Chapter 8: Long-Lived Assets. Post-Class Homework

1. Holey Foods has a piece of equipment that it bought on January 1, 2011 for $48,000, which it sells to an equipment supplier on 12/31/2013 for $16,000. Holey Foods used the double declining balance method and assumed it would use the equipment for four years. The residual value is $10,000. Assume that, apart from the sale, all other entries have been properly recorded. Prepare the journal entry related to the sale of this piece of equipment on December 31, 2013. 4 points.

	Journal Entry	Debit	Credit

2. Consider Net Capital Expenditures as the total amount of cash spent on obtaining capitalizable, non-current assets minus the total cash received from the sale or disposal of these assets.

During 2013 Holey Foods spent $14,000 on supplies; spent $20,000 on brand new equipment, which depreciated $4,000 during the year; sold the item noted above in Question 1; incurred $3,500 of expenses related to repairing other equipment, $800 of which it did not yet pay; and spent $1,000 improving the useful life and efficiency of its building.

What is the amount of Net Capital Expenditures for Holey Foods in 2013? 2 points.

3. Now, assume it is the end of 2014 and at this exact date, Holey Foods learns that no one, literally no one, will ever want to buy any of its non-organic, non-local food. If Holey Foods has $4 Million of inventory on its balance sheet, what transaction should Holey Foods record? If no entry is needed, clearly write No Entry Needed. 2 points.

	Journal Entry	Debit	Credit

4. In this exact same scenario (end of 2014), assume Holey Foods has equipment used exclusively for making its non-organic, non-local food. The equipment was bought for $7 Million on Jan 1, 2013 and uses Straight-Line depreciation. The equipment has an initial residual value of $2 Million and an expected useful life of five years. Another company, Groupoff, is willing and able to pay Holey Foods $1 Million for the equipment and there are no other potential buyers. The estimated future cash flows the equipment would help generate from use (not sale) are $20,000. Prior to any sale, what transaction should Holey Foods record? If no entry is needed, clearly write No Entry Needed. 2 points.

	Journal Entry	Debit	Credit

5. Now, assume Holey Foods actually sells the equipment to Groupoff for $ 1 Million on January 1, 2015 and all entries were appropriately recorded in 2014. Focusing only on the actual sale of the equipment to Groupoff, answer the following:

Income before Taxes: CIRCLE: INCREASES / DECREASES / NO EFFECT

by Amount __________ 1 point.

Total Assets: CIRCLE: INCREASE / DECREASE / NO EFFECT

by Amount __________ 1 point.