ASSIGNMENT CHARACTERISTICS TABLE

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1 CHAPTER 9 Long-Lived Assets ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises Problems Set A Problems Set B 1. Apply the cost principle to property, plant, and equipment. 1, 2, 3, 4 1, 2, 3, 4 1, 2, 11 1, 3, 4, 6 1, 3, 4, 6 2. Explain and calculate amortization. 5, 6, 7, 8 5, 6, 7, 8, 9 2, 3, 4, 11 2, 3, 7, 8, 9, 12 2, 3, 7, 8, 9, Revise periodic amortization. 9, 10, 11 10, 11 5, 6, 7 4, 5, 6, 9 4, 5, 6, 9 4. Account for the disposal of property, plant, and equipment. 5. Calculate and record amortization of natural resources. 12, 13 12, 13, 14 8, 9 7, 8, 9 7, 8, 9 14, Identify the basic accounting issues for intangible assets. 16, 17, 18, , 12 10, 11 10, Illustrate the reporting and analysis of long-lived assets. 20, 21 17, 18, 19 13, 14 9, 11, 12, 13 9, 11, 12, 13 Solutions Manual 9-1 Chapter 9

2 ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Time Allotted (min.) 1A Record property transactions. Simple A Calculate partial period amortization. Moderate A 4A Determine cost; calculate and compare amortization under different methods. Account for operating and capital expenditures and asset impairments. Moderate Moderate A Record impairment and calculate revised amortization. Moderate A 7A Record operating and capital expenditures and calculate revised amortization. Calculate and compare amortization and gain or loss on disposal under straight-line and units-of-activity methods. Moderate Moderate A Record acquisition, amortization, and disposal of equipment. Moderate A Record property, plant, and equipment transactions; prepare partial financial statements. Complex A Correct errors in recording intangible asset transactions. Complex A 12A Record intangible asset transactions; prepare partial balance sheet. Record equipment and natural resource transactions; prepare partial financial statements. Moderate Moderate A Calculate ratios and comment. Moderate B Record property transactions. Simple B Calculate partial period amortization. Moderate B 4B Determine cost; calculate and compare amortization under different methods. Account for operating and capital expenditures and asset impairments. Moderate Moderate B Record impairment and calculate revised amortization. Moderate B Record operating and capital expenditures and calculate revised amortization. Moderate Solutions Manual 9-2 Chapter 9

3 ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number Description Difficulty Level Time Allotted (min.) 7B Calculate and compare amortization and gain or loss on disposal under straight-line and double declining-balance methods. Moderate B Record acquisition, amortization, and disposal of equipment. Moderate B Record property, plant, and equipment transactions; prepare partial financial statements. Complex B Correct errors in recording intangible asset transactions. Complex B 12B Record intangible asset transactions; prepare partial balance sheet. Record equipment and natural resource transactions; prepare partial financial statements. Moderate Moderate B Calculate ratios and comment. Moderate Solutions Manual 9-3 Chapter 9

4 BLOOM S TAXONOMY TABLE Correlation Chart between Bloom's Taxonomy, Study Objectives and End-of- Chapter Exercises and Problems Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation BE9-3 Q9-1 Q9-2 Q9-3 Q Apply the cost principle to property, plant, and equipment. 2. Explain and calculate amortization. 3. Revise periodic amortization. 4. Account for the disposal of property, plant, and equipment. 5. Calculate and record amortization of natural resources. 6. Identify the basic accounting issues for intangible assets. 7. Illustrate the reporting and analysis of long-lived assets. Broadening Your Perspective Q9-6 Q9-5 Q9-7 Q9-8 Q9-9, Q9-10, Q9-11 BE9-1 BE9-2 BE9-4 E9-1 E9-2 E9-11 P9-1A BE9-5 BE9-6 BE9-7 BE9-8 BE9-9 E9-2 E9-3 E9-4 E9-11 P9-2A P9-3A BE9-10 BE9-11 E9-5 E9-6 E9-7 P9-4A P9-5A Q9-12 Q9-13 BE9-12 BE9-13 BE9-14 E9-8 E9-9 P9-7A Q9-14, Q9-15 BE9-15 E9-10 P9-12A P9-12B Q9-20, BE9-17 Q9-16, Q9-17, Q9-18, Q9-19 BE9-16 E9-11 E9-12 P9-10A Q9-21 BE9-18 BE9-19 E9-13 P9-9A P9-3A P9-4A P9-6A P9-1B P9-3B P9-4B P9-6B P9-7A P9-8A P9-9A P9-12A P9-2B P9-3B P9-7B P9-8B P9-9B P9-12B P9-6A P9-9A P9-4B P9-5B P9-6B P9-9B P9-8A P9-9A P9-7B P9-8B P9-9B Continuing Cookie Chronicle BYP9-1 BYP9-2 BYP9-3 P9-11A P9-10B P9-11B P9-11A E9-14 P9-12A P9-13A P9-9B P9-13B P9-11B P9-12B BYP9-4 BYP9-5 Solutions Manual 9-4 Chapter 9

5 ANSWERS TO QUESTIONS 1. For long-lived assets, the cost principle means that cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use. These costs are capitalized rather than expensed, because they will provide benefits over future periods. 2. All three amounts will be debited to the land account. The cost to purchase the land and building as well as the cost to remove the building is recorded in the land account. These costs are incurred to prepare the land for its intended use. Since the old building is destroyed none of the purchase cost is allocated to Buildings. As well, the costs to grade the land are incurred to prepare the land for its intended use. Land will be debited for $505,000 ($430,000 + $45,000 + $30,000). 3. The cost principle has survived because it provides information that is objective and verifiable, whereas market values are subjective and changeable. In addition, if a company is not planning on selling the asset the market value of the asset is not relevant. 4. The purchase cost must be split between the land and building because the building is amortized and the land is not. In addition, the cost of each item will be necessary if the land, or the building, is later sold to determine any gain or loss on disposal. 5. The purpose of amortization is to allocate the cost of a long-lived, amortizable asset over its useful life in a systematic way. Amortization expense is matched to the revenues it has helped generate. A common misunderstanding about amortization is that amortization attempts to measure an asset s market value or real value. There is no attempt to measure the change in a long-lived asset s real value because long-lived assets are not held for resale. Another common misunderstanding is that accumulated amortization results in the accumulation of cash to purchase or replace the long-lived asset. Accumulated amortization represents the total cost of the asset that has been allocated to expense so far it does not represent a cash fund. 6. (a) Residual value is the expected cash value of the asset at the end of its useful life. It is sometimes called salvage value or trade-in value. Residual value is not amortized, since this is the amount expected to be recovered at the end of an asset s useful life. Solutions Manual 9-5 Chapter 9

6 QUESTIONS (Continued) Question 6 (Continued) (b) Residual value is subtracted from cost to determine the amortizable cost of the asset. Residual value limits the total value of amortization that can be taken for all three methods of amortization. Amortization will stop when the asset s book value equals its expected residual value. In the straight-line and the units-of-activity methods of calculating amortization, residual value is used in calculating the amortizable cost per year or the amortizable cost per unit. Residual value is not used in determining the amount that the declining-balance amortization rate is applied to. Under all three methods net book value should never be reduced below residual value. In other words, amortization stops when the asset s net book value is equal to its expected residual value. 7. Net book value is cost less accumulated amortization of an asset. Cost is the same under each method of amortization. In the early years, net book value will be less under the declining-balance method than under the straight-line method. The units-of-activity method is unpredictable. In all three methods, net book value at the end of the asset s useful life, will be equal to the asset s residual value. The amortization expense is constant under the straight-line method, varies according to production under the units-of-activity method and declines over time with the declining-balance method. In the early years amortization expense will be higher under the declining-balance method than the straight-line method. The units-of-activity method is unpredictable. Consequently, assuming no other changes, net income is constant under the straight-line method, varies according to production under the units-ofactivity method, and increases over time with the declining-balance method. In the early years, net income will be higher under the straightline method than the declining-balance method. It is unpredictable under the units-of-activity method. All three methods will result in the same total amortization expense over the asset s useful life. Solutions Manual 9-6 Chapter 9

7 QUESTIONS (Continued) 8. Ralph s plan will not work. For accounting purposes, a company should choose the amortization method that best matches expenses to revenues. For tax purposes income tax regulations require a company to use the single declining-balance method. Amortization is calculated on a class basis and a specified rate is specifically identified for specific types of classes of assets. 9. Operating expenditures are ordinary repairs made to maintain the operating efficiency and expected productive life of the asset. Because they are recurring expenditures and normally benefit only the current period, they are expensed when incurred. Capital expenditures are additions and improvements made to increase efficiency, productivity, or expected useful life of the asset. Because they benefit future periods, capital expenditures are debited to the asset account affected. 10. A permanent decline in the market value of a long lived asset is called an impairment loss. It occurs when the market value of a long-lived asset falls far below its book value and is not expected to recover, and the company does not expect to recover the net book value from future cash flows. It could occur when a machine has become obsolete or the market for a product made by a machine becomes obsolete. 11. A revision of amortization is made in current and future years but not retroactively. Amortization is based on the best available information at the time the estimate was made. Continual restatement of prior periods would adversely affect the reader's confidence in the financial statements; thus, prior periods should not be restated if amortization is revised. 12. In a sale of property, plant or equipment, the net book value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the net book value of the asset, a gain on disposal occurs. If the proceeds of the sale are less than the net book value of the asset sold, a loss on disposal occurs. In an exchange a new asset is received in an exchange for the old asset given up. If cash is part of the exchange and the amount is considered significant it is considered a monetary exchange. The gain or loss is calculated by comparing the fair value of the asset given up to its net book value. The trade-in allowance on the asset given up is not relevant. If the cash involved in the exchange is not significant or if there is no cash then the exchange is considered a nonmonetary exchange. The gain or loss is still calculated the same way unless the fair values of the assets cannot be determined. In that case no gain or loss is recorded. Solutions Manual 9-7 Chapter 9

8 QUESTIONS (Continued) 13. The asset and related accumulated amortization should continue to be reported on the balance sheet, without further amortization or adjustment, until the asset is retired. Reporting the asset and related accumulated amortization on the balance sheet informs the reader of the financial statements that the asset is still being used by the company. However, once an asset is fully amortized, no additional amortization should be taken on this asset, even if it is still being used. In no situation can the accumulated amortization exceed the cost of the asset. 14. (a) The amortizable cost of a natural resource includes cost less residual value. In calculating the amortization expense for natural resources, the amortizable cost is expressed on a per unit basis, divided by the total production or activity anticipated. The amortizable cost per unit is then multiplied by the actual production output or activity sold for the period. (b) Amortization is initially recorded as a current asset, inventory, because it is part of the cost of extracting the natural resource. The amortization becomes part of the cost of goods sold when the inventory is sold. 15. The amortization of natural resources is recorded as inventory and not as an expense because the resource extracted is expected to be sold. Until the resource is sold, it has a future benefit and all the costs of obtaining this resource are recorded as an asset, inventory. The cost is later expensed, as cost of goods sold, when the extracted resource is sold. 16. Intangible assets are rights, privileges and competitive advantages that result from ownership of long-lived assets. They have a future benefit in that they contribute to future revenue, however, they lack physical existence or substance. 17. Flin Company should amortize the patent over its 20 year legal life or its useful life, whichever is shorter. Flin Company must consider when its patent is likely to become ineffective at contributing to revenue and if this will occur before the end of its legal life. 18. Goodwill is the value of many favourable attributes that are intertwined in a business enterprise. Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be sold separately. Goodwill can only be sold if the entire business is sold. Solutions Manual 9-8 Chapter 9

9 QUESTIONS (Continued) 19. Research and development costs present several accounting problems. It is sometimes difficult to assign the costs to specific projects, and there are uncertainties in identifying the extent and timing of future benefits. As a result, all research and some development costs are recorded as an expense. Only certain development costs with reasonably assured future benefits can be capitalized. This is intended to maintain the objectivity and reliability of the financial statements. 20. Property, plant, and equipment and natural resources are often combined and reported in the balance sheet as property, plant, and equipment or capital assets. Goodwill must be disclosed separately. Other intangibles can be grouped under intangible assets. Amortization expense for the period should also be disclosed either on the income statement or in the notes to the financial statements. When impairment losses have occurred they should be shown on a separate line on the income statement with the details disclosed in a note. The notes to financial statements should disclose the balance of the major classes of amortizable assets and the amortization method(s) and rates used. The book value of each major class of unamortized assets should also be disclosed. Companies should also disclose their impairment policy in the notes to the financial statements. 21. The asset turnover and return on asset ratios show how effectively the company uses its long-lived assets. The asset turnover shows the amount of sales produced for each dollar invested in assets. It is calculated by dividing net sales by average total assets. The return on assets measures overall profitability. It is calculated by dividing net income by average total assets. Solutions Manual 9-9 Chapter 9

10 SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9-1 The cost of the land is $61,000 ($50,000 + $5,000 + $2,500 + $3,500). The installation of the fence should be debited to Land Improvements account. BRIEF EXERCISE 9-2 The cost of the truck is $43,000 (cash price $41,750 + painting and lettering $750 + installation of trailer hitch $500). The expenditures for the insurance and the motor vehicle licence are recurring and only benefit the current period. They should be expensed and not added to the cost of the truck. BRIEF EXERCISE 9-3 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) O C C O C O O C C O Solutions Manual 9-10 Chapter 9

11 BRIEF EXERCISE 9-4 Jan. 1 Land [$400,000 x ($127,500 $425,000)] ,000 Building [$400,000 x ($255,000 $425,000)] ,000 Equipment [$400,000 x ($42,500 $425,000)]... 40,000 Cash ,000 Mortgage Payable ($400,000 - $100,000) 300,000 BRIEF EXERCISE 9-5 Amortizable cost is $40,000 ($43,000 - $3,000). With a 4-year useful life, annual amortization is $10,000 ($40,000 4). Under the straight-line method, amortization is the same each year. Thus, amortization expense is (a) $10,000 for each year of the truck s life and (b) $40,000 in total over the truck s life. BRIEF EXERCISE 9-6 The declining-balance rate is 50% (25% x 2) and this rate is applied to net book value at the beginning of the year. Amortization expense for each year is as follows: (a) Calculation End of Year NBV (Beg. Amort. Amort. Accum. Net Book Year of Year X Rate = Expense Amort. Value $43, $43,000 50% $21,500 $21,500 21, ,500 50% 10,750 32,250 10, ,750 50% 5,375 37,625 5, ,375 50% 2,375¹ 40,000 3,000 ¹Limited to the amount to reduce the net book value to the residual value of $3,000 (b) Total amortization over the truck s useful life is $40,000. Solutions Manual 9-11 Chapter 9

12 BRIEF EXERCISE 9-7 Amortizable cost per unit: ($33,000 - $500) 325,000 km. = $0.10/km. Annual amortization expense: 2007: 125,000 x $0.10 = $12, : 105,000 x $0.10 = $10,500 BRIEF EXERCISE 9-8 (a) Amortization expense for each year: Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost* X Rate = Expense Amort. Value $43, $40,000 25% x 9/12 $ 7,500 $ 7,500 35, ,000 25% 10,000 17,500 25, ,000 25% 10,000 27,500 15, ,000 25% 10,000 37,500 5, ,000 25% x 3/12 2,500 40,000 3,000 *Amortizable cost = $43,000 - $3,000 (b) Total amortization expense over the truck s useful life is $40,000. (See accumulated amortization at end of 2012 above) Solutions Manual 9-12 Chapter 9

13 BRIEF EXERCISE 9-9 The double declining-balance rate is 50% (25% x 2) and this rate is applied to net book value at the beginning of the year. Amortization expense for each year is as follows: (a) Double Declining-Balance Calculation End of Year NBV (Beg. Amort. Amort. Accum. Net Book Year of Year X Rate = Expense Amort. Value $43, $43,000 50% x 9/12 $16,125 $16,125 26, ,875 50% 13,438 29,563 13, ,437 50% 6,719 36,282 6, ,718 50% 3,359 39,641 3, ,359 50% 359¹ 40,000 3,000 ¹ Limited to the amount to bring net book value to the residual value of $3,000 (b) Total amortization expense over the truck s useful life is $40,000. (See accumulated amortization at end of 2012 above) BRIEF EXERCISE 9-10 Loss on Impairment... 16,000 Accumulated Amortization Machinery 16,000 Calculation: Net Book Value ($90,000 - $54,000)... $36,000 Less: Market Value... 20,000 Impairment loss... $16,000 Solutions Manual 9-13 Chapter 9

14 BRIEF EXERCISE 9-11 Amortization expense from 2005 to 2007: [($60,000 - $4,000) 7 years = $8,000] 2005 $ 8, , ,000 Total $24,000 Net book value, Jan. 1, 2008 ($60,000 - $24,000)... $36,000 Add: Equipment up-grade... 9,000 Less: Revised residual value... (3,000) Remaining amortizable cost... 42,000 Remaining useful life (9 years - 3 years)... 6 years Revised annual amortization expense $ 7,000 BRIEF EXERCISE 9-12 (a) Accumulated Amortization Delivery Equipment... 41,000 Delivery Equipment... 41,000 (b) Accumulated Amortization Delivery Equipment... 38,000 Loss on Disposal... 3,000 Delivery Equipment... 41,000 Cost of delivery equipment... $41,000 Less: Accumulated amortization... 38,000 Net book value at date of disposal... 3,000 Proceeds from sale... 0 Loss on disposal... $ 3,000 Solutions Manual 9-14 Chapter 9

15 BRIEF EXERCISE 9-13 (a) Sept. 30 Amortization Expense [($72,500 - $2,500) 5 x 9/12]... 10,500 Accumulated Amortization Office Equipment... 10,500 (b) Sept. 30 Cash... 8,250 Accumulated Amortization Office Equipment¹... 66,500 Gain on Disposal... 2,250 Office Equipment... 72,500 ¹[($72,500 - $2,500) 60 months x 57 months] = $66,500 Cost of office equipment $72,500 Less accumulated amortization 66,500 Net book value at date of disposal 6,000 Proceeds from sale 08, 8,250 Gain on disposal $ 2,250 (c) Sept. 30 Cash... 4,500 Accumulated Amortization Office Equipment... 66,500 Loss on Disposal... 1,500 Office Equipment... 72,500 Cost of office equipment $72,500 Less accumulated amortization 66,500 Net book value at date of disposal 6,000 Proceeds from sale 4,500 Loss on disposal $ 1,500 Solutions Manual 9-15 Chapter 9

16 BRIEF EXERCISE 9-14 Jan. 7 Machinery (new)... 76,000* Accumulated Amortization Machinery... 78,000 Loss on Disposal... 3,000** Machinery (old)... 95,000 Cash ($80,000 - $18,000)... 62,000 *Consideration paid cash plus market value of old asset: ($62,000 + $14,000 = $76,000) **Loss is the book value less the fair market value: ($95,000 - $78,000 - $14,000 = $3,000) BRIEF EXERCISE 9-15 (a) Amortizable cost = $7,000,000 - $500,000 = $6,500,000 Amortizable cost per unit = $6,500,000 28,000,000 tonnes = $ per tonne Amortization cost for ore extracted in Year 1: $ per tonne x 6,000,000 tonnes = $1,392,600 Aug. 31 Inventory... 1,392,600 Accumulated Amortization. 1,392,600 Amortization to be included in cost of goods sold: $ per tonne x 5,000,000 tonnes = $1,160,500 Amortization to be included in inventory: $ per tonne x 1,000,000 tonnes = $232,100 Solutions Manual 9-16 Chapter 9

17 BRIEF EXERCISE 9-15 (Continued) (b) CUONO MINING CO. Balance Sheet (Partial) August 31, 2008 Assets Current assets Inventory... $232,100* Property, plant, and equipment Ore mine... $7,000,000 Less: Accumulated amortization... 1,392,600 5,607,400 * Check ($1,392,600 - $1,160,500 = $232,100) Solutions Manual 9-17 Chapter 9

18 BRIEF EXERCISE 9-16 (a) 2008 Jan. 2 Patents ,000 Cash ,000 (b) Dec. 31 Amortization Expense ($180,000 10)... 18,000 Accumulated Amortization Patents... 18,000 (c) 2009 Jan. 5 Patents... 9,000 Cash... 9,000 (d) Original cost of patent:... $180,000 Less: accumulated amortization... (18,000) Plus: Legal costs to defend... 9,000 Remaining cost to be amortized ,000 Remaining useful life (10 years - 1 year)... 9 years Revised annual amortization expense $ 19,000 BRIEF EXERCISE 9-17 (a) I (b) PPE (c) NR (d) NA (current asset) (e) I (f) PPE (g) NA (current asset) (h) NA (income statement) (i) I (j) I (k) NA (current liability) (l) PPE (m) PPE (n) NR Solutions Manual 9-18 Chapter 9

19 BRIEF EXERCISE 9-18 CANADIAN TIRE CORPORATION, LIMITED Balance Sheet (Partial) December 31, 2005 (in millions) Property, plant, and equipment Land... $ Buildings... $2,094.4 Less: Accumulated amortization ,390.0 Fixtures and equipment... $528.4 Less: Accumulated amortization Leasehold improvements... $265.6 Less: Accumulated amortization Other property, plant, and equipment Total property, plant, and equipment 2,743.9 Intangible assets Goodwill... $46.2 Marks Work Wearhouse store brands and banners Marks Work Wearhouse franchise agreements Total intangible assets 98.6 Solutions Manual 9-19 Chapter 9

20 BRIEF EXERCISE 9-19 ($ in millions) Return on assets $283 [($2,785 + $2,661) 2] = 10.39% Asset turnover $3,294 [($2,785 + $2,661) 2] = 1.21 times Solutions Manual 9-20 Chapter 9

21 EXERCISE 9-1 SOLUTIONS TO EXERCISES (a) Under the cost principle, the acquisition cost of a property, plant, and equipment includes all expenditures necessary to acquire the asset and make it ready for its intended use. This includes not only the cost of acquisition, but any freight, installation, testing, and similar costs to get the asset ready for use. For example, the cost of factory machinery includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs. Costs such as these benefit the life of the factory machinery and not just the current period. Consequently, they should be capitalized and amortized over the machinery s useful life. Cost is measured by the cash paid in a cash transaction, or by the cash equivalent price paid when noncash assets are used in payment. The cash equivalent price is equal to the fair market value of the asset given up. If that value is not clearly determinable, the fair market value of the asset received is used instead. (b) 1. Delivery Equipment (or Vehicles) 2. Prepaid Insurance 3. Land 4. Land ($6,600 - $1,700 = $4,900) 5. Plant 6. Plant 7. Plant 8. Land improvements 9. Factory machinery 10. Factory machinery Solutions Manual 9-21 Chapter 9

22 EXERCISE 9-2 (a) Appraised Value % of Total Cost Allocated Land $366,000 61% $353,800 Building 192,000 32% 185,600 Land Improvements 42,000 7% 40,600 $600,000 $580,000* *Total cost $75,000 (cash) + $500,000 (mortgage) + $5,000 (legal fees) = $580,000 (b) Land ,800 Land Improvements... 40,600 Building ,600 Cash ($75,000 + $5,000)... 80,000 Mortgage Payable ,000 (c) Amortizable cost for the building is $165,600 ($185,600 $20,000). With a 40-year useful life, annual amortization expense is $4,140 ($165,600 40). Amortizable cost for the land improvements is $40,600. With a ten year useful life, annual amortization expense is $4,060 ($40,600 10). Solutions Manual 9-22 Chapter 9

23 EXERCISE 9-3 (a) (1) Straight-line Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost* X Rate = Expense Amort. Value $164, $142,500 20% $28,500 $28, , ,500 20% 28,500 57, , ,500 20% 28,500 85,500 79, ,500 20% 28, ,000 50, ,500 20% 28, ,500 22,000 * $164,500 - $22,000 = $142,500 (2) Double Declining-Balance Calculation End of Year NBV (Beg. Amort. Amort. Accum. Net Book Year of Year X Rate = Expense Amort. Value $164, $164,500 40% $65,800 $65,800 98, ,700 40% 39, ,280 59, ,220 40% 23, ,968 35, ,532 40% 13,532¹ 142,500 22, ,000 40% 0 142,500 22,000 ¹ Limited to the amount to bring net book value to the residual value of $22,000 Solutions Manual 9-23 Chapter 9

24 EXERCISE 9-3 (Continued) (a) (Continued) (3) Units-of-Activity Calculation End of Year Units of Amort. Amort. Accum. Net Book Year Activity X Cost/Unit* = Expense Amort. Value $164, ,000 $0.38 $29,640 $29, , , ,880 58, , , ,360 85,880 78, , , ,000 50, , , ,500 22,000 *Amortizable cost per unit is $0.38 per kilometre: [($164,500 $22,000) 375,000 = $0.38] (b) I recommend it use the units-of-activity method as it results in the best matching of expense with revenue. Solutions Manual 9-24 Chapter 9

25 EXERCISE 9-4 (a) (1) Straight-line Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost* X Rate = Expense Amort. Value $86, $78,000 25% $4,875** $4,875 81, ,000 25% 19,500 24,375 61, ,000 25% 19,500 43,875 42, ,000 25% 19,500 63,375 22, ,000 25% 14,625*** 78,000 8,000 *$86,000 - $8,000 = $78,000 **$19,500 x 3/12 = $4,875 ***$19,500 x 9/12 = $14,625 (2) Double Declining-Balance Calculation End of Year NBV (Beg. Amort. Amort. Accum. Net Book Year of Year X Rate = Expense Amort. Value $86, $86,000 50% $10,750* $10,750 75, ,250 50% 37,625 48,375 37, ,625 50% 18,813 67,188 18, ,812 50% 9,406 76,594 9, ,406 50% 1,406** 78,000 8,000 *$86,000 x 50% x 3/12 = $10,750 **Limited to the amount to bring net book value to the residual value of $8,000 Solutions Manual 9-25 Chapter 9

26 EXERCISE 9-4 (Continued) (a) (Continued) (3) Units-of-Activity Calculation End of Year Units of Amort. Amort. Accum. Net Book Year Activity X Cost/Unit* = Expense Amort. Value $86, $7.80 $3,900 $3,900 82, , ,840 25,740 60, , ,620 48,360 37, , ,280 68,640 17, , ,360** 78,000 8,000 *Amortizable cost per unit is $7.80/hour [($86,000 $8,000) 10,000 = $7.80] **Limited to the amount to bring net book value to the residual value of $8,000. (b) Over the life of the asset, amortization expense will be the same for all three methods. (c) Cash flow is the same under all three methods. Amortization is an allocation of the cost of a long-lived asset and not a cash expenditure. Solutions Manual 9-26 Chapter 9

27 EXERCISE 9-5 Jan. 10 Building... 70,000 Cash... 70,000 Apr. 8 Repairs Expense... 25,000 Cash... 25,000 Sep. 2 Equipment... 22,500 Cash... 22,500 Nov. 1 Repairs Expense... 1,000 Cash... 1,000 Dec. 31 Loss on Impairment ,000 Accumulated Amortization Equipment ,000 [($500,000 - $150,000) - $230,000] Solutions Manual 9-27 Chapter 9

28 EXERCISE 9-6 (a) Current amortization Building: ($800,000 $40,000) 20 yrs = $38,000 per year Equipment: ($120,000 $5,000) 5 yrs = $23,000 per year (b) Current ages Building January 1998 to January 2008: 10 years Equipment January 2006 to January 2008: 2 years January 1, 2008 Building Equipment Cost... $800,000 $120,000 Accumulated Amortization: Building (10 x $38,000) ,000 Equipment (2 x $23,000)... 46,000 Net book value... $420,000 $ 74,000 (c) Type of Asset Building Equipment Net book value, 1/1/08 Less: Residual value Revised amortizable cost $420,000 62,000 $358,000 $74,000 3,600 $70,400 Divide by revised remaining useful life, in years Revised annual amortization expense (25-10) 15 yrs $23,867 (4-2) 2 yrs $35,200 Solutions Manual 9-28 Chapter 9

29 EXERCISE 9-7 (a) 2007 June 30 Amortization Expense... 6,500 Accumulated Amortization Equipment... 6,500 [($30,000 - $4,000) 4 years] (b) July 1 Equipment ($5,000 + $500)... 5,500 Cash... 5,500 (c) 2008 June 30 Amortization Expense... 5,200 Accumulated Amortization Equipment... 5,200 Net book value, July 1, 2007 ($30,000 - $6,500)... $23,500 Add: New part... 5,500 29,000 Less: Revised residual value... 3,000 Remaining amortizable cost... $26,000 Remaining useful life (6-1)... 5 years Revised annual amortization expense... $ 5,200 (d) Cost ($30,000 + $5,500)... $35,500 Accumulated Amortization ($6,500 + $5,200)... 11,700 Net book value June 30, $23,800 Solutions Manual 9-29 Chapter 9

30 EXERCISE 9-8 Jan. 2 Delivery Truck (New) ($6,500 + $33,000)*... 39,500 Accumulated Amortization... 22,500 Loss on sale... 1,000 Delivery truck (Old)... 30,000 Cash... 33,000 *Fair value of old truck $6,500 + cash $33,000 Mar. 31 Amortization Expense... 1,550 Accumulated Amortization Machinery... 1,550 ($62, years x 3/12) 31 Accumulated Amortization Machinery [($62, years) x (9 years + 3 months)]... 57,350 Loss on Disposal... 4,650 Machinery... 62,000 Sept 1 Amortization Expense... 1,220 Accumulated Amortization... Office Equipment... 1,220 ($5,490 3 years x 8/12) 1 Cash Accumulated Amortization Office Equipment... 4,880 ($5,490 3 years x 2 years + 8 months) Gain on Disposal Office Equipment... 5,490 Solutions Manual 9-30 Chapter 9

31 EXERCISE 9-9 (a) (1) Straight-line method: ($16,000 - $1,000) 4 years = $3,750 per year or $7,500 for 2006 and (2) Double declining-balance method DDB Rate: ¼ x 2 = 50% 2006: $16,000 x 50% = $8, : $16,000 - $8,000 = $8,000 x 50% = $4,000 Total amortization expense for 2006 and 2007 = $12,000 (b) (1) Straight-line method Proceeds - Net book value = Gain (loss) [$5,000 - ($16,000 - $7,500)] = ($3,500) (2) Double declining-balance method Proceeds - Net book value = Gain (loss) [$5,000 - ($16,000 - $12,000) = $1,000 (c) The amount of the loss using the straight-line method is $3,500. The amount of the gain using the double-decliningbalance method is $1,000. The amounts are not the same because of the difference in the amortization expense calculation on a year to year basis which impacts the net book value of the asset which in turn impacts the gain or loss on disposal. If you consider, however, the total impact on net income over the two year period the amounts are identical. Using the straight-line method total amortization is $7,500 and loss on disposal is $3,500 resulting in an $11,000 decrease in net income over the two year period. Using the doubledeclining-balance method total amortization is $12,000 and gain on disposal is $1,000. Overall effect on net income using both methods over the two year period is an $11,000 decrease. Solutions Manual 9-31 Chapter 9

32 EXERCISE 9-10 (a) The units-of-activity method is recommended for amortizing natural resources because it results in the best matching of expense to revenues. It requires that an estimate can be made of the total number of units that are available to be extracted from the resource. (b) Dec. 31 Inventory ($ x 100,000)... 53,750 Accumulated Amortization Mine 53,750 Amortizable cost $520,000 - $90,000 = $430,000 Amortizable cost per unit: $430, ,000 t = $ per tonne (c) PHILLIPS INC. Income Statement (Partial) Year Ended December 31, 2008 Cost of goods sold: (will include this amount plus other costs) ($ x 75,000 t)... $40,313 PHILLIPS INC. Balance Sheet (Partial) December 31, 2008 Assets Current assets Inventory ($53,750 - $40,313)... $ 13,437* Property, plant, and equipment Ore mine... $520,000 Less: Accumulated amortization... 53, ,250 *Check: 25,000** t unsold x $ = $13,437 **100,000 t extracted 75,000 t sold = 25,000 t in inventory Solutions Manual 9-32 Chapter 9

33 EXERCISE Amortization is the process of allocating the cost of a longlived asset to expense over the asset s useful life. Because the value of land generally does not decline with time and usage, its usefulness and revenue producing ability does not decline. In addition, the useful life of land is indefinite. Therefore it would be incorrect for the student to amortize the land. This is a violation of the matching principle. 2. Goodwill is an intangible asset with an indefinite life. According to generally accepted accounting principles, goodwill is not amortized but reviewed annually for impairment. If a permanent decline in value has occurred the goodwill is written down and an impairment loss is recorded on the income statement. Therefore, the amortization entry should be reversed and no decline in value recorded until an impairment in value occurs. Recording amortization is a violation of the matching principle. 3. This is a violation of the cost principle. Because current market values are subjective and not reliable, they are not used to increase the recorded value of an asset after acquisition. The appropriate accounting treatment is to leave the building on the books at its zero book value. Solutions Manual 9-33 Chapter 9

34 EXERCISE 9-12 (a) Jan. 2 Patents... 45,000 Cash... 45,000 April 1 Trademark ,000 Cash ,000 July 1 Franchise ,000 Cash ,000 Sept. 1 Research Expense ,000 Cash ,000 (b) Dec. 31 Loss on Impairment Goodwill... 85,000 Goodwill... 85, Amortization Expense ,500 Accumulated Amortization Patents [($450,000 5) + (45,000 3)] ,000 Accumulated Amortization Franchise [($250,000 10) x 6/12] 12,500 Solutions Manual 9-34 Chapter 9

35 EXERCISE 9-13 (a) Account Financial Statement Section Accumulated Amortization Building Balance Sheet Property, Plant, and Equipment Accumulated Amortization Finite-Life Intangible Assets Balance Sheet Intangibles Accumulated Amortization Machinery and Equipment Accumulated Amortization Other Property, Plant, and Equipment Accumulated Amortization Satellites Accumulated Amortization Telecommunications Assets Balance Sheet Balance Sheet Balance Sheet Balance Sheet Property, Plant, and Equipment Property, Plant, and Equipment Property, Plant, and Equipment Property, Plant, and Equipment Amortization Expense Income Statement Operating Expenses Buildings Balance Sheet Property, Plant, and Equipment Cash and Cash Equivalents Balance Sheet Current Assets Common Shares Balance Sheet Shareholders Equity Finite-Life Intangible Assets Balance Sheet Intangibles Goodwill Balance Sheet Intangibles Indefinite-Life Intangible Balance Sheet Intangibles Assets Land Balance Sheet Property, Plant, and Equipment Machinery and Equipment Balance Sheet Property, Plant, and Equipment Other Long-term Assets Balance Sheet Long-Term Assets Other Property, Plant, and Equipment Balance Sheet Property, Plant, and Equipment Plant under Construction Balance Sheet Property, Plant, and Equipment Satellites Balance Sheet Property, Plant, and Equipment Telecommunications Assets Balance Sheet Property, Plant, and Equipment Solutions Manual 9-35 Chapter 9

36 EXERCISE 9-13 (Continued) (b) BCE Inc. Balance Sheet (Partial) December 31, 2005 (in millions) Property, plant, and equipment Land... $ 94 Buildings... $3,157 Less: Accumulated amortization... 1,340 1,817 Plant under construction... 1,852 Machinery and equipment... $6,273 Less: Accumulated amortization... 3,685 2,588 Telecommunications assets... $36,334 Less: Accumulated amortization... 24,144 12,190 Satellites... $1,552 Less: Accumulated amortization ,148 Other Property, plant, and equipment... $200 Less: Accumulated amortization Total Property, plant, and equipment... 19,823 Intangible assets Finite-life intangible assets... $3,813 Less: Accumulated amortization... 1,574 2,239 Goodwill... 7,887 Indefinite-life intangible assets... 3,031 Total intangible assets... 13,157 Solutions Manual 9-36 Chapter 9

37 EXERCISE 9-14 (a) (in thousands) December 31, 2005 January 1, 2005 Asset turnover Return on assets $206,674 [($308,226 + $300,152) 2] = 0.68 times $8,097 [($308,226 + $300,152) 2] = 2.7% $211,476 [($300,152 + $242,755) 2] = 0.78 times $14,426 [($300,152 + $242,755) 2] = 5.3% (b) Sleeman s asset turnover has decreased over the 2 years. Net Revenues have decreased from $211,476 to $206,674 even though total assets have increased from $300,152 to $308,226. Sleeman is operating less efficiently in the year ended December 31, 2005 as compared to the year ended January 1, Return on assets has decreased significantly from 5.3% to 2.7%. The slight increase in total assets from $300,152 to $308,336 has not generated an increase in net income. In fact, net income has fallen from $14,426 to $8,097. Solutions Manual 9-37 Chapter 9

38 SOLUTIONS TO PROBLEMS PROBLEM 9-1A (a) Feb. 7 Land ,000 Cash... 75,000 Note Payable ,000 9 Land... 5,500 Cash... 5, Land... 15,000 Cash... 15, Cash... 4,000 Land... 4,000 Mar. 2 Building... 18,000 Cash... 18,000 July 5 Building ,000 Cash ,000 Note Payable , Building... 6,500 Cash... 6,500 Aug. 22 Land Improvements... 12,000 Cash... 12,000 Sept. 1 Prepaid Insurance... 2,500 Cash... 2,500 Dec. 31 Interest Expense... 17,500 Cash... 17,500 Solutions Manual 9-38 Chapter 9

39 PROBLEM 9-1A (Continued) (b) Land Date Explanation Ref. Debit Credit Balance 2008 Feb , , , , , , , ,500 Building Date Explanation Ref. Debit Credit Balance 2008 Mar. 2 18,000 18,000 July 5 650, , , ,500 Land Improvements Date Explanation Ref. Debit Credit Balance 2008 Aug ,000 12,000 The cost of land that will appear on Weisman s December 31, 2008 balance sheet will be $291,500. The cost of building that will appear on Weisman s December 31, 2008 balance sheet will be $674,500. The cost of land improvements that will appear on Weisman s December 31, 2008 balance sheet will be $12,000. Solutions Manual 9-39 Chapter 9

40 PROBLEM 9-2A (a) Accumulated Amortization Year Calculation Dec. 31 MACHINE 1 Straight-line Amortization 2006 ($44,940* 7) x 10/12 = $5,350 $ 5, $44,940 7 = $6,420 11, $44,940 7 = $6,420 18,190 *$48,940 - $4,000 = $44,940 MACHINE 2 Declining-balance Amortiation 2007 $84,000 x 20%* x 4/12 = $5,600 $ 5, ($84,000 - $5,600) x 20% = $15,680 21,280 *1/10 years = 10% x 2 = 20% Solutions Manual 9-40 Chapter 9

41 PROBLEM 9-2A (Continued) (b) Accumulated Amortization Year Calculation Dec. 31 MACHINE ($44,940* 7) x 1/2 = $3,210 $ 3, $44,940 7 = $6,420 9, $44,940 7 = $6,420 16,050 *$48,940 - $4,000 = $44,940 MACHINE $84,000 x 20%* x 1/2 = $8,400 $ 8, (84,000 - $8,400) x 20% = $15,120 23,520 *1/10 years = 10% x 2 = 20% (c) It really doesn t matter which policy Tarcher chooses in terms of recording amortization in the year of acquisition, as long as it follows the policy consistently. The same total amortization will be recorded whether amortization is recorded monthly, or semi-annually. Amortization is an estimate only, in any case. (d) The choice of the method to prorate amortization in the period of acquisition will not affect amortization expense if the units-of-activity method is used. Under this method, amortization is a function of the units produced not the time the machine is owned. Solutions Manual 9-41 Chapter 9

42 PROBLEM 9-3A (a) Cost: Cash price $180,000 Delivery costs 1,000 Installation and testing 3,200 Total cost $184,200 (b) The one-year insurance policy is not included as it is an operating expenditure, benefiting only the current period. 1. STRAIGHT-LINE AMORTIZATION Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $184, $172,700* 20%** x 8/12 $23,027 $ 23, , ,700 20% 34,540 57, , ,700 20% 34,540 92,107 92, ,700 20% 34, ,647 57, ,700 20% 34, ,187 23, ,700 20% x 4/12 11, ,700 11,500 * Amortizable cost = $184,200 - $11,500 = $172,700 ** 1 5 years = 20% Solutions Manual 9-42 Chapter 9

43 PROBLEM 9-3A (Continued) (b) (Continued) 2. DOUBLE DECLINING-BALANCE AMORTIZATION Calculation End of Year NBV Beg. Amort. Amort. Accum. Net Book Year of Year X Rate = Expense Amort. Value $184, $184,200 40%* x 8/12 $49,120 $49, , ,080 40% 54, ,152 81, ,048 40% 32, ,571 48, ,269 40% 19, ,023 29, ,177 40% 11, ,694 17, ,506 40% 6,006** 172,700 11,500 * 1 5 years = 20% x 2 = 40% **Use the amount that makes net book value equal to residual value 3. UNITS-OF-ACTIVITY AMORTIZATION Calculation End of Year Units of Amort. Amort. Accum. Net Book Year Activity X Cost/Unit* = Expense Amort. Value $184, ,500 $3.14* $26,690 $ 26, , , ,680 64, , , , ,480 83, , , ,450 50, , , ,280 20, , , ,700 11,500 *Amortizable cost per unit: ($184,200 - $11,500) 55,000 units = $3.14 Solutions Manual 9-43 Chapter 9

44 PROBLEM 9-3A (Continued) (c) Double declining-balance amortization provides the highest amount of amortization expense for 2006, thus resulting in the lowest net income that year. Over the life of the asset, all three methods result in the same total amortization expense (equal to the amortizable cost). (d) All three methods will result in the same cash flow in 2006 and over the life of the asset. Recording amortization expense does not affect cash flow. There is no Cash account involved in the entry to record amortization (Dr. Amortization Expense; Cr. Accumulated Amortization). It is only an allocation of the capital cost to expense over an asset s useful life. (e) Factors that should influence management s choice of the amortization method to use include the revenue pattern of a specific asset, the productivity of the asset, as well as the usage of the asset on a year over year basis. If an asset generates revenue consistently over time, then the straight-line method is most appropriate. If an asset is more productive in its earlier years then the declining-balance method is most appropriate. If usage of an asset can be easily measured and usage is very different year over year then the units-of-activity method is the most appropriate. Solutions Manual 9-44 Chapter 9

45 PROBLEM 9-4A Feb. 12 Building ,000 Cash ,000 Mar. 6 Maintenance Expense... 7,500 Cash... 7,500 Apr. 10 Furniture and Fixtures... 25,000 Cash... 25,000 May 17 Machinery... 35,000 Cash... 8,000 June 28 Maintenance Expense... 5,000 Cash... 5,000 July 20 Repairs Expense... 10,000 Cash... 10,000 Aug. 5 Training Expense... 1,600 Cash... 1,600 Sep. 18 Machinery... 80,000 Cash... 80,000 Nov. 6 Prepaid Insurance... 4,600 Cash... 4,600 Dec. 31 Loss on Impairment... 70,000 Accumulated Amortization Equipment... 70,000 [($400,000 - $150,000) - $180,000] Dec. 31 No journal entry required. Once a permanent impairment has been recorded, the value of an asset is not adjusted for any recovery in value. Solutions Manual 9-45 Chapter 9

46 PROBLEM 9-5A (a) Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $650, $620,000* 12.5% $77,500 $ 77, , , % 77, , , , % 77, , , , % 77, , ,000 * Amortizable cost = $650,000 - $30,000 = $620,000 ** 1 8 years = 12.5% (b) Dec. 31 Loss on Impairment 220,000 Accumulated Amortization Equipment ,000 [($650,000 - $310,000) - $120,000] (c) Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $530,000¹ $120, $90, % 3 $45, ,000 75, ,000 50% 45, ,000 30,000 ¹Accumulated Amortization = $310,000 end of year before Loss on impairment + $220,000 Loss on Impairment 2 Amortizable cost = $120,000 - $30,000 = $90, years remaining = 50% (d) Accumulated amortization at the end of this equipment s useful life will be $620,000. Net book value at the end of this equipment s useful life will be the amount of residual value which is $30,000. Solutions Manual 9-46 Chapter 9

47 PROBLEM 9-6A (a) Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $220, $200,000* 20%** x 6/12 $20,000 20, , ,000 20% 40,000 60, , ,000 20% 40, , , ,000 20% 40, ,000 80,000 * Amortizable cost = $220,000 - $20,000 = $200,000 ** 1 5 years = 20% (b) Jan. 9 Equipment... 33,000 Cash... 33,000 Nov. 18 Maintenance Expense... 1,500 Cash... 1,500 Dec. 15 Repair Expense... 2,400 Cash... 2,400 (c) Net book value, December 31, $80,000 Add: Addition... 33, ,000 Less: Revised residual value... 25,000 Revised amortizable cost... 88,000 Remaining useful life (9-3½ years)... 5½ years Revised annual amortization expense... $16,000 Solutions Manual 9-47 Chapter 9

48 PROBLEM 9-6A (Continued) (d) Net book value before overhaul: Dec. 31, 2007 $80,000 Add: Cost of overhaul 33,000 Net book value after overhaul 113,000 Less: Annual amortization after overhaul: 2008 $16, , , , , ($16,000 x 6/12) 8,000 88,000 Net book value at end of useful life: June 30, 2013 $25,000 Accumulated amortization: Before overhaul: Dec. 31, 2007 $140,000 Amortization from Jan 1, 2008 to June 30, 2013 (see above) 88,000 At end of useful life: June 30, 2013 $228,000 Check: Original cost of asset $220,000 Cost of overhaul 33, ,000 Less: accumulated amortization June 30, ,000 Net book value June 30, 2013 $ 25,000 Note: Net book value June 30, 2013 = revised estimated residual value of $25,000. Solutions Manual 9-48 Chapter 9

49 PROBLEM 9-7A (a) 1. STRAIGHT-LINE AMORTIZATION Calculation End of Year Annual Net Amortizable Amort. Amort. Accum. Book Year Cost X Rate (1/3) = Expense Amort. Value $170, $144,000* 1/3 $48,000 $48, , ,000 1/3 48,000 96,000 74, ,000 1/3 48, ,000 26,000 *$170,000 - $26,000 = $144, UNITS-OF-ACTIVITY AMORTIZATION Calculation End of Year Annual Net Units of Amort. Amort. Accum. Book Year Activity X Cost/Unit 1 = Expense Amort. Value $170, ,000 $0.36 $55,800 $55, , , , ,400 65, , , ,000 26,000 1 Amortizable cost per unit: ($170,000 - $26,000) 400,000 km = $0.36 per kilometre Solutions Manual 9-49 Chapter 9

50 PROBLEM 9-7A (Continued) (b) 1. (a) Straight (b) Units- -Line of-activity Cost... $170,000 $170,000 Accumulated amortization , ,400 Book value... 74,000 65,600 Cash proceeds... 60,000 60,000 Loss on disposal... $ 14,000 $ 5, Amortization expense... $ 96,000 $104,400 Add: Loss on disposal... 14,000 5,600 Net expense... $110,000 $110,000 In total the effect on net earnings is the same under both methods. This is because the method of amortization selected only affects the timing of the expense recognition. In total over the life of the asset the expense recognized is the same. Solutions Manual 9-50 Chapter 9

51 PROBLEM 9-8A (a) 2006 Mar. 11 Office Equipment... 85,000 Accounts Payable... 85,000 (b) Dec. 31 Amortization Expense... 17,500 Accumulated Amortization Office Equipment... 17,500 [($85,000 - $1,000) 4 years] x 10/12 months (c) 2007 Dec. 31 Amortization Expense... 21,000 Accumulated Amortization Office Equipment... 21,000 ($85,000 - $1,000) 4 years 2008 Nov. 22 Amortization Expense... 19,250 Accumulated Amortization Office Equipment... 19,250 [($85,000 - $1,000) 4 years] x 11/12 (1) Nov. 22 Accumulated Amortization Office Equipment¹... 57,750 Loss on Disposal... 27,250 Office Equipment... 85,000 ¹ $17,500 + $21,000 + $19,250 = $57,750 (2) Nov. 22 Cash... 35,000 Accumulated Amortization Office Equipment... 57,750 Gain on Disposal... 7,750 Office Equipment... 85,000 Solutions Manual 9-51 Chapter 9

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