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Chapter 11 Homework Solutions 1- Exercise 11-2 1 Straight-line

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Chapter 11 Homework Solutions 1- Exercise 11-2 1 Straight-line ...

    Chapter 11 Homework Solutions

    1- Exercise 11-2

     1. Straight-line:

     $115,000 - 5,000

     = $11,000 per year

     10 years

     2. Sum-of-the-years’ digits:

     Sum-of-the-digits is ([10 (10 + 1)] ? 2) = 55

     2006 $110,000 x 10/55 = $20,000

     2007 $110,000 x 9/55 = $18,000

     3. Double-declining balance:

     Straight-line rate is 10% (1 ? 10 years) x 2 = 20% DDB rate

     2006 $115,000 x 20% = $23,000

     2007 ($115,000 - 23,000) x 20% = $18,400

     4. One hundred fifty percent declining balance:

     Straight-line rate is 10% (1 ? 10 years) x 1.5 = 15% rate

     2006 $115,000 x 15% = $17,250

     2007 ($115,000 - 17,250) x 15% = $14,663

     5. Units-of-production:

     $115,000 - 5,000

     = $.50 per unit depreciation rate

     220,000 units

     2006 30,000 units x $.50 = $15,000

     2007 25,000 units x $.50 = $12,500

2- Exercise 11-3

     1. Straight-line:

     $115,000 - 5,000

     = $11,000 per year

     10 years

     2006 $11,000 x 3/12 = $ 2,750

     2007 $11,000 x 12/12 = $11,000

     2. Sum-of-the-years’ digits:

     Sum-of-the-digits is {[10 (10 + 1)]/2} = 55

     2006 $110,000 x 10/55 x 3/12 = $ 5,000

     2007 $110,000 x 10/55 x 9/12 = $15,000

     + $110,000 x 9/55 x 3/12 = 4,500

     $19,500

     3. Double-declining balance:

     Straight-line rate is 10% (1 ? 10 years) x 2 = 20% DDB rate

     2006 $115,000 x 20% x 3/12 = $5,750

     2007 $115,000 x 20% x 9/12 = $17,250

     + ($115,000 - 23,000) x 20% x 3/12 = 4,600

     $21,850

     or,

     2007 ($115,000 - 5,750) x 20% = $21,850

     4. One hundred fifty percent declining balance:

     Straight-line rate is 10% (1 ? 10 years) x 1.5 = 15% rate

     2006 $115,000 x 15% x 3/12 = $ 4,313

     2007 $115,000 x 15% x 9/12 = $12,937

     + ($115,000 - 17,250) x 15% x 3/12 = 3,666

     $16,603

     Or,

     2007 ($115,000 - 4,313) x 15% = $16,603

     5. Units-of-production:

     $115,000 - 5,000

     = $.50 per unit depreciation rate

     220,000 units

     2006 10,000 units x $.50 = $ 5,000

     2007 25,000 units x $.50 = $12,500

    3 = Exercise 11-8

    Requirement 1

     Cost of the equipment:

     Purchase price $154,000

     Freight charges 2,000

     Installation charges 4,000

     $160,000

     Straight-line rate of 12.5% (1 ? 8 years) x 2 = 25% DDB rate.

     Book Value

    Beginning of

     Depreciation Book Value Year

    Year X Rate per Year = Depreciation End of Year

    2006 $160,000 25% $ 40,000 $120,000

    2007 120,000 25% 30,000 90,000

    2008 90,000 25% 22,500 67,500

    2009 67,500 25% 16,875 50,625

    2010 50,625 * 5,000 45,625

    2011 45,625 * 5,000 40,625

    2012 40,625 * 5,000 35,625

    2013 35,625 * 5,000 30,625

    Total $129,375

    * Switch to straight-line in 2010:

    Straight-line depreciation:

     $50,625 - 30,625

     = $5,000 per year

     4 years

Requirement 2

    For plant and equipment used in the manufacture of a product, depreciation is a product cost and is

    included in the cost of inventory. Eventually, when the product is sold, depreciation will be included in

    cost of goods sold.

4 - Exercise 11-11

    Requirement 1

     a. To record the purchase of a patent.

    January 1, 2004

    Patent ................................................................................................. 700,000

     Cash .............................................................................................. 700,000

     To record amortization on the patent.

    December 31, 2004 and 2005

    Amortization expense ($700,000 ? 10 years) ....................................... 70,000

     Patent ............................................................................................ 70,000

     b. To record the purchase of a franchise.

    2006

    Franchise ............................................................................................ 500,000

     Cash .............................................................................................. 500,000

     c. To record research and development expenses.

    2006

    Research and development expense .................................................... 380,000

     Cash .............................................................................................. 380,000

Exercise 11-11 (concluded)

     Year-end adjusting entries

     Patent: To record amortization on the patent.

    December 31, 2006

    Amortization expense (determined below) .......................................... 112,000

     Patent ............................................................................................ 112,000

     Calculation of annual amortization after the estimate change:

     ($ in thousands)

     $700 Cost

     $70 Old annual amortization ($700 ? 10 years)

     x 2 years 140 Amortization to date (2004-2005)

     560 Unamortized cost (balance in the patent account)

     ? 5 Estimated remaining life

     $112 New annual amortization

     Franchise: To record amortization of franchise.

    December 31, 2006

    Amortization expense ($500,000 ? 10 years) ....................................... 50,000

     Franchise ....................................................................................... 50,000

    Requirement 2

     Intangible asset

     Patent $448,000 [1]

     Franchise 450,000 [2]

     Total intangibles $898,000

     [1] $560,000 - 112,000

     [2] $500,000 - 50,000

5 - Exercise 11-13

     ($ in millions)

    Amortization expense (determined below) .......................................... 2.5

     Patent ............................................................................................ 2.5

     Calculation of annual amortization after the estimate change:

     $ in millions)

     $9 Cost

     $1 Old annual amortization ($9 ? 9 years)

     x 4 years 4 Amortization to date (2002-2005)

     5 Unamortized cost (balance in the patent account)

     ? 2 Estimated remaining life (6 years 4 years)

     $2.5 New annual amortization

6 - Exercise 11-17

    Requirement 1

     Analysis:

     Correct Incorrect

     (Should Have Been Recorded) (As Recorded)

2003 Machine 350,000 Expense 350,000

     Cash 350,000 Cash 350,000

2003 Expense 70,000 Depreciation entry omitted

     Accum. deprec. 70,000

2004 Expense 70,000 Depreciation entry omitted

     Accum. deprec. 70,000

2005 Expense 70,000 Depreciation entry omitted

     Accum. deprec. 70,000

During the three-year period, depreciation expense was understated by $210,000, but other

    expenses were overstated by $350,000, so net income during the period was understated by

    $140,000, which means retained earnings is currently understated by that amount.

During the three-year period, accumulated depreciation was understated, and continues to be

    understated by $210,000.

To correct incorrect accounts

    Machine ............................................................................... 350,000

     Accumulated depreciation ($70,000 x 3 years) ................. 210,000

     Retained earnings ($350,000 210,000)........................... 140,000 Requirement 2

     Correcting entry:

     Assuming that the machine had been disposed of, no correcting entry would be required

    because, after five years, the accounts would show appropriate balances.

7 - Exercise 11-18

    Requirement 1

     Book value $6.5 million

     Fair value 3.5 million

     Impairment loss 3.0 million

    Requirement 2

    Because the undiscounted sum of future cash flows of $6.8 million exceeds book value of $6.5

    million, there is no impairment loss.

    8 - Exercise 11-19

    Requirement 1

    Determination of implied goodwill:

     Fair value of Centerpoint, Inc. $220 million

     Fair value of Centerpoint’s net assets (excluding goodwill) 200 million

     Implied value of goodwill $ 20 million

    Measurement of impairment loss:

     Book value of goodwill $50 million

     Implied value of goodwill 20 million

     Impairment loss $30 million Requirement 2

    Because the fair value of the reporting unit, $270 million, exceeds book value, $250 million, there

    is no impairment loss.

9 - Exercise 11-20

     1. To record the replacement of the heating system.

    Accumulated depreciation - building ................................................... 250,000

     Cash .............................................................................................. 250,000

     2. To record the addition to the building.

    Building.............................................................................................. 750,000

     Cash .............................................................................................. 750,000

     3. To expense annual maintenance costs.

    Maintenance expense .......................................................................... 14,000

     Cash .............................................................................................. 14,000

     4. To capitalize rearrangement costs.

    Machinery .......................................................................................... 50,000

     Cash .............................................................................................. 50,000

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