35,000 X 7/12 = $20,417 **** $28,000 X 5/12 = $11,667 2018 Depreciation—Sum-of-the-Years’-Digits = $32,084 (d) 2017 40% X ($117,900) X 5/12 = $19,650 2018 40% X ($117,900 – $19,650) = $39,300 OR 1st full year (40% X $117,900) = $47,160 2nd full year [40% X ($117,900 – $47,160)] = $28,296 2017 Depreciation = 5/12 X $47,160 = $19,650 2018 Depreciation = 7/12 X $47,160 = $27,510 5/12 X $28,296 = 11,790 $39,300 LO: 1, Bloom: AP, Difficulty: Simple, Time: 20-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None 11-18 2018 $20,417*** 11,667**** $32,084 EXERCISE 11-6 (20–30 minutes) (a) 2017 Straight-line $212,000 – $12,000 = $25,000/year 8 3 months—Depreciation $6,250 = ($25,000 X 3/12) (b) 2017 Output $212,000 – $12,000 = $5.00/output unit 40,000 1,000 units X $5.00 = $5,000 (c) 2017 Working hours $212,000 – $12,000 20,000 = $10.00/hour 525 hours X $10.00 = $5,250 (d) 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 36 OR Sum-of-the-years’-digits Total Year 1 8/36 X $200,000 = $44,444 2 7/36 X $200,000 = $38,889 3 6/36 X $200,000 = $33,333 n (n + 1) 2 2017 $11,111a _______ $11,111 = 8(9) = 36 2 Allocated to 2018 2019 b $33,333 9,722c $29,167d _______ 8,333 $43,055 $37,500 2019: $37,500 = (9/12 of 2nd year of machine’s life plus 3/12 of 3 rd year of machine’s life) a $44,444 X 3/12 b $44,444 X 9/12 c $38,889 X 3/12 d $38,889 X 9/12 (e) Double-declining balance 2015: 1/8 X 2 = 25%. 2017: 25% X $212,000 X 3/12 = $13,250 2018: 25% X ($212,000 – $13,250) = $49,688 11-19 EXERCISE 11-6 (Continued) OR 1st full year (25% X $212,000) = $53,000 2nd full year [25% X ($212,000 – $53,000)] = $39,750 2017 Depreciation 3/12 X $53,000 = $13,250 2018 Depreciation 9/12 X $53,000 = $39,750 3/12 X $39,750 = 9,938 $49,688 LO: 1, Bloom: AP, Difficulty: Moderate, Time: 20-30, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None EXERCISE 11-7 (25–35 minutes) Methods of Depreciation Description A B C D Date Purchased Cost Salvage 2/12/17 $142,500 8/15/16 (c) 79,000 7/21/15 75,400 (g) 10/12/17 219,000 $16,000 21,000 23,500 69,000 Machine A—Testing the methods Straight-Line Method for 2017 Life Accum. Depr. to 2018 Method 10 5 8 5 (a) SYD SL DDB SYD $33,350 29,000 (e) 47,567 70,000 2019 Depr. (b) $19,550 (d) 11,600 (f) 4,333 (h) 35,000 $ 6,325 [($142,500 – $16,000) ÷ 10] X 1/2 Straight-Line Method for 2018 Total Straight Line $12,650 $18,975 Double-Declining Balance for 2017 Double-Declining Balance for 2018 Total Double Declining Balance $14,250 ($142,500 X .2 X .5) $25,650 [($142,500 – $14,250) X .2] $39,900 Sum-of-the-years-digits for 2017 $11,500 [($142,500 – $16,000) X Sum-of-the-years-digits for 2018 $21,850 ($126,500 X 10/55 X 1/2) + 10/55 X .5] ($126,500 X 9/55 X .5) Total Sum-of-the-years-digits Method used must be Using SYD, 2019 Depreciation is 11-20 $33,350 SYD $19,550 ($126,500 X 9/55 X 1/2) + ($126,500 X 8/55 X .5) EXERCISE 11-7 (Continued) Machine B—Computation of the cost Asset has been depreciated for 2 1/2 years using the straight-line method. Annual depreciation is then equal to $29,000 divided by 2.5 or $11,600. 11,600 times 5 plus the salvage value is equal to the cost. Cost is $79,000 [($11,600 X 5) + $21,000]. Using SL, 2017 Depreciation is $11,600. Machine C—Using the double-declining balance method of depreciation 2015’s depreciation is 2016’s depreciation is 2017’s depreciation is 2018’s depreciation is $ 9,425 $16,494 $12,370 $ 9,278 $47,567 ($75,400 X .25 X .5) ($75,400 – $9,425) X .25 ($75,400 – $25,919) X .25 ($75,400 – $38,289) X .25 Using DDB, 2019 Depreciation is $4,333 ($75,400 – $47,567 – $23,500) Machine D—Computation of Year Purchased First Half Year using SYD = $25,000 [($219,000 – $69,000) X 5/15 X .5] Second Year using SYD = $45,000 ($150,000 X 5/15 X .5) + ($150,000 X 4/15 X .5) $70,000 Thus the asset must have been purchased on October 12, 2017 Using SYD, 2019 Depreciation is $35,000 ($150,000 X 4/15 X .5) + ($150,000 X 3/15 X .5) LO: 1, Bloom: AP, Difficulty: Simple, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None 11-21 EXERCISE 11-8 (20–25 minutes) Old Machine June 1, 2015 Purchase Freight Installation Total cost $31,000 200 500 $31,700 Annual depreciation charge: ($31,700 – $2,500) ÷ 10 = $2,920 On June 1, 2016, debit the old machine for $1,980; the revised total cost is $33,680 ($31,700 + $1,980); thus the revised annual depreciation charge is: ($33,680 – $2,500 – $2,920) ÷ 9 = $3,140. Book value, old machine, June 1, 2019: [$33,680 – $2,920 – ($3,140 X 3)] = Less: Fair value Loss on exchange Cost of removal Total loss $21,340 20,000 1,340 75 $ 1,415 (Note to instructor: The above computation is done to determine whether there is a gain or loss from the exchange of the old machine with the new machine and to show how the cost of removal might be reported. Also, if a gain occurs, the gain is not deferred (1) because the exchange has commercial substance and (2) the cost paid exceeds 25% of the total value of the property received.) New Machine Basis of new machine Cash paid ($35,000 – $20,000) Fair value of old machine Installation cost Total cost of new machine $15,000 20,000 1,500 $36,500 Depreciation for the year beginning June 1, 2019 = ($36,500 – $4,000) ÷ 10 = $3,250. LO: 1, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None 11-22