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

By David Lee,2014-06-27 22:56
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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)

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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