E 10-6

E 10-6

Depreciation Expense Per Year
Year	Straight-Line	Units-of-Production	Double-Declining-Balance
20X1	$ 3,000	$ 4,080	$ 7,500
20X2	3,000	3,360	3,750
20X3	3,000	2,160	375
20X4	3,000	2,400	375
	$12,000	$12,000	$12,000

__________

Computations:

Straight-line: ($15,000 ! $3,000) ) 4 = $3,000 per year.

Units-of-production: ($15,000 ! $3,000) ) 100,000 miles = $.12 per mile;

34,000 ´ $.12 = $4,080; 28,000 ´ $.12 = $3,360; 18,000 ´ $.12 = $2,160;

20,000 ´ $.12 = $2,400.

Double-declining-balance: $15,000 ´ (1/4 ´ 2) = $7,500;

($15,000 ! $7,500) ´ 2/4 = $3,750; ($15,000 ! $7,500 ! $3,750) =

$3,750 ! $3,000 residual value = $750 ) 2 = $375.

The units-of-production method tracks the wear and tear on the truck most closely.

For income-tax purposes, the double-declining-balance method is best because it provides the most depreciation and thus the largest tax deductions in the early life of the asset. The company can invest the tax savings to earn a return on the investment.

(15-20 min.) E 10-7

MACRS depreciation method for income tax:

Double-declining-balance

	Double- Declining- Balance	Straight- Line
Year 1:
$165,000 ´ 2/7	$47,143
($165,000 ! $16,500) ) 7		$21,214
Year 2:
($165,000 ! $47,143) ´ 2/7	33,673
($165,000 ! $16,500) ) 7	______	21,214
Total	$80,816	$42,428
Extra cash to invest with DDB
($80,816 ! $42,428)	$38,388

__________

Note: This solution ignores the half-year convention of MACRS depreciation.

(10-15 min.) E 10-8

Journal
DATE		ACCOUNT TITLES AND EXPLANATION	DEBIT	CREDIT
Year	15	Depreciation Expense
		[($775,000 ! $100,000) ) 40]	16,875
		Accumulated Depreciation—Building		16,875

Year	16	Depreciation Expense	21,458*
		Accumulated Depreciation—Building		21,458

__________

*Computation:

Depreciable cost: $775,000 ! $100,000 = $675,000

Depreciation through year 15: $675,000 ) 40 = $16,875 ´ 15 = $253,125

Asset’s remaining depreciable book value:

$775,000 ! $253,125 ! $200,000 = $321,875

New estimated useful life remaining: 15 years

New annual depreciation: $321,875 ) 15 = $21,458

(10-15 min.) E 10-9

Journal
DATE		ACCOUNTS AND EXPLANATIONS	POST. REF.	DEBIT	CREDIT
20X4		Depreciation for 9 months:
Sept.	30	Depreciation Expense		1,710^a
		Accumulated Depreciation—
		Fixtures			1,710

		Sale of fixtures:
	30	Cash		4,950
		Accumulated Depreciation—
		Fixtures ($3,800 + $1,710)		5,510
		Store Fixtures			9,500
		Gain on Sale of Fixtures			960^b

__________

^{a20X3 depreciation: $9,500 ´
2/5 = $3,800}

20X4 depreciation: ($9,500 ! $3,800) ´ 2/5 ´ 9/12 = $1,710

^{bGain is computed as follows:
Sale price of old store fixtures........................... $4,950
Book value of old fixtures:
Cost............................................................... $9,500
Less Accumulated depreciation.................... (5,510) 3,990
Gain on sale....................................................... $ 960}

(10-15 min.) E 10-10

Cost of new truck = Book value of old truck + Cash paid

$338,175 = $258,175^a + $80,000

__________

^{aCost of old truck $385,000
Accumulated depreciation:}

($385,000 ! $100,000) ´	75 + 120 + 210 + 40	................. (126,825)
	1,000

_______

Book value of old truck $258,175

(10-15 min.) E 10-11

Journal
DATE		ACCOUNTS AND EXPLANATIONS	POST. REF.	DEBIT	CREDIT
	(a)	Purchase of minerals:
		Mineral Asset		298,500
		Cash			298,500

	(b)	Payment of fees and other costs:
		Mineral Asset ($500 + $1,000)		1,500
		Cash			1,500

		Mineral Asset		60,000
		Cash			60,000

	(c)	Depletion Expense		75,600*
		Accumulated Depletion—
		Mineral Asset			75,600

__________

*$298,500 + $500 + $1,000 + $60,000 = $360,000;

$360,000 ) 200,000 tons = $1.80 per ton;

42,000 tons ´ $1.80 = $75,600

(10-15 min.) E 10-12

Journal
DATE		ACCOUNTS AND EXPLANATIONS	POST. REF.	DEBIT	CREDIT
Part	1(a)	Purchase of patent:
		Patents		1,370,000
		Cash			1,370,000

	(b)	Amortization for one year:
		Amortization Expense—Patents
		($1,370,000 ) 8)		171,250
		Patents			171,250

Part	2	Amortization for year 5:
		Amortization Expense—Patents		342,500*
		Patents			342,500

__________

*Asset remaining book value: $1,370,000 ! ($171,250 ´ 4) = $685,000

New estimated useful life remaining: 2 years

New annual amortization: $685,000 ) 2 = $342,500

(10-15 min.) E 10-13

Req. 1

Campbell’s title

for goodwill: Purchase Price in Excess of Net Assets

of Businesses Acquired

This title fits the definition of goodwill almost word for word.

Req. 2

	Millions
Payments to acquire other businesses.......................................	$105
Less: Payments for goodwill, included in
the above purchase price ($1,697 ! $1,655)........................	(42)
Payment for other assets, such as
receivables, inventory, property, and equipment.................	$ 63

(10-15 min.) E 10-14

Req. 1

Cost of goodwill purchased:


Purchase price paid for Adelaide Bakeries.............................		$12,000,000
Market value of Adelaide’s net assets:
Market value of Adelaide’s assets………...	$15,000,000
Less: Adelaide’s liabilities.............……….	(10,000,000)
Market value of Adelaide’s net assets..................………..		5,000,000
Cost of goodwill purchased....................................................		$ 7,000,000

Reqs. 2 and 3

Journal
DATE	ACCOUNTS AND EXPLANATIONS	POST. REF.	DEBIT	CREDIT
	Assets (Cash, Receivables,
	Inventories, Plant Assets)		15,000,000
	Goodwill		7,000,000
	Liabilities			10,000,000
	Cash			12,000,000
	Purchased Adelaide Bakeries.

	Amortization Expense—
	Goodwill ($7,000,000 ) 10)		700,000
	Goodwill			700,000
	Recorded amortization of goodwill.

(15-20 min.) E 10-15

		Year
		1	2	3	4	5
		Millions of Francs (F)
1.	Total current assets	No effects
2.	Equipment, net	F3.6u*	F2.7u**	F1.8u	F0.9u	Correct
3.	Net income	3.6u*	0.9o	0.9o	0.9o	0.9o

__________

u = Understated

o = Overstated

*Cost (F4.5 million) ! Depreciation expense (F.9 million) = F3.6 million

**Cost (F4.5 million) ! Two years’ depreciation (F1.8 million) = F2.7

million

(15-30 min.) E 10-16

(All amounts in millions of dollars)

Req. 1

Unamortized Special Tools
Dec. 31, 19X8 Balance	7,298
19X9 Acquisitions	2,559	19X9 Amortization	2,492

Dec. 31, 19X9 Balance	7,365

Req. 2

Sale proceeds ................................ $215

Less gain........................................ (15)

Book value of assets sold ............... $200

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