acc 304 week 6

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ACC 304: Intermediate Accounting I Assignment: Week Six Acquisition and Depreciation Exercises Exercise #1 The following transactions occurred during 2017. Assume that depreciation of 10% per year is charged on all machinery and 5% per year on buildings, on a straight-line basis, with no estimated salvage value. Depreciation is charged for a full year on all fixed assets acquired during the year, and no depreciation is charged on fixed assets disposed of during the year. Jan 30 A building that cost $132,000 in 2000 is torn down to make room for a new building. The wrecking contractor was paid $5,100 and was permitted to keep all materials salvaged. March 10 Machinery that was purchased in 2010 for $16,000 is sold for $2,900 cash, f.o.b. purchaser's plant. Freight of $300 is paid on the sale of this machinery. March 20 A gear breaks on a machine that cost $9,000 in 2009. The gear is replaced at a cost of $2,000. The replacement does not extend the useful life of the machine but does make the machine more efficient. May 18 A special base installed for a machine in 2011 when the machine was purchased has to be replaced at a cost of $5,500 because of defective workmanship on the original base. The cost of the machinery was $14,200 in 2011. The cost of the base was $3,500, and this amount was charged to the Machinery account in 2011. June 23 One of the buildings is repainted at a cost of $6,900. It had not been painted since it was constructed in 2013. Instructions: Prepare general journal entries for the transactions. (Round to the nearest dollar.) 1 Exercise #2 Selected accounts included in the property, plant, and equipment section of Lobo Corporation's balance sheet at December 31, 2016, had the following balances. During 2017, the following transactions occurred. 1. A tract of land was acquired for $150,000 as a potential future building site. 2. A plant facility consisting of land and building was acquired from Mendota Company in exchange for 20,000 shares of Lobo's common stock. On the acquisition date, Lobo's stock had a closing market price of $37 per share on a national stock exchange. The plant facility was carried on Mendota's books at $110,000 for land and $320,000 for the building at the ex- change date. Current appraised values for the land and building, respectively, are $230,000 and $690,000. 3. Items of machinery and equipment were purchased at a total cost of $400,000. Additional costs were incurred as follows. 4. Expenditures totaling $95,000 were made for new parking lots, streets, and sidewalks at the corporation's various plant locations. These expenditures had an estimated useful life of 15 years. 5. A machine costing $80,000 on January 1, 2009, was scrapped on June 30, 2017. Double-decliningbalance depreciation has been recorded on the basis of a 10-year life. 6. A machine was sold for $20,000 on July 1, 2017. Original cost of the machine was $44,000 on January 1, 2014, and it was depreciated on the straight-line basis over an estimated useful life of 7 years and a salvage value of $2,000. Instructions: (Round to the nearest dollar.) (a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2017. 2 Hint: Disregard the related accumulated depreciation accounts.) (b) List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and supporting computations in good form for each item. In addition, indicate where, or if, these items should be included in Lobo's financial statements. Exercise #3 In 1990, Herman Moore Company completed the construction of a building at a cost of $2,000,000 and first occupied it in January 1991. It was estimated that the building will have a useful life of 40 years and a salvage value of $60,000 at the end of that time. Early in 2001, an addition to the building was constructed at a cost of $500,000. At that time, it was estimated that the remaining life of the building would be, as originally estimated, an additional 30 years, and that the addition would have a life of 30 years and a salvage value of $20,000. In 2019, it is determined that the probable life of the building and addition will extend to the end of 2050, or 20 years beyond the original estimate. Instructions: (a) Using the straight-line method, compute the annual depreciation that would have been charged from 1991 through 2000. (b) Compute the annual depreciation that would have been charged from 2001 through 2018. (c) Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2019. (d) Compute the annual depreciation to be charged, beginning with 2019. Exercise #4 The 2014 annual report of Tootsie Roll Industries contains the following: 3 Instructions: Compute the following ratios for Tootsie Roll for 2014. (a) Asset turnover. (b) Return on assets. (c) Profit margin on sales. (d) How can the asset turnover be used to compute the return on assets? Exercise #5 The certified public accountant is frequently called upon by management for advice regarding methods of computing depreciation. Of comparable importance, although it arises less frequently, is the question of whether the depreciation method should be based on consideration of the assets as units, as a group, or as having a composite life. Instructions: (a) Briefly describe the depreciation methods based on treating assets as (1) units and (2) a group or as having a composite life. (b) Present the arguments for and against the use of each of the two methods. (c) Describe how retirements are recorded under each of the two methods. 4 Exercise #1 The following transactions occurred during 2017. Assume that depreciation of 10% per year is charged on all machinery an Depreciation is charged for a full year on all fixed assets acquired during the year, and no depreciation is charged on fixed a Jan-30 A building that cost $132,000 in 2000 is torn down to make room for a new building. The wrecking contractor w Mar-10 Machinery that was purchased in 2010 for $16,000 is sold for $2,900 cash, f.o.b. purchaser's plant. Freight of $3 Mar-20 A gear breaks on a machine that cost $9,000 in 2009. The gear is replaced at a cost of $2,000. The replacement May-18 A special base installed for a machine in 2011 when the machine was purchased has to be replaced at a cost of $ The cost of the machinery was $14,200 in 2011. The cost of the base was $3,500, and this amount was charged Jun-23 One of the buildings is repainted at a cost of $6,900. It had not been painted since it was constructed in 2013. Instructions: Prepare general journal entries for the transactions. (Round to the nearest dollar.) Solution:Date Partculars ### Building A/c Amount (in $) Debit 5100 To Cash A/c (Repair expenses capitalised ) ### Cash A/c To Loss on Sale of Fixed Assets A/c To Accumulated Depreciation A/c To Machinery A/c ( sale of Machinery recorded) 2600 3498 9902 ### Machine A/c (New) Loss on Disposal of assets A/c Accumulated Depreciation A/c To Machinery (old) To Cash A/c 2000 2505 6495 ### Machine (New) A/c Accumulated Depreciation A/c Loss on disposal of assets A/c To Machinery (old) To Cash 5500 2090 1410 ### Repair & Maintenance expense A/c To Cash (expense recorded) 6900 charged on all machinery and 5% per year on buildings, on a straight-line basis, with no estimated salvage value. eciation is charged on fixed assets disposed of during the year. g. The wrecking contractor was paid $5,100 and was permitted to keep all materials salvaged. rchaser's plant. Freight of $300 is paid on the sale of this machinery. of $2,000. The replacement does not extend the useful life of the machine but does make the machine more efficient. s to be replaced at a cost of $5,500 because of defective workmanship on the original base. nd this amount was charged to the Machinery account in 2011. t was constructed in 2013. Amount (in $) Credit 5100 Working Notes 10-Mar-17 1 Cost of Machinery Less: Accumulated Depreciation 2010 to 2016 9600 2017 302 Depreciated Value on March 10, 2017 16000 2 9000 2000 Depreciated Value on March 10, 2017 3 3500 5500 20-Mar-17 Cost of Machinery Less: Accumulated Depreciation 2009 to 2016 6300 2017 195 18-May-17 Cost of Old Base Less: Accumulated Depreciation 2011 to 2016 1750 2017 340 Depreciated Value on March 10, 2017 6900 more efficient. 16000 9902 6098 9000 6495 2505 3500 2090 1410 Exercise #2 Selected accounts included in the property, plant, and equipment section of Lobo Corporation's balance sheet at December 31 Land 300,000 Land Improvements 140,000 Buildings 1,100,000 Equipments 960,000 During 2017, the following transactions occurred. 1. A tract of land was acquired for $150,000 as a potential future building site. 2. A plant facility consisting of land and building was acquired from Mendota Company in exchange for 20,000 shares of Lobo's On the acquisition date, Lobo's stock had a closing market price of $37 per share on a national stock exchange. The plant facilit the building at the ex- change date. Current appraised values for the land and building, respectively, are $230,000 and $690,00 3. Items of machinery and equipment were purchased at a total cost of $400,000. Additional costs were incurred as follows. Freight and unloading $13,000 Sales Taxes 20,000 Installation 26,000 4. Expenditures totaling $95,000 were made for new parking lots, streets, and sidewalks at the corporation's various plant loca 5. A machine costing $80,000 on January 1, 2009, was scrapped on June 30, 2017. Double-declining-balance depreciation has b 6. A machine was sold for $20,000 on July 1, 2017. Original cost of the machine was $44,000 on January 1, 2014, and it was de over an estimated useful life of 7 years and a salvage value of $2,000. Instructions: (Round to the nearest dollar.) (a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2017. Land Buildings Land Improvements Equipments Hint: Disregard the related accumulated depreciation accounts.) (b) List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and s in good form for each item. In addition, indicate where, or if, these items should be included in Lobo's financial statements. Solutions :- Detailed Analysis of changes in following balance sheet Accounts (a) Land 300,000 150,000 189302 - Particulars Opening Balance Add: Addition Land Improvements 140,000 95000 Buildings 1,100,000 550698 - Less : Deletions - - - Closing Balance 639,302 235,000 1,650,698 Note:- No depreciation charged for the year 2017, because no information provided in this regard. Working Note 2 1 Land & Building Total Cost (20,000 shares x $37 per share) 740000 Capitalised Value 3 Mendota's Book Value on exchange date Land 110,000 Building 320,000 Total Cost 430,000 Total Cost incurred would be apportioned in proportion of Mendonta's book value as follows:Land Building Total (b) Machinery & equipments pu Add: Total Additional Costs Machinery Sold Machinery Costing Less : Depreciation (for 3.5 y Annual Dep Depreciated Value on July 1 189302 550698 740000 Items in the fact situation that were not used to determine the answer to (a) - Current appraised values for the land and building, respectively, are $230,000 and $690,000 w - Other Detailed presentation is given as above. alance sheet at December 31, 2016, had the following balances. 740000 e for 20,000 shares of Lobo's common stock. ck exchange. The plant facility was carried on Mendota's books at $110,000 for land and $320,000 for ly, are $230,000 and $690,000. s were incurred as follows. rporation's various plant locations. These expenditures had an estimated useful life of 15 years. ng-balance depreciation has been recorded on the basis of a 10-year life. anuary 1, 2014, and it was depreciated on the straight-line basis the pertinent amounts and supporting computations obo's financial statements. Equipments 960,000 459,000 - Total 2,500,000 150,000 740,000 Exercise #2'!E71 459,000 Exercise #2'!M59 95,000 0 -12,080 -23,000 1,383,920 -12,080 Exercise #2'!T62 -23,000 Exercise #2'!M67 0 3,908,920 n this regard. Machinery & equipments purchased cos 400,000 Add: Total Additional Costs 59000 Capitalised Value 459,000 4 Machinery Scapped Machinery Costing on January 1, 2009 Less : Depreciation (for 8.5 yrs.) Annual Dep. Rate (Double Declining method)=20% Machinery Sold Depreciated Value on June 30, 2017 Machinery Costing Less : Depreciation (for 3.5 yrs.) 6000 44,000 21000 Depreciated Value on July 1, 2017 23,000 are $230,000 and $690,000 were not used to answer to (a) calculation of Depreciation Year Opening Ba 1 80000 2 64000 3 51200 4 40960 5 32768 6 26214 7 20972 8 16777 8.5 13422 Total 80,000 67920 method)=20% 12,080 Depreciation Dep. Rate Dep. Expense 20% 16000 20% 12800 20% 10240 20% 8192 20% 6554 20% 5243 20% 4194 20% 3355 10% 1342 Total 67920 Exercise #3 In 1990, Herman Moore Company completed the construction of a building at a cost of $2,000,000 and first occupied it in J It was estimated that the building will have a useful life of 40 years and a salvage value of $60,000 at the end of that time. Early in 2001, an addition to the building was constructed at a cost of $500,000. At that time, it was estimated that the rem an additional 30 years, and that the addition would have a life of 30 years and a salvage value of $20,000. In 2019, it is determined that the probable life of the building and addition will extend to the end of 2050, or 20 years beyo Instructions: (a) Using the straight-line method, compute the annual depreciation that would have been charged from 1991 through 200 (b) Compute the annual depreciation that would have been charged from 2001 through 2018. (c) Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2019. (d) Compute the annual depreciation to be charged, beginning with 2019. Solutions :(a) (b) Using the straight-line method, compute the annual depreciation that would have been charged from 1991 th Cost of Buiding Salvage Value Useful life Amount (in $) 2,000,000 60,000 40 yrs. Annual Depreciation 48500 Compute the annual depreciation that would have been charged from 2001 through 2018. Additional Cost Salvage Value Useful life Amount (in $) 500,000 20,000 30 yrs. Annual Additional Depreciation 16000 Annual Depreciation From 2001 through 2018 = Annual Depreciation before Addition + Annual Add = (c) 64500 Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in No Additional Journal Entry is required to adjust the account balances, because it is chang (d) Compute the annual depreciation to be charged, beginning with 2019. Depreciation Expense= ((Historical Cost - Accumulated Depreciation)- Salvage Value)/Remaining Usefu Historical Cost Accumulated Depreciation Salvage Value Remaining useful life 2,500,000 1646000 80,000 32 yrs. Depreciation expense 24187.5 00 and first occupied it in January 1991. 0 at the end of that time. was estimated that the remaining life of the building would be, as originally estimated, d of 2050, or 20 years beyond the original estimate. ed from 1991 through 2000. estimated life in 2019. een charged from 1991 through 2000. re Addition + Annual Additional Depreciation n of the estimated life in 2019. ances, because it is change in estimate not in accounting method. e Value)/Remaining Useful Life Exercise #4 The 2014 annual report of Tootsie Roll Industries contains the following: (in millions) December 31, 2014 Total Assets Total Liabilities Net Sales Net Income December 31, 2013 910.4 219.3 539.9 63.2 888.4 208.1 539.6 60.8 Instructions : Compute the following ratios for Tootsie Roll for 2014. (a) Asset turnover. (b) Return on assets. (c) Profit margin on sales. (d) How can the asset turnover be used to compute the return on assets? Solution :- (a) Assets Turnover Ratio = Sales/Total Assets December 31, 2014 Sales 539.9 Total Assets 910.4 = 0.59 (b) Return on assets ratio (ROA) = Net Income/Total Assets December 31, 2014 Net Income 63.2 Total Assets 910.4 = 0.07 (c) Profit Margin Ratio = Net Income/Net sales Net Income Net Sales = (d) December 31, 2014 63.2 539.9 0.12 How can the asset turnover be used to compute the return on assets? The distinct difference between return on assets and asset turnover is that the return on assets c By using net income instead of revenues, the return on assets formula factors in a company's exp The asset turnover ratio can be used to calculate return on assets with the following formula ROA = Net Profit Margin x Asset Turnover Ratio Net Profit Margin is revenues divided by net income and the asset turnover ratio is net income di By multiplying these two together, revenues is cancelled out leaving the formula for return on ass December 31, 2013 539.6 888.4 0.61 December 31, 2013 60.8 888.4 0.07 December 31, 2013 60.8 539.6 0.11 ver is that the return on assets considers net income and asset turnover considers revenues. rmula factors in a company's expenses. s with the following formula t turnover ratio is net income divided average total assets. ing the formula for return on assets shown on top of the page. Exercise #5 The certified public accountant is frequently called upon by management for advice regarding methods of computing dep Of comparable importance, although it arises less frequently, is the question of whether the depreciation method should as a group, or as having a composite life. Instructions: (a) Briefly describe the depreciation methods based on treating assets as (1) units and (2) a group or as having a compos (b) Present the arguments for and against the use of each of the two methods. (c) Describe how retirements are recorded under each of the two methods. Solutions:(a) - The unit method of recording depreciation involves the treatment of plant assets or substantial additions ther the costs of specific assets and related accumulated depreciation. Computation of depreciation is based on the The method is distinguished from group and composite-life methods under which the cost and estimated life of straight-line, accelerated, or other accepted computation methods. - Under the group or composite-life methods, assets are aggregated into accounting units. Such grouping might together all assets of similar physical characteristics, such as trucks, presses, returnable con-tainers, etc. A vertic function, such as a sugar refinery, a service station, etc. The geographical grouping includes all assets in a distric - Depreciation under these methods requires development of a weighted-average rate from the assets' depreci the total cost of each asset grouping and its related accumulated depreciation. The asset grouping should be com (b) 1 Arguments for the use of the unit method are: i. The method is simple in that it does not require involved mathematical comput ii. The gain or loss on the retirement of a particular asset can be computed. iii. For cost purposes, depreciation on idle equipment can be isolated. iv. The method results in a more accurately computed depreciation provision in an Arguments against the unit method are: i. Considerable additional bookkeeping is necessary to account for each asset and ii. There is a point of diminishing returns in the accumulation of accounting data u iii. Under a decentralized financial control system where a measure of the division might scrap fully or nearly fully depreciated equipment to improve the division iv. There may be reluctance on the part of a division manager to replace equipme on the division's profits in the year of replacement. 2 Arguments for the use of the group and composite-life methods are: i. The methods require less detailed bookkeeping. ii. The application of depreciation to the whole group tends to average out or offs iii. Periodic income is not distorted by gains or losses on disposal of assets. iv. A more useful charge to expense is derived from these methods because of the losses on individual assets are of little significance. Arguments against the use of the group and composite-life methods would include: i. The methods would conceal faulty estimates for a long period of time. ii. When there is an early heavy retirement of assets a debit balance might appea iii. iv. v. (c) Information is not available regarding a particular machine for cost-calculation Under a decentralized financial control system where a measure of the division to improve the division's financial reports a division manager might scrap idle b book value. The company would sustain an actual loss in the amount of the val Under the same situation as \"iv\" above, except that net book value is used, wh division manager might hesitate to replace them because of the high rate of ret Under the unit method, retirements are recorded by removing from the accounts the cost of the ass adjusted for salvage and disposal costs, if any, is recognized as gain or loss. Under the group and composite-life methods the cost of the retired asset is removed from the asset cost of the retired asset, adjusted for salvage, salvage costs, and removal costs. Accordingly, there is n serves as a suspense account for the recognition of gain or loss until the final asset retirement. methods of computing depreciation. preciation method should be based on consideration of the assets as units, up or as having a composite life. substantial additions thereto as individual items. The method entails maintaining detailed records of preciation is based on the estimated useful life of the individual asset. cost and estimated life of the assets are commingled. Depreciation may be recorded by nits. Such grouping might be horizontal, vertical, or geographical. Horizontal grouping assembles e con-tainers, etc. A vertical or functional grouping comprises all assets contributing to a common economic ludes all assets in a district or region, such as telephone poles. e from the assets' depreciable costs and estimated lives. Separate accounts are established for et grouping should be composed of a large number of units to obtain a reliable average life. ved mathematical computations. t can be computed. n be isolated. epreciation provision in any given year, as the total depreciation charge represents the best estimate of the depreciation of each asset a account for each asset and its related depreciation. (The advent of computers reduces the work burden, however.) ation of accounting data under this method, that is, additional accuracy may not justify the additional cost of record-keeping. a measure of the division's efficiency is the rate of return on the gross book value of the investment a division manager nt to improve the division's rate of return even though the equipment is still serviceable. nager to replace equipment not fully depreciated with more efficient equipment because of the effect of the loss nds to average out or offset errors, economic or operating, caused by underdepreciation or overdepreciation. disposal of assets. e methods because of their recog-nition that depreciation estimates are based on averages and that gains and g period of time. ebit balance might appear in the accumulated depreciation account and present an accounting problem. chine for cost-calculation purposes. a measure of the division's efficiency is the rate of return on the gross book value of the investment, manager might scrap idle but serviceable equipment or equipment that is not earning a satisfactory return on s in the amount of the value of the equipment scrapped. et book value is used, where the assets, although serviceable, are fully or almost fully depreciated, the ause of the high rate of return on investment. counts the cost of the asset and its related accumulated depreciation. The difference between the two accounts, s removed from the asset account, and the accumulated depreciation account is reduced by the amount of the sts. Accordingly, there is no periodic recognition of gain or loss; the accumulated depreciation account al asset retirement. epreciation of each asset and is not the result of averaging the cost over a longer period of time. record-keeping. Exercise #1 The following transactions occurred during 2017. Assume that depreciation of 10% per year is charged on all machinery an Depreciation is charged for a full year on all fixed assets acquired during the year, and no depreciation is charged on fixed a Jan-30 A building that cost $132,000 in 2000 is torn down to make room for a new building. The wrecking contractor w Mar-10 Machinery that was purchased in 2010 for $16,000 is sold for $2,900 cash, f.o.b. purchaser's plant. Freight of $3 Mar-20 A gear breaks on a machine that cost $9,000 in 2009. The gear is replaced at a cost of $2,000. The replacement May-18 A special base installed for a machine in 2011 when the machine was purchased has to be replaced at a cost of $ The cost of the machinery was $14,200 in 2011. The cost of the base was $3,500, and this amount was charged Jun-23 One of the buildings is repainted at a cost of $6,900. It had not been painted since it was constructed in 2013. Instructions: Prepare general journal entries for the transactions. (Round to the nearest dollar.) Solution:Date Partculars ### Building A/c Amount (in $) Debit 5100 To Cash A/c (Repair expenses capitalised ) ### Cash A/c To Loss on Sale of Fixed Assets A/c To Accumulated Depreciation A/c To Machinery A/c ( sale of Machinery recorded) 2600 3498 9902 ### Machine A/c (New) Loss on Disposal of assets A/c Accumulated Depreciation A/c To Machinery (old) To Cash A/c 2000 2505 6495 ### Machine (New) A/c Accumulated Depreciation A/c Loss on disposal of assets A/c To Machinery (old) To Cash 5500 2090 1410 ### Repair & Maintenance expense A/c To Cash (expense recorded) 6900 charged on all machinery and 5% per year on buildings, on a straight-line basis, with no estimated salvage value. eciation is charged on fixed assets disposed of during the year. g. The wrecking contractor was paid $5,100 and was permitted to keep all materials salvaged. rchaser's plant. Freight of $300 is paid on the sale of this machinery. of $2,000. The replacement does not extend the useful life of the machine but does make the machine more efficient. s to be replaced at a cost of $5,500 because of defective workmanship on the original base. nd this amount was charged to the Machinery account in 2011. t was constructed in 2013. Amount (in $) Credit 5100 Working Notes 10-Mar-17 1 Cost of Machinery Less: Accumulated Depreciation 2010 to 2016 9600 2017 302 Depreciated Value on March 10, 2017 16000 2 9000 2000 Depreciated Value on March 10, 2017 3 3500 5500 20-Mar-17 Cost of Machinery Less: Accumulated Depreciation 2009 to 2016 6300 2017 195 18-May-17 Cost of Old Base Less: Accumulated Depreciation 2011 to 2016 1750 2017 340 Depreciated Value on March 10, 2017 6900 more efficient. 16000 9902 6098 9000 6495 2505 3500 2090 1410 Exercise #2 Selected accounts included in the property, plant, and equipment section of Lobo Corporation's balance sheet at December 31 Land 300,000 Land Improvements 140,000 Buildings 1,100,000 Equipments 960,000 During 2017, the following transactions occurred. 1. A tract of land was acquired for $150,000 as a potential future building site. 2. A plant facility consisting of land and building was acquired from Mendota Company in exchange for 20,000 shares of Lobo's On the acquisition date, Lobo's stock had a closing market price of $37 per share on a national stock exchange. The plant facilit the building at the ex- change date. Current appraised values for the land and building, respectively, are $230,000 and $690,00 3. Items of machinery and equipment were purchased at a total cost of $400,000. Additional costs were incurred as follows. Freight and unloading $13,000 Sales Taxes 20,000 Installation 26,000 4. Expenditures totaling $95,000 were made for new parking lots, streets, and sidewalks at the corporation's various plant loca 5. A machine costing $80,000 on January 1, 2009, was scrapped on June 30, 2017. Double-declining-balance depreciation has b 6. A machine was sold for $20,000 on July 1, 2017. Original cost of the machine was $44,000 on January 1, 2014, and it was de over an estimated useful life of 7 years and a salvage value of $2,000. Instructions: (Round to the nearest dollar.) (a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2017. Land Buildings Land Improvements Equipments Hint: Disregard the related accumulated depreciation accounts.) (b) List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and s in good form for each item. In addition, indicate where, or if, these items should be included in Lobo's financial statements. Solutions :- Detailed Analysis of changes in following balance sheet Accounts (a) Land 300,000 150,000 189302 - Particulars Opening Balance Add: Addition Land Improvements 140,000 95000 Buildings 1,100,000 550698 - Less : Deletions - - - Closing Balance 639,302 235,000 1,650,698 Note:- No depreciation charged for the year 2017, because no information provided in this regard. Working Note 2 1 Land & Building Total Cost (20,000 shares x $37 per share) 740000 Capitalised Value 3 Mendota's Book Value on exchange date Land 110,000 Building 320,000 Total Cost 430,000 Total Cost incurred would be apportioned in proportion of Mendonta's book value as follows:Land Building Total (b) Machinery & equipments pu Add: Total Additional Costs Machinery Sold Machinery Costing Less : Depreciation (for 3.5 y Annual Dep Depreciated Value on July 1 189302 550698 740000 Items in the fact situation that were not used to determine the answer to (a) - Current appraised values for the land and building, respectively, are $230,000 and $690,000 w - Other Detailed presentation is given as above. alance sheet at December 31, 2016, had the following balances. 740000 e for 20,000 shares of Lobo's common stock. ck exchange. The plant facility was carried on Mendota's books at $110,000 for land and $320,000 for ly, are $230,000 and $690,000. s were incurred as follows. rporation's various plant locations. These expenditures had an estimated useful life of 15 years. ng-balance depreciation has been recorded on the basis of a 10-year life. anuary 1, 2014, and it was depreciated on the straight-line basis the pertinent amounts and supporting computations obo's financial statements. Equipments 960,000 459,000 - Total 2,500,000 150,000 740,000 Exercise #2'!E71 459,000 Exercise #2'!M59 95,000 0 -12,080 -23,000 1,383,920 -12,080 Exercise #2'!T62 -23,000 Exercise #2'!M67 0 3,908,920 n this regard. Machinery & equipments purchased cos 400,000 Add: Total Additional Costs 59000 Capitalised Value 459,000 4 Machinery Scapped Machinery Costing on January 1, 2009 Less : Depreciation (for 8.5 yrs.) Annual Dep. Rate (Double Declining method)=20% Machinery Sold Depreciated Value on June 30, 2017 Machinery Costing Less : Depreciation (for 3.5 yrs.) 6000 44,000 21000 Depreciated Value on July 1, 2017 23,000 are $230,000 and $690,000 were not used to answer to (a) calculation of Depreciation Year Opening Ba 1 80000 2 64000 3 51200 4 40960 5 32768 6 26214 7 20972 8 16777 8.5 13422 Total 80,000 67920 method)=20% 12,080 Depreciation Dep. Rate Dep. Expense 20% 16000 20% 12800 20% 10240 20% 8192 20% 6554 20% 5243 20% 4194 20% 3355 10% 1342 Total 67920 Exercise #3 In 1990, Herman Moore Company completed the construction of a building at a cost of $2,000,000 and first occupied it in J It was estimated that the building will have a useful life of 40 years and a salvage value of $60,000 at the end of that time. Early in 2001, an addition to the building was constructed at a cost of $500,000. At that time, it was estimated that the rem an additional 30 years, and that the addition would have a life of 30 years and a salvage value of $20,000. In 2019, it is determined that the probable life of the building and addition will extend to the end of 2050, or 20 years beyo Instructions: (a) Using the straight-line method, compute the annual depreciation that would have been charged from 1991 through 200 (b) Compute the annual depreciation that would have been charged from 2001 through 2018. (c) Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2019. (d) Compute the annual depreciation to be charged, beginning with 2019. Solutions :(a) (b) Using the straight-line method, compute the annual depreciation that would have been charged from 1991 th Cost of Buiding Salvage Value Useful life Amount (in $) 2,000,000 60,000 40 yrs. Annual Depreciation 48500 Compute the annual depreciation that would have been charged from 2001 through 2018. Additional Cost Salvage Value Useful life Amount (in $) 500,000 20,000 30 yrs. Annual Additional Depreciation 16000 Annual Depreciation From 2001 through 2018 = Annual Depreciation before Addition + Annual Add = (c) 64500 Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in No Additional Journal Entry is required to adjust the account balances, because it is chang (d) Compute the annual depreciation to be charged, beginning with 2019. Depreciation Expense= ((Historical Cost - Accumulated Depreciation)- Salvage Value)/Remaining Usefu Historical Cost Accumulated Depreciation Salvage Value Remaining useful life 2,500,000 1646000 80,000 32 yrs. Depreciation expense 24187.5 00 and first occupied it in January 1991. 0 at the end of that time. was estimated that the remaining life of the building would be, as originally estimated, d of 2050, or 20 years beyond the original estimate. ed from 1991 through 2000. estimated life in 2019. een charged from 1991 through 2000. re Addition + Annual Additional Depreciation n of the estimated life in 2019. ances, because it is change in estimate not in accounting method. e Value)/Remaining Useful Life Exercise #4 The 2014 annual report of Tootsie Roll Industries contains the following: (in millions) December 31, 2014 Total Assets Total Liabilities Net Sales Net Income December 31, 2013 910.4 219.3 539.9 63.2 888.4 208.1 539.6 60.8 Instructions : Compute the following ratios for Tootsie Roll for 2014. (a) Asset turnover. (b) Return on assets. (c) Profit margin on sales. (d) How can the asset turnover be used to compute the return on assets? Solution :- (a) Assets Turnover Ratio = Sales/Total Assets December 31, 2014 Sales 539.9 Total Assets 910.4 = 0.59 (b) Return on assets ratio (ROA) = Net Income/Total Assets December 31, 2014 Net Income 63.2 Total Assets 910.4 = 0.07 (c) Profit Margin Ratio = Net Income/Net sales Net Income Net Sales = (d) December 31, 2014 63.2 539.9 0.12 How can the asset turnover be used to compute the return on assets? The distinct difference between return on assets and asset turnover is that the return on assets c By using net income instead of revenues, the return on assets formula factors in a company's exp The asset turnover ratio can be used to calculate return on assets with the following formula ROA = Net Profit Margin x Asset Turnover Ratio Net Profit Margin is revenues divided by net income and the asset turnover ratio is net income di By multiplying these two together, revenues is cancelled out leaving the formula for return on ass December 31, 2013 539.6 888.4 0.61 December 31, 2013 60.8 888.4 0.07 December 31, 2013 60.8 539.6 0.11 ver is that the return on assets considers net income and asset turnover considers revenues. rmula factors in a company's expenses. s with the following formula t turnover ratio is net income divided average total assets. ing the formula for return on assets shown on top of the page. Exercise #5 The certified public accountant is frequently called upon by management for advice regarding methods of computing dep Of comparable importance, although it arises less frequently, is the question of whether the depreciation method should as a group, or as having a composite life. Instructions: (a) Briefly describe the depreciation methods based on treating assets as (1) units and (2) a group or as having a compos (b) Present the arguments for and against the use of each of the two methods. (c) Describe how retirements are recorded under each of the two methods. Solutions:(a) - The unit method of recording depreciation involves the treatment of plant assets or substantial additions ther the costs of specific assets and related accumulated depreciation. Computation of depreciation is based on the The method is distinguished from group and composite-life methods under which the cost and estimated life of straight-line, accelerated, or other accepted computation methods. - Under the group or composite-life methods, assets are aggregated into accounting units. Such grouping might together all assets of similar physical characteristics, such as trucks, presses, returnable con-tainers, etc. A vertic function, such as a sugar refinery, a service station, etc. The geographical grouping includes all assets in a distric - Depreciation under these methods requires development of a weighted-average rate from the assets' depreci the total cost of each asset grouping and its related accumulated depreciation. The asset grouping should be com (b) 1 Arguments for the use of the unit method are: i. The method is simple in that it does not require involved mathematical comput ii. The gain or loss on the retirement of a particular asset can be computed. iii. For cost purposes, depreciation on idle equipment can be isolated. iv. The method results in a more accurately computed depreciation provision in an Arguments against the unit method are: i. Considerable additional bookkeeping is necessary to account for each asset and ii. There is a point of diminishing returns in the accumulation of accounting data u iii. Under a decentralized financial control system where a measure of the division might scrap fully or nearly fully depreciated equipment to improve the division iv. There may be reluctance on the part of a division manager to replace equipme on the division's profits in the year of replacement. 2 Arguments for the use of the group and composite-life methods are: i. The methods require less detailed bookkeeping. ii. The application of depreciation to the whole group tends to average out or offs iii. Periodic income is not distorted by gains or losses on disposal of assets. iv. A more useful charge to expense is derived from these methods because of the losses on individual assets are of little significance. Arguments against the use of the group and composite-life methods would include: i. The methods would conceal faulty estimates for a long period of time. ii. When there is an early heavy retirement of assets a debit balance might appea iii. iv. v. (c) Information is not available regarding a particular machine for cost-calculation Under a decentralized financial control system where a measure of the division to improve the division's financial reports a division manager might scrap idle b book value. The company would sustain an actual loss in the amount of the val Under the same situation as \"iv\" above, except that net book value is used, wh division manager might hesitate to replace them because of the high rate of ret Under the unit method, retirements are recorded by removing from the accounts the cost of the ass adjusted for salvage and disposal costs, if any, is recognized as gain or loss. Under the group and composite-life methods the cost of the retired asset is removed from the asset cost of the retired asset, adjusted for salvage, salvage costs, and removal costs. Accordingly, there is n serves as a suspense account for the recognition of gain or loss until the final asset retirement. methods of computing depreciation. preciation method should be based on consideration of the assets as units, up or as having a composite life. substantial additions thereto as individual items. The method entails maintaining detailed records of preciation is based on the estimated useful life of the individual asset. cost and estimated life of the assets are commingled. Depreciation may be recorded by nits. Such grouping might be horizontal, vertical, or geographical. Horizontal grouping assembles e con-tainers, etc. A vertical or functional grouping comprises all assets contributing to a common economic ludes all assets in a district or region, such as telephone poles. e from the assets' depreciable costs and estimated lives. Separate accounts are established for et grouping should be composed of a large number of units to obtain a reliable average life. ved mathematical computations. t can be computed. n be isolated. epreciation provision in any given year, as the total depreciation charge represents the best estimate of the depreciation of each asset a account for each asset and its related depreciation. (The advent of computers reduces the work burden, however.) ation of accounting data under this method, that is, additional accuracy may not justify the additional cost of record-keeping. a measure of the division's efficiency is the rate of return on the gross book value of the investment a division manager nt to improve the division's rate of return even though the equipment is still serviceable. nager to replace equipment not fully depreciated with more efficient equipment because of the effect of the loss nds to average out or offset errors, economic or operating, caused by underdepreciation or overdepreciation. disposal of assets. e methods because of their recog-nition that depreciation estimates are based on averages and that gains and g period of time. ebit balance might appear in the accumulated depreciation account and present an accounting problem. chine for cost-calculation purposes. a measure of the division's efficiency is the rate of return on the gross book value of the investment, manager might scrap idle but serviceable equipment or equipment that is not earning a satisfactory return on s in the amount of the value of the equipment scrapped. et book value is used, where the assets, although serviceable, are fully or almost fully depreciated, the ause of the high rate of return on investment. counts the cost of the asset and its related accumulated depreciation. The difference between the two accounts, s removed from the asset account, and the accumulated depreciation account is reduced by the amount of the sts. Accordingly, there is no periodic recognition of gain or loss; the accumulated depreciation account al asset retirement. epreciation of each asset and is not the result of averaging the cost over a longer period of time. record-keeping