Chapter 16 to 20.pdf

210

CHAPTER 16 Problem 16-1 1. 2. 3. 4. 5.

C D D D B

Problem 16-2

Land Building Cash paid for land and old building 1,000,000 Removal of old building 50,000 Payment to tenants of old building to vacate premises 15,000 Architect fee 200,000 Building permit 30,000 Fee for title search 10,000 Survey before construction 20,000 Excavation 100,000 Cost of new building constructed 6,000,000 Assessment fee 5,000 Cost of grading, leveling and landfill 45,000 Driveways and walks 40,000 Temporary quarters for construction crew 80,000 Temporary building to house tools and materials 60,000 Cost of construction changes _________ 50,000 1,145,000 6,560,000 Note: The cost of replacing windows is treated as expense. Problem 16-3 Cost of land Legal fees Payment of mortgage Payment of taxes Cost of razing building Proceeds from sale of materials Grading and drainage Architect fee Payment to contractor Interest cost Driveway and parking lot Cost of trees, shrubs and other landscaping Cost of installing lights in parking lot Premium for insurance

Land 2,000,000 10,000 50,000 20,000 30,000 ( 5,000) 15,000

Building

Land improvement

200,000 8,000,000 300,000

_______ 2,120,000

25,000 8,525,000

40,000 55,000 5,000 _______ 100,000

The payment for medical bills and the cost of open house party are outright expenses because they are not a necessary cost of acquiring the land and building.

211

Problem 16-4

Purchase price Materials Excavation Labor Remodeling Cash discounts Supervision Compensation insurance Clerical and other expenses Paving of streets Plans and specifications Legal cost - land

Land 1,300,000

10,000 1,310,000

Office Factory Land buildingbuilding improvements 700,000 3,200,000 100,000 2,500,000 200,000 ( 60,000) 30,000 50,000 30,000 40,000 150,000 ________ ________ ______ 900,000 6,000,000

40,000

1. The imputed interest on corporation’s own money is not capitalizable. 2. The payment of claim for injuries not covered by insurance and the legal cost of injury claim are treated as expense. 3. Saving on construction is not recognized.

Problem 16-5 Taxes in arrears Payment for land Demolition of old building Total cost of land

50,000 1,000,000 100,000 1,150,000

Architect fee Payment to city hall Contract price Safety fence around construction site Safety inspection on building Removal of safety fence Total cost of factory building

230,000 120,000 5,000,000 35,000 30,000 20,000 5,435,000

Problem 16-6 Purchase price Title clearance fee Cost of razing old building Scrap value of old building Total cost of land Construction cost of new building

3,000,000 50,000 100,000 ( 10,000) 3,140,000 8,000,000

212 Problem 16-7 Purchase price Remodeling Salvage materials Grading, leveling and other permanent improvement Repairs

Land 1,000,000

Building 4,000,000 150,000 ( 5,000)

50,000 ________ 1,050,000

10,000 4,155,000

The repairs are capitalized because they are necessary prior to the occupancy and intended use of the building.

Problem 16-8 Fair value Repairs Remodeling Invoice price Discount Base

Land 1,500,000

Building 5,000,000 200,000 300,000

Machinery

1,000,000 20,000) _________ _________ 50,000 1,500,000 5,500,000 1,030,000 (

The driveway and parking lot are charged to land improvements.

Problem 16-9 Fair value Repairs Special tax assessment Platform Remodeling Purchase price Discount Freight Installation

Land Building Machinery 4,000,000 1,500,000 200,000 30,000 70,000 400,000 800,000 ( 40,000) 20,000 _________ _________ 30,000 1,530,000 4,600,000 2,380,000

1,500,000

Problem 16-10 Purchase price Commission Legal fees Title guarantee Cost of razing old building Salvage value of materials Cost of land

2,000,000 100,000 50,000 10,000 75,000 ( 5,000) 2,230,000

Contract price 6,000,000 Plans, specification and blueprint 100,000 Architectural fee 250,000 Cost of new building 6,350,000

213 Problem 16-11 Land Balances, Jan. 1 Acquisition of land - #621: Purchase price Commission Clearing cost Sale of timber and gravel Acquisition of land - #622: Purchase price Cost of demolition New building: Construction cost Excavation fee Architectural design Building permit Improvements: Electrical work Construction extension (800,000 x 1/2) Improvements on office space Purchase of new machine: Invoice price Freight Unloading charge Balances, December 31

1,500,000

Building

Leasehold improvements

Machinery

4,000,000

500,000

1,000,000

3,000,000 60,000 15,000 ( 5,000) 4,000,000 300,000 5,000,000 50,000 150,000 40,000 350,000 400,000 650,000 1,750,000 _________ 8,870,000

_________ 9,240,000

20,000 __ 30,000 2,800,000

_________ 1,900,000

The third tract of land should be presented as current asset because it was “classified as held for sale”.

Problem 16-12 Land

Land improvements

Building

Balances, Jan. 1 3,500,000 900,000 7,000,000 Land acquired 1,250,000 Issuance of share capital: 12/36 x 4,500,000 1,500,000 24/36 x 4,500,000 3,000,000 New machinery New parking lot, street and sidewalk 750,000 Machinery sold ________ ________ _________ Balances, Dec. 31 6,250,000 1,650,000 10,000,000

Machinery 1,500,000

3,400,000 (

500,000) 4,400,000

The “assessed values” do not represent the fair values of the land and building but are used in allocating the market value of the share capital.

214 Problem 16-13 Invoice price Cash discount Freight Installation cost Testing cost

Problem 16-15

Problem 16-14 3,000,000 Invoice cost 4,000,000 ( 150,000) Discount (5% x 4,000,000) ( 200,000) 50,000 Transportation 40,000 30,000 Installation 100,000 20,000 Trial run-salary of engineer 50,000 2,950,000 Cash allowance ( 60,000) 3,930,000

Cost paid (896,000 – 96,000) Cost of transporting machine Installation cost Testing cost Safety rails and platform Water device Cost of adjustment Estimated dismantling cost Total cost of machine

800,000 30,000 50,000 40,000 60,000 80,000 75,000 65,000 1,200,000

Note that the estimated dismantling cost is capitalized because the company has a present obligation as required by contract. In the absence of a present obligation, the estimated dismantling cost is not capitalized.

Problem 16-16 Second hand market value Overhaul and repairs Installation Testing Hauling Safety device

2,400,000 150,000 80,000 110,000 10,000 250,000 3,000,000

Problem 16-17 1. Materials Labor Installation Trial run Discount Overhead

600,000 400,000 60,000 30,000 ( 40,000) 150,000 1,200,000

2. Adjusting entries: 1. Loss on retirement of old machinery

6,000

Machinery (20,000 – 14,000)

6,000

215 2. Purchase discount Machinery

40,000 40,000

3. Machinery Factory overhead

150,000

4. Profit on construction Machinery

100,000

150,000 100,000

5. Tools Machinery

90,000

6. Depreciation – tools Tools (90,000 / 3 x 4/12)

10,000

7. Machinery Accumulated depreciation Depreciation – machinery

90,000 10,000 128,600 40,000 88,600

Depreciation recorded Correct depreciation (1,200,000 / 10 x 4/12) Overdepreciation

128,600 40,000 88,600

Problem 16-18 Initial design fee Executive chairs and desks Storm windows and installation Installation of automatic door opening system Overhead crane Total capital expenditures

150,000 200,000 500,000 200,000 350,000 1,400,000

Problem 16-19 1. Accumulated depreciation Loss on retirement of building Building Building Cash Depreciation (8,100,000 / 20) Accumulated depreciation Building (9,000,000 + 2,500,000 – 2,000,000) Accumulated depreciation (1,800,000 – 400,000) Book value

400,000 1,600,000 2,000,000 2,500,000 2,500,000 405,000 405,000 9,500,000 1,400,000 8,100,000

2. Accumulated depreciation (1,960,000 x 20%) Loss on retirement of building Building (2,500,000 x .784)

392,000 1,568,000 1,960,000

216 Building Cash Depreciation (8,132,000 / 20) Accumulated depreciation

2,500,000 2,500,000 406,600 406,600

Building (9,000,000 – 1,960,000 + 2,500,000) Accumulated depreciation (1,800,000 – 392,000) Book value

9,540,000 1,408,000 8,132,000

Problem 16-20 a. Annual depreciation (8,400,000 / 30)

280,000

Age of building (7,000,000 / 280,000)

25 years

b. Building Cash

2,500,000 2,500,000

c. Building (8,400,000 + 2,500,000) Less: Accumulated depreciation Book value d. Depreciation (3,900,000 / 15) Accumulated depreciation

10,900,000 7,000,000 3,900,000 260,000 260,000

Original life Less: Expired life Remaining useful life, beginning of current year Add: Extension in life Revised useful life

30 25 5 10 15

Problem 16-21 1. Building Cash 2. Depreciation Accumulated depreciation 3. Building Cash Accumulated depreciation (2,500,000 / 50 x 2) Loss on retirement of building Cash

10,500,000 10,500,000 200,000 200,000 3,000,000 3,000,000 100,000 2,400,000 2,500,000

4. Depreciation (10,700,000 – 500,000 / 48) Accumulated depreciation

212,500 212,500

217 Building (10,500,000 + 3,000,000 – 2,500,000) Accumulated depreciation (400,000 – 100,000) Book value – 1/1/2008

11,000,000 300,000 10,700,000

Problem 16-22 1. Machinery Cash

5,000,000 5,000,000

2. Depreciation Accumulated depreciation 3. Depreciation (3,600,000 / 6) Accumulated depreciation

450,000 450,000 600,000 600,000

Cost Accumulated depreciation: 2005 2006 Book value Residual value Remaining depreciable cost – 1/1/2007

5,000,000 450,000 450,000

4. Machinery Cash 5. Depreciation (3,300,000 / 5) Accumulated depreciation

900,000 4,100,000 500,000 3,600,000

300,000 300,000 660,000 660,000

Cost Accumulated depreciation (900,000 + 600,000) Book value – 1/1/2008 Residual value Remaining depreciable cost – 1/1/2008

5,300,000 1,500,000 3,800,000 500,000 3,300,000

Problem 16-23 1. Depreciation (60,000 x 3/12) Accumulated depreciation Accumulated depreciation (480,000 + 15,000) Loss on retirement of store equipment Store equipment 2. Depreciation (150,000 x 4/12)

15,000 15,000 495,000 105,000 600,000 50,000

Accumulated depreciation

50,000

218 Cash Accumulated depreciation (1,050,000 + 50,000) Loss on sale of office equipment Office equipment 3. Depreciation (600,000 x 5/12) Accumulated depreciation Delivery equipment – new Accumulated depreciation Cash (5,000,000 – 750,000) Delivery equipment – old Gain on exchange (750,000 – 350,000)

100,000 1,100,000 300,000 1,500,000 250,000 250,000 5,000,000 2,650,000 4,250,000 3,000,000 400,000

Original cost Less: Accumulated depreciation to date (2,400,000 + 250,000) Book value 4. Accumulated depreciation Office equipment 5. Depreciation (900,000 x 9/12) Accumulated depreciation Accumulated depreciation (2,700,000 + 675,000) Fire loss Machinery

3,000,000 2,650,000 350,000

1,200,000 1,200,000 675,000 675,000 3,375,000 1,125,000 4,500,000

Problem 16-24 1. Discount on bonds payable Machinery

500,000 500,000

Interest expense (500,000 / 10 x 9/12) Discount on bonds payable

37,500

Accumulated depreciation Depreciation

75,000

37,500 75,000

Depreciation for 9 months Depreciation for 12 months (600,000 / 9/12) Depreciable cost (800,000 x 5 years) Cost

600,000 800,000 4,000,000 Per book 5,000,000

Adjusted 4,500,000

Less: Residual value Depreciable cost

1,000,000 4,000,000

1,000,000 3,500,000

219 Correct depreciation for 9 months (3,500,000 / 5 x 9/12) Less: Depreciation recorded Overstatement

525,000 600,000 75,000

2. Interest expense Machinery (3,500,000 – 3,200,000)

300,000 300,000

Machinery Freight in

150,000 150,000

Accumulated depreciation Depreciation

30,000 30,000

Depreciation per book Correct depreciation (3,350,000 / 5) Overstatement

700,000 670,000 30,000

3. Loss on exchange Machinery Cost per book Correct cost Trade in value Add: Cash paid Overstatement

390,000 390,000 3,000,000 150,000 2,460,000

Trade in value Less: Book value Loss on exchange 4. Allowance for doubtful accounts Loss on exchange – accounts receivable Treasury share Per book Machinery Accounts receivable Treasury shares Machinery Should be Machinery Allowance for doubtful accounts (20% x 4,200,000)

2,610,000 390,000 150,000 540,000 (390,000)

840,000 60,000 900,000 4,200,000 4,200,000 4,200,000 4,200,000 3,300,000 840,000

Loss on accounts receivable Accounts receivable

60,000 4,200,000

220 Treasury shares Machinery

3,300,000 3,300,000

The cost of treasury shares acquired for noncash consideration is usually measured by the recorded amount of the noncash asset surrendered (SFAS No. 18).

Problem 16-25 Answer A Allocated cost of land (2,400,000 / 6,000,000 x 5,500,000) Property taxes (2,400 / 6,000 x 250,000) Cost of survey Total cost of land

2,200,000 100,000 5,000 2,305,000

Incidentally, the cost of the building is: Allocated cost (3,600 / 6,000 x 5,500,000) Property taxes (3,600 / 6,000 x 250,000) Renovation Total cost of building

3,300,000 150,000 500,000 3,950,000

Problem 16-26 Answer A Purchase price Payments to tenants Demolition of old building Legal fees Title insurance Proceeds from sale of materials Total cost of land

4,000,000 200,000 100,000 50,000 30,000 ( 10,000) 4,370,000

Problem 16-27 Answer D Purchase price of land Legal fees for contract Architect fee Demolition of old building Construction cost Total cost

Land 600,000 20,000

Building 80,000

50,000 _______ 670,000

3,500,000 3,580,000

Problem 16-28 Answer D Acquisition price

7,000,000

Option of building acquired Repairs Total cost

200,000 500,000 7,700,000

221 Problem 16-29 Answer D Purchase price Shipping Installation Testing Total cost

250,000 5,000 10,000 35,000 300,000

Problem 16-30 Answer A Problem 16-31 Answer A All expenditures are capitalized.

Problem 16-32 Answer A All costs are capitalized.

Problem 16-33 Answer C Continuing and frequent repairs Repainting of the plant building Partial replacement of roof tiles Repair and maintenance expense Problem 16-34 Answer B Problem 16-35 Answer B

400,000 100,000 150,000 650,000

222 CHAPTER 17 Problem 17-1

Problem 17-2

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

A D B D D D D C C B

C A D D D B C B A A

Problem 17-3 Depreciation Table – Straight Line Year 2008 2009 2010 2011 2012

Particular Acquisition cost

Depreciation 120,000 120,000 120,000 120,000 120,000 600,000

Accumulated depreciation 120,000 240,000 360,000 480,000 600,000

Book value 635,000 515,000 395,000 275,000 155,000 35,000

Depreciation Table – Service Hours Method Year 2008 2009 2010 2011 2012

Particular Acquisition cost 14,000 x 10 13,000 x 10 10,000 x 10 11,000 x 10 12,000 x 10

Depreciation 140,000 130,000 100,000 110,000 120,000 600,000

Accumulated depreciation

Book value 635,000 495,000 365,000 265,000 155,000 35,000

140,000 270,000 370,000 480,000 600,000

Depreciation rate per hour = 600,000 / 60,000 = 10

223 Depreciation Table – Production Method Year 2008 2009 2010 2011 2012

Particular Acquisition cost 34,000 x 4 32,000 x 4 25,000 x 4 29,000 x 4 30,000 x 4

Depreciation 136,000 128,000 100,000 116,000 120,000 600,000

Accumulated Depreciation 136,000 264,000 364,000 480,000 600,000

Book value 635,000 499,000 371,000 271,000 155,000 35,000

Depreciation rate per unit of output = 600,000 / 150,000 = 4 Depreciation Table – Sum of Years’ Digits Year 2008 2009 2010 2011 2012

Particular Acquisition cost 5/15 x 600,000 4/15 x 600,000 3/15 x 600,000 2/15 x 600,000 1/15 x 600,000

Depreciation 200,000 160,000 120,000 80,000 40,000 600,000

Accumulated depreciation 200,000 360,000 480,000 560,000 600,000

SYD = 1 + 2 + 3 + 4 + 5 = 15

Book value 635,000 435,000 275,000 155,000 75,000 35,000

Depreciation Table – Double Declining Balance

Year 2008 2009 2010 2011 2012

Particular Acquisition cost 40% x 635,000 40% x 381,000 40% x 228,600 40% x 137,160 82,296 – 35,000

Depreciation 254,000 152,400 91,440 54,864 47,296 600,000

Accumulated depreciation 254,000 406,400 497,840 552,704 600,000

Book value 635,000 381,000 228,600 137,160 82,296 35,000

Fixed rate = 100% / 5 = 20% x 2 = 40% Problem 17-4 a. Straight line method: 2008 2009

27,500 55,000

224 b. Working hours method: 550,000 Rate per hour = ------------------- = 11 50,000 hours 2008 (3,000 hours x 11) 2009 (5,000 hours x 11)

33,000 55,000

c. Output method: 550,000 Rate per unit = -------------------- = 2.75 200,000 units 2008 (18,000 units x 2.75) 2009 (22,000 units x 2.75)

49,500 60,500

d. Sum of years’ digits: 10 + 1 SYD = 10 (------------) = 55 2 2008 (10/55 x 550,000 x 6/12)

50,000

2009 Jan. 1-June 30

50,000

July 1-Dec. 31 (9/55 x 550,000 x 6/12)

45,000 95,000

e. Double declining balance: 2008 (570,000 x 20% x 6/12) 2009 (570,000 – 57,000 x 20%)

57,000 102,600

Problem 17-5 Fixed rate = 1.00 - .5623 or .4377 2008 2009 2010 2011

(500,000 x .4377) (500,000 – 218,850 x .4377) (500,000 - 341,909 x .4377) (500,000 – 411,105 – 50,000)

218,850 123,059 69,196 38,895 450,000

Problem 17-6 a. Sum of years’ digit April 1, 2008 – March 31, 2009 (1,080,000 x 8/36) April 1, 2009 – March 31, 2010 (1,080,000 x 7/36)

240,000 210,000

225 Depreciation from April 1 to December 31, 2008 (240,000 x 9/12)

180,000

Depreciation for 2009: January 1 – March 31 (240,000 x 3/12) April 1 – December 31 (210,000 x 9/12)

60,000 157,500 217,500

b. Double declining balance Fixed rate = 100 / 8 = 12.5 x 2 = 25% 2008 (1,200,000 x 25% x 9/12) 2009 (1,200,000 – 225,000 x 25%)

225,000 243,750

Problem 17-7 a. Service hours method: 960,000 – 60,000 Depreciation rate per hour = ---------------------------- = 112.50 8,000 hours 2008 (1,000 hours x 112.50) 2009 (2,000 hours x 112.50)

112,500 225,000

b. Sum of years’ digits: Sum of half years

=

45

2008 (9/45 x 900,000 x 3/6)

90,000

2009 January 1 – March 31 (9/45 x 900,000 x 3/6) April 1 – September 30 (8/45 x 900,000) October 1 – December 31 (7/45 x 900,000 x 3/6)

90,000 160,000 70,000 320,000

Problem 17-8 a. Rate per unit (900,000 / 180,000) 2008 (5,000 x 5) 2009 (20,000 x 5)

5.00 25,000 100,000

b. Double declining balance: Fixed rate (100% / 8 x 2)

25%

2008 (920,000 x 25% x 6/12) 2009 (920,000 – 115,000 x 25%)

115,000 201,250

226 c. Sum of years’ digits: July 1 – December 31, 2008 (900,000 x 8/36 x 6/12)

100,000

January 1 – June 30, 2009 (900,000 x 8/36 x 6/12) July 1 – December 31, 2009 (900,000 x 7/36 x 6/12) Depreciation for 2009

87,500

Problem 17-9 Assets Machinery Office equipment Building Delivery equipment

Cost 310,000 110,000 1,600,000 430,000 2,450,000

Salvage 10,000 10,000 100,000 30,000

Depreciable cost 300,000 100,000 1,500,000 15 400,000 2,300,000

100,000 187,500

Life in years 5 10 4

Annual depreciation 60,000 10,000 100,000 100,000 270,000

a. Composite rate = 270,000 / 2,450,000 = 11.02% b. Composite life

= 2,300,000 / 270,000 =

c. Depreciation Accumulated depreciation

8.52 years 270,000 270,000

Problem 17-10 Assets Building Machinery Equipment

Cost 6,100,000 2,550,000 1,030,000 9,680,000

Salvage 100,000 50,000 30,000

Depreciable cost 6,000,000 2,500,000 1,000,000 9,500,000

Life in Annual years depreciation 20 300,000 5 500,000 10 100,000 900,000

a. Composite depreciation rate = 900,000 / 9,680,000 = 9.3% b. Average life = 9,500,000 / 900,000 = 10.56 years c. Depreciation Accumulated depreciation d. Cash Accumulated depreciation Machinery e. Depreciation Accumulated depreciation (9,680,000 – 2,550,000 x 9.3%)

900,000 900,000 40,000 2,510,000 2,550,000 663,090 663,090

227 Problem 17-11 2003 Jan. 1 Machinery Cash Dec. 31 Depreciation (20% x 900,000) Accumulated depreciation

900,000 900,000 180,000 180,000

2004 Dec. 31 Depreciation Accumulated depreciation

180,000

2005 Dec. 31 Depreciation Accumulated depreciation

180,000

2006 Dec. 31 Depreciation Accumulated depreciation

180,000

Cash Accumulated depreciation Machinery (4 x 45,000)

180,000

180,000

180,000 10,000 170,000 180,000

2007 Dec. 31 Depreciation (720,000 x 20%) Accumulated depreciation Cash Accumulated depreciation Machinery (14 x 45,000)

144,000 144,000 15,000 615,000 630,000

2008 Dec. 31 Depreciation Accumulated depreciation

9,000 9,000

Remaining cost Less: Balance of accumulated depreciation Book value Less: Salvage proceeds Maximum depreciation Cash Accumulated depreciation Machinery (4 x 45,000)

90,000 79,000 11,000 2,000 9,000 2,000 88,000 90,000

228

Problem 17-12 1. Old machinery overhauled (240,000 + 60,000) Accumulated depreciation 2005 (240,000 / 8) 2006 2007 Total Book value – January 1, 2008

300,000 30,000 30,000 30,000 90,000 210,000

Old machinery overhauled (210,000 / 7 years) Remaining cost of old machinery (1,152,000 – 240,000 / 8) New machinery (460,800 / 8 x 5/12) Total depreciation 2. Old machinery New machinery Cost of overhaul Total cost Accumulated depreciation: Balance – January 1 Depreciation for 2008 Book value – December 31, 2008

30,000 114,000 24,000 168,000 1,152,000 460,800 60,000 1,672,800 432,000 168,000

600,000 1,072,800

Problem 17-13 Main machine (7,500,000 / 10) First component – from January 1 to April 1, 2008 (1,200,000 / 6 x 3/12) Second component – from April 1 to December 31, 2009 (2,000,000 – 400,000 / 4 x 9/12) Total depreciation for 2008

750,000 50,000 300,000 1,100,000

The second component is depreciated over the remaining life of the main machine. The original life is 10 years and 6 years already expired. Thus, the remaining life is 4 years.

Problem 17-14 1. Tools

40,000 Cash

40,000

2. Tools

20,000

Cash 20,000

3. Cash

4,000 Tools

4,000

4. Depreciation Tools

46,000 46,000

Balance of tools account Less: Estimated cost on December 31 Depreciation

196,000 150,000 46,000

229

Problem 17-15 Retirement method March

1 Electric meters Cash

250,000 250,000

1 Cash Depreciation Electric meters July

20,000 160,000 180,000

1 Electric meters Cash

400,000

December 1 Electric meters Cash

200,000

400,000 200,000

1 Cash Depreciation Electric meters Replacement method

15,000 135,000 150,000

March July

1 Depreciation (250,000 – 20,000) Cash

230,000 230,000

1 Electric meters Cash

400,000 400,000

December 1 Depreciation (200,000 – 15,000) Cash

Problem 17-16

185,000 185,000

Retirement method

2008 Tools Cash

120,000 120,000

Cash (300 x 50) Depreciation Tools (300 x 200)

15,000 45,000 60,000

2009 Tools Cash

360,000 360,000

Cash (700 x 70) Depreciation Tools

49,000 111,000 160,000

230 500 x 200 200 x 300 Cost of tools retired

100,000 60,000 160,000 Replacement method

2008 Tools (100 x 300) Depreciation (300 x 30)

30,000 90,000

Cash 120,000

Cash Depreciation

15,000 15,000

2009 Tools (200 x 400) Depreciation (700 x 400) Cash Cash Depreciation 2008 Tools

80,000 280,000 360,000 49,000 49,000

Inventory method 120,000

Cash Cash

120,000 15,000

Tools

15,000 Depreciation (265,000 – 200,000) Tools

65,000 65,000

2009 Tools Cash

360,000

Cash Tools

49,000

Depreciation (511,000 - 350,000) Tools

360,000 49,000 161,000 161,000

Problem 17-17 1. Land (350,000 + 450,000) Land acquired (380,000 + 25,000 + 45,000) 2. Depreciation of land improvements (180,000 / 15) 3. Depreciation of building (4,500,000 – 1,050,000 x 7.5%)

800,000 450,000 12,000 258,750

231 4. Depreciation of machinery and equipment (1,160,000 – 60,000 / 10) (300,000 / 10) (60,000 / 10 x 6/12)

110,000 30,000 3,000 143,000

5. Fixed rate (100% / 3 x 1.5)

50%

(1,800,000 – 1,344,000 x 50%)

228,000

Problem 17-18 1. Beginning balance Acquisition (150,000 / 750,000 x 1,250,000) Total cost of land

875,000 250,000 1,125,000

Technically, the land for undetermined use is an investment property. 2. Old (7,500,000 – 1,644,500 x 8%) New (600,000/750,000 x 1,250,000 = 1,000,000 x 8%) Depreciation – building 3. 2,250,000 / 10 400,000 / 10 x 6/12

468,440 80,000 548,440 225,000 20,000

Depreciation – machinery

245,000

4. Depreciation – leasehold improvements (216,000 – 108,000 / 5 years)

21,600

5. Depreciation – land improvements 192,000 / 12 x 9/12)

12,000

Problem 17-19 1. Old building (4,672,200 x 10%) New building Direct cost Fixed (15,000 x 25) Variable (15,000 x 27) Total cost 3,000,000 x 10% Total depreciation

467,220 2,220,000 375,000 405,000 3,000,000 300,000 767,220

Fixed rate (100 / 20 x 2)

10%

232 2. Old machinery (1,380,000 / 10) New machinery Invoice cost Concrete embedding Wall demolition Rebuilding of wall Total cost 400,000 / 10 x 6/12 Total depreciation

138,000 356,000 18,000 7,000 19,000 400,000 20,000 158,000

Problem 17-20 Answer A Cost of machinery (cash price) Less: Residual value Depreciable cost Straight line depreciation (1,050,000 / 10)

1,100,000 50,000 1,050,000 105,000

Problem 17-21 Answer B Sales price Book value:

2,300,000

Cost Accumulated depreciation (3,600,000 / 5 x 3) Gain

4,200,000 2,160,000

2,040,000 260,000

Problem 17-22 Answer B Accumulated depreciation – 12/31/2007 Add: Depreciation for 2008 Total Less: Accumulated depreciation on property, plant and equipment retirements (squeeze) Accumulated depreciation – 12/31/2008

Problem 17-23 Answer B A B C

Cost Salvage 550,00050,000 200,00020,000 40,000 790,000

Depreciable cost Life 500,000 20 180,000 15 40,000 5 720,000

3,700,000 550,000 4,250,000 250,000 4,000,000

Annual depreciation 25,000 12,000 8,000 45,000

Composite life = 720,000 / 45,000

16 years

233 Problem 17-24 Answer D Invoice price Cash discount (2% x 4,500,000) Delivery cost Installation and testing Total cost Salvage value Depreciable cost

4,500,000 90,000) 80,000 310,000 4,800,000 800,000 4,000,000 (

Rate per unit (4,000,000 / 200,000)

20

Depreciation for 2008 (30,000 x 20)

600,000

Problem 17-25 Answer B Cost Accumulated depreciation 2007 (8/36 x 3,600,000) 2008 (7/36 x 3,600,000) Book value, 12/31/2008

4,000,000 800,000 700,000

1,500,000 2,500,000

Problem 17-26 Answer B The first three fractions are: 2006 2007 2008

10/55 9/55 8/55

Thus, the 2008 depreciation of P240,000 is equal to 8/55. Depreciable cost (240,000 / 8/55) Salvage Total cost

1,650,000 50,000 1,700,000

Problem 17-27 Answer B April 1, 2006 to March 31, 2007 (5/15 x 3,000,000) April 1, 2007 to March 31, 2008 (4/15 x 3,000,000) Accumulated depreciation, March 31, 2008

1,000,000 800,000 1,800,000

Problem 17-28 Answer A The accumulated depreciation on December 31, 2007 is recomputed following a certain method. The same is arrived at following the SYD as follows: SYD = 1 + 2 + 3 + 4 + 5 = 15

234 2005 (5/15 x 900,000) 2006 (4/15 x 900,000) 2007 (3/15 x 900,000) Accumulated depreciation – 12/31/2007

300,000 240,000 180,000 720,000

Accordingly, the SYD is followed for 2008. 2008 depreciation (2/15 x 900,000)

120,000

Problem 17-29 Answer B Straight line rate (100% / 8 years) Fixed rate (12.5 x 2) 2007 depreciation (1,280,000 x 25%) 2008 depreciation (1,280,000 – 320,000 x 25%)

12.5% 25% 320,000 240,000

Problem 17-30 1. 4,000,000 – 2,560,000 x 40%

(Answer D)

576,000

2. 1,800,000 x 2/15 (SYD)

(Answer A)

240,000

3. Sales price Book value (2,800,000 – 1,344,000) Gain

(Answer A)

1,700,000 1,456,000 244,000

Problem 17-31 Answer B Straight line rate (100% / 5 years) Fixed rate (20% x 2) 2006 depreciation (5,000,000 x 40%) 2007 depreciation (3,000,000 x 40%) Accumulated depreciation, December 31, 2007 Depreciation for 2008 – straight line (5,000,000 – 3,200,000 / 3) Accumulated depreciation, December 31, 2008

20% 40% 2,000,000 1,200,000 3,200,000 600,000 3,800,000

Problem 17-32 Answer A Cost – 1/1/2005 Accumulated depreciation – 12/31/2007 (7,200,000 / 10 x 3) Book value – 12/31/2007

7,200,000 2,160,000 5,040,000

SYD for the remaining life of 7 years (1 + 2 + 3 + 4 + 5 + 6 + 7)

28

Depreciation for 2008 (5,040,000 x 7/28)

1,260,000

Problem 17-33 Answer B Annual depreciation (1,536,000 / 8)

192,000

235 Problem 17-34 Answer B Fixed rate (100% / 4 x 2) Cost Depreciation for 2007 (50% x 6,000,000) Book value – 1/1/2008 Residual value Maximum depreciation in 2008 Fixed rate in 2008 (100% / 2 x 2)

50% 6,000,000 3,000,000 3,000,000 ( 600,000) 2,400,000 100%

This means that the computers should be fully depreciated in 2008. Since there is a residual value of P600,000, the maximum depreciation for 2008 is equal to the book value of P3,000,000 minus the residual value of P600,000 or P2,400,000.

236 CHAPTER 18 Problem 18-1

Problem 18-2

1. 2. 3. 4. 5.

1. 2. 3. 4. 5.

D A A C A

B C C C D

Problem 18-3 1. Ore property Cash

5,000,000

2. Ore property Cash

3,000,000

3. Machinery

4,000,000

5,000,000 3,000,000

Cash 4. Depletion Accumulated depreciation

4,000,000 1,140,000 1,140,000

8,000,000 – 400,000 = 7,600,000 7,600,000 / 2,000,000 = 3.80 300,000 x 3.80 = 1,140,000 5. Depreciation Accumulated depreciation

600,000 600,000

4,000,000 / 2,000,000 = 2.00 300,000 x 2.00 = 600,000

Problem 18-4 2008

2009

Rock and gravel property Cash

960,000

Depletion (1,000,000 x .40) Accumulated depletion

400,000

Rock and gravel property Cash

490,000

Depletion (600,000 x .75) Accumulated depletion

450,000

960,000 400,000 490,000 450,000

237 Total cost (960,000 + 490,000) Less: Accumulated depletion Depletable cost Divide by estimated remaining output (2,400,000 – 1,000,000) Revised depletion rate per ton 2010

1,450,000 400,000 1,050,000 1,400,000 .75

Rock and gravel property Cash

500,000

Depletion (700,000 x .44) Accumulated depletion

308,000

Total cost Add: Additional development cost Total Less: Accumulated depletion (400,000 + 450,000) Remaining depletable cost Divide by new estimated remaining output

500,000 308,000 1,450,000 500,000 1,950,000 850,000 1,100,000 2,500,000

New depletion rate

.44

Problem 18-5 2008

Resource property Cash

3,960,000

Building Equipment Cash

960,000 1,240,000

Depletion (12,000 x 32) Accumulated depletion

3,960,000

2,200,000 384,000 384,000

Cost of resource property Less: Residual value Depletable cost Divide by estimated output Depletion rate per unit Depreciation (12,000 x 8) Accumulated depreciation – building

3,960,000 120,000 3,840,000 120,000 32 96,000 96,000

960,000 Depreciation rate per unit = ---------------- = 8 120,000 The output method is used in computing the depreciation of the building because the life of the resource property (5 years or 120,000 / 24,000) is shorter than the life of the building (8 years).

238 Depreciation Accumulated depreciation (1,240,000 / 4 years = 310,000)

310,000 310,000

The straight line method is used for the heavy equipment because the life of 4 years is shorter than the life of the resource property of 5 years. 2009

Depletion Accumulated depletion (25,000 x 32)

800,000

Depreciation (25,000 x 8) Accumulated depreciation – building

200,000

Depreciation Accumulated depreciation – equipment

310,000

800,000 200,000 310,000

Problem 18-6 2008

Ore property Cash Ore property Estimated liability for restoration cost

2009

2010

5,400,000 5,400,000 450,000 450,000

Mine improvements Cash

8,000,000

Depletion (600,000 x 2.60) Accumulated depletion

1,560,000

Depreciation (600,000 x 4) Accumulated depreciation

2,400,000

Depletion (400,000 x 1.60) Accumulated depletion Depletable cost Less: 2009 depletion Balance (3,640,000 / 2,275,000 = 1.60) Mine improvements Cash Depreciation (400,000 x 2.80) Accumulated depreciation Cost (8,000,000 + 770,000) Less: Accumulated depreciation Book value (6,370,000 / 2,275,000 = 2.80)

Problem 18-7 Depletion rate (5,000,000 / 1,000,000) Depreciation rate (8,000,000 / 1,000,000)

8,000,000 1,560,000 2,400,000 640,000 640,000 5,200,000 1,560,000 3,640,000 770,000 770,000 1,120,000 1,120,000 8,770,000 2,400,000 6,370,000

239 5.00 8.00

First year Depletion (200,000 x 5) Depreciation (200,000 x 8)

1,000,000 1,600,000

Second year Depletion (250,000 x 5) Depreciation (250,000 x 8)

1,250,000 2,000,000

Third year Depletion

none

Depreciation (Schedule A)

550,000

Schedule A – Computation of depreciation for third year Cost of equipment Less: Accumulated depreciation Book value – beginning of third year by remaining useful life in years (10 – 2) for third year

8,000,000 3,600,000 4,400,000 Divide 8 Depreciation 550,000

Fourth year Depletion (100,000 x 5) Depreciation (Schedule B)

500,000 700,000

Schedule B – Computation of depreciation for fourth year Cost of equipment Less: Accumulated depreciation Book value – beginning of fourth year Original estimate of resource deposits Less: Extracted in first and second years Remaining output

8,000,000 4,150,000 3,850,000 1,000,000 tons 450,000 550,000 tons

Depreciation rate per unit (3,850,000 / 550,000) Depreciation for third year (100,000 x 7)

7.00 700,000

Problem 18-8 1. Retained earnings Accumulated depletion Total Less: Capital liquidated Depletion in ending inventory (5,000 x 20) Maximum dividend

1,500,000 2,500,000 4,000,000 1,800,000 100,000 1,900,000 2,100,000

240 2. Retained earnings Capital liquidated Dividends payable

1,800,000 200,000 2,000,000

Problem 18-9 1. Cash (50,000 x 110) Share capital (50,000 x 100) Share premium

5,500,000

2. Resource property Cash

3,000,000

5,000,000 500,000 3,000,000

3. Mining equipment Cash

800,000

4. Cash (85,000 x 50) Sales

4,250,000

5. Mining and other direct cost Administrative expenses Cash

2,268,000 500,000

800,000 4,250,000

2,768,000

6. Depletion Accumulated depletion (3,000,000 / 1,000,000 x 90,000) 7. Depreciation (90,000 x .80) Accumulated depreciation - mining equipment

270,000 270,000 72,000 72,000

Depreciation rate (800,000 / 1,000,000) = .80 8. Inventory, December 31 (5,000 x 29) Profit and loss

145,000 145,000

Mining labor and other direct costs Depletion Depreciation Total production costs incurred Divide by number of units extracted Unit cost

2,268,000 270,000 72,000 2,610,000 90,000 29

241 Multinational Company Income Statement Year ended December 31, 2008 Sales Cost of sales Mining labor and other direct costs Depletion Depreciation Total production cost Less: Inventory, December 31 Gross income

4,250,000 2,268,000 270,000 72,000 2,610,000 145,000 2,465,000 1,785,000

Administrative expenses Net income

500,000 1,285,000 Multinational Company Statement of Financial Position December 31, 2008 Assets

Current assets: Cash Inventory Noncurrent assets: Resource property Less: Accumulated depletion Mining equipment Less: Accumulated depreciation Total assets

3,182,000 145,000 3,000,000 270,000 2,730,000 800,000 72,000 728,000

3,327,000

3,458,000 6,785,000

Equity Share capital Share premium Retained earnings Total equity

5,000,000 500,000 1,285,000 6,785,000

Retained earnings Add: Accumulated depletion Total Less: Unrealized depletion in ending inventory (5,000 x 3) Maximum dividend

Retained earnings Capital liquidated Dividends payable

1,285,000 270,000 1,555,000 15,000 1,540,000

1,285,000 255,000 1,540,000

242 Problem 18-10 1. Purchase price Road construction Improvements and development costs Total cost Residual value Depletable cost Depletion rate per unit (5,200,000 / 4,000,000)

50,000 5,000,000 750,000 5,800,000 ( 600,000) 5,200,000 1.30

Depletion for 2008 (500,000 x 1.30) Depletable cost Depletion in 2008 Remaining depletable cost Development costs in 2009 Total depletable cost – 1/1/2009 Original estimated tons Additional estimate Total estimated tons Extracted in 2008 Remaining tons – 1/1/2009

650,000 5,200,000 ( 650,000) 4,550,000 1,300,000 5,850,000 4,000,000 3,000,000 7,000,000 ( 500,000) 6,500,000

New depletion rate per unit (5,850,000 / 6,500,000) Depletion for 2009 (1,000,000 x .90) 2. Cost of buildings Residual value Depreciable cost Depreciation rate per unit (1,800,000 / 4,000,000) Depreciation for 2008 (500,000 x .45)

.90 900,000 2,000,000 ( 200,000) 1,800,000 .45 225,000

In the absence of any statement to the contrary, the output method is used in computing depreciation of mining equipment. Depreciable cost Depreciation for 2008 Remaining depreciable cost Additional building in 2009 Total depreciable cost – 1/1/2009 New depreciation rate per unit (1,950,000 / 6,500,000) Depreciation for 2009 (1,000,000 x .30)

Problem 18-11 2008

No depletion because there is no production.

2009

Purchase price Estimated restoration cost Development cost – 2008 Development cost – 2009 Total cost Residual value Depletable cost

1,800,000 ( 225,000) 1,575,000 375,000 1,950,000 .30 300,000

243

28,000,000 2,000,000 1,000,000 1,000,000 32,000,000 ( 5,000,000) 27,000,000

Rate in 2009 (27,000,000 / 10,000,000) Depletion in 2009 (3,000,000 x 2.70) 2010

Tons extracted in 2010 Tons remaining in 12/31/2010 Total estimated output – 1/1/2010

2.70 8,100,000 3,500,000 2,500,000 6,000,000

New rate in 2010 (27,000,000 – 8,100,000/6,000,000) Depletion in 2010 (3,500,000 x 3.15)

3.15 11,025,000

Problem 18-12 Answer B Acquisition cost Development cost Estimated restoration cost Total cost Less: Residual value Depletable cost

26,400,000 3,600,000 1,800,000 31,800,000 3,000,000 28,800,000

Rate per unit (28,800,000 / 1,200,000) Depletion for 2008 (60,000 x 24)

24 1,440,000

Problem 18-13 Answer C Depletion rate per unit (9,200,000 / 4,000,000)

2.30

Problem 18-14 Answer C Rate per unit (46,800,000 – 3,600,000 / 2,160,000) Depletion in cost of goods sold (240,000 x 20)

20 4,800,000

244 Problem 18-15 Answer D Acquisition cost Less: Residual value Depletable cost Less: Accumulated depletion – 12/31/2007 (7,000,000 / 10,000,000 = .70 x 4,000,000) Remaining depletable cost – 1/1/2008 New depletion rate (4,200,000 / 7,500,000) Depletion for 2008 (1,500,000 x .56)

10,000,000 3,000,000 7,000,000 2,800,000 4,200,000 .56 840,000

Problem 18-16 Answer B Depletable cost Depletion for 2007 (33,000,000 / 4,000,000 = 8.25 x 200,000) Balance – 1/1/2008

33,000,000 ( 1,650,000) 31,350,000

Production in 2008 New estimate – 12/31/2008 New estimate – 1/1/2008

225,000 5,000,000 5,225,000

Depletion for 2008 (31,350,000 / 5,225,000 = 6 x 225,000)

1,350,000

Problem 18-17 Question 1 – Answer A Purchase price Less: Residual value Depletable cost Depletion rate (12,000,000 / 1,500,000) Depletion for 2008 (150,000 x 8) Production (25,000 x 6)

14,000,000 2,000,000 12,000,000 8.00 1,200,000 150,000

Question 2 – Answer C Production from July 1 to December 31, 2008 (25,000 x 6) Annual production (25,000 x 12) Estimated life of mine (1,500,000 / 300,000)

150,000 tons 300,000 tons 5 years

Since the life of the mine is shorter than the life of the equipment, the output method is used in computing depreciation.

245 Equipment Less: Residual value Depreciable cost Rate per unit (7,500,000 / 1,500,000) Depreciation for 2008 (150,000 x 5)

8,000,000 500,000 7,500,000 5.00 750,000

Problem 18-18 Answer C Purchase price

9,000,000

Development costs in 2007 Total cost Residual value Depletable cost

300,000 9,300,000 1,200,000 8,100,000

Rate in 2007 (8,100,000 / 2,000,000)

4.05

Depletion for 2007 (200,000 x 4.05)

810,000

Depletable cost Depletion in 2007 Balance Development costs in 2008 Depletable cost in 2008

8,100,000 ( 810,000) 7,290,000 135,000 7,425,000

Rate in 2008 (7,425,000 / 1,650,000)

4.50

Depletion for 2008 (300,000 x 4.50)

1,350,000

246 CHAPTER 19 Problem 19-1 1. 2. 3. 4. 5.

C B D C C

6. 7. 8. 9. 10.

B C A B A

Problem 19-2 1. Appreciation (7,200,000 – 4,500,000)

2,700,000

2. Book value (4,500,000 – 900,000)

3,600,000

3. Depreciated replacement cost (7,200,000 x 80%)

5,760,000

4. Revaluation surplus (5,760,000 – 3,600,000)

2,160,000

Problem 19-3 1. Annual depreciation on cost (750,000 / 5)

150,000

Original life (3,000,000 / 150,000) 2. Equipment Accumulated depreciation Revaluation surplus 3. Depreciation (4,800,000 / 20) Accumulated depreciation 4. Revaluation surplus Retained earnings (1,350,000 / 15)

20 years 1,800,000 450,000 1,350,000 240,000 240,000 90,000 90,000

Problem 19-4 1. Annual depreciation on cost (9,000,000 / 25)

360,000

Age of asset (3,600,000 / 360,000) 2. Machinery Accumulated depreciation (40% x 6,000,000) Revaluation surplus 3. Depreciation (9,000,000 / 15) Accumulated depreciation

10 years 6,000,000 2,400,000 3,600,000 600,000 600,000

247 4. Revaluation surplus Retained earnings (3,600,000 / 15)

240,000 240,000

Problem 19-5 Proportional approach 1. Building Accumulated depreciation Revaluation surplus

3,000,000 750,000 2,250,000

2. Depreciation (8,000,000 / 40) or (6,000,000 / 30) Accumulated depreciation

200,000 200,000

Gross replacement cost (6,000,000 / 75%) 8,000,000 3. Revaluation surplus Retained earnings (2,250,000 / 30)

75,000 75,000

Elimination approach 1. Accumulated depreciation Building Building (6,000,000 – 3,750,000) Revaluation surplus

1,250,000 1,250,000 2,250,000 2,250,000

2. Depreciation (6,000,000 / 30) Accumulated depreciation

200,000 200,000

3. Revaluation surplus Retained earnings

75,000 75,000

Problem 19-6 1. Equipment Accumulated depreciation Revaluation surplus

2,700,000

2. Depreciation (7,500,000 / 10) Accumulated depreciation

750,000

3. Revaluation surplus (2,200,000 / 10) Retained earnings 4. Cash Accumulated depreciation Equipment Gain on sale of equipment

500,000 2,200,000 750,000 220,000 220,000 8,000,000 2,250,000 9,200,000 1,050,000

248 Revaluation surplus (2,200,000 - 220,000) Retained earnings

1,980,000 1,980,000

Problem 19-7 1. Building Accumulated depreciation Revaluation surplus 2. Depreciation (13,000,000 / 5)

10,000,000 4,000,000 6,000,000 2,600,000

Accumulated depreciation

2,600,000

3. Revaluation surplus Retained earnings (6,000,000 / 5)

1,200,000 1,200,000

Problem 19-8 Building Accumulated depreciation

Cost 3,000,000 600,000 2,400,000

Replacement cost 5,000,000 1,000,000 4,000,000

Appreciation 2,000,000 400,000 1,600,000

Accumulated depreciation on cost (3,000,000 x 20%)

600,000

Life of asset (100% / divided by 4%)

25 years

Percent of accumulated depreciation (5 years / 25)

20%

Gross replacement cost (4,000,000 / 80%)

5,000,000

Accumulated depreciation on replacement cost (5,000,000 x 20%)

1,000,000

a. “Should be entry: Building Accumulated depreciation Revaluation surplus

2,000,000 400,000 1,600,000

b. Correcting entry: Building Retained earnings Accumulated depreciation Revaluation surplus

1,000,000 1,000,000

c. Depreciation (4,000,000 / 20) Accumulated depreciation

200,000

400,000 1,600,000 200,000

249 d. Revaluation surplus Retained earnings (1,600,000 / 20)

80,000 80,000

Problem 19-9 1. Accumulated depreciation Machinery

800,000 800,000

2. Retained earnings Revaluation surplus

400,000 400,000

Problem 19-10 Cost 5,000,000

Land Building Accumulated depreciation (25,000,000 x 3/25) (45,000,000 x 3/25) Machinery Accumulated depreciation (10,000,000 x 3/5) (15,000,000 x 3/5)

Equipment Accumulated depreciation (3,000,000 x 3/10) (4,200,000 x 3/10)

Replacement cost 10,000,000

Appreciation 5,000,000

25,000,000

45,000,000

20,000,000

3,000,000 _________ 22,000,000

5,400,000 39,600,000

2,400,000 17,600,000

10,000,000

15,000,000

6,000,000 __________ 4,000,000

5,000,000

9,000,000 3,000,000 6,000,000 2,000,000

Cost 3,000,000

Replacement cost 4,200,000

900,000 _________ 2,100,000

1,260,000 2,940,000

a. Land Building Machinery Equipment Accumulated depreciation – building Accumulated depreciation – machinery Accumulated depreciation – equipment Revaluation surplus

5,000,000 20,000,000 5,000,000 1,200,000

b. Depreciation Accumulated depreciation – building Accumulated depreciation – machinery Accumulated depreciation – equipment

5,220,000

Appreciation 1,200,000 _ 360,000 840,000

2,400,000 3,000,000 360,000 25,440,000 1,800,000 3,000,000 420,000

250 Building: Cost (22,000,000 / 22) Appreciation (17,600,000 / 22)

1,000,000 800,000

1,800,000

Machinery: Cost (4,000,000 / 2) Appreciation (2,000,000 / 2)

2,000,000 1,000,000

3,000,000

Equipment: Cost (2,100,000 / 7) Appreciation (840,000 / 7) Total depreciation

300,000 120,000

c. Revaluation surplus Retained earnings (800,000 + 1,000,000 + 120,000)

420,000 5,220,000

1,920,000 1,920,000

d. Property, plant and equipment (at revalued amounts): Land Building Machinery Equipment Total Less: Accumulated depreciation Net carrying value

10,000,000 45,000,000 15,000,000 4,200,000 74,200,000 20,880,000 53,320,000

The following disclosure should be made in the notes to financial statements: Cost Land Building Machinery Equipment Total Accumulated depreciation Net carrying value

5,000,000 25,000,000 10,000,000 3,000,000 43,000,000 13,200,000 29,800,000

Replacement cost 10,000,000 45,000,000 15,000,000 4,200,000 74,200,000 20,880,000 53,320,000

Schedule of Accumulated Depreciation Cost 4,000,000 8,000,000 1,200,000 13,200,000

Building Machinery Equipment

251

Problem 19-11 Answer B Building Accumulated depreciation

Replacement cost 7,200,000 12,000,000 1,680,000 20,880,000

Cost 5,000,000 1,250,000 3,750,000

Replacement cost 8,000,000 2,000,000 6,000,000

Appreciation 3,000,000 750,000 2,250,000

Problem 19-12 Answer B Sound value 5,000,000 18,750,000 2,500,000

Land Building (75% x 25,000,000) Machinery (50% x 5,000,000)

Book Revaluation value surplus 2,000,0003,000,000 11,250,0007,500,000 1,500,000 1,000,000 11,500,000

Problem 19-13 Answer D Fair value – December 31, 2008 Net book value – December 31, 2008 Revaluation surplus

450,000 302,500 142,500

Problem 19-14 Answer A Answer B Answer B

Question 1 Question 2 Question 3

Problem 19-15 1. 2. 3. 4. 5.

A C B A A

6. 7. 8. 9. 10.

A A D D D

11. 12. 13. 14. 15.

A A A D A

Problem 19-16 1. Impairment loss Accumulated depreciation

900,000 900,000

Cost Accumulated depreciation Book value – January 1 Recoverable value Impairment loss 2. Depreciation (1,500,000 / 3) Accumulated depreciation

4,500,000 2,100,000 2,400,000 1,500,000 900,000 500,000 500,000

252 3. Cost Accumulated depreciation (2,100,000 + 900,000 + 500,000) Book value – December 31

4,500,000 3,500,000 1,000,000

Problem 19-17 1. Impairment loss Accumulated depreciation

1,125,000 1,125,000

Cost – January 1 Accumulated depreciation (2,500,000 – 500,000 / 8 x 2) Book value – January 1 Recoverable value Impairment loss

2,500,000 500,000 2,000,000 875,000 1,125,000

2. Depreciation Accumulated depreciation (875,000 – 125,000 / 2)

375,000 375,000

3. Cost Accumulated depreciation (500,000 + 1,125,000 + 375,000) Book value – December 31

2,500,000 2,000,000 500,000

Problem 19-18 1. Offer price 25,000,000 5,000,000 30,000,000

Cost of dismantling and removal assumed by the bidder Fair value less cost to sell Present value of future cash flows Less: Estimated liability Value in use

33,000,000 5,000,000 28,000,000

Carrying amount 39,000,000 Less: Estimated liability 5,000,000 Adjusted carrying amount 34,000,000 Recoverable amount – fair value less cost to sell, being the higher amount 30,000,000 Impairment loss 4,000,000 PAS 36, paragraph 78, provides that the fair value less cost to sell is equal to the estimated selling price plus the estimated liability assumed by the buyer. The standard further provides that to perform a meaningful comparison between the carrying amount and recoverable amount, the estimated liability assumed by the buyer is deducted in determining both the value in use and carrying amount of the asset. 2. Impairment loss Accumulated depreciation

4,000,000 4,000,000

253 Problem 19-19 1. 2008

Net cash inflows 18,000,000

PV factor .930

Present value 16,740,000

2009 2010 2011

15,000,000 15,000,000 12,000,000 60,000,000

.857 .794 .735

12,855,000 11,910,000 8,820,000

Total value in use

50,325,000

2. The recoverable amount is the value in use of P50,325,000 because this is higher than the fair value less cost to sell of P48,000,000. 3. Impairment loss Accumulated depreciation (65,000,000 – 50,325,000)

14,675,000

4. Depreciation Accumulated depreciation (50,325,000 / 4)

12,581,250

14,675,000 12,581,250

Problem 19-20 1. Depreciation Accumulated depreciation (10,000,000 / 10)

1,000,000 1,000,000

2. Depreciation Accumulated depreciation

1,000,000

3. Impairment loss Accumulated depreciation

2,000,000

4. Depreciation Accumulated depreciation (6,000,000 / 8) 5. Accumulated depreciation Gain on impairment recovery

1,000,000 2,000,000 750,000 750,000 1,750,000 1,750,000

Cost – 1/1/2006 Accumulated depreciation (10,000,000 / 10 x 2) Book value – 12/31/2007 Impairment loss – 2007 Adjusted book value – 12/31/2007 Depreciation – 2008 (6,000,000 / 8) Book value – 12/31/2008

10,000,000 2,000,000 8,000,000 2,000,000 6,000,000 750,000 5,250,000

Cost – 1/1/2006 Accumulated depreciation (10,000,000 / 10 x 3) Book value – 12/31/2008 (assuming no impairment) Recorded book value Gain on reversal of impairment

10,000,000 3,000,000 7,000,000 5,250,000 1,750,000

254 The fair value or recoverable value of P7,500,000 cannot exceed the “book value” that would have been determined assuming no impairment is recognized.

Problem 19-21 1. Impairment loss Accumulated depreciation (35,000,000 – 30,000,000)

5,000,000

2. Depreciation Accumulated depreciation (30,000,000 / 5)

6,000,000

5,000,000 6,000,000

Observe that the undiscounted net cash flows from the asset amount to P37,500,000 for 5 years. This amount is more than the book value of the machinery. Under American Standard, no impairment loss should be recognized in this case. However, under the PAS 36, if the recoverable amount is less than carrying amount, an impairment loss is recognized, regardless of the amount of undiscounted cash flows whether less than or more than the carrying amount. PAS 36 has totally rejected the concept of undiscounted cash flows for impairment purposes.

Problem 19-22 1. Value in use (1,500,000 x 5.65) 2. Impairment loss Accmulated depreciation

8,475,000 8,250,000 8,250,000

Buildings Accumulated depreciation (22,500,000 / 20 x 6) Book value – 1/1/2008 Fair value – higher than value in use Impairment loss 3. Depreciation Accumulated depreciation (10,000,000 / 10)

25,000,000 6,750,000 18,250,000 10,000,000 8,250,000 1,000,000 1,000,000

Problem 19-23 1. Value in use (800,000 x 3.99) 2. Impairment loss Accumulated depreciation

3,192,000 308,000 308,000

Machinery Accumulated depreciation Book value – 1/1/2008 Present value of cash flows – higher than fair value Impairment loss 3. Depreciation Accumulated depreciation (3,192,000 / 5)

5,000,000 1,500,000 3,500,000 3,192,000 308,000 638,400 638,400

255 Problem 19-24

1. Total carrying amount Value in use Impairment loss

5,000,000 3,600,000 1,400,000

2. Impairment loss allocated to goodwill Impairment loss allocated to the other assets

500,000 900,000 1,400,000

When an impairment loss is recognized for a cash generating unit, the loss is allocated to the assets of the unit in the following order: a. First, to the goodwill, if any. b. Then, to all other assets of the unit prorata based on their carrying amount. Building Inventory Trademark

Carrying amount 2,000,000 1,500,000 1,000,000 4,500,000

3. Impairment loss Goodwill Accumulated depreciation – building Inventory Trademark

Fraction 20/45 15/45 10/45

Loss 400,000 300,000 200,000 900,000

1,400,000 500,000 400,000 300,000 200,000

Problem 19-25 1. Carrying amount Value in use Impairment loss

16,000,000 11,000,000 5,000,000

2. Allocation of impairment loss Building (8/16 x 5,000,000) Equipment (4/16 x 5,000,000) Inventory (4/16 x 5,000,000)

2,500,000 1,250,000 1,250,000 5,000,000

Observe that after allocating the P2,500,000 loss to the building, the carrying amount of the building would be P5,500,000 which is lower than its fair value of P6,500,000. Accordingly, only P1,500,000 loss is allocated to the building and the balance of P1,000,000 is reallocated to the equipment and inventory prorata.

256

Allocated loss Reallocated loss (4/8 x 1,000,000) (4/8 x 1,000,000) Impairment loss 3. Impairment loss Accumulated depreciation – building Accumulated depreciation – equipment Inventory

Building 2,500,000 (1,000,000) _________ 1,500,000

Equipment 1,250,000

Inventory 1,250,000

500,000 _________ 1,750,000

500,000 1,750,000

5,000,000 1,500,000 1,750,000 1,750,000

Problem 19-26 All Unimart’s stores are in different locations and probably have different customer profile. So although Smart is managed at the corporate level, Smart generates cash inflows that are largely independent from those of the other Unimart’s stores. Therefore, it is likely that Smart in itself is a cash generating unit.

Problem 19-27 It is likely that the recoverable amount of an individual magazine title can be assessed. Even though the level of advertising income for a title is influenced to a certain extent by the other titles in the customer segment, cash inflows from direct sales and advertising are identifiable for each title. In addition, decisions to abandon titles are made on an individual basis. Accordingly, the individual magazine titles generate cash inflows that are largely independent from one another and therefore, each magazine title is a separate cash generating unit.

Problem 19-28 Case 1 1. A is separate cash generating unit because there is an active market for A’s products. 2. Although there is an active market for the products of B and C, cash inflows from B and C depend on the allocation of production across two countries. It is unlikely that cash inflows from B and C can be determined individually. Therefore, B and C, together should be treated as a cash generating unit.

257 Case 2

a. A cannot be treated as a separate cash generating unit because its cash inflows depend on the sales of the final product by B and C, since there is no active market for A’s product. b. As a consequence, A, B and C, together, and therefore, Maximus Company, as a whole, should be treated as the largest single cash generating unit.

Problem 19-29 The primary purpose of the building is to serve as a corporate asset supporting Litmus Company’s manufacturing operations. Therefore, the building in itself cannot be considered to generate cash inflows that are largely independent of the cash inflows from the entity as a whole. In this case, the cash generating unit is Litmus Company as a whole. The building is not held for investment. Thus, it is not appropriate to determine the value in use of the building based on the cash inflows of related rent.

Problem 19-30 Answer C Cost, January 1, 2005 Accumulated depreciation, December 31, 2007 (100,000 x 3) Book value, December 31, 2007 Recoverable value Impairment loss

800,000 300,000 500,000 200,000 300,000

The loss is recorded as follows: Impairment loss Accumulated depreciation Cost Accumulated depreciation (300,000 + 300,000) Recoverable value, January 1, 2008 Depreciation for 2008 (200,000 / 5) Book value, December 31, 2008

300,000 300,000 800,000 600,000 200,000 40,000 160,000

Problem 19-31 Answer B From August 31, 2005 to May 31, 2008 is a period of 33 months. Thus, the remaining life of the machine is 27 months, 60 months original life minus 33. Depreciation for the month of June 2008 (1,350,000 / 27 months)

50,000

258 Cost

3,200,000

Accumulated depreciation – 5/31/2008 (3,200,000 – 500,000 x 33/60) Book value – 5/31/2008 Fair value Impairment loss

1,485,000 1,715,000 1,350,000 365,000

Problem 19-32 Answer B Cost – January 1, 2004 Accumulated depreciation, December 31, 2007 (900,000 / 10 x 4) Book value, December 31, 2007 Depreciation for 2008 (640,000 – 40,000 / 4) Book value, December 31, 2008

1,000,000 360,000 640,000 150,000 490,000

Problem 19-33 Answer C Book value, 1/1/2008 Depreciation for 2008 (1,600,000 / 4) Book value, 12/31/2008 Sales price-recoverable value Impairment loss

2,400,000 400,000 2,000,000 650,000 1,350,000

Problem 19-34 Answer C Depreciation for 2008 (10% x 2,000,000) Cost – 1/2/2004 Accumulated depreciation - 12/31/08 (200,000 x 5) Book value-12/31/2008 Estimated cost of disposal Impairment loss

200,000 2,000,000 1,000,000 1,000,000 50,000 1,050,000

Problem 19-35 Answer C Cost Accumulated depreciation – 1/1/2008 (2,000,000 – 100,000 / 10 x 2.5) Book value – 1/1/2008 Fair value Impairment loss

2,000,000 475,000 1,525,000 600,000 925,000

Problem 19-36 Answer C Cost – 12/31/2004 Accumulated depreciation – 8/31/2008 (2,400,000 / 96 months x 44) Book value – 8/31/2008 Fair value Impairment loss

2,800,000 1,100,000 1,700,000 1,500,000 200,000

259

Problem 19-37 Answer C Carrying value Decommissioning cost

28,000,000 ( 8,000,000)

Adjusted carrying value Fair value less cost to sell – higher (20,000,000 less 1,000,000) Impairment loss Value in use Decommissioning cost Adjusted value in use

20,000,000 19,000,000 1,000,000 26,000,000 ( 8,000,000) 18,000,000

Problem 19-38 Answer C Carrying value – 12/31/2007 Depreciation for 2008 (20%) Carrying value – 12/31/2008 Carrying value – 12/31/2008 (assuming no impairment) Reversal of impairment loss

CHAPTER 20 Problem 20-1

Problem 20-2

7,000,000 (1,400,000) 5,600,000 7,200,000 1,600,000

260

1. 2. 3. 4. 5.

D C D A D

6. 7. 8. 9. 10.

D A D D B

1. 2. 3. 4. 5.

A A C D D

6. 7. 8. 9. 10.

B B D D D

Problem 20-3 2008 Jan. 1 Patent Cash

255,000 255,000

Dec. 31 Amortization of patent Patent (255,000 / 20)

12,750 12,750

2009 Dec. 31 Amortization of patent Patent

12,750

2010 Jan. 5 Legal expense Cash

90,000

12,750

90,000

Dec. 31 Amortization of patent Patent

12,750 12,750

2011 Jan. 1 Patent Cash

510,000 510,000

Dec. 31 Amortization of patent Patent

42,750 42,750

On original cost On competing patent (510,000 / 17)

12,750 30,000 42,750

Problem 20-4 2008 2011

Research and development expense Cash

510,000

Patent Cash

720,000

510,000 720,000

261 Amortization of patent (720,000 / 16) Patent

45,000 45,000

2012

Patent

540,000 Cash

540,000

Amortization of patent Patent

81,000 81,000

On related patent On competing patent (540,000 / 15)

45,000 36,000 81,000

Problem 20-5 2008 2009

Research and development expense Cash

250,000 250,000

Patent

60,000 Cash

60,000

Amortization of patent Patent (60,000 / 10) 2010

6,000 6,000

Patent

600,000 Cash

600,000

Original cost New patent Total cost Less: Amortization for 2008 Balance – January 1, 2009 Amortization of patent (654,000 / 15) Patent 2011

Amortization of patent Patent Patent written off Patent Balance – 1/1/2010 Less: Amortization 2010 2011 Unamortized cost

60,000 600,000 660,000 6,000 654,000 43,600 43,600 43,600 43,600 566,800 566,800 654,000 43,600 43,600

87,200 566,800

262

Problem 20-6 1. Patent Cash

7,140,000 7,140,000

2. Amortization of patent Patent (7,140,000 / 15)

476,000

3. Amortization of patent Patent (5,712,000 / 7)

816,000

4. Acquisition cost Amortization for 2005, 2006 and 2007 (476,000 x 3) Carrying amount – 1/1/2008 Amortization for 2008 Carrying amount – 12/31/2008

476,000 816,000 7,140,000 (1,428,000) 5,712,000 ( 816,000) 4,896,000

Problem 20-7 1. Patent Cash 2. Amortization of patent Patent (900,000 / 10) 3. Patent written off Patent

900,000 900,000 90,000 90,000 540,000 540,000

Cost Amortization for 2005, 2006, 2007 and 2008 (90,000 x 4) Carrying amount – 12/31/2008

900,000 (360,000) 540,000

Problem 20-8 1. Patent Cash 2. Legal expenses Cash 3. Amortization of patent Patent X (1,200,000 / 8) Y (2,000,000 / 5) Z (3,000,000 / 6)

6,200,000 6,200,000 450,000 450,000 1,050,000 1,050,000 150,000 400,000 500,000 1,050,000

263

Problem 20-9 1. Retained earnings Patent

500,000

2. Patent Retained earnings

510,000

500,000 510,000

3. No adjustment. 4. Loss on damages Legal expense Accrued liabilities

100,000 30,000

5. Patent Retained earnings

24,500

130,000 24,500

Amortization per book (500,000 – 450,000) Correct amortization for 2007 (510,000 / 20) Overamortization 6. Amortization of patent Patent

50,000 25,500 24,500 25,500 25,500

Problem 20-10 2008

Copyright Cash

285,000

Amortization of copyright Copyright

150,000

285,000 150,000

285,000 / 95,000 = 3 per copy 50,000 x 3 = 150,000 2009

Amortization of copyright Copyright (30,000 x 3)

90,000 90,000

Problem 20-11 1. Copyright Retained earnings

240,000 240,000

Cost of copyright Less: Amortization (300,000 / 5) Book value 2. Amortization of copyright Copyright

300,000 60,000 240,000 60,000 60,000

264

Problem 20-12 1. Copyright Patent Retained earnings

620,000 400,000 1,020,000

Copyright 1 Less: Amortization from 1/1/2004 to 12/31/2007 (400,000 / 20 x 4) Book value

400,000 80,000 320,000

Copyright 2 Less: Amortization from 7/1/2005 to 12/31/2007 (360,000 / 15 x 2.5) Book value

360,000 60,000 300,000

Patent Less: Amortization for 2006 and 2007 (500,000 / 10 x 2) Book value

500,000 100,000 400,000

2. Amortization of copyright (20,000 + 24,000) Amortization of patent Copyright Patent

44,000 50,000 44,000 50,000

Problem 20-13 Books of Franchisee 1. Franchise Cash

6,000,000 6,000,000

2. Amortization of franchise Franchise (6,000,000 / 20)

300,000 300,000

3. Cash

25,000,000 Sales

25,000,000

4. Franchise fee expense Cash (25,000,000 x 5%)

1,250,000 1,250,000

Problem 20-14 Books of Franchisee 1. Franchise Cash Note payable 2. Note payable (15,000,000 / 4) Interest expense (15,000,000 x 10%) Cash

20,000,000 5,000,000 15,000,000 3,750,000 1,500,000 5,250,000

265 3. There is no amortization because the franchise is for an indefinite period.

Problem 20-15 Books of Franchisee 1. Franchise (3,000,000 + 3,790,000) Discount on note payable Cash Note payable

6,790,000 1,210,000 3,000,000 5,000,000

Note payable Present value of note (1,000,000 x 3.79) Implied interest

5,000,000 3,790,000 1,210,000

2. Amortization of franchise Franchise (6,790,000 / 10) 3. Note payable Cash

679,000 679,000 1,000,000 1,000,000

4. Interest expense (10% x 3,790,000) Discount on note payable

379,000 379,000

Problem 20-16 Requirement a 1. Leasehold improvement – building Cash

5,000,000 5,000,000

2. Rent expense (50,000 x 12) Cash

600,000

3. Depreciation (5,000,000 / 10) Accumulated depreciation

500,000

600,000 500,000

Requirement b Accumulated depreciation Loss on leasehold cancelation Leasehold improvement – building

2,500,000 2,500,000 5,000,000

Problem 20-17 1. Rent expense Prepaid rent Cash

1,200,000 1,200,000 2,400,000

266 2. Leasehold Cash

2,000,000 2,000,000

3. Leasehold improvement Cash

500,000

4. Amortization of leasehold Leasehold (2,000,000 / 5)

400,000

5. Depreciation (500,000 / 5) Accumulated depreciation

100,000

500,000 400,000 100,000

Problem 20-18 1. Leasehold Cash 2. Rent expense (150,000 x 12) Cash

1,000,000 1,000,000 1,800,000 1,800,000

3. Leasehold improvement Cash

400,000

4. Leasehold improvement Cash

100,000

5. Amortization of leasehold Leasehold (1,000,000 / 10)

100,000

6. Depreciation Accumulated depreciation

400,000 100,000 100,000 60,000 60,000

400,000 / 10 100,000 / 5

40,000 20,000 60,000

Problem 20-19 1. Rent expense Cash

600,000

2. Leasehold Cash

100,000

3. Leasehold improvement Cash

200,000

4. Leasehold improvement

50,000

600,000 100,000 200,000

Cash

50,000

267 5. Amortization of leasehold Leasehold (100,000 / 5)

20,000

6. Depreciation Accumulated depreciation

52,500

20,000 52,500

200,000 / 5 50,000 / 4

40,000 12,500 52,500

Problem 20-20 1. Amortization of patent Accumulated amortization (1,920,000 – 240,000 / 6)

280,000

2. Trademark (800,000 x 3/4) Noncompetition agreement Cash

600,000 200,000

280,000

800,000

3. Amortization of noncompetition agreement Accumulated amortization (200,000 / 5)

40,000

4. Royalty expense Cash

50,000

40,000 50,000

Problem 20-21 1. Acquisition cost Net assets acquired Goodwill 2. Cash Accounts receivable Inventory Property, plant and equipment Goodwill Accounts payable Note payable – bank Cash

7,500,000 (4,600,000) 2,900,000 50,000 800,000 1,350,000 4,300,000 2,900,000 900,000 1,000,000 7,500,000

Problem 20-22 1. Acquisition cost Net assets acquired at fair value Goodwill Total assets at fair value

6,000,000 (3,300,000) 2,700,000 5,300,000

Total liabilities Net assets acquired at fair value

2,000,000 3,300,000

268 2. Cash Accounts receivable Inventory Patent Property, plant and equipment Goodwill Accounts payable Cash

50,000 500,000 1,500,000 250,000 3,000,000 2,700,000 2,000,000 6,000,000

Problem 20-23 1. Cash Inventory In-process R and D Total assets Total liabilities Net assets Acquisition cost Net assets acquired at fair value Goodwill

1,000,000 500,000 5,000,000 6,500,000 3,000,000 3,500,000 8,000,000 (3,500,000) 4,500,000

The goodwill includes the fair value of the assembled workforce of P1,200,000. The assembled workforce is not accounted for separately as an asset. 2. Cash Inventory In process R and D Goodwill Accounts payable Notes payable Cash

1,000,000 500,000 5,000,000 4,500,000 2,600,000 400,000 8,000,000

Problem 20-24 1. Average earnings Divide by Net assets including goodwill Less: Net assets before goodwill Goodwill 2. Average earnings Less: Normal earnings (8% x 1,700,000) Excess earnings Divide by Goodwill

250,000 10% 2,500,000 1,700,000 800,000 250,000 136,000 114,000 15% 760,000

269 3. Average earnings Less: Normal earnings (10% x 1,700,000) Excess earnings Multiply by Goodwill

250,000 170,000 80,000 5 400,000

4. Excess earnings Multiply by Goodwill

80,000 5.65 452,000

Problem 20-25 Average earnings or prior years (1,500,000 / 3) Increase in average earnings (10% x 500,000) Total Less: Patent amortization (500,000 / 5 years) Earnings for goodwill computation a. Average future earnings Divide by Net assets including goodwill Less: Net assets excluding goodwill Goodwill

500,000 50,000 550,000 100,000 450,000 450,000 8% 5,625,000 5,000,000 625,000

b. Average earnings Less: Normal earnings (8% x 5,000,000) Average excess earnings Divide by Goodwill

450,000 400,000 50,000 10% 500,000

c. Goodwill (50,000 x 3.17)

158,500

Problem 20-26 a. Average earnings Expected increase (1,000,000 – 900,000) Total Less: Normal earnings (4,800,000 x 10%) Excess earnings Goodwill (370,000 x 4) Shareholders’ equity per book Less: Recorded goodwill Net assets before goodwill

750,000 100,000 850,000 480,000 370,000 1,480,000 5,000,000 200,000 4,800,000

b. Goodwill (370,000 / 20%)

1,850,000

270 Problem 20-27 1. Share capital Retained earnings Total shareholders’ equity Less: Recorded goodwill Net assets before goodwill

2,000,000 1,500,000 3,500,000 1,000,000 2,500,000

Average earnings (1,200,000 + 150,000 / 3) Less: Normal earnings (10% x 2,500,000) Excess earnings Divide by Goodwill

450,000 250,000 200,000 16% 1,250,000

2. Net assets before goodwill Goodwill Purchase price

2,500,000 1,250,000 3,750,000

Problem 20-28 1. Value in use Net assets including goodwill at carrying amount Impairment loss 2. Impairment loss Goodwill

38,000,000 42,000,000 ( 4,000,000) 4,000,000 4,000,000

Problem 20-29 1. Value in use Net assets including goodwill at carrying amount Impairment loss 2. Impairment loss Goodwill Accounts receivable Inventory Accumulated depreciation

60,000,000 75,000,000 (15,000,000) 15,000,000 5,000,000 2,000,000 3,000,000 5,000,000

The remaining impairment loss of P10,000,000, after deducting the loss applicable to goodwill, is allocated to the other noncash assets on a prorata basis.

Problem 20-30 1. Present value of indefinite cash flows (200,000 / 10%)

2,000,000

Trademark Impairment loss

6,000,000 (4,000,000)

271 Present value of cash flows from cash generating unit (9,000,000 x 8.51) 76,590,000 Net assets including goodwill at carrying amount 80,000,000 Impairment loss ( 3,410,000) 2. Impairment loss Trademark Goodwill

7,410,000 4,000,000 3,410,000

Problem 20-31 1. Total carrying amount Value in use Impairment loss 2. Impairment loss Goodwill Accumulated depreciation – building (25/45 x 270,000) Inventory (15/45 x 270,000) Trademark (5/45 x 270,000)

5,000,000 4,230,000 770,000 770,000 500,000 150,000 90,000 30,000

Problem 20-32 12/31/2008 1/1/2009 7/1/2009 11/1/2009

R and D expense Cash

2,500,000

R and D expense Cash

1,200,000

R and D expense Cash

500,000

Patent

350,000

2,500,000 1,200,000 500,000

Cash 11/15/2009

Patent

350,000 800,000

Cash 12/31/2009

Patent

800,000 100,000

Cash

100,000

Problem 20-33 1. Product costs which are associated wit inventory items are: Duplication of computer software and training materials

2,500,000

Packaging product Total inventory

900,000 3,400,000

2. The costs incurred from the time of technological feasibility to the time when product costs are incurred should be capitalized as computer software cost.

Other coding costs after establishment of technological feasibility Other testing costs after establishment of technological feasibility Costs of producing product masters for training materials Total costs to be capitalized

272 2,400,000 2,000,000 1,500,000 5,900,000

3. Completion of detail program design Cost incurred for coding and testing to establish technological feasibility Total costs charged as expense

1,300,000 1,000,000 2,300,000

Problem 20-34 1. Designing and planning Code development Testing Total R and D expense in 2008

1,000,000 1,500,000 __500,000 3,000,000

The cost of producing the product master of P2,500,000 is capitalized as software cost to be subsequently amortized. 2. Cost of producing the software program in 2009 Amortization of software cost (2,500,000 / 4) Total expense in 2009

1,000,000 625,000 1,625,000

Problem 20-35 Answer C Cost Accumulated amortization from 2005 to 2007 (357,000 / 15 x 3) Book value – 12/31/2007 Amortization for 2008 (285,600 / 7) Book value – 12/31/2008

357,000 71,400 285,600 40,800 244,800

Problem 20-36 Answer C Cost 1/1/2003 Accumulated depreciation – 12/31/2007 (6,000,000 / 15 x 5) Book value – 1/1/2008 Amortization for 2008 (4,000,000 / 5)

Problem 20-37 Answer C

6,000,000 2,000,000 4,000,000 800,000

Cumulative earnings Less: Gain on sale Adjusted cumulative earnings

550,000 50,000 500,000

273 Average earnings (500,000 / 5) Divide by capitalization rate Net assets including goodwill Less: Net assets before goodwill Goodwill

100,000 10% 1,000,000 750,000 250,000

Problem 20-38 Answer C Net assets Multiply by excess rate (16% minus 10%) Excess earnings Multiply by present value factor Goodwill

1,800,000 6% 108,000 3.27 353,160

Problem 20-39 Answer D Purchase price Less: Goodwill Net assets before goodwill Estimated annual earnings (squeeze) Less: Normal earnings (4,500,000 x 10%) Excess or superior earnings Divide by capitalization rate Goodwill

5,000,000 500,000 4,500,000 550,000 450,000 100,000 20% 500,000

Problem 20-40 Answer C Accounts receivable Inventory Equipment Short-term payable Net assets at fair value

2,000,000 500,000 500,000 (2,000,000) 1,000,000

Acquisition cost Net assets at fair value Goodwill

5,000,000 (1,000,000) 4,000,000

Problem 20-41 Answer A Problem 20-42 Answer C

Downpayment Present value of annual payment for 4 years (1,000,000 x 2.91) Cost of franchise

2,000,000 2,910,000 4,910,000

274 Problem 20-43 Answer A Design costs Legal fees of registering trademark Registration fee with Patent Office Total cost of trademark

1,500,000 150,000 50,000 1,700,000

Problem 20-44 Answer B Original lease Extension Total life Less: Years expired (2006 and 2007) Remaining life Life of improvement (shorter)

12 years 8 20 2 18 years 15 years

Leasehold improvement Less: Depreciation for 2008 (540,000 / 15) Book value

540,000 36,000 504,000

Problem 20-45 Answer D Depreciation (3,600,000 / 6)

600,000

Problem 20-46 Answer C Depreciation of equipment Materials used Compensation costs of personnel Outside consulting fees Indirect costs allocated

135,000 200,000 500,000 150,000 250,000 1,235,000

Problem 20-47 Answer A Modification to the formulation of a chemical product Design of tools, jigs, molds and dies Laboratory research Total research and development expense

135,000 170,000 215,000 520,000

Problem 20-48 Answer D All costs are charged to R and D expense.

275 Problem 20-49 Answer A Trademark Value in use (120,000 / 6%) Impairment loss

3,000,000 2,000,000 1,000,000

Patent Amortization for 2008 (2,000,000 / 5) Book value – 12/31/2008 Value in use (500,000 x 3.47) Impairment loss

2,000,000 400,000 1,600,000 1,735,000 -_ _

Problem 20-50 Answer B Carrying amount of net assets Value in use (8,000,000 x 1.5) Impairment loss – applicable to goodwill

16,000,000 12,000,000 4,000,000