Financial accounting 10th edition harrison solutions manual by michael.horsley590

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Chapter 7: Plant Assets, Natural Resources, & Intangibles Learning Objectives 1. 2. 3. 4. 5. 6. 7. 8.

Measure and account for the cost of plant assets Distinguish a capital expenditure from an immediate expense Measure and record depreciation on pant assets Analyze the effect of a plant asset disposal Apply GAAP for natural resources and intangible assets Explain the effect of an asset impairment on the financial statements Analyze rate of return on assets Analyze the cash flow impact of long-lived asset transactions

Questions You Should Be Able To Answer Learning Objective Question(s) 1. Measure and (1) At what value are account for the plant assets recorded cost of plant assets under GAAP? (2) What is included in cost?

(3) If different kinds of plant assets (land, buildings, equipment) with different depreciable lives and methods are purchased in a lump sum purchase, how is the total cost allocated among them? 2. Distinguish a (1) What is the capital expenditure distinguishing from an immediate characteristic of a expense capital expenditure that requires recording it as an asset on the balance sheet rather than as a direct expense on the income statement?

Answer (1) Historical cost

For practice S7-1

(2) Initial cost + all expenditures necessary to make the asset ready for use (3) According to relative fair market values of the individual assets in the group

S7-2

(1) The expenditure is S7-3 expected to benefit multiple future periods as opposed to just the period when it is made. If the expenditure extends the useful life of the asset, it is capitalized. If not, it is expensed.

3. Measure and record depreciation on plant assets

(1) What is depreciation?

(1) Allocating the cost of a fixed asset over the periods of its estimated useful life.

(2) What is accumulated depreciation?

(2) A contra-asset account that measures the accumulated amount of depreciation that has been taken on a fixed asset over its useful life

(3) What is book value (BV)?

(3) Cost – accumulated depreciation

(4) Write the formulas for the following depreciation methods: a. Straight-line (SL)

(4)

b. Units of production (UOP)

c. Doubledeclining balance (DDB) (5) Which method of depreciation results in the highest net income in the asset’s early years? Lowest net income?

S7-4, S7-8

S7-7 (depreciation after change in useful life)

a. (Cost – salvage value)/useful life in years b. (Cost-salvage value)/useful life in units x number of units produced c. [(1/SL life)×2]× previous year end BV

(5) Usually SL results in higher net income; DDB usually results in lowest net income

S7-6 (best method for highest net income)

(7) Which (7) DDB depreciation method is usually the best method to choose for tax purposes during the early years of a fixed asset’s life? 4. Analyze the (1) What are the (1) a. Adjust effect of a plant steps in accounting depreciation up to asset disposal for a plant asset date of disposal: disposal Depr. Exp. xxx Accumulated Depr. xxx b. Update BV of asset (cost – accumulated depreciation) c. Cash proceeds – BV = gain/loss 5. Apply GAAP for (1) Depletion of a (1) UOP natural resources natural resource is and intangible similar to which assets depreciation method? (2) Prepare journal entries for:

S7-5 (best method for tax purposes)

S7-8

S7-9 (depletion on natural resources)

(2)

a. depletion of the a. Inventory xxx resource and Natural transfer into Resource xxx inventory b. selling the resource

b. Cost of Goods Sold xxx Inventory xxx

(3) What are intangible assets?

(3) Assets without S7-10 (intangible physical substance that goodwill) represent expected rights to future benefits.

Give examples.

Examples are patents, trademarks, copyrights.

Are intangible assets amortized?

Intangible assets other than goodwill are amortized over their useful lives.

(4) What is goodwill? (4) The excess of purchase price over fair market value of net assets acquired.

6. Explain the effect of an asset impairment on the financial statements

What must happen for it to be recorded?

The company must purchase the assets and liabilities of another company and pay more than the combined fair value of the net assets of that company.

Is goodwill amortized?

Goodwill is not amortized, but rather tested periodically for impairment. Step 1: Compare net book value (NBV) of asset with estimated future cash flows (CF) of the asset. If NBV < CF, asset is impaired; go to step 2. If not, asset is not impaired. Step 2: Impairment loss = NBV – fair value of asset

What are the two steps to test impairment of a longlived asset?

S7-14

7. Analyze rate of return on assets (ROA)

8. Analyze the cash flow impact of long-lived asset transactions

(1) What is the formula for rate of return on assets (ROA)? (2) What is a more detailed and informative way to show ROA?

(1) Net income ÷ Average total assets

(3) What do the following component ratios of DuPont Analysis show: a. Profit margin

(3)

(2) Use DuPont Analysis to break ROA into components as follows: Net profit margin ratio X Asset turnover [Net income/ Net sales] X [Net sales/ Average total assets]

a. profitability (high margin) b. Asset turnover b. efficiency (low cost) (1) Which section of the (1) The investing S7-13 cash flow statement section reflects activity from the long-lived section of the balance sheet? (2) What is a sign of a (2) Generally healthy, healthy company an growing companies investing standpoint? show a net use of cash (outflow) from investing activities.

Chapter 7 Outline I.

S7-11, S7-12

Measure and Account for the Cost of Plant Assets A. Types of long-lived assets 1. Plant assets 2. Natural resources 3. Intangible assets B. Types of plant assets 1. Land – does not depreciate 2. Buildings, machinery, and equipment 3. Land improvements and leasehold improvements 7-5 Copyright ©2015 Pearson Education Inc.

II.

III.

IV.

VI.

C. Lump-sum (basket) purchases of assets Distinguish a Capital Expenditure from an Immediate Expense A. Capital expenditure: increase the asset’s capacity or extend useful life B. Expense: maintain asset or restore it to working order Measure and Record Depreciation on Plant Assets A. Book value = cost – accumulated depreciation B. Depreciation: allocation of a plant asset’s cost to expense over its life C. Measuring depreciation 1. Cost 2. Estimated useful life: length of service expected from using the asset 3. Estimated residual value: expected cash value of an asset at end of useful life D. Depreciation methods 1. Straight-line method 2. Units-of-production method 3. Double-declining-balance method (an accelerated method) E. Comparing depreciation methods F. Other issues in accounting for plant assets G. Depreciation for tax purposes H. Depreciation for partial years I. Changing the useful life of a depreciable asset J. Fully depreciated assets Analyze the Effect of a Plant Asset Disposal A. Disposing of a fully depreciated asset for no proceeds B. Selling a plant asset C. Exchanging a plant asset D. Use T-accounts for analyzing plant asset transactions Apply GAAP for Natural Resources and Intangible Assets A. Accounting for natural resources – depletion B. Accounting for intangible assets – amortization C. Accounting for specific intangibles 1. Patents 2. Copyrights 3. Trademarks and trade names 4. Franchises and licenses 5. Goodwill D. Accounting for research and development costs Explain the Effect of an Asset Impairment on the Financial Statements A. Step 1: test the asset for impairment (NBV > Estimated FCF) B. Step 2: compute impairment loss (NBV – FV) 7-6 Copyright ©2015 Pearson Education Inc.

VII.

VIII.

Analyze Rate of Return on Assets A. ROA = Net Income Avg. Total Assets B. ROA measures how much the entity earned for each dollar of assets invested C. DuPont analysis gives a more detailed view of ROA Analyze the Cash Flow Impact of Long-Lived Asset Transactions A. Acquisitions (investing activity) B. Sales (investing activity) C. Depreciation

Chapter Activities 1.

Chapter Opener

This chapter’s spotlight is on the FedEx Corporation. Discuss the types of assets that FedEx might use in their business. Ask the students to think about the different intangible assets that FedEx might own. Challenge the students to think about how the cost of those assets might be allocated on FedEx’s books by using the process of depreciation and amortization. 2.

Depreciation Activity

Have the students list on the board the assets that they own personally (cars, computers, homes, etc.), along with the approximate costs of each. Then assign estimated lives to each of the assets and an estimated residual value. Then ask the students to calculate depreciation for each of these items using the three methods of depreciation. Once the students have this information, they can determine accumulated depreciation per year and book value. Difficult Topics  

Depreciation method equations Selling an asset, especially debiting accumulated depreciation and debit/credit losses/gains

Chapter 7: Assignment Grid

Assignment

S7-1

S7-2

S7-3

S7-4

S7-5

S7-6

S7-7

S7-8

S7-9

S7-10 S7-11 S7-12

Topic(s)

L.O.

Level of Difficulty

Estimated Time (minutes) 5

Measure the cost and book value of a company’s plant assets Measure and record the cost of individual assets in a lump-sum purchase of assets Distinguish a capital expenditure from an immediate expense Compute depreciation and book value by three methods – first year only Select the best depreciation method for income tax purposes Compute partial year depreciation, and select the best depreciation method Compute and record depreciation after a change in useful life of the asset Compute depreciation; record a gain or loss on disposal Account for the depletion of a company’s natural resources Measure and record goodwill Calculate return on assets Calculate return on assets

Easy

Medium

10-15

Easy

5-10

Medium

3,4

5-10

Medium

5-10

Easy

5-10

Medium

Easy

Medium

(Will have an X if available) Excel General Templates Ledger Templates

Easy

Assignment

S7-13

S7-14

E7-15A E7-16A

E7-17A

E7-18A E7-19A

E7-20A

E7-21A E7-22A

E7-23A

E7-24A

Topic(s)

L.O.

Level of Difficulty

Estimated Time (minutes) 5

Analyze the cash flow impact of investing activities on the statement of cash flows Explain the effect of asset impairment on financial statements Measure the cost of plant assets Allocate costs to assets acquired in a lumpsum purchase; dispose of a plant asset Distinguish capital expenditures from expenses Measure, depreciate, and report plant assets Determine depreciation amounts by three methods Report plant assets, depreciation, and investing cash flows Change a plant asset’s useful life Measure DDB depreciation; analyze the effect of a sale of a plant asset Measure a plant asset’s cost; calculate UOP depreciation; analyze the effect of a used asset trade-in Record natural resource assets and depletion

Medium

5-10

Medium

1,4

10-15

Medium

5-10

Easy

1,3

Medium

15-20

Medium

1,3,8

Easy

10-15

Medium

3,4

15-20

Medium

1,3,4

10-15

Medium

10-15

Medium

Excel Templates

Medium

General Ledger Templates

Assignment

E7-25A

E7-26A

E7-27A E7-28A E7-29B E7-30B

E7-31B

E7-32B E7-33B

E7-34B

E7-35B E7-36B

E7-37B

Topic(s)

L.O.

Level of Difficulty

5,6

Estimated Time (minutes) 10-15

Record intangibles, amortization, and impairment Compute and account for goodwill; explain the effect of asset impairment Calculate return on assets Report cash flows for plant assets Measure the cost of plant assets Allocate costs to assets acquired in a lumpsum purchase; dispose of a plant asset Distinguish capital expenditures from expenses Measure, depreciate, and report plant assets Determine depreciation amounts by three methods Report plant assets, depreciation, and investing cash flows Change a plant asset’s useful life Measure DDB depreciation; analyze the effect of a sale on a plant asset Measure a plant asset’s cost; calculate UOP depreciation; analyze the effect of a used asset trade-in

5,6

5-10

Medium

5-10

Medium

5-10

Medium

1,4

10-15

Difficult

5-10

Difficult

1,3

Difficult

15-20

Difficult

1,3,8

Difficult

10-15

Medium

3,4

15-20

Difficult

1,3,4

10-15

Difficult

Excel Templates

Medium

General Ledger Templates

Assignment

E7-38B

E7-39B

E7-40B

E7-41B E7-42B Q7-43 to Q7-57 P7-58A

P7-59A

P7-60A

P7-61A

Topic(s)

L.O.

Level of Difficulty

Estimated Time (minutes) 10-15

Record natural resource assets and depletion Record intangibles, amortization, and impairment Compute and account for goodwill and impairment Calculate return on assets Report cash flows for plant assets Practice Quiz

5,6

10-15

Medium

5,6

5-10

Medium

5-10

Medium

All

30-40

Medium

Measure and account 1,2,3 for plant assets; distinguish a capital expenditure from an expense; measure and record depreciation Measure and account 1,3 for the cost of plant assets; measure and record depreciation under DDB Measure and account 1,3,4 for the cost of plant assets and depreciation; analyze and record a plant asset disposal Measure and account 1,3,8 for the cost of a plant asset; measure depreciation by three methods; identify the cash flow advantage of accelerated depreciation for tax purposes

20-30

Medium

25-35

Medium

30-40

Medium

Excel Templates

General Ledger Templates

Medium

Assignment

P7-62A

P7-63A P7-64A

P7-65A P7-66A

P7-67B

P7-68B

P7-69B

P7-70B

Topic(s)

L.O.

Estimated Time (minutes) 20-25

Level of Difficulty

Analyze plant asset transactions from a company’s financial statements Account for natural resources Analyze the effect of a plant asset addition and disposal; report plant asset transactions on the financial statements Calculate return on assets Analyze the effect of a plant asset disposal and the cash flow impact of long-lived asset transactions Measure and account for plant assets; distinguish a capital expenditure from an expense; measure and record depreciation Measure and account for the cost of plant assets; measure and record depreciation under DDB Measure and account for the cost of plant assets and depreciation; analyze and record a plant asset disposal Measure and account for the cost of a plant asset; measure depreciation by three methods; identify the cash flow advantage of accel. depreciation for tax purposes

1,3,4, 6,8

20-30

Medium

1,4,8

30-40

Medium

20-30

Medium

4,8

20-30

Medium

1,2,3

20-30

Medium

1,3

Medium

1,3,4

25-35

Medium

1,3,8

30-40

Medium

Excel Templates

General Ledger Templates

Medium

Assignment

P7-71B

P7-72B P7-73B

P7-74B P7-75B

E7-76

E7-77

P7-78

Decision Case 1

Decision Case 2

Ethical Issue

Topic(s)

L.O.

Estimated Time (minutes) 20-25

Level of Difficulty

Analyze plant asset transactions from a company’s financial statements Account for natural resources Analyze the effect of a plant asset addition and disposal; report plant asset transactions on the financial statements Calculate return on assets Analyze the effect of a plant asset disposal and the cash flow impact of long-lived asset transactions Determine the effect on net income of a change in the depreciation method Distinguish a capital expenditure from an expense, and measure the financial statement effects of an expensing error Determine plant and equipment transactions for an actual company Measure profitability based on different inventory and depreciation methods Distinguish between capital expenditures and expense; account for plant assets and intangible assets United Jersey Bank

1,3,4, 6,8

20-30

Medium

1,4,8

30-40

Medium

20-30

Medium

4,8

20-30

Medium

15-20

Medium

15-25

Medium

20-30

Medium

30-45

Difficult

2,5

20-30

Medium

All

30-40

Difficult

Medium

Excel Templates

General Ledger Templates

Assignment

Focus on Financials: Amazon .com Focus on Analysis: Yum! Brands, Inc.

Group Project

Topic(s)

L.O.

Estimated Time (minutes) 30-40

Level of Difficulty

Analyze activity in plant assets

2,3,6

Difficult

Measure the cost of plant assets; explain plant asset activity; apply GAAP for intangible assets, explain an asset impairment, analyze rate of return on assets; analyze the cash flow impact of long-lived asset transactions Visit a local business

1,5,6, 7,8

20-30

Difficult

All

90+

Difficult

Excel Templates

General Ledger Templates

Answer Key to Chapter 7 Quiz (Quiz on following pages.) 1. D 2. A 3. C 4. A 5. D 6. A 7. B 8. A 9. B 10. C

Name____________________________________ Date_________________ Section_______________

CHAPTER 7 10-MINUTE QUIZ Circle the letter of the best response. Case 7-1: Use the information below to answer Questions 1 – 6. A business purchased an asset that had a total cost of $110,000 and a residual value of $10,000. The asset is expected to service the business for a period of 10 years or produce a total of 1,000,000 units. The machine was purchased January 1st of the current year and has been in service one complete year. 1.

Refer to Case 7-1. What is the depreciable cost of the asset? A. $110,000 B. $120,000 C. $90,000 D. $100,000

Refer to Case 7-1. Using the straight-line method, what is the amount of depreciation expense in Year two of the asset’s life? A. $10,000 B. $20,000 C. $11,000 D. $12,000

Refer to Case 7-1. Now assume the business uses the units-of-production method. If the asset produces 250,000 units in Year 1 and 200,000 units in Year two, what is the amount of depreciation expense for Year two? A. $22,000 B. $45,000 C. $20,000 D. $25,000

Refer to Case 7-1 and Question 3. What is the book value of the asset at the end of Year two, using the units-of-production method? A. $65,000 B. $60,500 C. $80,000 D. $90,000

Refer to Case 7-1. What is the depreciation expense in Year one, if the double-decliningbalance method is used? A. $11,000 B. $10,000 C. $20,000 D. $22,000

The entry to record the annual depreciation does not include: A. A debit to Accumulated Depreciation. B. A debit to Depreciation Expense. C. A credit to Accumulated Depreciation. D. None of the above

In calculating the total cost of land, all costs are included except: A. Purchase price. B. Fencing C. Brokerage commission. D. Survey fees

If a plant asset is sold and a gain is incurred, the entry to record the sale would include a debit to: A. Accumulated Depreciation. B. Gain on Sale of Asset. C. Plant Asset. D. Sales Revenue.

Return on assets: A. is calculated as average total assets/net income. B. is calculated as net income/average total assets. C. is calculated as net income/net sales. D. measures the amount of sales dollars generated by each dollar of assets invested in the business.

10.

Which of the following statements is TRUE? A. Allocating the cost of a plant asset over its useful life is called depletion B. Allocating the cost of a natural resource to an expense is called depreciation. C. Intangible assets are amortized. D. All of the above are true.