a. Johnson and Johnson invested $39 million ($793 $754) of land during 2012.

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1 Pratt Chapter 9 Solutions BE9 3 a. Johnson and Johnson invested $39 million ($793 $754) of land during b. Accumulated depreciation increased during 2012 because of depreciation expense taken by Johnson and Johnson. Instead of reducing the asset account directly, depreciation expense is added to accumulated depreciation, which offsets the asset account to show its reduction in value. c. If the company used an accelerated method of depreciation, the assets would be shown at a lower net value in the early years. Accelerated methods take more depreciation charges in the early years of an asset s life and less in the later years, when compared to the straight -line method. d. Johnson and Johnson would show $16,097 million for property, plant and equipment on its financial statement for The gross amount and the accumulated depreciation would be disclosed in the footnote. E9 1 a. Lowery, Inc., should capitalize all costs associated with getting the equipment in a serviceable condition and location. These costs would be the actual purchase price of $920,000, the transportation cost of $62,000, and the insurance cost of $10,000. Therefore, the tota l cost of the equipment is $992,000. b. The depreciation base equals the dollar amount of a fixed asset's cost that the company does not expect to recover over the asset's useful life, but instead expects to consume over the asset's useful life. Since the plant equipment's total cost is $992,000 and since Lowery, Inc., expects to sell the equipment for $50,000 at the end of its useful life, Lowery, Inc., does not expect to recover $942,000 of the asset's cost. Therefore, the depreciation base equals $942,000. The depreciation base always equals the capitalized cost of a fixed asset less its estimated salvage value. c. The amount that will be depreciated over the life of the plant equipment is its depreciation base. The depreciation base equals the amount of the equipment's future benefits that the company will consume. The outflow of future benefits are expenses, in this case depreciation expense. Therefore, the total amount that Lowery, Inc., will depreciate over the equipment's useful life is $942,000. E9 7 a. An asset's book value equals the asset's initial capitalized value less the associated accumulated depreciation. With straight-line depreciation, accumulated depreciation equals depreciation expense per year times the number of years the asset has been used. Therefore, the asset's book value would be calculated as follows: Depreciation expense per year = (Cost Salvage Value) Useful Life = ($60,000 $12,000) 5 years = $9,600 per year

2 Book Value = Capitalized Cost Accumulated Depreciation = $60,000 ($9,600 3 years) = $31,200 b. Depreciation Expense = [(Cost Accumulated Depreciation) Salvage Value] Remaining Useful Life = (Book value Salvage value) Remaining useful life = ($31,200 $12,000) 5 remaining years = $3,840 Depreciation Expense (E, SE)... 3,840 Accumulated Depreciation ( A)... 3,840 Depreciated asset for E9 9 a. (1) Straight-line depreciation: Depreciation per Year= (Cost Salvage Value) Useful Life (2) Double-declining-balance depreciation: = ($300,000 $60,000) 4 years = $60,000 per year for 2014, 2015, 2016, and 2017 Depreciation Depreciation Accumulated Book Date Factor Expense Cost Depreciation Value 1/1/14 $300,000 $ 0 $300,000 12/31/14 50% $150,000 a 300, , ,000 12/31/15 50% 75, , ,000 75,000 12/31/16 50% 15,000 b 300, ,000 60,000 12/31/17 50% 0 300, ,000 60,000 a Depreciation Expense = Book Value at Beginning of the Period Depreciation Factor b Book Value Depreciation Factor = $75,000 50% = $37,500. If Benick Industries depreciated $37,500 in 2016, the asset's book value would drop below its salvage value. To prevent this from happening, depreciation expense for 2016 can be only $15,000. b. A manager should consider the costs and benefits associated with each depreciation method. The most likely benefit is the impact of depreciation methods on income taxes. An accelerated method decreases the present value of tax payments. However, since there is no requirement

3 E9 11 that a company use the same depreciation method for financial reporting purposes as it does for tax reporting, tax considerations are not an issue for financial reporting. A manager should also consider the bookkeeping costs associated with each method. However, with computers the bookkeeping costs should be relatively consistent across methods. Finally, since the choice of depreciation methods affects net income, managers might consider the impact of the different depreciation methods on contracts such as debt covenants and incentive compensation contracts. Comparability with other firms in the same industry may also be a factor. 1. Activity Method: Depreciation Expense per Mile = ($100,000 $20,000) 200,000 Miles = $0.4/Mile Depreciation Expense (E, SE)... 19,200 Accumulated Depreciation ( A)... 19,200 Depreciated asset for Depreciation Expense (E, SE)... 14,000 Accumulated Depreciation ( A)... 14,000 Depreciated asset for Depreciation Expense (E, SE)... 16,000 Accumulated Depreciation ( A)... 16,000 Depreciated asset for Depreciation Expense (E, SE)... 10,000 Accumulated Depreciation ( A)... 10,000 Depreciated asset for Depreciation Expense (E, SE)... 14,000 Accumulated Depreciation ( A)... 14,000 Depreciated asset for Depreciation Expense (E, SE)... 4,000 Accumulated Depreciation ( A)... 4,000 Depreciated asset for Cash (+A)... 12,000 Accumulated Depreciation (+A)... 77,200 Loss on Sale of Truck (Lo, SE)... 10,800 Truck ( A) ,000 Sold truck.

4 2. Straight-line Method: Depreciation Expense per Year = ($100,000 $20,000) 5 Years = $16,000/year Depreciation Expense (E, SE)... 16,000 Accumulated Depreciation ( A)... 16,000 Depreciated asset. Note: This entry would be made each year for five years. No entry would be made in Year 6 since the truck's estimated useful life ended at the end of Year 5, which means that the truck would have been depreciated down to its estimated salvage value. Cash (+A)... 12,000 Accumulated Depreciation (+A)... 80,000 Loss on Sale of Truck (Lo, SE)... 8,000 Truck ( A) ,000 Sold truck. E9 15 Assuming that Paris Company kept the equipment for its entire five-year estimated useful life, the depreciation schedule on the equipment would be as follows. Depreciation Depreciation Accumulated Book Date Factor Expense Cost Depreciation Value 1/1/12 $25,000 $ 0 $25,000 12/31/12 40% $10,000 25,000 10,000 15,000 12/31/13 40% 6,000 25,000 16,000 9,000 12/31/14 40% 3,600 25,000 19,600 5,400 12/31/15 40% 400* 25,000 20,000 5,000 12/31/16 40% 0 25,000 20,000 5,000 * Because the equipment's book value cannot drop below its estimated salvage value, depreciation expense for 2015 cannot exceed $400.

5 a. Accumulated Depreciation Equipment (+A)... 19,600 Loss on Disposal of Equipment (Lo, SE)... 5,400 Equipment ( A)... 25,000 Disposed of equipment. b. Accumulated Depreciation Equipment (+A)... 20,000 Loss on Disposal of Equipment (Lo, SE)... 5,000 Equipment (-A)... 25,000 Disposed of equipment. c. Cash (+A)... 8,000 Accumulated Depreciation Equipment (+A)... 19,600 Equipment ( A)... 25,000 Gain on Sale of Fixed Assets (Ga, +SE)... 2,600 Sold equipment. d. Fixed Asset (new) (+A)... 30,000 Accumulated Depreciation Equipment (+A)... 20,000 Loss on Disposal of Fixed Asset (Lo, SE)... 3,000 Cash ( A)... 28,000 Equipment (old) ( A)... 25,000 Exchanged fixed assets. E9 16 a. and b. First, let us compute the original cost of the equipment that was sold in 2014 as follows: Equipment Equipment Equipment Equipment at the End + Purchased sold during = at the End of 2013 during of 2014 $32,700 + $12,000 X = $37,500 X = $7,200 Now, let us compute the related accumulated depreciation for the equipment sold during as follows: Accumulated Depreciation Exp. Accumulated Accumulated Depreciation at + for 2014 Depreciation = Depreciation the End of 2013 for the Sold at the End Equipment of 2014 during 2014 $14,300 + $7,200 X = $17,600

6 Now, we can reconstruct the journal entry. X = $ 3,900 Cash... 5,400* Accumulated Depreciation... 3,900 Equipment... 7,200 Gain on Sale of Equipment... 2,100 * $7,200 + $2,100 $3,900 = $5,400 E9 18 a. First, let us compute the related accumulated depreciation for the equipment sold during as follows: Accumulated Depreciation Cap. Accumulated Accumulated Depreciation at + for 2014 Depreciation = Depreciation the End of 2013 for the Sold at the End Equipment of 2014 during 2014 $9,800 + $3,800 X = $10,500 X = $ 3,100 Now, we can reconstruct the journal entry. Cash... 4,300 Loss on Sale of Equipment Accumulated Depreciation... 3,100 Equipment... 8,300 b. Equipment Equipment Equipment Equipment at the End + Purchased sold during = at the End of 2013 during of 2014 P9 13 $23,400 + X $8,300 = $26,900 X = $11,800 Equipment purchased during 2014 = $11,800 a. Most assets are reported on the balance sheet at historical cost or at historical cost less accumulated depreciation. The historical cost of a particular asset is constant over time. However, the fair market value of that same asset fluctuates over time. Consequently, the fair market value of assets can be less than, equal to, or greater than the historical cost of the assets at any point in time. b. Diversified would pay more for Specialists due to goodwill (i.e., synergy). Specialists' assets considered as a package are worth more than the sum of their individual values. Goodwill arises because certain "assets" are not included on a company's balance sheet. Items that cannot be

7 given a value (i.e., cannot be quantified) are omitted from a balance sheet. Examples include customer loyalty and the company's name recognition. c. Assets (+A)... 1,350,000 Goodwill (+A) ,000 Liabilities (+L) ,000 Cash ( A)... 1,800,000 Purchased Specialists, Inc. d. Until recently under GAAP, goodwill was capitalized at the time of acquisition and then amortized over a maximum of 40 years. The school of thought holding the opposite viewpoint espouses that goodwill should be expensed at the time of acquisition. They maintain that since goodwill is a plug number on the books of the acquired company and its amortization period is totally arbitrary, it need not be put on the balance sheet. Further, goodwill should be periodically tested to see if it has been impaired (i.e., if the fair value of the assets acquired has dropped). ID9 13 a. Property, plant and equipment make up 12.6% ($11,854/$93,798) of total assets. Other longlived assets make up 22.9% ($21,490/$93,798) of total assets. b. According to Note 5, Information Technology Assets is the largest category within property, plant and equipment. c. Depreciation expense (from the Statement of Cash Flow) is 3.96% ($1,988/$50,175) of Net Revenue. Because depreciation is a non-cash expense, it is added back in the Statement of Cash Flow in the calculation of cash from operating activities. a. According to Note 1, Google depreciates its assets using the straight-line method. The company uses 2 to 5 years for most assets, but up to 25 years for buildings. b. The company s largest intangible asset is Goodwill.